On January 11, 2024, the ECJ issued the judgment in the case C-433/22 (HPA – Construções).
Executive summary
- In the case of HPA – Construções, the ECJ addressed whether national law can restrict the application of a reduced VAT rate to works contracts for repair and renovation of inhabited private dwellings in line with point 2 of Annex IV to the VAT Directive.
- The Court held that the reduced VAT rate applies specifically to renovation and repair services for properties actually used for residential purposes at the time of the works.
- Properties intended for residential use but not occupied during the works, as well as properties used for commercial or investment purposes, are excluded from the reduced rate.
- The Court emphasized that the reduced rate should be interpreted strictly and is intended to benefit consumers who reside in the property during the works.
- Therefore, national legislation can restrict the application of the reduced VAT rate based on the actual residential use of the dwellings during the works.
Facts
- HPA, a commercial company, entered into five contracts for renovation works with three commercial property owners in 2007.
- The company applied a reduced VAT rate of 5% on the invoices for the services provided under these contracts.
- After a tax inspection in 2011, HPA was issued a VAT adjustment notice for an additional amount of EUR 374,750.77. HPA challenged this notice and the Administrative and Tax Court annulled it.
- The tax authority appealed this decision, arguing that the reduced VAT rate should only apply to renovation services for immovable property actually used for residential purposes. The tax authority argues that according to point 2.24 of List I in the VAT Code and Circular No 30025, the reduced VAT rate for renovation services only applies to properties actually used for residential purposes before and after the services are provided. It is contended that properties solely intended for residential use but not actually occupied as such at the time of the services, such as those in the five works contracts mentioned in paragraph 13, are not eligible for the reduced VAT rate.
- The referring court seeks interpretation of the VAT Directive to clarify the circumstances under which renovation services may benefit from the reduced VAT rate.
- The court also notes a previous judgment regarding the distinction between renovation and repair activities and the application of the reduced rate to private dwellings.
Question
Can national law restrict the application of reduced VAT rate to works contracts for repair and renovation of inhabited private dwellings, in line with point 2 of Annex IV to the VAT Directive?
Argumentation
- The Court was asked whether national legislation that applies a reduced rate of VAT to renovation and repair services of private dwellings, provided that these dwellings are actually used for residential purposes at the time of the works, is compatible with point 2 of Annex IV to the VAT Directive.
- The Court explained that the usual meaning of “private dwellings” refers to immovable property intended for residential use. The renovation and repair services covered by point 2 of Annex IV must relate to properties used for private residential purposes. Therefore, services relating to properties used for commercial purposes are not covered.
- The Court held that the reduced rate of VAT applies solely to renovation and repair services in properties actually used for residential purposes. Properties that have authorizations for residential purposes but are not actually used for residential purposes at the time of the works are excluded. Likewise, services concerning properties used for commercial or investment purposes are also excluded.
- The Court emphasized that the reduced rate of VAT is an exception to the standard rate and should be interpreted strictly. It noted that the purpose of a reduced rate is to benefit consumers. The application of the reduced rate benefits final consumers who reside in the property during the works and are not entitled to deduct input VAT.
- In conclusion, point 2 of Annex IV to the VAT Directive does not prevent national legislation that applies a reduced VAT rate to renovation and repair services of private dwellings, provided that the dwellings are actually used for residential purposes at the time of the works.
Decision
Point 2 of Annex IV to Council Directive 2006/112/EC allows for the application of a reduced VAT rate for renovation and repair services for private dwellings, if used for residential purposes at the time of the works.
Source
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