Flashback on ECJ cases C-400/98 (Breitsohl) – Interpretation of VAT Directive on Deduction and Option for Taxation

On June 8, 2000, the ECJ issued its decision in the case C-400/98 (Breitsohl).

Context: Turnover taxes – Common system of value added tax – Articles 4, 17 and 28 of the Sixth Directive 77/388/EEC – Status as taxable person and exercise of the right to deduct in the event of failure of the economic activity envisaged, prior to the first VAT determination – Supplies of buildings and the land on which they stand – Whether possible to limit the option for tax to buildings only, thereby excluding the land

Summary

The case discussed in the judgment involves the interpretation of Articles 4, 17, and 28 of the Sixth Council Directive 77/388/EEC, which relates to turnover taxes and the common system of value-added tax (VAT). The case concerns the status of a taxable person and the right to deduct VAT in the event of the failure of an economic activity before the first VAT determination. Specifically, the case addresses the issue of whether it is possible to limit the option for tax to buildings only, excluding the land on which they stand.

The facts of the case involve a taxpayer, Mrs. Brigitte Breitsohl, who engaged in transactions related to a business project involving the sale and repair of motor vehicles. She incurred expenses for the construction of a motor vehicle repair workshop on a plot of land. However, due to financial difficulties, the construction works were interrupted, and Mrs. Breitsohl sold the completed parts of the building and the land.

The questions referred to the Court of Justice for a preliminary ruling by the Bundesfinanzhof (Federal Finance Court) are as follows:

Whether the right to deduct VAT on investment expenditure should be granted based on the intention to carry out economic activities, even if it is known that the intended economic activity will not be pursued.
Whether the option for taxation can be limited to buildings only, excluding the land.

In response to the first question, the Court ruled that the right to deduct VAT on transactions related to a planned economic activity still exists, even if the tax authority is aware that the intended economic activity will not be pursued. The Court emphasized that the right to deduct arises when the deductible tax becomes chargeable, and it is not dependent on the formal recognition of the taxpayer’s status by the tax authority.

Regarding the second question, the Court ruled that the option for taxation, exercised at the time of the supply of buildings or parts of buildings and the land on which they stand, must relate inseparably to both the buildings or parts of buildings and the land. The Court emphasized that the concept of “supply of buildings or parts of buildings and the land on which they stand” cannot be dissociated from each other. Therefore, a taxable person who supplies buildings and land must either use the VAT exemption for the entire supply or opt for taxation of the entire supply. The option for taxation cannot be limited to buildings only, excluding the land.

Article in the EU VAT Directive

Articles 4, 17 and 28 of the Sixth Directive 77/388/EEC (Article 9, 167, 168 of the EU VAT Directive 2006/112/EC)

Article 4 of the Sixth Directive provides:

1. ”Taxable person” shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.
2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.
3. Member States may also treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in paragraph 2 and in particular one of the following:
- (a) the supply before first occupation of buildings or parts of buildings and the land on which they stand; Member States may determine the conditions of application of this criterion to transformations of buildings and the land on which they stand.
  - Member States may apply criteria other than that of first occupation, such as the period elapsing between the date of completion of the building and the date of first supply or the period elapsing between the date of first occupation and the date of subsequent supply, provided that these periods do not exceed five years and two years respectively.
  - ”A building” shall be taken to mean any structure fixed to or in the ground;
- (b) the supply of building land.
  - ”Building land” shall mean any unimproved or improved land defined as such by the Member States.

Under Article 17 of the Sixth Directive:

1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.
2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:
- (a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

Article 28(3) of the Sixth Directive provides:

During the transitional period referred to in paragraph 4, Member States may:

(b) continue to exempt the activities set out in Annex F under conditions existing in the Member State concerned;
(c) grant to taxable persons the option for taxation of exempt transactions under the conditions set out in Annex G;

Facts

In 1989, Mrs Breitsohl applied for a motor vehicle dealership, which was accepted subject to conditions. In 1990, she declared an industrial and commercial establishment, acquired land, and commissioned a repair workshop. Due to rising costs, the bank refused to finance the additional work, leading to the interruption of the construction. Mrs Breitsohl agreed to pay the building company, sell the completed works, and sell the land. In her 1990 VAT return, she declared taxable transactions and deductible amounts, resulting in a surplus.

Questions

1. According to the case-law of the Court of Justice of the European Communities (Case C-110/94 INZO v Belgian State [1996] ECR I-857), even the very first investment expenditure incurred for the purposes of a business may be regarded as an economic activity within the meaning of Article 4 of Directive 77/388/EEC. The tax authority has to take account of the business person’s declared intention in this regard. The status of taxable person accorded on that basis cannot, in principle, be withdrawn retroactively on account of certain events having or having not occurred (principle of legal certainty). This also applies to the deductions relating to the investment transactions.

According to those principles, is the right to deduct tax (Article 17 of Directive 77/388/EEC) on setting up expenditure to be accorded on the basis of the intention to take up economic activity leading to taxable transactions even where the tax authority is already aware, when the first tax assessment is made, that the intended economic activity leading to taxable transactions was not actually taken up?

If the answer to Question 1 is in the affirmative:

2. In the case of a supply of buildings or parts thereof and of the land on which they stand, can the option for taxation be restricted to the buildings and parts thereof?

AG Opinion

(1) Articles 4 and 17 of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover
taxes — Common system of value added tax: uniform basis of assessment are to be interpreted as meaning that the right to deduct VAT on transactions
effected with a view to taking up a projected economic activity continues to exist even where the tax authority is already aware, when the first tax
assessment is made, that the economic activity leading to taxable transactions will not be taken up.
(2) Article 4(3)(a) of the Sixth Directive should be interpreted as meaning that in the case of a supply of buildings or parts thereof and of the land on which
they stand, the option for taxation must be exercised inseparably in respect of the immovable property as a whole, including both the buildings or parts
thereof and the land on which they stand.

Decision

1. Articles 4 and 17 of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment are to be interpreted as meaning that the right to deduct the value added tax paid on transactions carried out with a view to the realisation of a planned economic activity still exists even where the tax authority is aware, from the time of the first tax assessment, that the economic activity envisaged, which was to give rise to taxable transactions, will not be taken up.

2. Article 4(3)(a) of the Sixth Directive 77/388 is to be interpreted as meaning that the option for taxation exercised at the time of the supply of buildings or parts of buildings and the land on which they stand must relate inseparably to the buildings or parts of buildings and the land on which they stand.

Source