ECJ C-528/19 (Mitteldeutsche Hartstein-Industrie AG) – Judgment – Deduction of input tax for construction work on public roads

On Spetember 16, 2020, the ECJ issued its decision in the case C-528/19 (Mitteldeutsche Hartstein-Industrie AG.

Reference for a preliminary ruling – Taxation – Value added tax (VAT) – Sixth Directive 77/388/EEC – Article 17(2)(a) – Deduction of input tax – Origin and scope of the right to deduct – Extension of a road belonging to a municipality – Entry in the accounts of the costs incurred by the works as part of the taxable person’s general costs – Determination of the existence of a direct and immediate link with the economic activity of the taxable person – Supply made free of charge – Supply to be treated as a supply made for consideration – Article 5(6))

This case is about the deduction of input tax for construction work on public roads. Previous posts about this case can be found HERE

Artciles of the VAT Directive

Artciles 2(1), 5(6), 17(2)(a) of Sixth Council Directive 77/388/EEC (Articles 2, 16, 168 of the EU VAT Directive 2006/112/EC).

Article 16
The application by a taxable person of goods forming part of his business assets for his private use or for that of his staff, or their disposal free of charge or, more generally, their application for purposes other than those of his business, shall be treated as a supply of goods for consideration, where the VAT on those goods or the component parts thereof was wholly or partly deductible.
However, the application of goods for business use as samples or as gifts of small value shall not be treated as a supply of goods for consideration.

Article 168
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;
(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18(a) and Article 27;
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
(d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22;
(e) the VAT due or paid in respect of the importation of goods into that Member State.

Facts

The plaintiff company, a limited liability company, was granted permission to operate a quarry under the condition that it expand a public municipal road to be used for the removal of the limestone obtained. The owner of the street was the city. The applicant claimed deduction of input tax on the works related to the development of other contractors. In the view of the tax authority, the plaintiff had provided with the expansion of the road taxable gratuitous delivery of works according to § 3 para. 1 sentence 1 no. 3 of the VAT law (UStG) to the city.

On September 16, 2020, the ECJ came to a verdict.

Question

In circumstances such as those of the main proceedings, in which a taxable person carries out construction works on a municipal road on behalf of a city, is that taxable person, which has procured from other taxable persons services relating to the construction of the road that has been transferred to the municipality, entitled to deduct input tax in respect thereof pursuant to Article 17(2)(a) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes?

If the answer to Question 1 is in the affirmative: In circumstances such as those of the main proceedings, in which a taxable person carries out construction works on a municipal road on behalf of a city, does a supply of goods for consideration exist when the authorisation to operate a quarry is the consideration for the supply of a road?

If the answer to Question 2 is in the negative: In circumstances such as those of the main proceedings, in which a taxable person carries out construction works on a municipal road on behalf of a city, is the free-of-charge transfer of the public road to the municipality treated, in accordance with Article 5(6) of Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes, as a supply of goods free of charge even though the transfer serves commercial purposes, in order to prevent an untaxed final consumption by the municipality?

Decision

1. Article 17(2)(a) of 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, must be interpreted as meaning that a taxable person is entitled to deduct input value added tax paid for the works for the extension of a municipal road carried out for the benefit of a municipality, where that road is used both by that taxable person in connection with its economic activity and by the public, in so far as those extension works did not exceed what was necessary to allow that taxable person to carry out its economic activity and the costs of those works are included in the price of the output transactions carried out by that taxable person.

2. Sixth Directive 77/388, in particular Article 2(1) thereof, must be interpreted as meaning that the authorisation to operate a quarry granted unilaterally by an authority of a Member State does not constitute consideration received by a taxable person which carried out, without monetary consideration, works for the extension of a road belonging to a municipality, with the result that those extension works do not constitute a transaction carried out for consideration within the meaning of that directive.

3. Article 5(6) of Sixth Directive 77/388 must be interpreted as meaning that works carried out, for the benefit of a municipality, for the extension of a municipal road open to the public but used, in connection with its economic activity, by the taxable person which carried out those works free of charge and by the public, do not constitute a transaction which must be treated as a supply of goods made for consideration within the meaning of that provision.

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