ECJ Case C-405/19 (Vos Aannemingen Bvba) – Judgment – VAT exemption immovable property; Input VAT deduction

On Oct 1, 2020, the ECJ issued his decision in the case C-405/19 (Vos Aannemingen Bvba). This case is about input VAT deduction. How to deal with recovery of input VAT, if the costs also benefit another party that uses the purchases for (VAT exempt) activities that do not give a right to claim back input VAT? Does it matter how strong the link is between the costs and the VAT exempt activities? Does it matter if the person that claimed input VAT was allowed, but chose not to, recharge the costs to the other party?

Articles in the EU VAT Directive

Article 17(2)(a) of the Sixth Council Directive 77/388/EEC (Art, 167 in the EU VAT Directive 2006/112/EC)

Article 17

Origin and scope of the right to deduct

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;

Facts

When a taxable person – a project developer – pays publicity, administration and brokerage costs when selling apartments, which also accrue to a third, this does not prevent the taxable person from deducting in full the value added tax paid on such expenditure at an earlier stage,provided that there is a direct and immediate link between these expenses and the economic activity of the taxable person and that the benefit for the third party is secondary to the needs of the taxable person’s business.
The fact that the costs paid by the taxable person also benefit a third, does not preclude the taxable person from fully deducting the value added tax paid at an earlier stage on those costs where they are not included in the general costs of the taxable person but are attributable to specific transactions in a subsequent stage, provided that those costs are directly and directly linked to the taxable person’s taxable transactions, it being for the referring court to assess this in the light of all the circumstances in which those transactions took place.
Where a third party benefits from the expenses incurred by the taxable person, the fact that the latter is able to pass on part of those expenses to that third party constitutes one of the elements – in addition to all the other circumstances in which the transactions in question took place – which the referring court must take into account in order to determine the extent of the taxable person’s right to deduct value added tax.

Question

Is Article 17 of Directive 77/388/EEC ¹ to be interpreted as meaning that the fact that expenditure also benefits a third party — as is the case where, in connection with the sale of apartments, a project promoter pays advertising costs, administrative costs and estate agents’ commission, which also benefit the landowners — does not preclude the value added tax (VAT) charged on those costs from being fully deductible, provided that it is established that there is a direct and immediate link between the expenditure and the economic activity of the taxable person and that the advantage to the third party is of secondary importance compared to the requirements of the taxable person’s business?

Does that principle apply also where the costs in question are not general costs but costs attributable to specific output transactions which may or may not be subject to VAT, such as in this case the sale, on the one hand, of apartments and, on the other, of land?

Does the fact that the taxable person is able/entitled to pass on part of the expenditure to the third party whom the expenditure benefits, but does not do so, have any impact on the question of the deductibility of the VAT on those costs?

AG Opinion

None

Decision

1. Article 17(2)(a) 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, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as meaning that the fact that expenditure incurred by a taxable person, a property developer, in respect of advertising costs, administrative costs and estate agents’ commission, in connection with the sale of apartments, also benefits a third party, does not preclude that taxable person deducting in full the input value added tax paid on that expenditure where, firstly, there is a direct and immediate link between that expenditure and the taxable person’s economic activity and, secondly, the benefit to the third party is ancillary to the taxable person’s business purposes.

2. Article 17(2)(a) of the Sixth Directive 77/388, as amended by Directive 95/7, must be interpreted as meaning that the fact that the expenditure incurred by the taxable person also benefits a third party does not preclude that taxable person deducting in full the input value added tax paid in relation to that expenditure, in the case where that expenditure does not relate to the taxable person’s general overheads but constitutes costs attributable to particular output transactions, in so far as those costs maintain a direct and immediate link with the taxable person’s taxable transactions, which is for the referring court to assess with regard to all of the circumstances in which those transactions occurred.

3. Article 17(2)(a) of the Sixth Directive 77/388, as amended by Directive 95/7, must be interpreted as meaning that, in the case where a third party benefits from expenditure incurred by the taxable person, the fact that it is possible for the taxable person to pass on to the third party a part of the expenditure so incurred constitutes one of the elements, along with all of the other circumstances in which the transactions concerned occurred, which the referring court must consider for the purposes of determining the scope of the taxable person’s right to deduct value added tax.

Source