On October 29, 2009, the ECJ issued its decision in the case C-174/08 (NCC Construction Danmark).
Context: Sixth VAT Directive – Article 19(2) – Deduction of input tax – Hybrid taxable person – Goods and services used for both taxable and exempt activities – Calculation of the deductible proportion – Definition of ‘incidental real estate transactions’ – Self-supply – Principle of fiscal neutrality
Article in the EU VAT Directive
Article 19(2) of the Sixth VAT Directive (Article 174(2) and 174(3) of the EU VAT Directive 2006/112/EC).
Article 174
1. The deductible proportion shall be made up of a fraction comprising the following amounts:
(a) as numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible pursuant to Articles 168 and 169;
(b) as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.
Member States may include in the denominator the amount of subsidies, other than those directly linked to the price of supplies of goods or services referred to in Article 73.
2. By way of derogation from paragraph 1, the following amounts shall be excluded from the calculation of the deductible proportion:
(a) the amount of turnover attributable to supplies of capital goods used by the taxable person for the purposes of his business;
(b) the amount of turnover attributable to incidental real estate and financial transactions;
(c) the amount of turnover attributable to the transactions specified in points (b) to (g) of Article 135(1) in so far as those transactions are incidental.
3. Where Member States exercise the option under Article 191 not to require adjustment in respect of capital goods, they may include disposals of capital goods in the calculation of the deductible proportion. ▼B
Facts
- NCC is a building and contracting business. It carries out construction projects, including in particular engineering, planning, consultancy and labour activities in the building sector on behalf of other parties and on its own account.
- The sale of real estate constructed on its own account is not the applicant’s principal activity, but rather a separate activity which derives from the building work subject to VAT.
- Since the Danish VAT law exempts the sale of buildings constructed on its own account from VAT, NCC was required, as a hybrid taxable person, to calculate a proportion in order to establish the amount in respect of which it had a right to deduct VAT on the costs common to its two activities (general costs).
- For the purpose of that calculation, NCC did not take into consideration the turnover from the sale of buildings constructed on its own account. It submitted that that activity of selling real estate should be regarded as an ‘incidental real estate transaction’ within the meaning of the second sentence of Article 19(2) of the Sixth Directive.
- The Danish tax authorities changed their practice as from 1 April 2002, taking the view that the activity of selling real estate carried out by a building business could not be treated in the same way as an ‘incidental real estate transaction’. The result for the company was that input VAT on its common costs was thereafter only partially deductible.
- NCC, which sought to benefit from full deduction of VAT attributable to its common costs, disputed the view of Skatteministeriet.
Questions
AG Opinion
Article 19(2) 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 is to be interpreted as meaning that the sale by a building business of buildings constructed on its own account, where the construction of those buildings is subject to value added tax and their subsequent sale is exempt, cannot constitute an ‘incidental transaction’ within the meaning of that provision, if that sale constitutes, as in the present case, the direct, permanent and necessary extension of the building activity.
Decision
1. Article 19(2) 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 is to be interpreted as meaning that the sale, in the case of a building business, of buildings constructed on its own account cannot be classified as an ‘incidental real estate transaction’ within the meaning of that provision, where that activity constitutes the direct, permanent and necessary extension of its business. In those circumstances, it is not necessary, in this case, to assess to what extent that sales activity, viewed separately, entails a use of goods and services on which value added tax is payable.
2. The principle of fiscal neutrality cannot preclude a building business, which is required to pay value added tax on supplies relating to construction effected on its own account (self‑supply), from being unable fully to deduct the value added tax relating to the general costs incurred thereby, since the turnover from the sale of buildings thus constructed is exempt from value added tax.
Summary
Self-supplies – Goods and services used for both taxable and exempt activities – Concept of “ancillary transactions relating to immovable property”
The sale by a construction company of immovable property built by it for its own account cannot be classified as an ancillary transaction in relation to immovable property within the meaning of that provision, if that activity is the direct, permanent and necessary extension of its taxable activity. In those circumstances, it is not necessary to assess in concrete terms to what extent this sales activity, taken in isolation, involves the use of goods and services on which VAT is payable.
The principle of fiscal neutrality cannot preclude a construction company that pays VAT in respect of supplies related to construction activities that it carries out for its own account (self-supplies) from deducting VAT on the general costs of providing those services. cannot deduct in full if the turnover from the sale of the construction works thus realized is exempt from VAT.
Source:
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