Flashback on ECJ cases C-465/03 (Kretztechnik) – A transaction falling outside the scope of VAT does not necessarily mean that deduction is excluded

On May 26, 2005, the ECJ issued its decision in the case C-465/03 (Kretztechnik).

Context: Sixth VAT Directive – Supplies for consideration – Share issue – Admission of a company to a stock exchange – Deductibility of VAT.

Article in the EU VAT Directive

Article 2(1), 17(1) and (2) of the Sixth VAT Directive (Articles 2, 167, 168 of the EU VAT Directive 2006/112/EC).

Article 2
1. The following transactions shall be subject to VAT:
(a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;
(b) the intra-Community acquisition of goods for consideration within the territory of a Member State by:
(i) a taxable person acting as such, or a non-taxable legal person, where the vendor is a taxable person acting as such who is not eligible for the exemption for small enterprises provided for in Articles 282 to 292 and who is not covered by Articles 33 or 36;
(ii) in the case of new means of transport, a taxable person, or a non-taxable legal person, whose other acquisitions are not subject to VAT pursuant to Article 3(1), or any other non-taxable person;
(iii) in the case of products subject to excise duty, where the excise duty on the intra-Community acquisition is chargeable, pursuant to Directive 92/12/EEC, within the territory of the Member State, a taxable person, or a non-taxable legal person, whose other acquisitions are not subject to VAT pursuant to Article 3(1);
(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such;
(d) the importation of goods.

Article 167
A right of deduction shall arise at the time the deductible tax becomes chargeable.

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

Kretztechnik is a company limited by shares established in Austria whose objects are the development and distribution of medical equipment. By resolution of its general meeting of shareholders of 18 January 2000, its capital was increased from EUR 10 million to EUR 12.5 million. With a view to raising the capital needed for that increase, it applied for admission to the Frankfurt Stock Exchange.
Kretztechnik was listed on that stock exchange in March 2000. Its capital was increased by the issue of bearer shares.
The tax assessment of 5 July 2002 drawn up by the Finanzamt Linz for 2000 did not allow deduction of the input VAT paid by Kretztechnik on the supplies linked with its admission to the stock exchange. Since the issuing of shares is regarded in Austria as being exempt from VAT on the basis of a provision of national law analogous to Article 13B(d)(5) of the Sixth Directive, that company cannot, according to the Finanzamt, avail itself of any right to deduct input VAT.

Questions

1) In becoming listed on a stock market and in issuing shares in that connection to new shareholders in return for the issue price, does a public limited company make a supply for consideration within the meaning of Article 2(1) of [the] Sixth … Directive?

2) If the first question is answered in the affirmative: are Article 2(1) and Article 17 of the Sixth Directive to be interpreted as meaning that all services obtained in connection with a listing on the stock market are to be attributed to an exempt supply and that for that reason there is no right to a deduction of input tax?

3) If the first question is answered in the negative: is there a right under Article 17(1) and (2) of the Sixth Directive to deduct input tax on the ground that the services in respect of which a deduction of input tax is claimed (advertising, agent’s fees, and legal and technical advice) are used for the purposes of the undertaking’s taxable transactions?

AG Opinion

(1) In becoming listed on a stock market and in issuing shares in that connection to new shareholders in return for the issue price, a public limited company does not make a supply for consideration within the meaning of Article 2(1) 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;

(2) Input tax on services acquired for the purposes of such a share issue may be deducted to the extent that the company charges VAT on its output transactions, in accordance with Article 17(1), (2) and (5) of the Sixth Directive.

Decision

1. A new share issue does not constitute a transaction falling within the scope of Article 2(1) 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, as amended by Council Directive 95/7/EC of 10 April 1995.

2. Article 17(1) and (2) of Sixth Directive 77/388, as amended by Directive 95/7, confer the right to deduct in its entirety the VAT charged on the expenses incurred by a taxable person for the various supplies acquired by him in connection with a share issue, provided that all the transactions undertaken by the taxable person in the context of his economic activity constitute taxed transactions.

Summary

Issue of shares upon IPO of a company – Services for consideration – Deduction of VAT

The issue of new shares is not an act falling within the scope of Article 2(1) of the Sixth Directive.

Under Article 17(1) and (2) of the Sixth Directive, there is a right to deduct all the VAT charged on the costs incurred by a taxable person for the various services which he has engaged in the context of a share issue, provided that all the transactions of which are taxable persons in the context of his business activity, are taxable transactions.

Source