ECJ C-207/23 (Finanzamt X) – Judgment – Free transfer of heat B2B is considered a “supply of goods” and is subject to VAT

On April 25, The ECJ has released the judgment in the case C-207/23 (Finanzamt X).

Context: Preliminary ruling – Common system of value added tax – Directive 2006/112/EC – Taxable transactions – Article 16 – Withdrawal of an item from the undertaking and the free transfer of this item to another taxable person – Drying of wood and heating of asparagus fields with heat from a combined heat and power plant , which is connected to a biogas plant – Art. 74 – Tax assessment basis – Cost price – Limitation to input-taxed costs

Summary

The European Court of Justice (ECJ) issued a judgment in Case C-207/23 on April 25, 2024, concerning the VAT treatment of heat supplied free of charge between businesses.

The Court ruled that the free transfer of heat from one business to another is considered a “supply of goods” and is subject to VAT, regardless of whether the recipient can deduct input tax. The taxable amount for this free supply should be based on the cost price of the heat, which includes both directly attributable costs of production and indirect costs such as financing.

The Court’s decision aims to prevent situations where businesses could gain an unfair advantage by avoiding VAT on the supply of goods

Article in the EU VAT Directive

Articles 16 and 74 of the EU VAT Directive 2006/112/EC.

Article 16 (Taxable transaction – Supply of goods)
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 74 (Taxable amount)
Where a taxable person applies or disposes of goods forming part of his business assets, or where goods are retained by a taxable person, or by his successors, when his taxable economic activity ceases, as referred to in Articles 16 and 18, the taxable amount shall be the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined at the time when the application, disposal or retention takes place.

Facts

The applicant, appellant on a point of law and respondent in the appeal on a point of law (applicant) operates a biogas plant that produces biogas from biomass. In 2008 (the relevant year), the biogas produced was used for decentralised electricity and heat generation in a connected cogeneration plant, where it was supplied to a combustion engine that powered a generator.
The majority of the electricity generated in this way was supplied to the general electricity grid and paid for by the operator of that grid.
The heat also produced as a by-product of this process was partially reused in the production process. However, in the relevant year the applicant supplied most of the heat to Company A ‘free of charge’ as per a contract concluded on 29 November 2007 for the drying of wood in containers and to B GbR (Company
B) as per a contract concluded on 29 July 2008 for the heating of asparagus fields. Both contracts specified that the level of remuneration was to be determined on an individual basis according to the economic situation of the recipient of the heat, and was not to be specified in the contracts themselves.
In the relevant year, in return for supplying 6 714 247 kWh of electricity, the applicant received from the grid operator, in addition to a minimum feed-in tariff of EUR 1 054 337.85 in accordance with Paragraph 8(1) of the German Gesetz für den Vorrang Erneuerbarer Energien (Law prioritising renewable energy; ‘the EEG’), as amended on 7 November 2006 (BGBl. (Federal Law Gazette) I 2006, 2550), an additional amount in accordance with Paragraph 8(3) of the EEG (‘cogeneration bonus’) as the electricity generated by the applicant was considered to be electricity generated within the meaning of Paragraph 3(4) of the German Gesetz für die Erhaltung, die Modernisierung und den Ausbau der Kraft-WärmeKopplung (Law on the preservation, modernisation and expansion of combined heat and power; ‘the KWKG’), as amended on 19 March 2002 (BGBl. I 2002, 1092). This cogeneration bonus, which amounted to EUR 85 070.66, was included by the defendant, appellant on a point of law and respondent in the appeal on a point of law (the Finanzamt (Tax Office)) in the basis for calculation of taxable transactions in accordance with the VAT return filed by the applicant.
As the applicant did not charge a fee to the recipients of the heat, the auditor commissioned to carry out an external audit of the applicant considered this to be a disposal of heat free of charge within the meaning of Paragraph 3(1b), first sentence, third indent, of the German Umsatzsteuergesetz (Law on turnover tax; ‘the UStG’) for the benefit of A and B. Given the absence of a purchase price for the heat, the auditor used the cost price to determine the taxable amount for this application of goods in accordance with Paragraph 10(4), first sentence, first indent, of the UStG. Of the overall costs listed in the profit and loss statement amounting to EUR 1 104 453.35, the auditor calculated that the amount of EUR 384 791.55 (= 34.84%) was attributable to the supplied heat. On the basis of
this taxable amount, the auditor determined that turnover tax in the amount of EUR 73 110.29 was due.
The Tax Office followed up the results of the audit with a VAT notice for 2008, which was issued on 17 November 2011. An appeal was lodged against this notice, but this was rejected by the Tax Office as unfounded in its appeal decision of 1 August 2012.
In its original action the applicant invoked, inter alia, the fact that the cogeneration bonus was a consideration from a third party. The Finanzgericht (Finance Court) upheld the action filed by the applicant in first-instance proceedings. Upon appeal by the Tax Office, the Bundesfinanzhof (Federal Finance Court) set aside the ruling issued by the Finance Court in its judgment of 31 May 2017 – XI R 2/14 (Collection of Decisions of the Federal Finance Court [BFHE], 258, 191, Bundessteuerblatt (Federal Tax Gazette) [BStBl] II 2017, 1024) and referred the case back to the Finance Court. It did not consider the cogeneration bonus paid by the electricity grid operator to the applicant to be remuneration for the heat provided by the applicant ‘free of charge’. Instead, it took the view that the remuneration received from the electricity grid operator should be regarded as consideration for the electricity supplied to it by the applicant. The Federal Finance Court concluded that a ruling could not yet be handed down in the case as it was not possible to decide how much tax should be applied to the disposal of goods free of charge by the applicant. It argued that this tax rate is to be calculated on the basis of Paragraph 10(4), first sentence, first indent, of the UStG in accordance with the principles of the Federal Finance Court judgments of 12 December 2012 – XI R 3/10 (BFHE 239, 377, BStBl II 2014, 809) and 16 November 2016 – V R 1/15 (BFHE 255, 354, BStBl II 2022, 777). Thus, the Finance Court was called upon to produce the necessary findings.
In the proceedings at second instance the applicant appealed against the calculation made by the Tax Office in relation to the taxable amount for the heat supplied, inter alia on the ground that the amount of the application of goods should be calculated in accordance with Paragraph 10(4), first sentence, first indent, of the UStG on the basis of the cost price. The Finance Court upheld the action in part in the second instance. It reduced the amount of VAT owed, concluding that the VAT for the goods disposed of free of charge should be calculated in accordance with Paragraph 10(4), first sentence, first indent, of the UStG on the basis of their cost price, which is to be calculated using the so-called market value method, taking account of the market values of electricity and heat in the applicant’s specific location.
In their appeals on points of law, the applicant and the Tax Office invoke a breach of substantive law.

Questions

1. If a taxable person makes heat from its company available to another taxable person for the latter’s economic operations free of charge (in this case: allocation of heat from the cogeneration plant of an electricity provider for the benefit of an agricultural company for the purpose of heating asparagus fields), is this to be regarded as an ‘application by a taxable person of goods forming part of his business assets’ in the form of a ‘disposal free of charge’ within the meaning of Article 16 of the VAT Directive? Is the answer to this question dependent on whether the taxable person receiving the heat uses it for purposes that would entitle that person to a deduction of input tax?
2. In the case of an application of goods (within the meaning of Article 16 of the VAT Directive), is the cost price within the meaning of Article 74 of the VAT
Directive to be calculated solely on the basis of those costs that are subject to input tax?
3. Does the cost price include only direct production or generation costs, or does it also include only indirectly attributable costs such as financing costs?

ECJ C-207/23 (Finanzamt X) – Judgment – Free transfer of heat B2B is considered a “supply of goods” and is subject to VAT

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