The principle of neutrality - PowerPoint Presentation

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The principle of neutrality and the right to deduct Input VAT in the jurisdiction of the European Court of Justice and the Federal Tax Court of Germany

3 August 2016Dr. Friederike GrubeJustice at the Federal Tax Court of Germany

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Topic OverviewIntroductionFirst ruling of the ECJ concerning the principle of neutrality: Case RompelmanFurther development of the principle of

neutrality in connection with the right to

deduct Input-VAT: Case INZO,

Case Ghent Coal, Case Fini H.New Developments

:

Case Polski Trawertyn, Case Malburg, Case Sweda Jurisdiction of the Supreme Tax Court (Bundesfinanzhof)

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IntroductionArt. 113 of the European Treaty of Lissabon: Harmonization of legislation concerning VAT in the European Union – Principle of unanimityVAT-Directive 1. 01. 2007 (more than 400 articles) Provisions of

VAT-Directive have to be implemented in the national VAT-Law of

each Member State of the

European UnionArt. 267 European Treaty of Lissabon: Reference of preliminary rulings to

the

European Court of Justice (Luxembourg) 3

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Two aspects of the Principle of neutrality in VAT-LawThe principle of neutrality in VAT-Law is equivalent to the principle of equal treatment

The principle of neutrality is connected with the

right of taxable

persons to deduct Input-VAT Article 168 of

the

VAT-

Directive rules:„In so far as goods and services are used for the purposes of

the

taxed

transactions of a taxable person…is entitled to deduct Input-VAT…“

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The right to deduct Input-VATin a MS of the European Union Output-VAT/Input-VAT Output-VAT T

-------------------

A

---------------

Private

P Taxable

person

T

has

the right to

deduct

Input-VAT

and has to pay VAT for his output-supply Taxable person A has the right to deduct Input-VAT and has to pay VAT for his output-supplyPrivate person P has to pay VAT as a final consumer and has no right to deduct Input-VAT

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Judgment of the ECJ 14 February 1985Case C-263/83 RompelmanFacts of the caseV--->--->-->-- R--->---->----TPR acquired

the future title to 2 units in premises under construction

(showrooms)R

intended to let the showrooms to

traders

R

claimed a refund of Input-VAT before the premises in question had been letThe inspector of taxes

rejected

the

claim because the actual exploitation of the purchases had not yet commenced

…

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Judgment of the ECJ 14 February 1985Case C-263/83 RompelmanII. Decision of the ECJThe taxable person is

allowed do deduct Input-VAT in so far as the goods and

services on which

the tax was paid are used for

his

taxed transactions (Art. 17 Sixth Council Directive – now Art. 168 VAT-Directive)According to the principle of neutrality

this

provision

applies without distinction to the VAT paid before or after commencing

the

output supplies of goods or servicesR is entitled to deduct Input-VAT MS have the possibilities of imposing certain obligations in order to prevent abuses and to ensure that the deduction is limited to the real costs connected to the business activity7

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Judgment of the ECJ 29 February 1996Case C-110/94 INZOI. Facts of the caseINZO was founded in 1974 to develop processes

for the treatment of sea water and turn

it into

drinking water.To that end INZ0

acquired

goods and commissioned a study on the profitability of a project for the construction. The study of

the

project

identified numerous problems and some of the investors withdrew. In 1988

the

project was abandoned and INZO was put into liquidation. The tax authority realized that INZO had not carried out any taxable transaction. It therefore claimed repayment of the VAT recovered by INZO between 1978 and 1982. INZO contested that claim. 8

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Judgment of the ECJ 29 February 1996Case C-110/94 INZOII. Decision of the ECJAlthough the wording

of Art. 168 VAT Directive does not allow the deduction since the

Input-VAT could not be

connected with any output VAT-taxed supplies

the

ECJ

decided that – according to the principle of neutrality - in a situation such as that of INZO the Input-VAT

could

be

deducted

– provided that there was no fraud or abuse by the person

or

entity exercising the right of deduction….9

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Judgment of the Financial Court of Berlin25 April 1996 - I 37/94 -A taxable person, who had tried to run a restaurant on a ship in Berlin on the river Spree

is entitled to deduct Input-VAT although he never carried out any

output VAT-taxed

supplies of services because he had never

obtained

the approval to use the ship on the river Spree which was not the fault of the taxable person in

question

.

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Judgment of the ECJ 15 January 1998Case C-37/95 Ghent Coal Terminal I. Facts of the caseIn 1980 Ghent Coal

purchased land in the harbour area of Ghent

and carried out investment

work and deducted the Input-VAT. On 1 March 1982

Ghent

Coal had to exchange the land in question for other land situated elsewhere in the

Ghent

harbour

area

. Therefore Ghent Coal never used the land in respect

of

which it had carried out the investment work giving rise to the deduction. In 1984 the tax authorities sought repayment of the VAT… 11

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Judgment of the ECJ 15 January 1998Case C-37/95 Ghent Coal Terminal II. Decision of the

ECJAlthough a literal application

of Article 168 of

the VAT-Directive would

have

let to denying Ghent Coal the right

to

deduct

,

because

the works in question were

never

used for the purposes of VAT-taxed transactions the ECJ deviated from the literal interpretation of Article 168 of the VAT-Directive and decided that Ghent Coal was entitled to deduct Input-VAT according to the principle of neutrality12

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Judgment of the ECJ 3 March 2005Case C-32/03 Fini H. I. Facts of the caseFini H. was created in 1989 with the object of

running a restaurant. Therefore it leased premises from

20 May 1988. The lease, which was concluded

for a term of 10 years, could

be

terminated only with effect from 30 September 1998. Fini H. closed the restaurant at the end of 1993 and

the

premises

subsequently

remained unused. The landlord refused to consent to terminate the

lease.

Fini H.

continued to deduct Input-VAT without declaration of any Output VAT. The tax authority demanded repayment of the sums paid to Fini H. who did not accept this....13

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Judgment of the ECJ 3 March 2005Case C-32/03 Fini H. II. Decision of the ECJReferring again to the principle

of neutrality and relying on precedents such as INZO the

ECJ held that

the principle of neutrality allowed deduction in

this

case – provided of course that there was no fraud or abuse involved…14

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New developments: Judgment of the ECJ 1 March 2012Case C-280/10 Polski TrawertynI. Facts of the caseOn 26 Dec. 2006 a

court official issued an invoice to the partners

for the

acquisition of immovable property. On 26 Apr. 2007 the

partners

founded Polski Trawertyn. The same day a notary issued an invoice to the partnership for drawing up

a

notarial

act

.

In relation of the first invoice the tax office

stated

that Polski Trawertyn did not have the right to deduct Input-VAT since she was not the acquirer of the immovable property. As regards the second invoice the tax office denied the right to deduct Input-VAT, because the invoice had been issued before Polski Trawertyn was registered in the companies register – since the registration was effected the 5 June 2007, the invoice of 26 Apr. 2007 was issued to a non-existent entity…. 15

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Judgment of the ECJ 1 March 2012Case C-280/10 Polski TrawertynII. Questions referred to the ECJ by the Court of

PolandIs an entity, in the persons of future

partners, which effects

investment expenditure before formal registration of the

partnership

…, entitled, following registration of the partnership as an entity… to..deduct Input-VAT incurred in connection with

investment

ecpenditure

which is used for taxable activities carried out within the

framework

of

the partnership?Does an invoice..which was issued to the partners and not to the partnership, preclude…the right to deduct Input-VAT….? 16

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Judgment of the ECJ 1 March 2012Case C-280/10 Polski TrawertynIII. Considerations of the ECJ regarding the 1 questionThe

partners themselves are not entitled to deduct the

Input-VAT in question because

the contribution of the capital

goods

at

issue is an exempt transactionAccording to the case-law (Rompelmann, INZO) preparatory acts must be

treated

as

constituting

economic activityThe principle of neutrality requires that the

first

investment expenditure must be regarded as an economic activityAnyone who carries out such investment transactions must be regarded as a taxable personAccordingly the partners may be considered as taxable persons for.. VAT and in principle entitled to deduct Input-VAT17

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Judgment of the ECJ 1 March 2012Case C-280/10 Polski TrawertynIII. Considerations of the ECJ regarding

the 1 questionSince it is not

possible for

the partners to deduct Input-VAT according

to

the national VAT-Law the partnership must be entitled to take account of those

investment

transactions

when deducting Input-VAT in order to ensure

the

principle of neutralityOn the other hand the tax authorities would be entitled to demand repayment of the amounts deducted if the right to deduct had been exercised fraudulently or abusively19

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Judgment of the ECJ 1 March 2012Case C-280/10 Polski TrawertynIV. Answer to the 1 question..Art. 9, 168 and 169 of the

VAT-Directive must be interpreted as precluding national legislation wich

permits neither partners

nor their partnership to exercise

the

right to deduct Input-VAT on the investment costs incurred by those partners, before the

creation

and

registration

of the partnership, for the purposes of and with the view

to

its economic activity20

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Judgment of the Federal Tax Court6 September 2007 V R 16/06A partnership is entitled to deduct Input-VAT if it carries out VAT-taxed transactions or

has the intention to do soA single partner

of a partnership

may exercise the right to

deduct

Input-VAT in

relation to the common property of the partnership if he uses this property for

economic

acitivity

or has the intention to do soThe single partner of a partnership

is

not entitled to deduct Input-VAT in relation to the economic activity of a future partnership…. Personal remark: This judgment is not in accordance with the judgment of the ECJ Polski Trawertyn…22

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Judgment of the ECJ 13 March 2014Case C-204/13, MalburgI. Facts of the caseUp to 31 December

1994 Mr. Malburg held a 60 % share in the

partnership

Malburg & Malburg – „old

partnership

“ –

while the other 2 partners each held 20 % shares. The

old

partnership

was

dissolved

on 31 December 1994 with a portion of

the

client base being transferred to each of the partners. With effect from 1 january 1995 the 2 other partners each operated separately as independent tax advisors. On 31 December 1994 Mr Malburg founded a new partnership in which he held a 95 % share (the „new partnership“). Mr Malburg

made

available

the

client

base

free

of

charge

to

the

new

partnership

for

use

in

its

business

.

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Judgment of the ECJ 13 March 2014Case C-204/13, MalburgI. Facts of the caseThe tax office

assessed the old partnership as liable for

payment of VAT

for 1994 based on the transfer of

the

client base. The tax due was paid. The old partnership issued an invoice dated 16 august 2004 and addressed

to

Mr.

Malburg

the

amount of 1, 5 million € for the division of assets on 31 December 1994 including a separate

itemisation

for VAT. Mr Malburg deducted Input-VAT which had been invoiced to him in respect of the acquisition of the client base. The tax authorities refused that VAT deduction. 24

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Judgment of the ECJ 13 March 2014Case C-204/13, MalburgII. Question referred to the ECJ:Having regard to the principle of neutrality, must …

Article 168 of the VAT-Directive interpreted as meaning that

a partner in a partnership

of tax advisors who acquires from

the

partnership a client base for the sole purpose of transfer it directly thereafter and free

of

charge

to

a

newly founded partnership, in which he is the principal partner, for

it

to use such client bases in its business, may be entitled to deduct the Input-Tax paid on the acquisition of the client base?25

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Judgment of the ECJ 13 March 2014Case C-204/13, MalburgIII. Considerations of the ECJThe situation in the case Polski Trawertyn was uniqueThe existence of a

direct and immediate link between a particular Input-Transaction and a particular Output-Tansaction or

transactions giving

rise to entitlement to deduct is in

principle

necessary before a taxable person is entitled to deduct Input-VAT26

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Judgment of the ECJ 13 March 2014Case C-204/13, MalburgIII. Considerations of the ECJIn the case Polski Trawertyn the output

-transaction fell within the scope of VAT, but constituted a transaction exempt

from VATIn the

case Malburg the provision of the client

base

for use by the new partnership free of charge does not fall within the scope of VAT, because this

cannot

be

considered

as an economic activityConsequently there is not a direct and immediate link between an Input – and Output-transaction

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Judgment of the ECJ 13 March 2014Case C-204/13, MalburgIII. Considerations of the ECJAlthough this immediate link is missing, there might

be a right to deduct Input-VAT, where the costs

of the services

in question are part of the general

costs

of

the taxable person and are, as such, components of the prize of the goods or services

he

supplies

….

That

might be the case if Mr. Malburg had acquired

the

client base at issue in the course of his activity as a managing director…but the referring Court had excluded that possibility from his reasoning…28

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Judgment of the ECJ 13 March 2014Case C-204/13, MalburgIII. Considerations of the ECJThe principle of neutrality does not apply to a situation such

as that at issue in the case Malburg where the

provision of the

client base for the use of a partnership

free

of

charge is not a transaction falling within the scope of VATMoreover the principle of neutrality is not a rule of primary

law

but a

principle

of

interpretation

to be applied concurrently with the principle on which it is a

limitation

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Judgment of the ECJ 13 March 2014Case C-204/13, MalburgIV. Answer to the question..Art. 168 VAT-Directive must

be interpreted as meaning

that a

partner in a partnership of tax

advisors

who acquires…..a client base for the sole purpose

of

making

that

client base available directly

and

free of charge to a newly founded partnership of tax advisors, in which he is the principal partner, so that that partnership can use that client base in its business, without that client base however becoming part of the capital assets of the newly founded

partnership

,

is

not

entitled

to

deduct

Input-VAT

paid

on

the

acquisition

of

the

client

base

concerned

.

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Judgment of the Federal Tax Court 22 August 2014 XI R 26/10It is possible that Mr Malburg had

acquired the client base

at issue in the

course of his activity

as

a managing direktor of the „new partnership“ and that the

costs

resulting

from that acquisition had to

be

considered as forming part of the general costs relating to his activity as managing directorThen Mr Malburg might be entitled to deduct Input-VAT To investigate the relevant facts for this assumption the Federal Tax Court had to give the case back to Financial Court of Saarland…. 31

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Judgment of the ECJ 22 October 2015Case C-126/14, SvedaFacts of the caseSveda is a for

profit legal person whose activities

consist in

the organisation of trade fair, conferences

,

leisure

activities etc. On 2 March 2012 Sveda concluded an agreement with the National Paying

Agency

under

a

Ministry

.

Under that agreement Sveda undertook

to

implement the project entitled „Baltic mythology recreational (discovery) path“ and to offer the public access to it free of charge. The agency payed a share of up to 90 % of the costs of implementing the project, with the remaining expenses to be covered by Sveda. Sveda deducted the

Input-VAT

relating

to

the

construction

work

of

the

path

.

The

taxoffice

denied

the

deduction

of

the

Input-VAT….

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Judgment of the ECJ 22 October 2015Case C-126/14, SvedaII. Question referred to the ECJ Can Article

168 of the VAT-Directive be interpreted

as granting

a taxable person the

right

to deduct Input-VAT paid in producing or acquiring non-current assets

intended

for

business purposes, which….are directly

intended

for use by members of the public free of charge, but may be recognized as a means of attracting visitors to a location where the taxable person, in carrying out his economic activities, plans to supply goods and/or services? 33

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Judgment of the ECJ 22 October 2015Case C-126/14, SvedaIII. Considerations of the ECJA person who incurs

investment expenditure with the

intention, confirmed

by objective evidence, of

engaging

in

economic activity must be regarded as a taxable person who

has

the

right to deduct Input-VAT Whether a taxable

person

acts as such for the purposes of an economic activity is a question of fact which must be assessed by the referring courtHere the recreational path concerned may be regarded as a means of attracting visitors with a view to providing them with goods and services, such as souvenirs

,

food

and

drinks

as

well

as

access

to

attractions

etc.

Therefore

Sveda

acquired

or

produced

the

goods

with

the

intention

of

carrying

out an

economic

activity

….

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Judgment of the ECJ 22 October 2015Case C-126/14, SvedaIII. Considerations of the ECJThe finding is not put

into question by the

circumstance that

those goods will have

to

be made available to the public at no cost

,

because

this

will not

prevent Sveda from carrying out economic

activities

The acquisition or production of the capital goods is directly intended for use by the public free of charge but at the same time it is part of the taxable person‘s objective of carrying out subsequent taxed transactionsFurthermore the use of capital goods free of charge does not affect the existence of

the

direct

and

immediate link

between

Input

and

Output

transactions

,

because

the

activities

of

Sveda

are

not

exempt

of VAT

nor

do

they

fall outside

the

scope

of VAT…

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Judgment of the ECJ 22 October 2015Case C-126/14, SvedaIV. Answer to the question…A taxable

person is entitled to

deduct Input

VAT… for the purposes of a

planned

economic activity related to rural and recreational tourism, which

are

(i)

directly

intended

for use by the public

free

of charge, and may (ii) enable taxed transactions to be carried out, provided that a direct and immediate link is established between the expenses associated with the Input transactions and Output transactions giving rise to the right to deduct or with the taxable person‘s economic activity

as

a

whole

,

which

is

a matter

for

the

referring

court

to

detemine

on

the

basis

fo

objective

evidence

.

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Judgment of the Federal Tax Court14 Mai 2008 XI R 60/07I. The facts of the caseIn 1999 the plaintiff

built a restaurant and a petrol station

on his

premises. The restaurant was let – not

exempt

from VAT – to another taxable person. The same happened to the

petrol

station

.

To

get access from the premises

to

the public roads it was necessary to change the crossing of the streets in a roundabout building. According to a treaty concluded with the Fed. Rep. of Germany the plaintiff was obliged to establish the roundabout circulation on his own costs. The fulfilment of this contract was the condition to get the

building

permission

for

the

restaurant

and

the

petrol

station

.

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Judgment of the Federal Tax Court14 Mai 2008 XI R 60/07I. The facts of the caseAccording to

the lease-agreement with the operator of the

petrol

station the plaintiff was obliged

to

establish the roundabout circulation and should receive a payment

of 8, 25 % per

year

of

the

building costs besides the houserent

.

The

taxoffice decided that the plaintiff had a right to deduct Input-VAT but also had to pay VAT for a taxable supply of goods free of charge – the supply of the roundabout circulation to Germany – for business use. The plaintiff lodged a complaint against the decision of the taxoffice. The taxoffice rejected the complaint. The Financial Court decided

in

favour

of

the

taxoffice

.

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Judgment of the Federal Tax Court14 Mai 2008 XI R 60/07II. Decision of the CourtThe Federal Tax Court decided that

the plaintiff had a right to

deduct Input-VAT but at the

same time had to pay VAT

for

a

supply of goods to the Federal Republic of Germany free of charge for purposes of

his

business

(§ 3 Abs. 1b Satz 1 Nr. 3 UStG;

Article

16 of the VAT-Directive). The Federal Tax Court did not

see

any problem with „double-taxation“ because the plaintiff had the right to deduct Input-VAT… 39

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Judgment of the Federal Court13 January 2011 V R 12/08(1)If the taxable person has the

intention – right from the

start – to

use the acquired

goods

or services not for his economic activity and for

supplies

free

of

charge he is not entitled to

deduct

Input-VAT

(2) Nor is he entitled to deduct Input-VAT if he establishes development measures and has the intention – right from the beginning - to supply these infrastructure works free of charge to a local community for public use(3) Nor is he entitled to deduct Input-VAT if he supplies the premises

including

the

established

development

measures

not

free

of

charge

to

a

local

community

for

public

use

,

because

the

supply

of

land

in

principle

is

exempt

of VAT in

Germany..

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Final remarksThank you for your attention!!!41