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 2016 Dr Friederike Grube ID: 809633
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Slide1
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
1
Slide2Topic 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)
2
Slide3IntroductionArt. 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
Slide4Two 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…“
4
Slide5The 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
5
Slide6Judgment 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
…
6
Slide7Judgment 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
Slide8Judgment 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
Slide9Judgment 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
Slide10Judgment 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
.
10
Slide11Judgment 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
Slide12Judgment 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
Slide13Judgment 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
Slide14Judgment 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
Slide15New 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
Slide16Judgment 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
Slide17Judgment 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
Slide18Slide19Judgment 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
Slide20Judgment 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
Slide21Slide22Judgment 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
Slide23Judgment 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
.
23
Slide24Judgment 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
Slide25Judgment 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
Slide26Judgment 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
Slide27Judgment 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
27
Slide28Judgment 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
Slide29Judgment 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
29
Slide30Judgment 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
.
30
Slide31Judgment 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
Slide32Judgment 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….
32
Slide33Judgment 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
Slide34Judgment 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
….
34
Slide35Judgment 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…
35
Slide36Judgment 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
.
36
Slide37Judgment 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
.
37
Slide38Judgment 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
.
38
Slide39Judgment 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
Slide40Judgment 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..
40
Slide41Final remarksThank you for your attention!!!41