Although obvious at first sight, the problem concerned rises many questions regarding the correct interpretation of the Council Directive 2006/112/EC dated 28 November 2006 on the common system of value added tax, as amended by Council Directive 2009/162/EU dated 22 December 2009 (OJ 2010 L 10, p. 14) (‘the Directive’). Thus, it was a subject-matter of a request for a preliminary ruling from the Cour d’appel de Mons (Court of Appeal, Mons, Belgium) following which a Judgment of the European Court of Justice (Seventh Chamber) dated 27.03.2019 in case C‑201/18, Mydibel SA v État belge (‘the Judgment’) was enacted.
The ‘sale and lease back’ is a variation of the financial lease in which the third party – the seller and the lessee are the same person. The aim of the lessee is to achieve additional funding based on tangible assets, which he possesses and at the same time to make use of the more beneficial ‘sale and lease back’ tax regime. It is often stated that the ‘sale and lease back’ is ‘a purely financial transaction designed to increase the liquidity of the taxable person’. As a consequence of this feature arises the question whether due to the ‘sale and lease back’ a change occurs in the factors used to determine the amount to be deducted in which case an adjustment pursuant to art. 185 of the Directive is required.
An adjustment of the initial deduction of VAT is required in the cases indicated in chapter 5 ‘Adjustment of deductions’ of the Directive. Pursuant to Art. 184 of the Directive: ‘The initial deduction shall be adjusted where it is higher or lower than that to which the taxable person was entitled.’ In addition, Art. 185 of the Directive envisages that an adjustment shall be made where, after the VAT return is made, some change occurs in the factors used to determine the amount to be deducted. This hypothesis precisely is in the center of the request for a preliminary ruling and is the subject-matter of the above-mentioned Judgment of the European Court of Justice (‘ECJ’).
In the Judgment, ECJ has indicated that pursuant to the well-established practice of the Court, the assessment whether the circumstances occurred after the deduction had affected that deduction or not, depends on the use to which the goods or services are put, or are intended to be put, which determines both the extent of the initial deduction to which the taxable person is entitled and the extent of any adjustments in the course of the following periods. ECJ noted that the adjustment mechanism pursuant to Art. 184-186 of the Directive, ‘is intended to enhance the precision of deductions so as to ensure the neutrality of VAT, so that transactions effected at an earlier stage continue to give rise to the right to deduct only to the extent that they are used to make supplies subject to VAT.’ Thus ‘a close and direct relationship between the right to deduct input VAT and the use of the goods or services concerned for taxable output transactions‘ is created.
The ECJ`s conclusion envisages that the mere creation of an emphyteutic right not subject to VAT cannot be regarded as a change in the factors used to determine the amount of the deductions made after the VAT return was made. Thus, the inference that the establishment of such emphyteutic right terminates the close and direct relationship between the right to deduct input VAT and the use of the goods or services concerned for taxable output transactions, is much less acceptable.
Art. 187-189 of the Directive contain special provisions as to the adjustment of deduction of the VAT when it concerns a capital asset. Pursuant to Art. 189, a) of the Directive, each Member States may define the concept of ‘capital goods’. This concept is mostly related to goods used for the purposes of economic activity and distinguishable by their durable nature and their value and such that the acquisition costs are not normally treated as current expenditure but are written off over several years.
Considering the above-mentioned special rules for adjustment of deduction of VAT in case of capital assets, the ECJ provides some important guidelines to the national courts as to the assessment whether a given transaction in respect of property results in the transfer of the right to dispose of the property as owner. This assessment should be made by the court in each individual case, insofar as pursuant to the practice of ECJ ‘‘supply of goods’ does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law but covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were its owner.’
When deciding whether a distinct transaction, which is part of the ‘sale and lease back’, falls within the concept of ‘capital goods’, the court shall take into account that according to the ECJ`s practice there is a single supply when two or more elements or acts supplied by the taxable person to the customer are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split. Thus, the national court should make its own assessment whether the evidence put before him discloses the characteristics of a single transaction despite its contractual structure.
In the concrete case – subject-matter of the Judgment, the ECJ has concluded that the transactions, which represent ‘sale and lease back’, cannot be classified as ‘supplies of goods’ insofar as the emphyteutic rights reduced by the rights stemming from the leases of real property, do not empower them to dispose of the buildings as if they were their owners.