The Court of Justice of the European Union (“the Court”) ruled by a judgment dated 16.09.2020 an interesting case of denial of the right to VAT deduction for supplies received for construction works for the extension of a municipal road. This road was both for public use and was used by the taxable person.
The Court analyzed basic principles of its settled case-law.
The facts under the dispute
- A German managing holding company and its two subsidiaries form one tax entity.
- One of the subsidiaries is granted authorization from the regional council to use a stone quarry for extraction of limestone.
- A condition for the use of the quarry is the reconstruction of the access to it on a municipal road, open for public use. The projects belong to the municipality. The costs are borne by the subsidiary. After the reconstruction, the road must be used by the subsidiary while the road remains opne for public use.
- The subsidiary commissioned the other subsidiary from the holding to carry out that extension of the municipal road.
- The German holding company did not take into account the costs incurred by the first subsidiary for the construction works, but deducted the amounts of VAT attaching to the input services received from the second subsidiary.
- The national tax administration considers that the extension of the road in for the benefit of the municipality represents free-of-charge supply and as such is subject to The German holding company is issued a tax adjustment notice.
- The German holding company appeals by administrative and judicial order.
- The respective national court stays the proceedings and refers to the Court with questions concerning the right to deduction of the paid VAT and the way the supplies concerned shall be treated.
The questions to the Court and its replies
2.1 Is a taxable person entitled to deduction of VAT paid for received supplies for construction works on extension of a road carried out for the benefit of a municipality?
The answer is “Yes”, where:
- That road is used both by the taxable person in connection with its economic activity and by the public, and
- Those extension works do not exceed what is necessary to allow that taxable person to carry out its economic activity and
- The costs of those works are included in the price of the transactions carried out by that taxable person.
The Court’s considerations:
- The deduction system concerns the entire economic activity of the persons and guarantees neutrality of all economic activities, whatever their purpose or results.
- If the taxable person, acting as such at the time when he acquires goods or receives services, uses those goods or services for the purposes of his taxed transactions, he is entitled to deduct the VAT paid or payable in respect of those goods or services.
- The right is at hand when the received supply which is taxable with VAT has direct and immediate link to one or more carried out supplies incurring right to deduction or at least the costs made for the received goods or services are part of the total costs related with the overall economic activity of the taxable person.
- In the particular case, the operation of the quarry and the exercise of the economic activity on the part of the taxable person would not have been possible without the works on extension of the municipal road. The fact that the municipal road is open also for public use is not important.
- The costs for the received supplies related to the extension form part of the price of the services carried out by the person.
- A direct and immediate link is at hand in this case between the construction works on the extension of the road and the overall economic activity related with the operation of the limestone quarry.
- If the works for the extension of the road are limited to what is necessary for that purpose, the right to deduct should be recognized for all the costs resulting from those works. However, if the construction works exceed what is necessary to ensure the operation of the quarry, the right to deduct should be recognized only for the respective part of the costs, necessary for the economic activity of the person. The respective national court should check the above circumstances.
2.2 Does the authorization to operate the quarry represent consideration received by the taxable person who has carried out for free those works for the extension of the municipal road?
Are the construction works for this reason supply carried out for consideration?
The answer of both the questions is “No”.
Generally, a supply is carried out for consideration when there is a direct link between that supply and the reciprocal consideration actually received by the taxable person. A direct link is at hand when there is a legal relationship between the provider and the recipient with reciprocal performance and the remuneration received by the provider represents actual consideration for the service supplied to the recipient.
But in this case there is no direct link between the construction work for the benefit of the municipality and the granting of authorization to operate the limestone quarry, because:
- The construction works are carried out on a municipal road while the authorization to operate the limestone quarry is granted by the regional council.
- The decision for granting of the authorization to operate that quarry is unilateral decision of the regional council. And according to the Court’s case-law a relation with reciprocal performance cannot be established with a unilateral act of the public authority.
- No reciprocal performance is exchanged for the construction works.
- The construction works do not represent exchanged reciprocal performance for the right the quarry to be operated, but a condition for the execution of that right.
The Court however recognizes the right of the taxable person to deduct VAT in respect of a supply of services which consists in construction or improvement of a property owned by a third party in the case where those services are used by the taxable person and by the third party. The right is recognized even when the third party will enjoy the services for free.
2.3 Should the supply of construction works for extension of the road be treated as a supply of goods for consideration provided the fact that the road is used by the taxable person while keeping the public access?
The answer is “No”.
The question is asked in the context of two consecutive directives. The provision treats as supply of goods for consideration:
- 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 for free or
- their application for purposes other than those of his business,
Where the VAT on those goods or on their component parts is wholly or partially deductable.
According to the Court:
- The provision treats certain transactions for which no real consideration is received by the taxable person as supplies of goods carried out for consideration and subject to VAT.
- The provision is intended to ensure equal treatment as between a taxable person who applies goods for his own private use or for that of his staff, on the one hand, and a final consumer who acquires goods of the same type, on the other hand. Situations of untaxed final consumption are to be avoided.
- In this case there is no application by the taxable person of goods forming part of his business assets for his private use or for that of his staff – the works are carried out for the benefit of the municipality.
- Application for purposes other than those of the person’s business is also not at hand – the works are carried out for the needs of the person.
- Works on the extension of the municipal road carried out for free by the taxable person are at hand, which, however, should not lead to untaxed final consumption or to breach of the principle of equal treatment. Therefore, these works do not represent a supply which should be considered as a supply of goods for consideration within the meaning of the provision.
And because of the Court’s considerations, set out above in this article, in this case the taxable person is entitled to deduction of VAT paid for received supplies for construction works carried out for the benefit of a municipality.