VATupdate

ECJ C-140/17 (Gmina Ryjewo) – Judgment – Input VAT deduction adjustment after change of use of capital goods

Judgment of 25 July 2018 in Case C‑140/17 – Gmina Ryjewo


Article in the EU VAT Directive

Articles 167, 168 and 184 et seq. of Council Directive 2006/112/EC

Article 167
A right of deduction shall arise at the time the deductible tax becomes chargeable.

Article 168
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;
(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18 (a)and Article 27;
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
(d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22;
(e) the VAT due or paid in respect of the importation of goods into that Member State.

Article 184
The initial deduction shall be adjusted where it is higher or lower than that to which the taxable person was entitled.


Facts

Gmina Ryjewo (Municipality of Ryjewo, Poland) has been registered as a taxable person for the purpose of VAT. It has commissioned the construction of a community centre. In connection with that construction work, the municipality was supplied with goods and services, in respect of which it paid VAT. Once the construction of the community centre had been completed, the municipal cultural centre was entrusted with its management.

4 Years later the municipality wanted to transfer ownership of the building into its assets and to manage it directly. The municipality intended subsequently to use the community centre both free of charge, in order to meet the needs of the municipality’s population, and for consideration, by renting it out for commercial purposes. With regard to that paid use, the municipality expressly stated its intention to issue invoices that included VAT. The municipality had not yet deducted the input VAT paid.

The tax authorities denied the deduction of input VAT, primarily on the ground that, having acquired the goods and services in question for the purpose of making the building available to the municipal cultural centre free of charge, the municipality had not acquired those goods for the purposes of an economic activity and had therefore not acted as a person subject to VAT.

Upon the appeal of the municipality, the Polsih Court decided that Gmina Ryjewo’s initial use of the goods and services for the purpose of carrying out activities that are not subject to VAT does not deprive it of the right subsequently to deduct the input tax, in the case where the intended use of those goods and services has changed and they are then used for the purpose of taxable transactions. In that regard, the municipality cannot validly be criticised for not expressly stating that, when it acquired the building, it intended to use it as part of an economic activity.

Considerations:

The ECJ considered that the right of taxable persons to deduct the VAT due or already paid on goods purchased and services received as inputs from the VAT which they are liable to pay is a fundamental principle of the common system of VAT established by EU legislation. The right to deduct VAT is, however, subject to compliance with both substantive and formal requirements or conditions.

Only a person who is a taxable person and who is acting as such at the time of the purchase of goods has a right to deduct in respect of those goods and may deduct the VAT due or paid in respect of those goods if he uses them for the purposes of his taxable transactions. The right to deduct input VAT arises at the time when the deductible tax becomes chargeable, namely when the goods are delivered.


Questions

In the light of Articles 167, 168 and 184 et seq. of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax 1 and the principle of neutrality, does a municipality have the right to deduct (by effecting an adjustment) input tax on its investment expenditure in the case where:

–    in the initial period after production (acquisition), the capital goods were used for the purposes of a non-taxable area of activity (in connection with the municipality’s performance of the tasks of a public authority within its area of responsibility); and

–    the use to which the capital goods are put has changed and they will in future be used by the municipality also to carry out taxable transactions?

Is it relevant to the answer to the first question that, at the time when the capital goods were produced or acquired, the municipality’s intention to use those goods in future to carry out taxable transactions was not indicated clearly?

Is it relevant to the answer to the first question that the capital goods will be used for the purpose of carrying out both taxable and non-taxable transactions (in connection with the performance of the tasks of a public authority) and that it is not possible to ascribe specific investment expenditure to one of the abovementioned transaction categories?


AG Opinion

Pursuant to Articles 167, 168, 184, 185 and the second subparagraph of Article 187(2) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax and in the light of the principle of neutrality, a municipality has the right to deduct input tax on its investment expenditure by effecting an adjustment if it carries out taxable transactions with the investment. This is also the case where the capital goods produced or acquired were initially used for non-taxable purposes, but the use to which the capital goods are put has changed within the period provided for in Article 187 of the VAT Directive and the goods are now also used by the municipality to carry out taxable transactions.

In that connection, it is irrelevant whether, at the time of the production or acquisition of goods, an intention was indicated to use those goods in future to carry out taxable transactions.

Nor is it relevant to the answer to the first question that the capital goods are used for the purpose of carrying out both taxable and non-taxable transactions or that it is not possible to ascribe specific investment expenditure to one of the abovementioned transaction categories. This is relevant solely to the question of the apportionment of the amount of the input tax deduction and not to the input tax adjustment as such.


Decision

Articles 167, 168 and 184 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax and the principle of the neutrality of value added tax must be interpreted as not precluding abody governed by public law from being entitled to a right to adjustment of deductions of value added tax paid on immovable property acquired as capital goods in a situation, such as that at issue in the main proceedings, where, at the time of the acquisition of those goods, first, they could, by their very nature, be used both for taxable activities and for non-taxable activities but were initially used for non-taxable activities, and second, that public body had not expressly stated its intention to use those goods for a taxable activity but had also not excluded the possibility that they might be used for such a purpose, so long as it follows from an assessment of all the factual circumstances, which it is for the referring court to carry out, that the condition laid down by Article 168 of Directive 2006/112, according to which the taxable person must have acted as a taxable person at the time when it made that acquisition, is satisfied.


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