On 8 May 2019 the European Court of Justice gave its judgment in case C‑566/17 (Związek Gmin Zagłębia Miedziowego w Polkowicach), regarding the deduction of input VAT on both economic and non-economic activities (outside the scope of VAT).
A summary of this case: ZGZM was set up by several Polish local authorities to carry out waste management services. This was a non-business activity for VAT. Next to these activities, in 2013-15 it also carried out some commercial waste management. At the time, the Polish VAT rules did not contain guidance about a pre-pro rata. The ECJ disagreed with ZGZM’s view that it was entitled to full VAT recovery. Member States are not required to regulate everything exhaustively. Despite the absence of express rules, ZGZM was not entitled to VAT recovery on costs attributable to its non-business activities.
Facts (simplified):
Związek Gmin Zagłębia Miedziowego w Polkowicach (‘the Local Government Association’) is a public law entity to which several local authorities have conferred the task of carrying out their statutory duties regarding waste management in the geographical areas for which they are severally responsible. The Local Government Association receives a waste management fee for discharging those duties. Under national law the Local Government Association is not regarded as a taxable person in that respect and its activities are accordingly not subject to VAT.
The Local Government Association also provided additional services consisting of making available and transporting containers for various types of waste. The VAT exemption did not apply to all of those services, i.e. some of those services were subject to VAT (at different rates), whilst others were VAT-exempt.
The Local Government Association incurred capital and revenue expenditure. Some of that expenditure related to supplies made in relation to both its economic and non-economic activities. Therefore, the Local Government Association requested the Head of Fiscal Administration in Poland to give a ruling on its position under the VAT rules.
The Head of Administration ruled that to determine the deductible share of input tax, the Local Government Association should, first, determine the share of input tax connected with its economic activity, that is to say transactions liable to VAT or exempted from that tax and second since some of its activities were exempt from VAT, apply to the amount thus obtained a pro rata. The Head of Administration also held that it was the sole responsibility of the taxable person to select the method for calculation. In short, the Local Government Association should first check if the incurred costs were directly linked to either economic or non-economic activities, the VAT relating to the latter being not deductible.
The Local Government Association contested the decision, arguing that the non-economic activities should be taken into account as well, as the Polish VAT Law (at that moment) did not foresee in a ‘pre pro rata’, i.e. an allocation or coefficient between economic and non-economic activities.
The Polish Court asks the following questions to the European Court of Justice:
- Does the VAT Directive and the principle of VAT neutrality preclude a national practice where the right is granted to a full deduction of input VAT in connection with the purchase of goods and services used both for the purposes of a taxable person’s transactions falling within the scope of VAT (taxed and exempted) and falling outside the scope of VAT, owing to the absence in national law of methods and criteria for apportioning the input tax in relation to those types of transaction?
Judgment:
The European Court of Justice rules as follows:
“The VAT Directive must be interpreted as precluding a national practice whereby the taxable person is granted a right to full deduction of value added tax (VAT) on goods and services acquired by him for economic activities as well , which are taxable, as non-economic activities, which fall outside the scope of VAT, on the grounds that the applicable tax regime does not contain specific rules on the criteria and methods of distribution that enable the taxable person to determine which part of that The input tax paid relates to his economic activities and which part relates to his non-economic activities.”
Source: Curia
