On July 9, 2020, the European Court of Justice gave its decision in case C-374/19 (Finanzamt Bad Neuenahr-Ahrweiler). The case deals with the question if a taxable person who produces an investment object must adjust the input VAT deduction if he ceases the sales activity justifying the input tax deduction.
Article in the EU VAT Directive
Articles 184, 185 and 187 of Council Directive 2006/112/EC
The plaintiff is the parent company of a GmbH that operates an old people’s and nursing home (free of VAT). In 2003, this GmbH built a cafeteria in an extension of this retirement and nursing home, which was accessible to visitors through an outside entrance and for residents through the dining room of the nursing home.
The applicant originally stated that it would only use the cafeteria for taxable sales, since the cafeteria was intended for visitors from outside and not for the residents who should stay in the dining room. After an initial inspection the tax office largely agreed with this statement, but it seemed unlikely that no residents would visit and use the cafeteria with their visitors. The parties subsequently agreed that 10% of the cafeteria would be used for tax-exempt sales. This led to a VAT correction.
After a second inspection, the tax office found that the GmbH had no sales of goods in the cafeteria from 2009 to 2012 and that the trade was also deregistered in February 2013. This finding prompted the tax office to make a further VAT correction for these years, since the cafeteria was no longer used for sales that entitled to deduct input tax.
The Finanzgericht found that the intention to use the cafeteria for taxable hospitality sales had ceased to exist. Since the premises were not used by outside visitors, the usage shares would have inevitably changed so that the cafeteria is now used exclusively by the residents and therefore 100% for tax-exempt sales.
The applicant appealed against that judgment, claiming that the cafeteria was no longer used for taxable purposes, but this was not a change in the use of that cafeteria. The non-use should be seen as the result of a bad investment. The fact that the tax office had rejected a partial write-off shows that there was still an intention to use the cafeteria (and perform taxable sales) from 2009 to 2012. Access to the cafeteria was closed solely for security reasons. Their use by the residents had not increased.
The Bundesfinanzhof (Germany) decided to refer the following question to the Court of Justice for a preliminary ruling:
A taxpayer who produces an investment object with a view to taxable use with the right to deduct input tax (here: erection of a building to operate a cafeteria) must correct the input tax deduction in accordance with Art. 185 Para. 1 and Art. 187 of the VAT Directive if he sales activity entitling to input tax deduction (here: operation of the cafeteria) ceases and the investment object remains unused to the extent of the previously taxable use?
Does a taxable person who produces an investment object with regard to taxable use with entitlement to input tax deduction (in this case: construction of a building for the operation of a cafeteria) have to adjust the input tax deduction under Article 185(1) and Article 187 of the VAT Directive if he ceases the sales activity justifying the input tax deduction (in this case: operation of the cafeteria) and the investment object now remains unused in the scope of the previously taxable use?
Articles 184, 185 and 187 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as not precluding national legislation pursuant to which a taxable person who has acquired the right to deduct, on a pro-rata basis, value added tax (VAT) related to the construction of a cafeteria, which is annexed to the retirement home operated by him as an activity exempt from VAT and which is intended to be used for both taxed and exempt transactions, is required to adjust the initial VAT deduction where he has ceased all taxed transactions in that cafeteria’s premises, if he has continued to carry out exempt transactions in those premises, thus using them henceforth only for those transactions.
Note from the editors: The ECJ rules that if the owner of the cafetaria ceases to perform (taxable) activities, he (thus) no longer has the right to (fully) recover input VAT.