On 9 July 2020 the European Court of Justice gave its judgment in case C‑716/18 (CT v. AJFP Caraş-Severin). The case deals with the question if ‘real estate transactions’ must to be taken into account as ‘ancillary transactions’ when calculating the turnover threshold for SME’s.
Article in the EU VAT Directive
Article 288 [first paragraph] point 4 of Council Directive 2006/112/EC
Title XII Special Schemes – Chapter 1 Special Scheme for Small Enterprises – Section 2 Exemptions or graduated relief
The turnover serving as a reference for the purposes of applying the arrangements provided for in this Section shall consist of the following amounts, exclusive of VAT:
(4) the value of real estate transactions, financial transactions as referred to in points
The case concerns the ‘small enterprise exemption’, whereby taxable persons whose annual turnover is below a certain amount may be exempted from VAT by the Member State. In Romania that amount is EUR 65,000. The question at issue is how that amount is to be calculated if a taxable person carries on various activities. In this case, the taxable person received income from consultancy work as an accountant, tax consultant and lawyer, as an insolvency practitioner, as an author and from the letting of a property. It’s the latter part where the question rises if that income must be taken into account of not.
In addition to working as a university professor, the appellant in the main proceedings (‘the appellant’) practices a number of liberal professions, working as an accountant, tax consultant, insolvency practitioner and lawyer. He also occasionally receives copyright royalties.
In accordance with Romanian legislation, the appellant obtained a single tax registration code, for ‘accounting and financial audit activities, tax consultancy’, corresponding to the professions of tax consultant and accountant. For the purposes of his pursuit of those professions, the appellant declared various registered offices. The seat of the appellant’s individual insolvency practitioner’s office is registered at the address of a property owned by him.
Since 2007, the appellant has also received income from the letting of that property. The property was let to a company of which the appellant is a shareholder and director. This company has its registered office at the rented property and there carries out, inter alia, consultancy, accounting, financial audit and tax consultancy activities, having as its principal declared area of activity ‘business and management consultancy activities’.
The Romanian tax authorities (Administraţia Judeţeană a Finanţelor Publice, ‘the AJFP’) found that during 2012 the appellant had exceeded the turnover ceiling of 220,000 Romanian lei (RON) (EUR 65,000) established for the application of the special exemption scheme for small enterprises and, for that reason, should have registered as a taxable person subject to VAT.
In determining that turnover, the AJFP took into account both the income received from the appellant’s practice of the liberal professions of tax consultant, accountant and insolvency practitioner, as well as from copyright royalties, and rental income from the jointly owned property. It did not include in its calculation either the appellant’s salary as a professor or his income from his activity as a lawyer, which are subject to specific tax regimes.
The appellant did not agree with that calculation. The Curtea de Apel Timişoara (Court of Appeal, Timişoara, Romania) decided to refer the following questions to the ECJ:
In circumstances such as those here at issue, in which a natural person carries on an economic activity by practising several liberal professions and by letting out immovable property and thereby obtaining income of a continuous nature, do the provisions of Article 288 [first paragraph] point 4 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax 1 require the identification of a particular professional activity as being the principal activity in order to verify whether the letting can be classified as an ancillary transaction thereto and, if so, on the basis of what criteria is that principal activity to be identified, or must those provisions be interpreted as meaning that all of the professional activities by which the economic activity of that natural person is carried on constitute the ‘principal activity’?
In the event that the immovable property let by a natural person to a third party is not intended and used for the performance of the remainder of his economic activity, so that it is not possible to establish any connection between that letting and the practice of the various professions of that person, do the provisions of Article 288 [first paragraph] point (4) of Directive 2006/112 permit the classification of the letting as an ‘ancillary transaction’, with the consequence that it is excluded from the calculation of the turnover which serves as a reference for the purpose of applying the special exemption scheme for small undertakings?
In the situation described in the second question, is it relevant to the classification of the letting transaction as ‘ancillary’ that it is for the benefit of a third party — a legal person of which the natural person is a shareholder and director — established in the property let and carrying on professional activities of the same kind as those of the natural person in question?
The concept of real estate transactions, which are ancillary transactions, covers all exempt transactions within the meaning of Article 135(1)(j), (k) and (l) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax which do not have any close link to the enterprise’s (actual) taxable activity and are minimal, that is to say, they do not themselves exceed the exemption limit. There is no close link if they either constitute non-recurring acts beyond the actual object of the enterprise or do not entail a significant use of the enterprise’s goods and services.
Point 4 of the first paragraph of Article 288 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2009/162/EU of 22 December 2009, must be interpreted as meaning that, with respect to a taxable person who is a natural person and whose economic activity consists of the exercise of several liberal professions and the letting of immovable property, such a letting does not constitute an ‘ancillary transaction’ under that provision where that transaction is carried out in the context of a usual business activity of the taxable person.
34 In particular, for the purposes of interpreting the concept of ‘ancillary transaction’ within the meaning of that provision, the Court referred to the explanatory memorandum accompanying the proposal for a sixth Council directive (the “proposal for a sixth directive”). According to that statement, ‘[the] elements referred to in [Article 19 (2) of this proposal] must be excluded from the calculation of the deduction pro rata, in order to avoid that they may distort their real meaning in to the extent that such elements do not reflect the professional activity of the taxable person ”. According to the said statement, “[such] is the case of the sale of investment goods and real estate or financial operations which are carried out only on an ancillary basis, that is to say which are only of importance secondary or accidental in relation to the overall turnover of the company ”.The same statement specifies that “[these] operations are also excluded only if they do not relate to the usual professional activity of the taxable person”.
36 Admittedly, it should be noted that there are linguistic versions of the VAT Directive, in particular the versions in Bulgarian, German, English, Croatian, Dutch and Slovenian, which do not include the identical terms ‘ancillary operations’ to Article 174 (2) and Article 288, first subparagraph, point 4, of that directive.
37 However, having regard to the considerations set out in paragraphs 34 and 35 of this judgment, it must be concluded that the concepts contained in those provisions, although they are used in different contexts, have the same purpose.
38 Thus, the concept of ‘ancillary transaction’ designates certain transactions which do not fall within the ordinary professional activity of the taxable person.