Flashback on ECJ cases: C-132/16 Iberdrola Inmobiliaria Real Estate Investments – Conditions for the Right to deduct VAT (!!!) – Renovation free of charge for the benefit of a third party

Source Curia


  • VAT deduction of entrepreneurs not limited in case of use by other party
  • ‘Direct and immediate link’ between public works and taxable holiday accommodation
  • Supply of services for free (art. 26 (1)(b)) and art. 168(a) of the EU VAT Directive 2006/112/EU


Article 168(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that a taxable person has the right to deduct input value added tax in respect of a supply of services consisting of the construction or improvement of a property owned by a third party when that third party enjoys the results of those services free of charge and when those services are used both by the taxable person and by the third party in the context of their economic activity, in so far as those services do not exceed that which is necessary to allow that taxable person to carry out the taxable output transactions and where their cost is included in the price of those transactions.


If the taxpayer makes an investment in a communal pumping station, which is partly necessary for running his business, and partly serves the commune, then the VAT deduction is partial. The issue of whether VAT is taxed for free provision of services was not resolved by the Court.


  • Iberdrola owns land on which it plans to construct a holiday village.
  • The holiday village needs to be connected to the existing municipal waste-water pump station. The pump station had to be extensively renovated to collect waste water from the planned holiday houses.
  • Iberdrola and the Bulgarian municipality involved agreed that Iberdrola would repair the waste-water pump and would bear the costs for the repair.
  • Iberdrola deducted the VAT on the repair costs.
  • The Bulgarian tax authorities challenged the VAT deduction on these costs. They stated that Iberdrola had supplied the municipality a service free of charge

AG Opinion

  • For VAT to be deductible costs must have a direct and immediate link with output transactions of Iberdrola.
  • In her opinion Kokott stated that the crucial factor is who actually uses the repairs and whether this gives rise to untaxed final consumption.
  • In this case only the municipality directly uses the construction services for waste-water disposal.
  • Kokott therefore sees no direct and immediate link between the output transactions of Iberdrola and the repair costs.

See Simmons & Simmons

ECJ rehearsed the principles concerning VAT deduction

  • VAT deduction is a fundamental principle of the system of VAT which, in principle, may not be limited and is exercisable immediately
  • in order to relieve the taxpayer entirely of the burden of the VAT payable on supplies received from another taxable person to be used in the course of his economic activities,
  • [taxable persons]provided that they are themselves subject to VAT and used for the purposes of his taxed transactions.
  • There must be a direct and immediate link between a particular input transaction and a particular output transaction,
  • or the costs may be general business costs which are components of the price of the overall goods or services which the taxpayer supplies.
  • But where costs of a taxable person are used for purposes of transactions that are exempt or outside the scope of VAT, no output tax can be collected and so no input tax can be deducted.

Decision (AG opinion NOT followed)

  • Unlike AG, CJEU rules that there is a direct and immediate link between the repair costs and Iberdrola’s output transactions. According to the CJEU it would be impossible to connect the holiday village to the pump station without the repairs.
  • Without the repairs Iberdrola would thus not have been able to carry out its taxable transactions.
  • VAT deduction may however be limited, according to the CJEU, when the repairs go further than necessary to ensure the connection of the holiday village to the pump station. It is up to the referring court to check this.


  • The CJEU judgment has a favorable outcome for entrepreneurs compared to the Advocate-general’s opinion.
  • VAT will not be a cost to the entrepreneur as long as costs made are necessary for the economic activities of the entrepreneur.
  • The mere fact that another party (also) benefits, is in that respect not relevant.
  • However, the VAT deduction is limited when more is done than is necessary for the entrepreneur to carry out his taxable activities.


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