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VAT treatment of leaseback arrangements

Source sodisce (in Slovenian)

Unoffical translation

Immediate sale and leaseback of real estate between the same parties does not mean two reciprocal supplies of goods (separate legal transactions), but a single financial transaction to increase the company’s liquidity if: the company transfers (sells) real estate to a financial institution for the purpose of obtaining funds, the latter concludes a financial leasing contract with the seller for the same real estate; this purpose is demonstrated if the transfer of real estate does not allow the financial institution to dispose of it in a way as if it were their owner, which is also the case if the real estate remains in the possession of the previous owner, ie the lessee. The actual possibility of using the real estate is therefore important, and not only the legal aspect of the lessor’s acquisition of property rights by entry in the land register.

The exercise of the right to deduct VAT is limited to taxes due and cannot be extended to input VAT paid in error, even if VAT is due only because it is stated on the invoice. It follows that an exempt transaction does not confer the right to deduct input VAT, even if the tax would have been unduly paid.

The correction of VAT unduly charged must be possible if the issuer of the invoice acted in good faith. However, the circumstance of good faith becomes irrelevant if the issuer itself has done everything in time to prevent the risk of losing the tax revenue of the state.

DECREE:
I. The revision is granted and the judgment of the Administrative Court of the Republic of Slovenia IU 653 / 2017-7 of 12 June 2018 is amended so that the lawsuit is upheld and the decision of the Financial Administration of the Republic of Slovenia, no. DT 0610-11671 / 2015-7 08-530-15 of 20 April 2016, is dismissed and the case is returned to the same body for retrial.

II. The defendant is required to reimburse the applicant for the costs of the proceedings in the amount of EUR 3,707.58 within 15 days of service of this judgment.

EXPLANATORY STATEMENT:

1. Pursuant to Article 63 of the Administrative Dispute Act (hereinafter ZUS-1), the Administrative Court of the Republic of Slovenia (hereinafter the Administrative Court) dismissed the action against the decision of the Financial Administration of the Republic of Slovenia, no. DT 0610-11671 / 2015-7 08-530-15 of 20 April 2016. With this decision, the first-instance tax authority is in a repeated procedure of tax inspection control over the calculation and payment of value added tax (hereinafter VAT) for the period from On 1 September to 30 September 2007, the plaintiff was additionally assessed and ordered to pay VAT from the tax base of EUR 24,435,900.00 at the rate of 20% in the amount of EUR 4,887,180.00 and the related interest in the total amount of EUR 1,904,195.26 EUR. The obligation imposed is based on the finding that the plaintiff, as the lessee of the property, is not entitled to deduct input VAT because he has not provided proof, from which the actual purpose of the use of the acquired real estate for its taxed activity would be evident. The Ministry of Finance, by decision no. DT 499-16-101 / 2016-2 of 24 February 2017, dismissed the plaintiff’s appeal.

2. In the grounds of the judgment, the Administrative Court rejected the applicant’s claim that the sale and lease back transaction was a single financial transaction exempt from VAT, which should have given the plaintiff the right to a rectification ( reduction) of VAT charged on the sale of real estate in the statement for the tax period September 2007. It stated that the legal and substantive connection between the sales contract and the financial leasing contract is unquestionable and evident from the contracts themselves, but this connection does not mean that no up to two supplies within the meaning of Article 6 of the Value Added Tax Act (hereinafter ZDDV-1), which are subject to taxation with the said tax.

3. By order of the plaintiff, by decision X DoR 158/2018 of 3 April 2019, the Supreme Court allowed a revision on the question: “Is the legal transaction of sale and immediate financial lease carried out between the same contracting parties (the so-called sale and lease back ) qualifies from the point of view of VAT rules as a double sale of goods or as a credit transaction? “

4. In accordance with that decision, the applicant (‘the auditor’) lodged an appeal on points of law for incorrect application of substantive law and material breaches of the provisions of the administrative procedure. He proposes that the Supreme Court uphold the revision and amend the impugned judgment by upholding the lawsuit, annulling the impugned decision and returning the case to the tax authority for retrial, subordinate to annul the impugned judgment and refer the case to the Administrative Court for reconsideration. It seeks reimbursement of the costs of the proceedings.

5. The defendant replied to the audit. As the answer was not filed by a lawyer, nor was it shown that the signatory of the answer (Secretary of the Ministry of Finance representing the defendant) passed the state legal examination (second paragraph of Article 22 of ZUS-1), the Supreme Court did not consider the answer Of the Civil Procedure Act, hereinafter ZPP).

To point I. of the theorem

6. The audit is not substantiated.

7. In the case of a permitted revision, the Court of Audit examines the impugned judgment only in that part and with regard to those specific legal issues in respect of which the revision was allowed (second paragraph of Article 371 of the ZPP). When deciding, it is tied to the established factual situation, as the revision cannot be filed due to its erroneous or incomplete finding (second paragraph of Article 370 of the ZPP).

The facts of the case

8. On 4 September 2007, the auditor concluded a contract with the company H. in relation to the same real estate, namely a sale contract, with which he sold several built-up building plots to the said company in …, and then a contract for these real estates as a lessee on financial leasing. At the conclusion of the contracts, the auditor and H. exercised the right to choose for taxation under Article 45 of the Value Added Tax Act (hereinafter ZDDV-1), so that VAT in the amount of EUR 4,887,180.00 was charged for the sale of real estate, in the same amount also charged on account no. 7090002166 of 7 September 2007, issued by H. to the auditor in connection with the concluded financial leasing contract. On the basis of this invoice, the auditor claimed a deduction of input VAT, which was rejected by the tax authority because the auditor did not show it when taking over the real estate for financial leasing, that these will be intended for his further taxable transactions or the implementation of his business activities (investment in the construction of new facilities). It therefore considered that the property had been acquired for investment purposes and not for the purposes of the auditor’s subsequent taxed transactions.

9. The impugned decision, upheld as lawful by the Administrative Court, is also based on the view that the auditor’s sale of H.’s real estate and the lease of the same real estate to the auditor are a separate or separate supply, resulting in the auditor’s right to deduct input VAT. the lease assessment independently of the previously made supply (sale) of goods H.

Audit statements

10. The auditor, referring to the decision of the Court of Justice of the European Union (‘the ECJ’) in Mydibel SA v. Belgium(C-201/18) of 27 March 2019 argues that the sale and leaseback transaction is a single transaction which cannot be classified as a supply of goods. It summarizes the content of the sales contract and the financial leasing contract concluded with H., and states that these are related legal transactions in which there would be no sale of real estate without the agreed reverse financial lease, and the latter not without the realized sale. The contractual purpose of the parties to these contracts was not to sell the property twice in terms of transferring ownership risks and benefits from the plaintiff to H. It is a financing transaction where the seller (i.e. the auditor) continuously manages the risks and rewards. However, since, in accordance with the tax and case-law of the time, these transactions were subject to VAT on sales, the neutrality of the whole operation in terms of VAT can only be achieved by

Substantive audit assessment

11. In the light of the legal question allowed, the answer is whether the auditor’s sale and leaseback of real estate can be legally qualified as a two-time supply of goods or as a (one) credit transaction. The answer to this question is important, as the lending transaction is exempt from VAT, which also affects the assessment of the correctness of the auditor’s calculation and payment of VAT for the month of September 2007, which was the subject of the tax control in question.

About the sale and leaseback of the same real estate

12. In the case of NLB Leasing, doo, v. Slovenia (C-209/14) of 2 July 2015, the CJEU stated that, for VAT purposes, each transaction should normally be treated as separate and independent, as follows from the second subparagraph. the second paragraph of Article 1 of the VAT Directive, 1however, in some circumstances, several formally separate transactions that could be carried out separately and would therefore be subject to taxation or exemption separately should be treated as a single transaction if the transactions are not separate (paragraph 41). It thus allowed transactions to be considered as a ‘single supply’, in particular where two or more elements or acts supplied by a taxable person are so closely linked that they objectively constitute a single indivisible economic supply, the distribution of which would was artificial (paragraph 42).

13. A further interpretation followed in Mydibell (C-201/18), 2 where the CJEU was confronted with a case in which, in order to increase its liquidity, the company entered into tax-free transactions with two financial institutions in order to increase its liquidity. transaction sale and lease back(sale and leaseback), divided into two parts (paragraph 13 of the judgment). The CJEU stated, inter alia, that the way in which a sale and leaseback transaction is treated as a single service or as two separate transactions is a factual matter which is assessed on the basis of the circumstances of the particular case. It is a single service if the acts performed by the taxable person are so closely linked that they in fact constitute a single indivisible economic service, the division of which would be artificial (paragraphs 37 to 39 of the judgment). In the present case, the CJEU – subject to verification by the referring court of the relevant facts and elements of national law – explained that the sale and leaseback transactions concluded as non-taxable were exclusively financial transactions to increase the liquidity of the taxable person Mydibel, as the property remained in her possession and she used it continuously and permanently for the purposes of her taxable transactions. According to the CJEU, those facts, which must be examined by the referring court, show that each of those transactions is uniform, since the creation of a lease on immovable property was inextricably linked to the lease of the same immovable property.3 (paragraph 40). However, in the case of such a single transaction, it cannot be classified as a supply of goods within the meaning of Article 14 of the VAT Directive, under which the supply of goods constitutes a transfer of the right to dispose of tangible property as owner. In the present case, the rights conferred on the financial institution by those transactions, that is to say, the civil lease rights, a reduction in the rights deriving from the lease of immovable property held by Mydibel, do not allow those institutions to dispose of the immovable property as if were their owners (paragraph 41 of the judgment).

14. Based on the views of the CJEU and the facts of the case, it can be concluded – that is also the answer to the admissible audit question – that the immediate sale and leaseback of immovable property between the same parties does not constitute two reciprocal supplies of goods (separate legal transactions) but a single financial transaction to increase the liquidity of a company, if: the company transfers (sells) real estate to a financial institution for the purpose of obtaining funds as a loan, and the latter concludes a financial leasing contract with the seller for the same real estate; this purpose is demonstrated if the transfer of real estate does not allow the financial institution to dispose of it in a way as if it were their owner, which is also the case if the real estate remains in the possession of the previous owner, ie the lessee.

15. In the above circumstances, the sale and leaseback should therefore be considered as a single taxpayer financing service in terms of crediting (real estate is only a means of insurance) and not as a double supply of goods (real estate) within the meaning of Article 6 (1) of ZDDV-1. to which the supply of goods constitutes a transfer of the right to dispose of tangible property as if the recipient were the owner. In such a case, this also excludes the lessee’s right to deduct input VAT, as there is no taxable event without the supply of real estate, and no obligation to account for VAT without it (Articles 62 and 33 of ZDDV-1).

The lessee’s right to deduct input VAT on the lending transaction

16. In accordance with point 4 of Article 44 of ZDDV-1, the financial transactions listed in this point are exempt from VAT, including the granting of loans or loans in cash. For them, it is not possible for the taxable person performing these transactions to agree with another taxable person who is the recipient of the funds and has the right to deduct the full VAT that the transaction will be subject to VAT, as ZDDV-1 in the first paragraph 45 Article 4 restricts that possibility of exercising the right to opt for taxation in the case of otherwise exempt transactions to real estate transactions only. 5Therefore, a single credit transaction (sale and leaseback) does not create a right for the lessor to charge VAT to the lessor, and does not impose an obligation on him to pay it and consequently does not give the possibility of deducting input VAT. Pursuant to the first paragraph of Article 63 of ZDDV-1, the taxable person has the right to deduct from the VAT he is obliged to pay only the VAT he is obliged to pay or has paid in the purchase of goods or services. 6

17. In view of the above, the audit opinion is unfounded that the tax neutrality of an exempt single transaction can be ensured by recognizing the lessee’s right to deduct input VAT in any case, ie regardless of the fact that it is an exempt transaction. That recognition of a right would be illegal. As the CJEU stated in Case C-628/16 Kreuzmayr GmbH of 21 February 2018, the exercise of the right to deduct VAT is limited to taxes due and cannot be extended to input VAT paid in error, even if VAT is due only because it is stated on the invoice (paragraph 43 of the judgment). It follows that an exempt transaction does not confer the right to deduct input VAT, even if the tax would have been unduly paid.

18. It is therefore necessary to consider whether, in the event that the lessor and the lessee incorrectly charged VAT on the invoices for each of the stages of the single transaction in the context of that single credit transaction, that is to say, the real estate account and the real estate invoice. financial leasing – to ensure the tax neutrality of the transaction by another means – with the possibility of correcting the unduly charged tax.

On the lessee’s right to correct the unjustifiably charged VAT from the sale of real estate within the credit transaction

19. In Case C-566/07 Stadeco BV , 18.6.2009, the ECJ stated (paragraphs 36 to 38) that, in order to ensure VAT neutrality, it is for the Member States to provide in their national legal orders for the possibility of correction of any unduly charged tax if the issuer of the invoice proves that it is in good faith (as well as Genius Holding, C-342/87, paragraph 18). However, if the issuer of the invoice has completely eliminated the risk of loss of tax revenue in a timely manner, the principle of VAT neutrality requires that the tax unduly charged may be corrected without such adjustment being subject to the condition laid down by the Member States faith. This adjustment cannot depend on the discretion of the tax administration.

20. It follows that the correction of VAT unduly charged must be possible if the issuer of the invoice has acted in good faith. However, the circumstance of good faith becomes irrelevant if the issuer itself has done everything in time to prevent the risk of loss of tax revenue of the state.

21. In the opinion of the Supreme Court, the tax authority must also take this into account in the procedure of inspection control over the correctness of VAT calculation and payment and, recognizing that the taxpayer (lessee) unjustifiably charged VAT on the sale of real estate to the lessor, -1 and the cited practice of the CJEU. Otherwise, that is, without proper tax treatment of the legal transaction, the tax authority cannot assess the taxpayer underpaid tax for the controlled period and the decision to do so is premature.

In conclusion

22. In the light of the foregoing, despite finding that the legal and substantive connection between the sales contract and the financial leasing contract concluded in the present case is unequivocal and apparent from the contracts themselves, the Administrative Court unjustifiably rejected the possibility of linking the contracts to a different tax treatment. transaction except in the sense of two supplies of goods. As it referred to the reasons for the second-instance tax decision, it means that neither the defendant, due to an erroneous legal position that the sale and leaseback of real estate cannot be considered as a single transaction, established whether the auditor entered into a tax-free lending transaction or , which would exclude such a tax definition of concluded contracts,

23. Due to the incorrect application of substantive law, the Supreme Court therefore upheld the appeal and amended the impugned judgment (in accordance with the claim) by revoking the impugned decision and returning the case to the defendant for retrial (Article 94 § 1 in conjunction with paragraph 4). the first paragraph and the third paragraph of Article 64 of ZUS-1). It did not address the question of whether there were legal obstacles to the continuation of the procedure, as this would go beyond the scope of the audit assessment.

K II. points of the theorem

24. The auditor succeeded with the audit and the lawsuit, so the Supreme Court decided on the costs of the entire procedure (the second paragraph of Article 165 and the first paragraph of Article 154 of the ZPP in connection with the first paragraph of Article 22 of ZUS-1). The costs of the proceedings at first instance are recognized on the basis of the third paragraph of Article 25 of ZUS-1 and the second paragraph of Article 3 of the Rules on reimbursement of costs to the plaintiff in an administrative dispute in the amount of EUR 285.00, increased by 22% VAT (EUR). , 70 EUR.

25. Audit costs are assessed in accordance with the second paragraph of Article 155 of the ZPP, which refers to the application of the valid Lawyer’s Tariff (hereinafter OT) regarding the lawyer’s fee and costs. In doing so, the value of the disputed object (EUR 1,904,195.26) is taken into account, point 1 of tariff number 30 in connection with point 1 of tariff number 18 OT, on the basis of which the upper limit of the value of the service applicable to commercial disputes, and point 5 of the same tariff heading on a 50% increase in the value of the service for an extraordinary remedy. The audit fee thus amounts to 4,500 points, ie EUR 2,700.00, EUR 54,000 of material costs (Article 11 of the OT), all increased by 22% VAT in the amount of EUR 605.88. The auditor is thus entitled to reimbursement of EUR 3,359.88 of audit costs. Reimbursement of court fees paid will be in accordance with the first paragraph of Article 37. of Article of the Court Fees Act in connection with the provision of point c of footnote 6.1. such tariffs are enforced ex officio by the court of first instance.

26. The Supreme Court granted the auditor an audit fee in the amount of EUR requested, as it was lower than the amount to which he would have been entitled in respect of the value of the disputed object (EUR), subject to items 1 and 5 of heading 30 in respect of 1 item of tariff number 18 of the Lawyer ‘s Tariff, thus using the value of the lawyer’ s point of EUR 0.60. Of this amount, he is entitled to another 2% at the expense of material costs, which increased by 22% VAT amounts to EUR. The refund of court fees paid will be in accordance with the first paragraph of Article 37 of the Court Fees Act in connection with the provision of point c of footnote 6.1. such tariffs are enforced ex officio by the court of first instance.

Voting

27. The Senate of the Supreme Court adopted the decision unanimously.

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1 Council Directive 2006 / EC of 28.11.2006 on the common system of supplementary tax value.
2 The questions answered by the court concerned a dispute concerning the obligation of a taxable person (Mydibel) to correct the deduction of input VAT in respect of immovable property acquired as capital goods and initially deducting VAT correctly and then this property is subject to a sale and leaseback transaction.
3 Mydibel did not sell the property to financial institutions, but entered into a lease agreement with them for the benefit of those institutions (paragraph 13 of the judgment).
4The stated provision of Article 45 of ZDDV-1 reads: A taxable person who performs transactions for which the VAT exemption is determined in items 2, 7 and 8 of Article 44 of this Act may agree with the lessee, lessee, lessee or to buyers of real estate – taxable persons who have the right to deduct full VAT to charge VAT at the prescribed rate on the above transactions, which should be exempt from VAT.
5Pursuant to Article 44 of ZDDV-1, VAT payments are exempt transactions: rental or lease of real estate (including leasing), except for the cases found (point 2); the supply of buildings or parts of buildings and land on which buildings are erected, unless the delivery is made before the buildings or parts of buildings are first inhabited or used, or if the delivery is made before the expiry of two years from the first use or first occupancy (7 point); supply of land other than building land (point 8).
6 If this condition is met, according to the same legal provision, a further condition is that he has used or will use these goods or services for the purposes of his taxed transactions.

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