On 13 November 2020 the Satversmes tiesa (Constitutional Court, Latvia) raised questions to the ECJ. In Latvia, where a building belonging to one person is situated on land that belongs to someone else, the relationship between the lessor and the lessee is established by operation of law rather than through a voluntary agreement. Neither the owner of the land nor the owner of the building can alter that situation. This legal construct is known as compulsory leasing. The Latvian court wishes to find out if this type of lease is exempt from VAT.
Articles in the EU VAT Directive
Article 1 of Directive 2006/112/EC establishes that the principle of the common system of value added tax entails the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services.
Article 2 of Directive 2006/112/EC provides that: ‘The following transactions shall be subject to [value added tax]: […] (c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such’.
Article 135 of Directive 2006/112/EC establishes exemptions from value added tax as follows:
‘1. Member States shall exempt the following transactions: […] (l) the leasing or letting of immovable property.
2. The following shall be excluded from the exemption provided for in point (l) of paragraph 1:
(a) the provision of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use as camping sites;
(b) the letting of premises and sites for the parking of vehicles;
(c) the letting of permanently installed equipment and machinery;
(d) the hire of safes.
Member States may apply further exclusions to the scope of the exemption referred to in point (l) of paragraph 1.’
On 29 November 2012 the Saeima (Parliament) passed the Law on value added
tax, which came into force on 1 January 2013.
Article 1(14)(c) of the Law on value added tax (‘the contested provision’)
provides that a supply of services is a transaction which does not constitute a
supply of goods and that, for the purposes of this law, the leasing of property is
also deemed a supply of services.
3 The applicant considers that, in so far as it concerns the compulsory leasing of
land, the contested provision does not comply with the first sentence of Article 91
and the first three sentences of Article 105 of the Constitution of the Republic of
Latvia (‘the Constitution’).
The applicant is a public limited company. It owns a plot of land on which there
are multi-family residential buildings that belong to other parties. The plot of land
was acquired by the applicant in a lawful transaction. A compulsory leasing
arrangement exists between the applicant and the owners of the multi-family
residential buildings. The applicant has been registered as a taxable person for the
purposes of value added tax since 6 January 2002, and one of its principal
activities is the leasing and management of its own or leased property.
Under Article 50(1)(3) of the likums ‘Par valsts un pašvaldību dzīvojamo māju
privatizāciju’ (Law on the privatisation of State and local authority housing), in
the event of a compulsory lease, the owner of the land and the owner of the
multifamily residential building are required to conclude a lease of the land. The
amount of rent to which the applicant was entitled for the compulsory lease was,
in turn, determined by the legislation. In the case at issue, the parties failed to
reach agreement over the lease and the amount of the rent, and the applicant
therefore commenced legal proceedings to obtain the rent for the compulsory
leasing of the land, including the value added tax due, from the owners of the
housing. The court upheld the claim for payment of the rent for the compulsory
lease of the land, but dismissed the claim for payment of value added tax.
The contested provision establishes that the leasing of immovable property,
including compulsory leasing, is deemed a service that is subject to value added
tax. This considerably reduces the total income obtained by the landowner from
leasing an asset that belongs to it, since the applicant is required to pay value
added tax on the rent received under the compulsory lease to the Exchequer. The
applicant considers that this is a restriction on its right to property, recognised in
Article 105 of the Constitution. It also submits that its right to legal equality,
enshrined in the first sentence of Article 91 of the Constitution, has also been
breached, since landowners who are not registered as taxable persons for the
purposes of value added tax are not required to pay this tax on compulsory leases
of land in comparable circumstances.
In its opinion, when the legislature was deciding whether the provision of certain
services should be subject to value added tax, it should have considered whether
the leasing of immovable property constitutes a service which can, as a general
rule, be subject to value added tax, particularly in the case of compulsory leases.
In this regard, it should have taken account of European Union legislation, in
particular Council Directive 2006/112/EC of 28 November 2006 on the common
system of value added tax (‘Directive 2006/112/EC’). Article 135(1) of Directive
2006/112/EC establishes that the leasing of immovable property is not subject to
value added tax. According to the applicant, the exemption is due to the fact that
leasing of immovable property is normally a relatively passive activity, which
does not generate any significant added value.
4 The institution whose act is contested, the Parliament, argues that the contested
provision complies with the first sentence of Article 91 and the first three
sentences of Article 105 of the Constitution.
Article 2(1) of Directive 2006/112/EC establishes that the supply of services for
consideration within the territory of a Member State by a taxable person will be
subject to value added tax. In its opinion, according to the case-law of the Court of
Justice of the European Union, a service is subject to value added tax only if there
is a legal connection between the provider of the service and the recipient which
involves mutual obligations. It contends that the legal relationship of compulsory
leasing must be deemed a legal relationship created by operation of law between
the owner of the plot of land and the owner of the building. Under that legal
relationship, the owner of the plot of land leases the land to the owner of the
building and, in turn, the owner of the building pays the rent due in respect of the
compulsory lease to the owner of the plot of land. Therefore, the leasing of land
under a compulsory lease must be deemed the provision of a service subject to
value added tax.
The Parliament states that Article 135(1)(l) of Directive 2006/112/EC stipulates
that Member States must exempt the leasing and letting of immovable property
from value added tax. However, Article 135(2) allows Member States to
implement exclusions from that exemption; in other words, it permits them to
make provision for cases in which the leasing or letting of immovable property is
subject to value added tax. The Parliament considers that where a plot of land was
acquired with the intention of making a profit and in the knowledge of the
existence of a compulsory leasing arrangement, the legislature was entitled to
stipulate that the provision of services is subject to value added tax. Thus, in the
case of a compulsory lease, the lease is subject to value added tax where the
services are provided by a landowner who is registered as a taxable subject for the
purposes of value added tax. In turn, the owner of the building pays the rent stated
in the invoice, which also includes the appropriate amount of value added tax.
- Must the exemption from value added tax for the leasing of immovable property provided for in Article 135(1)(l) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax be interpreted as meaning that that exemption applies to the leasing of land in the case of compulsory leasing?
- If the answer to the first question is in the affirmative ― that is to say that the leasing of land in the case of compulsory leasing is exempt from value added tax ― then, where all other instances of the leasing of land are subject to value added tax, is such an exemption not contrary to one of the principles of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, namely the principle of neutrality of value added tax?