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Flashback on ECJ Cases C-124/12 (AES-3C Maritza East 1) – Right to deduct VAT for costs of transport services, work clothing, protective gear and business trips

13 February 2021
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8 min read

On July 18, 2013, the ECJ issued its decision in the case C-124/12 (AES-3C Maritza East 1). The case relates to the deductibility of VAT for transport services, work clothing, protective gear and business trips for staff working for that taxable person on the ground that that staff is provided to it by another entity and accordingly cannot be regarded as members of the taxable person’s staff, despite the fact that those costs can be regarded as having a direct and immediate link with the general costs connected with all the economic activities of that taxable person.

Article in the EU VAT Directive

Articles 168(1) and 176 of the EU VAT Directive 2006/112/EC.

Article 168
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;

Article 176 (restrictions to the right to deduct VAT)
The Council, acting unanimously on a proposal from the Commission, shall determine the expenditure in respect of which VAT shall not be deductible. VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.
Pending the entry into force of the provisions referred to in the first paragraph, Member States may retain all the exclusions provided for under their national laws at 1 January 1979 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession.

Facts

  • AES owns and operates a power station situated outside the populated area in the municipality of Galabovo.
  • AES does not have a workforce of its own to operate that power station and so needs to hire staff to work full-time under a contract for the provision of staff concluded with AES Maritsa Iztok I Sarvisis EOOD (‘AES Services’). Under that contract AES Services recruits and employs the personnel needed for AES’s economic activity. The contracts of employment for the staff employed are concluded by AES Services, which also pays the staff the remuneration agreed in those contracts.
  • The staff in question is accordingly provided to AES. Under the contract between AES and AES Services, the former pays the latter remuneration for its services in making personnel available. That remuneration includes the pay and social insurance contributions for the staff concerned. Work clothing and personal protective gear for staff and their transportation from the power station to their homes and back again are provided for AES. The expenses relating to those goods and services are not included in the remuneration paid to AES Services. If staff should make business trips their travelling expenses and overnight accommodation costs are also paid by AES directly.

Questions

1.    Is a provision such as that in Article 70(1)(2) of the Law on value added tax according to which a taxable person does not have a right to deduct value added tax on transport services, work clothing and protective gear received and on business travel expenses incurred because those goods and services are provided free of charge to natural persons, namely employees working for the taxable person’s benefit, compatible with Articles 168(a) and 176 of Council Directive 2006/112/ЕC  of 28 November 2006 on the common system of value added tax, if the following circumstances are taken into account:
–    the taxable person has not concluded any contracts of employment with the employees but engages them on the basis of a contractual relationship relating to the ‘provision of staff’ with another taxable person who is the employer of the personnel;
–    the transport services received are used to transport employees from certain collection points in various places to their place of work and back and there is no organised public transport available for staff to get to and around the place of work;
–    the provision of work clothing and protective gear is required under the Labour Code and the Law on health and safety at work;
–    the deduction of VAT would not be in dispute in relation to the transport services, work clothing, protective gear and business travel expenses if those goods and services had been provided by the employer of the staff; in the present case, however, the respective acquisitions were made by a taxable person who is not the employer but, on the basis of a contract for the provision of staff, draws the benefit of the work and bears the costs associated therewith?
2.    Does Article 176 of Directive 2006/112 empower a Member State, on acceding to the European Union, to introduce a limitation on the exercise of the right to deduct input tax such as that under Article 70(1)(2) of the Law on value added tax – namely that ‘the goods or services are intended to be supplied free of charge’ – if the legislation in force up to the date of accession did not expressly provide for such a limitation?
3.    If the previous question should be answered in the affirmative, does it follow that goods and services received are intended to be ‘supplied free of charge’ if they are purchased for the purposes of economic activity but, because of their nature, in order for them to be used they have to be provided to the staff working in the taxable person’s undertaking?

AG Opinion

None

Decision

1.      Article 168(a) and the second paragraph of Article 176 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as precluding national legislation under which a taxable person which incurs costs for transport services, work clothing, protective gear and business trips for staff working for that taxable person does not have the right to a deduction of the VAT relating to those costs on the ground that that staff is provided to it by another entity and accordingly cannot be regarded, for the purposes of that legislation, as members of the taxable person’s staff, despite the fact that those costs can be regarded as having a direct and immediate link with the general costs connected with all the economic activities of that taxable person.

2.      The second paragraph of Article 176 of Directive 2006/112 is to be interpreted as precluding a Member State, on its accession to the European Union, from introducing a limitation on the right to a deduction under a national legislative provision which provides for the exclusion from the right to a deduction of goods and services intended to be supplied free of charge or for activities outside the scope of the taxable person’s economic activity, when such an exclusion was not provided for in the national legislation in force until the date of that accession.

3.      It is for the referring court to interpret the provisions of domestic law at issue in the main proceedings, so far as possible, in accordance with European Union law. Where such an interpretation proves impossible, the referring court is required to set aside those provisions on the ground that they are incompatible with the second paragraph of Article 176 of Directive 2006/112.

Comments

Expenses related to the acquisition of goods and services intended for staff – Staff posted to a taxable person exercising the right to deduct but employed by another taxable person

National legislation does not permit a taxable person who incurs costs for transport services, work clothing, protective equipment and business travel for persons working for him, is not entitled to deduct the value added tax on these costs, on the ground that those persons are made available to him by another undertaking and cannot therefore be regarded as the taxable person’s personnel within the meaning of this legislation, even if those costs can be considered to have a direct and immediate connection with the general costs of all its economic activities.

It is not permitted for a Member State upon accession to the Union to introduce a restriction on the right to deduct by virtue of a national legal provision according to which goods or services intended for free transactions or for activities other than the economic activity of the taxable person the right to deduct are excluded, whereas the national legislation in force up to the date of accession did not provide for such a restriction.

It is for the national court to interpret the national provisions at issue in the main proceedings in accordance with Union law as far as possible. Should it appear that such an interpretation is not possible, the national court would have to set aside those provisions on the ground that they are not compatible with the second paragraph of Article 176 of the VAT Directive.

Source

 

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