On July 2, 2015, the ECJ issued its decision in the case C-209/14 (NLB Leasing).
Context: Reference for a preliminary ruling — VAT — Directive 2006/112/EC — Supply of goods or services — Lease agreement — Return of immovable property that is the subject-matter of a lease agreement to the lessor — Concept of ‘cancellation, refusal or total or partial non-payment’ — Lessor’s right to a reduction of the taxable amount — Double taxation — Separate supplies — Principle of fiscal neutrality
Article in the EU VAT Directive
Articles 2(1), 14, 24(1), 90(1) of the EU VAT Directive 2006/112/EC.
Article 2 (Subject matter and scope)
1. The following transactions shall be subject to VAT:
(a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;
(b) the intra-Community acquisition of goods for consideration within the territory of a Member State by:
(i) a taxable person acting as such, or a non-taxable legal person, where the vendor is a taxable person acting as such who is not eligible for the exemption for small enterprises provided for in Articles 282 to 292 and who is not covered by Articles 33 or 36;
(ii) in the case of new means of transport, a taxable person, or a non-taxable legal person, whose other acquisitions are not subject to VAT pursuant to Article 3(1), or any other non-taxable person;
(iii) in the case of products subject to excise duty, where the excise duty on the intra-Community acquisition is chargeable, pursuant to Directive 92/12/EEC, within the territory of the Member State, a taxable person, or a non-taxable legal person, whose other acquisitions are not subject to VAT pursuant to Article 3(1);
(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such;
(d) the importation of goods.
Article 14 (Taxable transaction – Supply of Goods)
1. “Supply of goods” shall mean the transfer of the right to dispose of tangible property as owner.
2. In addition to the transaction referred to in paragraph 1, each of the following shall be regarded as a supply of goods:
(a) the transfer, by order made by or in the name of a public authority or in pursuance of the law, of the ownership of property against payment of compensation;
(b) the actual handing over of goods pursuant to a contract for the hire of goods for a certain period, or for the sale of goods on deferred terms, which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment;
(c) the transfer of goods pursuant to a contract under which commission is payable on purchase or sale.
3. Member States may regard the handing over of certain works of construction as a supply of goods.
Article 24(Taxable transaction – Supply of Service)
1. “Supply of services” shall mean any transaction which does not constitute a supply of goods.
Article 90 (Taxable amount)
1. In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under
conditions which shall be determined by the Member States.
- In February 2008, NLB, as lender, and Domino ing, d.o.o. (‘Domino’), as borrower, entered into two short-term loan agreements with a specific purpose and ‘business cooperation’ agreements. The latter agreements stipulated, inter alia, that the purpose of the loans which NLB granted to Domino was to finance the purchase of property with a view to constructing housing, and that NLB could, if it so wished, finance the construction of that housing, in which it acknowledged that it had an interest. With those loans, Domino purchased property the previous owners of which were third parties to the contracts entered into by NLB and Domino.
- In April 2009, NLB and Domino entered into two sets of agreements, which, according to the information provided by the Vrhovno sodišče (Supreme Court), constitute a ‘sale and lease back’ transaction. First, by two sales contracts, NLB became owner of the property which Domino had previously purchased and, second, by two lease agreements, NLB undertook simultaneously to lease back that property to Domino for a period of a few months. Without prejudice to the business cooperation agreements concluded previously between those two companies, the lease agreements provided that, before they expired, Domino would have to choose between the following three options: to extend the duration of the agreements, to return the property to NLB or, finally, to exercise its option to purchase that property by paying all the outstanding instalments to NLB.
- When the lease agreements were concluded, NLB paid VAT on the amount invoiced to Domino under those agreements, namely the sum corresponding to all the monthly instalments, including the purchase options granted to Domino.
- Since Domino had not, upon the expiry of those lease agreements, paid all the instalments due to NLB, the latter, as those agreements permitted it to do, took back possession of the property which was the subject-matter of the lease agreement. In July 2010, NLB sold that property, as building land, to a third party company, Sava IP, d.o.o. (‘Sava IP’), and declared the VAT due on that occasion.
- As Domino failed to fulfil its obligations under those lease agreements, NLB requested that the VAT amount declared be adjusted for an amount corresponding to the value of the purchase options provided for in those agreements.
- In that regard, it is clear from the order for reference that NLB and Domino drew up, in accordance with the terms of the lease agreements, a final account, pursuant to which NLB paid Domino a sum corresponding to the difference between, first, the capital gain realised on the sale of the property to Sava IP and, second, Domino’s outstanding liabilities, including the purchase options.
- NLB deducted from the sale price of the property in question an amount corresponding to the sum of (i) the VAT which it had paid at the time of that transfer, (ii) the purchase option instalments not yet paid by Domino, and, finally, (iii) the monthly instalments for which Domino was still liable to NLB. NLB, in turn, paid the remaining balance to Domino. Subsequently, NLB issued Domino with two credit notes for an amount equivalent to the purchase option instalments and, in doing so, cancelled those instalments.
- By decision of 5 June 2012, the Slovenian tax authorities refused to grant NLB’s request to reduce the amount of the VAT paid by that company on the occasion of the conclusion of the lease agreements, on the ground that the two credit notes did not constitute a legal basis for reducing NLB’s taxable amount. They consider that those agreements were not ‘terminated’ and the repossession of the properties by NLB is not a case of ‘return’ within the meaning of Article 39(2) of the ZDDV-1, which transposes Article 90(1) of the VAT Directive into Slovenian law. In the view of those authorities, the lessor in fact took on the role of the lessee’s pledgee and sold the properties on the lessee’s behalf to Sava IP.
- NLB contested the Slovenian tax administration’s decision by bringing, first, an administrative action before the Ministry of Finance and, then, an action before the court of first instance with jurisdiction to hear its complaint. Both those actions were dismissed.
- In its appeal, NLB argues that the tax authorities and the court of first instance erred in their interpretation of Article 39 of the ZDDV-1 and Article 90(1) of the VAT Directive. The return of the property, which Domino undertook owing to its failure to fulfil its contractual obligations, corresponds to one of the cases referred to in the abovementioned provisions. NLB also claims that, were it not allowed to reduce its taxable amount in a context such as that in the main proceeding, that would amount to a breach of the principle of fiscal neutrality, given that it paid VAT a second time when it sold the property to a third party company.
Having regard to circumstances such as those of the case in the main proceedings, on a proper construction of Article 90(1) of Council Directive 2006/112/EC 1 of 28 November 2006 on the common system of value added tax, does the return of the property that is the object of a lease agreement (immovable property), as a result of the lessee’s failure to perform its obligations in full, into the possession of the lessor for the purposes of its subsequent sale and performance of the other obligations under the lease agreement, once all the payment instalments under the lease have fallen due, constitute a case of ‘cancellation, refusal or total or partial non-payment’ after the supply has taken place, in consequence of which the basis of assessment is to be reduced accordingly?
On a proper construction of Articles 2, 14 and 24(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, must the financial consideration relating to a purchase option be regarded as consideration for the performance of the agreement and as a supply of goods and, as such, subject to VAT, when it represents the greater part of the total amount due under a financial leasing agreement and is paid by the lessee to the lessor in such a way that, as a result of the failure in part to perform obligations, the lessor regains possession of the subject-matter of the lease agreement, sells it to a third party and pays the excess of the sale price to the lessee after deducting, in the final account, the sum relating to the purchase option, or must it be regarded as consideration for the service of the rent of, or for the use of, the property (and, as such, subject to VAT by law or at the option of the taxable persons), or must it rather be regarded as compensation for damage for the termination of the agreement, paid in order to make good the loss caused by the lessee’s failure to perform and having no direct connection with any provision of services for consideration and, as such, not subject to VAT?
If the answer to the second question should be that the sum in question is to be regarded as consideration for the supply of goods and the performance of the agreement, does the principle of the neutrality of VAT preclude a lessor’s having to pay output VAT twice, that is to say, once on the conclusion of a financial leasing agreement (including in respect of the purchase option, which represented the greater part of the contract value) and, as a result of the lessee’s failure to fulfil its obligations in full, a second time, on the subsequent sale of the immovable property in question to a third party, even though the liability to pay VAT on the second supply has been passed on to the lessee in the final account?
1. Articles 2(1), 14 and 24(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that where a lease agreement relating to immovable property provides either that ownership of that property is to be transferred to the lessee on the expiry of that agreement or that all the essential powers attaching to ownership of that property are to be enjoyed by the lessee and, in particular, substantially all the rewards and risks incidental to legal ownership of that property are transferred to the lessee and the present value of the amount of the lease payments is practically identical to the market value of the property, the transaction resulting from that agreement must be treated as an acquisition of capital goods.
2. Article 90(1) of Directive 2006/112 must be interpreted as not permitting a taxable person to reduce the taxable amount where that person has in fact received all the payments in consideration for the service which he supplied or where, without the agreement having been refused or cancelled, the recipient of that service is no longer liable to the taxable person for the agreed price.
3. The principle of fiscal neutrality must be interpreted as not precluding, first, a leasing service relating to immovable property and, second, the sale of that property to a person who is a third party to the lease agreement, being taxed separately for value added tax purposes, where those transactions cannot be regarded as forming a single supply, which is a matter for the referring court to determine.
Lease agreement – Restitution to the lessor of immovable property that is the subject of a lease – Concept of “cancellation, termination, dissolution or non-payment in whole or in part” – Lessor’s right to a reduction in the taxable amount
Where a lease for immovable property provides that at the end of that contract, ownership will pass to the lessee, or that the essential attributes of ownership of that immovable property will then be made available to the lessee, in particular the majority of the benefits and risks associated with the legal ownership of that immovable property passes to him and the updated sum of the installments is practically equal to the sale value of the property, the act resulting from such an agreement must be equated with the acquisition of an investment item .
A taxable person may not reduce his taxable amount when he has collected all the payments that were consideration for the transaction he performed or when the other contracting party, without the contract being broken or cancelled, ceases to owe the taxable person the agreed price is.
The principle of neutrality does not preclude VAT from being levied separately on a leasing transaction relating to immovable property and on the sale of that immovable property to a third party (in relation to the lease contract), in so far as those transactions are not can be regarded as a single act.
Similar ECJ cases
Reference to the case in the EU Member States