VATupdate

Flashback on ECJ Cases – C-174/14 (Saudaçor) – Company of the Azores Autonomous Region carries out economic activity

On October 29, 2015, the ECJ issued its decision in the case C-174/14 (Saudaçor).

Context: Reference for a preliminary ruling — Value added tax — Directive 2006/112/EC — Article 13(1) — Treatment as a non-taxable person — Concept of ‘body governed by public law’ — Limited company which is responsible for the provision of services in respect of the planning and management of the health service of the Autonomous Region of the Azores — Determination of the detailed arrangements for those services, including their remuneration, in programme agreements concluded between that company and that region


Article in the EU VAT Directive

Artciles 9(1), 13(1) of the EU VAT Directive 2006/112/EC/

Article 9 (Taxable person)
1. “Taxable person” shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.
Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as “economic activity”. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.

Article 13 (Taxable person)
1. States, regional and local government authorities and other bodies governed by public law shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with those activities or transactions.
However, when they engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as  nontaxable persons would lead to significant distortions of competition.
In any event, bodies governed by public law shall be regarded as taxable persons in respect of the activities listed in Annex I, provided that those activities are not carried out on such a
small scale as to be negligible.


Facts

  • On 2 March 2011, the Public Treasury drew up a draft inspection report proposing corrections concerning the VAT payable by Saudaçor in respect of the financial years 2007 to 2010 totalling EUR 4 750 586.24.
  • On 6 April 2011, the inspection report was adopted, after Saudaçor had been heard.
  • In that report, the Public Treasury held, inter alia, that, in view of its legal regime, Saudaçor could not rely on the rule under which bodies governed by public law are not regarded as taxable persons for VAT purposes, laid down in Article 2(2) of the VAT Code, a provision which seeks to transpose the first subparagraph of Article 4(5) of the Sixth Directive, the content of which is the same as that of the first subparagraph of Article 13(1) of Directive 2006/112.
  • According to the Public Treasury, the services provided by Saudaçor in respect of the planning and management of the regional health service under the programme agreements concern areas of activity involving private initiative, which means that treatment as a non-taxable person for VAT purposes might lead to distortions of competition. That is the case, for example, with the management and maintenance of the computer system for the region’s health sector. There is, in actual fact, in the Public Treasury’s view, an activity of an economic nature, with the result that the contributions laid down in the programme agreements and paid by the regional authorities in consideration for those services are subject to VAT. Furthermore, Saudaçor had accepted that it was subject to VAT in so far as it claimed a total sum of EUR 2 300 273.17 as VAT deductions on its purchases of goods and services.
  • Saudaçor brought an action before the Tribunal Administrativo e Fiscal de Ponta Delgada (Ponta Delgada Administrative and Tax Court) against the notices requiring payment of VAT and compensatory interest concerning the financial years 2007 to 2010, which demanded that it pay a total of EUR 5 157 249.72.
  • By its judgment, that court dismissed that action on the ground, inter alia, that, for the purpose of interpreting the rule laid down in the first subparagraph of Article 13(1) of Directive 2006/112, under which bodies governed by public law are not regarded as taxable persons for VAT purposes, there is no need to refer to the concept of ‘body governed by public law’ defined, in the context of public procurement law, in Article 1(9) of Directive 2004/18 since the latter concept is understood in a broad sense, whereas the concept of ‘body governed by public law’ within the meaning of the first subparagraph of Article 13(1) of Directive 2006/112 must be interpreted strictly when applying the rule of treatment as a non-taxable person for VAT purposes because that rule constitutes an exception to the general rule of taxation of any economic activity.
  • According to that court, that rule of treatment as a non-taxable person for VAT purposes does not cover an entity like Saudaçor which, although created by the RAA, is a limited company which is distinct from the region and subject to the rules of private law and which pursues its functions and objectives independently.
  • The Tribunal Administrativo e Fiscal de Ponta Delgada (Ponta Delgada Administrative and Tax Court) also considered that the services provided by Saudaçor in connection with the programme agreements constitute an activity of an economic nature, since they are provided for consideration. According to that court, the contributions paid by the RAA represent consideration for the services provided by Saudaçor and cannot be regarded as constituting budgetary transfers between public entities.
  • Hearing an appeal against that judgment, the referring court considers that the central issue in the case in the main proceedings is whether an entity such as Saudaçor can rely on the rule laid down in Article 2(2) of the VAT Code, the content of which corresponds to that of Article 13(1) of Directive 2006/112, under which bodies governed by public law are not regarded as taxable persons for VAT purposes, and whether the amounts to which the notices of payment of VAT relate constitute budgetary transfers between public entities.
  • It considers that, whilst it is clearly established in the Court’s case-law that only the activities of bodies governed by public law acting as public authorities are excluded from liability to VAT, it cannot be determined on the basis of that case-law whether an entity such as Saudaçor, having regard to its legal status as a limited company originating from the transformation of a State entity, comes within that concept of body governed by public law. The question arises in particular whether the scope of that concept tallies with the scope of the concept of ‘body governed by public law’ in Article 1(9) of Directive 2004/18 in the context of the definitions of the various categories of ‘contracting authorities’.

Questions

May a national court give substance to the concept of body governed by public law within the meaning of the first paragraph of Article 13(1) of Council Directive 2006/112/EC 1 of 28 November 2006, by reference to the legislative concept of body governed by public law laid down in Article 1(9) of Directive 2004/18/EC 2 of the European Parliament and of the Council of 31 March 2004?

Is an entity established as a limited company, with exclusively public capital and 100% owned by the Autonomous Region of the Azores, and whose object is the exercise of consultancy and management activities in matters relating to the Regional Health System, with the purpose of developing and reorganising it, through the performance of programme agreements concluded with the Autonomous Region of the Azores, which holds, by delegation, the public-authority powers conferred in those matters on the Autonomous Region, which was originally responsible for providing the public health service, covered by the concept of a body governed by public law acting as a public authority for the purpose of the first paragraph of Article 13(1) of Council Directive 2006/112/EC of 28 November 2006?

In the light of the provisions of that directive, may the consideration received by that company, which consists in the making available of the financial resources necessary for the performance of those programme agreements, be regarded as payment for the services provided, for the purposes of liability to VAT?

If so, does that company satisfy the requirements necessary in order to be entitled to rely upon the rule governing not being regarded as a taxable person laid down in Article 13(1) of Council Directive 2006/112/EC of 28 November 2006?


AG Opinion

With regard to the third question, in a situation like that at issue in the dispute in the main proceedings, ‘financial contributions’ paid under a programme agreement ‘in consideration for the services covered by the agreement’ by a public entity to a limited company governed by private law 100% of whose shares it holds constitute consideration for the services provided by that limited company to that public entity.

With regard to the first question, the concept of ‘other bodies governed by public law’ within the meaning of the first subparagraph of Article 13(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax may not be interpreted by reference to the concept of ‘body governed by public law’ as defined in Article 1(9) of Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts.

With regard to the second and fourth questions, pursuant to Directive 2006/112, a limited company with exclusively public capital which is not part of the public administration and which is governed by private law and taxed in accordance with the common regime under the applicable domestic legislation cannot be classified as a body governed by public law within the meaning of the first subparagraph of Article 13(1) of that directive.


Decision

1. Article 9(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 an activity such as that at issue in the main proceedings, whereby a company provides a region with services in respect of the planning and management of the regional health service under the programme agreements concluded between that company and that region, constitutes an economic activity within the meaning of that provision.

2. Article 13(1) of Directive 2006/112 must be interpreted as meaning that an activity such as that at issue in the main proceedings, whereby a company provides a region with services in respect of the planning and management of the regional health service under the programme agreements concluded between that company and that region, falls under the rule of treatment as a non-taxable person for value added tax purposes, laid down by that provision, in a situation where that activity constitutes an economic activity within the meaning of Article 9(1) of that directive, if, which it is for the referring court to ascertain, it can be considered that that company must be classified as a body governed by public law and that it carries out that activity as a public authority, in so far as the referring court finds that the exemption of that activity is not such as to lead to significant distortions of competition.

In that context, the concept of ‘other bodies governed by public law’ within the meaning of Article 13(1) of that directive must not be interpreted by reference to the definition of ‘body governed by public law’ in Article 1(9) of Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts.


Summary

The EU Court of Justice has ruled that Saudaçor’s services in the planning and management of the regional health service constitute an economic activity. There is no VAT liability if it can be established that Saudaçor must be regarded as a body governed by public law and that it carries out that activity as a public authority.

The Portuguese Saudaçor – Sociedade Gestora de Recursos e Equipamentos de Saúde dos Açores SA is a limited liability company with exclusively public capital. The authorized capital is 100% owned by the Azores Autonomous Region (ARA). Saudaçor is to provide services of general economic interest in the field of health care, such as the planning and management of the regional health service and related information systems, infrastructure and installations, as well as construction, maintenance, rehabilitation and the reconstruction of health centers and services, especially in regions affected by natural disasters and in high-risk areas. Saudaçor concludes program agreements with the ARA for the performance of these activities and receives a ‘financial contribution’ for this. Saudaçor assumes that it does not have to charge VAT. It hereby states that it is a public-law body within the meaning of art. 13 paragraph 1 EC Directive 2006/112. However, according to the Portuguese tax authorities, Saudaçor is subject to VAT. The tax authorities hereby refer to the legal regime applicable to Saudaçor and the fact that it has deducted VAT paid, without paying VAT on the amounts received from the ARA. The Portuguese court has referred questions for a preliminary ruling in this case. The tax authorities hereby refer to the legal regime applicable to Saudaçor and the fact that it has deducted VAT paid, without paying VAT on the amounts received from the ARA. The Portuguese court has referred questions for a preliminary ruling in this case. The tax authorities hereby refer to the legal regime applicable to Saudaçor and the fact that it has deducted VAT paid, without paying VAT on the amounts received from the ARA. The Portuguese court has referred questions for a preliminary ruling in this case.

The EU Court of Justice has ruled that Saudaçor’s services in the area of ​​planning and management of the regional health service constitute an economic activity within the meaning of art. 9 paragraph 1 EC Directive 2006/112. According to the European Court of Justice, there is no VAT liability if it can be established that Saudaçor must be regarded as a public-law body and that it carries out that activity as a government. It is for the referring court to examine this.


Source:


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