On April 23, 2015, the ECJ issued its decision in the case C-16/14 (Property Development Company).
Context: Reference for a preliminary ruling — Taxation — Sixth VAT Directive — Article 11A — Application of goods treated as a supply for consideration — Application of a building for an activity exempt from VAT — Taxable amount for that application — Interim interest paid during the construction of the building
Article in the EU VAT Directive
Articles 5(7)(b) , 11A(1)(b) of the Sixth VAT Directive. (Article 18 and 74 of the EU VAT Directive 2006/112/EC).
Article 18 (Taxable transaction)
Member States may treat each of the following transactions as a supply of goods for consideration:
(a) the application by a taxable person for the purposes of his business of goods produced, constructed, extracted, processed, purchased or imported in the course of such business, where the VAT on such goods, had they been acquired from another taxable person, would not be wholly deductible;
(b) the application of goods by a taxable person for the purposes of a non-taxable area of activity, where the VAT on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with point (a);
(c) with the exception of the cases referred to in Article 19, the retention of goods by a taxable person, or by his successors, when he ceases to carry out a taxable economic activity, where the VAT on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with point (a).
Where a taxable person applies or disposes of goods forming part of his business assets, or where goods are retained by a taxable person, or by his successors, when his taxable economic activity ceases, as referred to in Articles 16 and 18, the taxable amount shall be the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined at the time when the application, disposal or retention takes place.
- Between 1991 and 1994, Prodeco had constructed an office building with the intention of selling it. That building accordingly appeared as stock in the accounts. In valuing that stock, in accordance with the valuation rules laid down by it Prodeco included the interim interest as an asset.
- The interim interest comprised interest paid at the rate payable under the loan agreement entered into for the purpose of construction of the building, on the amounts of the loan released during construction.
- Prodeco deducted the VAT that it had paid on supplies of goods and services in connection with the construction of the building.
- In anticipation of the sale of the building in question, which finally took place in 2000, Prodeco had rented out parts of it from and after 1995. In the course of that economic activity it took no account the application of Article 12(1)(3) of the VAT Code in its tax declarations, a matter which was treated as an infringement of that provision during a check carried out by the Belgian tax authorities in 1998.
- Prodeco paid part of the amount of VAT demanded by the Belgian tax authorities, namely EUR 1 178 498, representing the total amount of VAT previously deducted from the incoming invoices relating to the construction of the building.
- However, it refused to pay the other part of the VAT also demanded by the Belgian tax authorities, namely EUR 554 416.67. That amount was calculated on the basis of interest paid by Prodeco under the loan agreement which enabled it to finance the construction of the building.
- In 2004, an order for payment was served on Prodeco for the last mentioned amount of VAT. It brought proceedings challenging the payment order before the Rechtbank van eerste aanleg te Antewerpen (Court of First Instance, Antwerp) which dismissed the action by judgment of 9 May 2008.
- Prodeco brought an appeal against that judgment before the Hof van beroep te Antwerpen (Court of Appeal, Antwerp). By judgment of 16 February 2010, that court declared the appeal well founded as far as concerns the interim interest which, in the view of that court, does not form part of the taxable amount in cases where Article 12(1)(3) of the VAT Code applies.
- The Belgian tax authorities brought an appeal in cassation against that judgment. By judgment of 19 January 2012, the Hof van Cassatie (Court of Cassation) set aside that judgment as regards the question of interim interest and referred the case to the Hof van beroep te Gent (Court of Appeal, Ghent).
- The Hof van beroep te Gent observes that, in support of its decision that interim interest must be part of the taxable amount, the Hof van Cassatie relied on the judgment in Muys’ en De Winter’s Bouw- en Aanemingsbedrijf (C‑281/91, EU:C:1993:855). In that judgment, the Court held that, where a supplier of goods or services grants his customer deferral of payment of the price in return for payment of interest until delivery, that interest constitutes part of the consideration obtained for the supply of goods or services within the meaning of Article 11A(1)(a) of the Sixth Directive.
- The Hof van beroep te Ghent takes the view that, although the Hof van Cassatie gave a clear ruling, the question remains whether or not interim interest must be taken into consideration.
- According to the Hof van beroep te Gent, the judgment in Muys’ en De Winter’s Bouw- en Aanemingsbedrijf (C‑281/91, EU:C:1993:855), concerning the interpretation of Article 11A(1)(a) of the Sixth Directive, is not necessarily relevant in a case such as that in the main proceedings. Interim interest should be regarded rather as being part of the ‘cost price’ which appears among the reference values mentioned in Article 11A(1)(b) of the Sixth Directive, or should be treated as ‘incidental expenses’ within the meaning of Article 11A(2).
- Article 35(4) of Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54(3)(g) of the Treaty on the annual accounts of certain types of companies (OJ 1978 L 222, p. 11) points in favour of that conclusion. That provision, which was transposed into Belgian law by Article 22a, first paragraph, of the Royal Decree of 8 October 1976 relating to the annual accounts of undertakings, stated that ‘[i]nterest on capital borrowed to finance the production of fixed assets may be included in production costs to the extent that it relates to the period of production’.
- Moreover, the principle of neutrality should also be taken into account. In that regard, the Hof van beroep te Gent draws attention to the fact that interim interest is not subject to VAT and, therefore, unlike supplies and services occasioned by the construction of the building, could not be subject to a deduction of VAT.
Is interest on borrowed capital which, according to Article 35(4) of the Fourth Council Directive 78/660/EEC of 25 July 1978, may be included in the production costs to the extent that it relates to the period of production, part of the taxable amount of an application within the meaning of Article 5(6) of Sixth Council Directive 77/388/EEC 2 of 17 May 1977, that is to say, part of the ‘cost price’ within the meaning of Article 11A(1) of the Sixth Directive and/or the incidental expenses within the meaning of Article 11A(2) of the Sixth Directive?
Article 11A(1)(b) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax must be interpreted as meaning that, in a case such as that at issue in the main proceedings, the taxable amount for the calculation of VAT on an application, within the meaning of Article 5(7)(b) thereof, of a building that the taxable person has constructed, is to be the purchase price, at the time the application is made, of buildings whose location, size and other essential characteristics are similar to those of the building in question. In that regard, it is irrelevant whether part of the purchase price is due to interest on borrowed capital.
Property Development Company NV (Prodeco) had an office building erected in the early 1990s. Because Prodeco wants to sell the building, it considers the building part of its stock. Prodeco also capitalizes on the intercalary interest (interest that was paid at the rate of the loan taken out before the construction of the building on the loan amounts released during construction). She deducted the VAT charged to Prodeco. However, the office building is not sold until the year 2000. In the meantime, Prodeco rents out (parts of) the building. During an inspection, the Belgian tax authorities find out that Prodeco has not paid any VAT in connection with the rental. It is in dispute whether the intercalary interest is included in the taxable amount.
The European Court of Justice (CJEU) has ruled that the purchase price of a comparable building is the taxable amount if a self-constructed building is assigned a purpose within the meaning of art. 5(7)(b) Sixth VAT Directive. According to the CJEU, this concerns the purchase price that applied at the time of this destination for buildings whose location, size and other essential characteristics are comparable to those of the self-erected building. According to the CJEU, it is immaterial whether part of this purchase price is the result of the payment of intercalary interest.
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