Flashback on ECJ Cases – C-400/15 (Landkreis Potsdam-Mittelmark) – No right to deduct VAT when on goods or services used for non-economic purposes greater than 90% of the total use

On Sept 15, 2016, the ECJ issued its decision in the case C-400/15 (Landkreis Potsdam-Mittelmark).

Context: Reference for a preliminary ruling — Taxation — Value Added Tax — Sixth Council Directive 77/388/EEC — Right to deduction — Decision 2004/817/EC — Legislative provision of a Member State — Expenditure on goods and services — Extent of use of goods or services for non-economic purposes greater than 90% of total use — Exclusion of the right to deduct

Article in the EU VAT Directive

Article 17(2)(a) of the Sixth VAT Directive (Article 168(a) 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;

Facts

The Landkreis is a local authority which performs, on its own account, tasks that go beyond the powers of the local districts and administrative bodies for which it is responsible. In its capacity as a public authority, the Landkreis is required, inter alia, for the performance of its public functions, to construct and maintain roads and to maintain road safety within its area. The Landkreis performed those tasks through a dedicated business (Eigenbetrieb) without legal personality.
In the 2008 tax year, the Landkreis acquired various goods, namely machinery, commercial vehicles and equipment, which it used mainly for the purposes of supplies which it made in the exercise of public authority. However, it also used those goods, to the extent of 2.65%, to provide, inter alia, pruning and tree-felling, mowing, sweeping and winter services to third parties. The Landkreis was accountable for VAT with regard to those supplies.
The Brandenburg Tax Office did not authorise the deduction of input VAT on the goods referred to in the previous paragraph, on the ground that the extent of use of those goods for the purposes of the Landkreis’s business did not amount to 10%, in accordance with the second sentence of Paragraph 15(1) of the UStG. When the appellant in the main proceedings lodged a complaint, the Brandenburg Tax Office allowed part of the deduction sought, on another ground. As to the remainder, the complaint was dismissed. The Finanzgericht Berlin-Brandenburg (Finance Court, Berlin-Brandenburg, Germany) dismissed the action brought before it by the Landkreis against that decision.
By an appeal on a point of law before the Bundesfinanzhof (Federal Finance Court), the Landkreis claimed that the refusal to grant the VAT deduction is contrary to EU law. This is because, according to the Landkreis, while the Authorising Decision authorises the Federal Republic of Germany to apply a measure derogating from Article 17 of the Sixth Directive, it does not authorise it to exclude the right to deduct input VAT in cases — such as the present case — in which the extent of use of the goods concerned for non-economic activities, which fall outside the scope of VAT but which cannot be considered to be ‘for non-business purposes’, is greater than 90%. The Landkreis submits, therefore, that it is entitled to a proportional deduction of 2.65% of the input VAT.
In the Landkreis’s view, the refusal to grant the right to deduct input VAT infringes the principle of neutrality as regards competition, because such a refusal means that non-deductible amounts of input VAT are included as a direct cost in the price calculation, despite the fact that the output transactions carried out by the Landkreis in competition with private undertakings are fully taxed. Consequently, the Landkreis claims to have suffered a structural competitive disadvantage.
In that context, the referring court points out that, under national law, the Landkreis is not entitled to deduct the input VAT which it has claimed. According to the referring court, this is because it uses the goods in question essentially to perform its public service functions and uses those goods only to the extent of 2.65% for the purposes of making business-related taxable supplies. In those circumstances, there is no right to deduct input VAT, pursuant to the second sentence of Paragraph 15(1) of the UStG, because the extent of use of the goods in question for the purposes of the Landkreis’s business is less than 10%.
The referring court recalls that, pursuant to Article 1 of the Authorising Decision, by way of derogation from the provisions of Article 17(2) of the Sixth Directive, the Federal Republic of Germany is authorised to exclude expenditure on goods and services from the right to deduct VAT when the extent of use of the goods and services in question for the private purposes of a taxable person or of his employees, or, more generally, for non-business purposes, is greater than 90%.
On the one hand, the Court of Justice has held that, to the extent that a taxable person intends to use such goods or to use them in part for non-economic activities which fall outside the scope of VAT, he is not entitled to deduct input VAT.
On the other hand, where goods are supplied which the taxable person intends to use both for economic activities subject to VAT and for private purposes ‘other than those of his business’, within the meaning of Article 6(2)(a) of the Sixth Directive, the taxable person may treat all those goods as assets forming part of his business and, on that basis, be entitled to deduct the whole of the input VAT. He must, however, pay the VAT on the non-business use of the goods, as is apparent, inter alia, from the judgement of 23 April 2009, Puffer (Case C‑460/07, EU:C:2009:254, paragraph 39).
The referring court considers that, according to those principles, the right to deduct input tax is necessarily excluded in so far as the goods acquired by the Landkreis are used, to the extent of 97.35%, for the performance of its public function activities, which are non-economic activities falling outside the scope of VAT. In addition, the referring court considers that the Landkreis has, in principle, the right to deduct the input VAT — in respect of the remaining 2.65%. However, this right to deduct is excluded pursuant to the second sentence of Paragraph 15(1) of the UStG.
In that regard, the referring court is uncertain as to whether Article 1 of the Authorising Decision authorises the exclusion of the right to deduct the input VAT not only where goods are used for the private purposes of the taxable person or his employees or, more generally, for non-business purposes — as is apparent from its wording —, but also in cases — such as that in the main proceedings — where the extent of use of the goods for non-economic activities, which fall outside the scope of VAT, is greater than 90%.
The referring court takes the view that, on the basis of the judgment of 12 February 2009, Vereniging Noordelijke Land- en Tuinbouw Organisatie (C‑515/07, EU:C:2009:88), the enabling provision in Article 1 of the Authorising Decision may be interpreted as meaning that the right to deduct input VAT may be excluded only in cases in which the goods acquired are used, to an extent greater than 90%, ‘for purposes other than those of [the taxable person’s] business’, and not where the goods are used for non-economic purposes which fall outside the scope of the VAT. In that case, the referring court is of the opinion that the rule set out in the second sentence of Paragraph 15(1) of the UStG does not come within the scope of the Authorising Decision, since the right to deduct input VAT is also excluded where the extent of use of the goods for non-economic purposes is greater than 90%.

Questions

The second sentence of Paragraph 15(1) of the German Umsatzsteuergesetz (Law on turnover tax) provides that the intra-Community supply, importation or acquisition of goods which a commercial operator uses in the amount of less than 10% for the purposes of his business does not count as being carried out for the purposes of his business — and to that extent excludes the right to deduct input tax.

That rule is based on Article 1 of Council Decision 2004/817/EC ¹ of 19 November 2004, which authorises the Federal Republic of Germany, by way of derogation from Article 17(2) of Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes, to exclude expenditure on goods and services from the right to deduct VAT when the goods and services in question are used more than 90% for the private purposes of a taxable person or of his employees, or, more generally, for non-business purposes.

Does this authorisation — in accordance with its wording — apply only to the cases covered by Article 6(2) of Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes (Article 26 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax), or does it apply, in addition, to all cases in which goods or services are used only partly for business purposes?

AG Opinion

None

Decision

Article 1 of Council Decision 2004/817/EC of 19 November 2004 authorising Germany to apply a measure derogating from Article 17 of Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes must be interpreted as meaning that it does not apply to a situation in which the goods or services that an undertaking acquires are used, to an extent greater than 90%, for non-economic activities, which fall outside the scope of value added tax.

Personal comments/VATupdate

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