Flashback on ECJ Cases – C-240/05 (Eurodental) – A transaction exempt from VAT does not give any right to deduct input tax

On December 7, 2006, the ECJ issued its decision in the case C-240/05 (Eurodental).

Context: Sixth VAT Directive – Exemptions – Articles 13A(1)(e), 17(3)(b) and 28cA(a) – Right to deduct – Manufacture and repair of dental prostheses – Intra-Community transactions relating to transactions which are exempt within the Member State – Effect of the derogating and transitional arrangements provided for in Article 28(3)(a) in conjunction with point 2 of annex E – Principle of fiscal neutrality – Partial harmonisation of VAT

Article in the EU VAT Directive

Article 13A(1)(e) of the Sixth EU VAT Directive (Article 132(1)(e) of the EU VAT Directive 2006/112/EC)

Article 132
1. Member States shall exempt the following transactions:
(e) the supply of services by dental technicians in their professional capacity and the supply of dental prostheses by dentists and dental technicians;

Facts

Eurodental is a company established in Luxembourg and is engaged, in essence, in making and repairing dental prostheses for customers based in Germany.
By decision of 26 March 1997, the competent tax authority refused to permit Eurodental, for the accounting periods 1992 and 1993, to deduct the input VAT charged on goods used to supply goods and services to customers based in Germany on the ground that Article 44 of the Law on VAT takes precedence over Article 43 thereof, in the versions applicable before and after 1 January 1993, with the result that Article 49(2)(a) of that law, which permits deduction of input VAT, does not apply.
The Tribunal d’arrondissement (Luxembourg) (District Court, Luxembourg), before which Eurodental brought an action for annulment and variation of that decision, held, by judgment of 16 December 2002, that the deduction had been incorrectly refused. After finding that Articles 43 and 44 above each relate to separate transactions, the former concerning transactions which are not meant for the territory of the country, while the latter concerns transactions carried out within the territory of the country, that court held that Article 49 of the Law on VAT authorises the deduction of input VAT for the transactions referred to in Article 43 of that law, in the version applicable before and after 1 January 1993, regardless of the VAT exemption rules applicable within the territory of the country. No provision of national law implies that Article 44 of the Law on VAT takes precedence over Article 43.

Questions

1. Does a delivery of goods which, when made within a Member State, is exempted by reason of Article 13A(1)(e) of Sixth Council Directive 77/388/EEC 1 of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, and does not give rise to the right to deduct input tax pursuant to Article 17 of the directive, fall within the ambit of Article 15(1) and (2) of the directive as worded prior to 1 January 1993 or Article 28cA(a), applicable as of 1 January 1993, and thus within the ambit of Article 17(3)(b) of the directive giving rise to the right to deduct input tax when the delivery is made by an operator established in a Member State of the Community to an operator established in another Member State and when the conditions relating to the application of Article 15(1) and (2) of the directive as worded prior to 1 January 1993 and of Article 28cA(a), applicable as of 1 January 1993, are met?

2. Does a supply of services which, when made within a Member State, is exempted by reason of Article 13A(1)(e) of 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: uniform basis of assessment, and does not give rise to the right to deduct input tax pursuant to Article 17 of the directive fall within the ambit of Article 15(3) as worded prior to 1 January 1993 (no exemptions were laid down for 1993) and thus within the ambit of Article 17(3)(b) of the directive giving rise to the right to deduct input tax when the delivery is made by an operator established in a Member State of the Community to an operator established in another Member State and when the conditions relating to the application of Article 15(3) as worded prior to 1 January 1993 are met?

AG Opinion

The supply of goods and services referred to in Article 13A(1)(e) of 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: uniform basis of assessment is exempt under that provision, even where it entails intra-Community transactions governed by Article 15(1), (2) and (3) (in the original version and in the one laid down in Directive 91/680/EEC) and Article 28cA(a), but does not thus give rise to the right of deduction laid down in Article 17.

Decision

A transaction which is exempted from value added tax within the territory of a Member State under Article 13A(1)(e) 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: uniform basis of assessment, as amended by Council Directive 91/680/EEC of 16 December 1991 supplementing the common system of value added tax and amending Directive 77/388/EEC with a view to the abolition of fiscal frontiers and Council Directive 92/111/EEC of 14 December 1992 introducing simplification measures with regard to value added tax, does not give rise to the right to deduct input value added tax pursuant to Article 17(3)(b) of that directive, even when it is an intra-Community transaction, and regardless of the system of value added tax applicable in the Member State of destination.

Summary

Eurodental is a Luxembourg-based company that manufactures and repairs dental prostheses for clients established in Germany. The Luxembourg tax authorities have refused to allow Eurodental to deduct input tax in respect of goods used for the supply of goods and the provision of services to customers established in Germany.

The referring court asks whether transactions such as the manufacture and repair of dental prostheses, which, when carried out within a Member State, are exempt from VAT as an activity in the public interest, may give rise to a deduction of input VAT if they are intra-Community transactions.

It is apparent from the order for reference that Eurodental’s transactions are covered by that exemption if they are carried out within the Member State in which that company is established. The referring court is therefore seeking, by its request, only to establish whether those transactions continue to fall within the scope of those provisions when they are performed for clients established in another Member State, in this case Germany.

A transaction which is exempt from VAT within a Member State under Article 132(1)(e) of the VAT Directive, irrespective of the VAT regime applicable in the Member State of destination, does not give any right to deduct input tax under Article 17(3)(b) of the Sixth Directive, even if it is an intra-Community transaction.

Source: