Flashback on ECJ Cases – C-319/12 (MDDP) – VAT borne in relation to exempt (educational) transactions is not deductible

On November 28, 2013, the ECJ issued its decision in the case C-319/12 (MDDP).

Context: VAT – Directive 2006/112/EC – Articles 132 to 134 and 168 – Exemptions – Educational services provided on a profit-making basis by bodies governed by private law – Right to deduction)

Article in the EU VAT Directive

Articles 132, 132(1)(f), 133, 134, 168 of the EU VAT Directive 2006/112/EC

Article 132 (Exemption)
1. Member States shall exempt the following transactions:
(f) the supply of services by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity, where those groups merely claim from their members exact reimbursement of their share of the joint expenses, provided that such exemption is not likely to cause distortion of competition;

Article 133 (Exemption)
Member States may make the granting to bodies other than those governed by public law of each exemption provided for in points (b), (g), (h), (i), (l), (m) and (n) of Article 132(1) subject in each individual case to one or more of the following conditions:
(a) the bodies in question must not systematically aim to make a profit, and any surpluses nevertheless arising must not be distributed, but must be assigned to the continuance or improvement of the services supplied;
(b) those bodies must be managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest, either themselves or through intermediaries, in the results of the activities concerned;
(c) those bodies must charge prices which are approved by the public authorities or which do not exceed such approved prices or, in respect of those services not subject to approval, prices lower than those charged for similar services by commercial enterprises subject to VAT;
(d) the exemptions must not be likely to cause distortion of competition to the disadvantage of commercial enterprises subject to VAT.
Member States which, pursuant to Annex E of Directive 77/388/EEC, on 1 January 1989 applied VAT to the transactions referred to in Article 132(1)(m) and (n) may also apply the conditions provided for in point (d) of the first paragraph of this Article when the said supply of goods or services by bodies governed by public law is granted exemption.

Article 134 (Exemption)
The supply of goods or services shall not be granted exemption, as provided for in points (b), (g), (h), (i), (l), (m) and (n) of Article 132(1), in the following cases:
(a) where the supply is not essential to the transactions exempted;
(b) where the basic purpose of the supply is to obtain additional income for the body in question through transactions which are in direct competition with those of commercial enterprises subject to VAT.

Article 168 (Right to deduct VAT)
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;
(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18 (a)and Article 27;
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
(d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22;
(e) the VAT due or paid in respect of the importation of goods into that Member State.

Facts

MDDP, a company incorporated under Polish law, organises specialised training courses and conferences in various fields of education and training, such as taxation, accountancy, finance, and in areas connected with the organisation and management of undertakings, including professional and personal development.
Those activities are organised by MDDP as part of its business, with a view to generating regular profit.
MDDP is not entered in the register of schools and non-public institutions in accordance with the Law on the education system of 7 September 1991 (Ustawa o systemie oświaty).
MDDP sought a special interpretation from the Minister concerning its right to deduct input VAT levied on goods and services purchased for the purpose of performing its educational services. It claimed that its educational services should not be exempt from VAT, but should be subject to it.
In that context, MDDP claimed that Article 43(1)(1) and Item 7 of Annex 4 to the Law on VAT are incompatible with point (i) of Article 132(1), Article 133 and Article 134 of the VAT Directive.
By contrast, the Minister considers that the provisions of the VAT Directive had been correctly transposed by Article 43(1)(1), read in conjunction with Item 7 of Annex 4, of the Law on VAT.
On 3 January 2011, MDDP then brought an action before the Wojewódzki Sąd Administracyjny w Warszawie (Warsaw Regional Administrative Court) for annulment of the abovementioned special interpretation, invoking an infringement of point (i) of Article 132(1) of the VAT Directive, read in conjunction with Articles 133 and 134 thereof.
By judgment of 17 October 2011, the Wojewódzki Sąd Administracyjny w Warszawie annulled the contested special interpretation on the ground that point (i) of Article 132(1) of the VAT Directive precludes organisations which do not provide educational services in the general interest from benefiting from an exemption from VAT.
The Wojewódzki Sąd Administracyjny w Warszawie held, relying on the judgment in Case C‑150/99 Stockholm Lindöpark [2001] ECR I‑493, that, in the case of an exemption which does not comply with the VAT Directive, the taxable person has the right to rely directly on Article 168 of that directive and to deduct input VAT levied on the purchase of goods and services used for the purpose of the educational services provided, even if they are exempt from VAT, where that exemption does not comply with the VAT Directive. It, however, noted the paradoxical nature of the situation resulting from the above, in which a taxable person performing operations exempt from VAT would also have a right to deduct under Article 168 of the VAT Directive.

Questions

1. Must point (i) of Article 132(1), Article 133 and Article 134 of [the VAT] Directive … be interpreted as precluding exemption from value added tax of educational services provided for commercial purposes by bodies not governed by public law, which follows from Article 43(1)(1) of the [Law on taxation of goods and services] … in conjunction with Item 7 of Annex 4 to that Law, in the version in force in 2010?

2. If the answer to the first question is in the affirmative, does this mean that due to the incompatibility of the exemption with the provisions of [the VAT] Directive, Article 168 of the directive grants taxpayers both the right to apply the tax exemption and to deduct input VAT?

AG Opinion

(1) Articles 132(1)(i), 133 and 134 of the VAT Directive are to be interpreted as meaning that they do not preclude the inclusion of educational services provided by private organisations for commercial purposes in the tax exemption. However, they do preclude those provisions being implemented in such a way that no conditions at all are imposed for the recognition of such an object in the case of private organisations.

(2) A taxable person is not entitled both to take advantage of the tax exemption and to exercise the right to deduct input tax. In a case such as the present one, direct reliance on Article 132(1)(i) of the VAT Directive will result in the educational services being taxable only if the recognition of the taxable person concerned as an organisation with a similar object exceeded the limits of the Member State’s discretion.

Decision

1. Point (i) of Article 132(1)(i), points (a) to (d) of 133(1) and Article 134 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that they do not preclude educational services provided for commercial purposes by bodies not governed by public law from being exempt from value added tax. However, point (i) of Article 132(1) of that directive precludes a general exemption of all supplies of educational services, without consideration of the objects pursued by non-public organisations providing those services.

2. A taxable person may not claim, in accordance with Article 168 of Directive 2006/112 or the national provision transposing it, a right to deduct input value added tax where, as a result of an exemption provided for by national law in infringement of point (i) of Article 132(1) of that directive, its output supplies of educational services are not subject to value added tax.

That taxable person may, however, rely on the incompatibility of that exemption with point (i) of Article 132(1) of Directive 2006/112 so that that exemption is not applied to it where, even taking account of the discretion granted to Member States, that taxable person could not objectively be regarded as an organisation having objects similar to those of an educational body governed by public law, within the meaning of that provision, which is to be determined by the national court.

In the latter case, the educational services supplied by that taxable person will be subject to value added tax and that person could then benefit from the right to deduct input value added tax.

Summary

VAT borne in relation to exempt (educational) transactions is not deductible, even when an exemption established in national law is incompatible with Dir 2006/112.
However, the taxable person who is in such situation may invoke the incompatibility of the national rule with the Directive so that it is not applied when, even taking into account the margin of appreciation granted to the Member States, the referred taxpayer cannot objectively be considered as a body with purposes comparable to those of a public education body. In this last hypothesis, the educational services carried out by this taxpayer will be subject to VAT and may, therefore, qualify for the right to deduct VAT.

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