On April 29, 2014, the ECJ issued its decision in the case C-137/02 (Faxworld).
Context: Reference for a preliminary ruling – Interpretation of the Sixth VAT Directive – Right of a Vorgründungsgesellschaft (civil-law partnership the object of which is to prepare the means necessary for the activities of a capital company yet to be formed) to deduct input VAT – Transfer for consideration of the totality of those means upon formation of the capital company – Transfer not subject to VAT in consequence of the exercise by the Member State concerned of the option provided for in Article 5(8) of the Sixth VAT Directive)
Article in the EU VAT Directive
Articles 2, 4(1), 4(2), 5(8), 6(5), 17(1) and 17(2) of the Sixth VAT Directive (Articles 2, 9(1), 19, 29, 167 and 168 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 19 (Transfer of Going concern)
In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and that the person to whom the goods are transferred is to be treated as the successor to the transferor.
Member States may, in cases where the recipient is not wholly liable to tax, take the measures necessary to prevent distortion of competition. They may also adopt any measures needed to prevent tax evasion or avoidance through the use of this Article.
Article 29
Article 19 shall apply in like manner to the supply of services.
Article 167 (Right to deduct VAT)
A right of deduction shall arise at the time the deductible tax becomes chargeable.
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;
(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
- Faxworld GbR is a civil-law partnership founded on 1 October 1996 with the sole object of setting up the company Faxworld Telefonmarketing Aktiengesellschaft (‘Faxworld AG’).
- As the national court explains, the establishment of an Aktiengesellschaft (German company limited by shares) may, as in the case before the national court, be preceded by a Vorgründungsgesellschaft. A Vorgründungsgesellschaft is based on a preliminary agreement between the founders of the company to cooperate with a view to establishing the Aktiengesellschaft. Therefore, if that company, once established, wishes to assume the assets, rights and obligations of the Vorgründungsgesellschaft, which are not transferred to it automatically, they must be transferred by way of a separate legal transaction.
- Thus, as a Vorgründungsgesellschaft, Faxworld GbR rented office premises, acquired fixed assets and had fixtures and fittings installed in the office premises. It also sent introductory mailings and engaged in advertising for the company to be established. After Faxworld AG was established by notarial act of 28 November 1996, Faxworld GbR ceased activities and transferred to Faxworld AG all the previously acquired assets at their book value, for a price of just under DEM 90 000. Faxworld AG was thus able to take up its commercial activities in the offices rented and equipped for its purposes by Faxworld GbR, without having to take any additional measures.
- Therefore, in performing its sole object, Faxworld GbR effected no output transactions other than the transfer of the assets it had acquired to Faxworld AG.
- For the financial year 1996, Faxworld GbR treated that transfer as a non-taxable transfer of a business under Paragraph 1(1a) of the UStG 1993. For the same financial year, the Finanzamt refused to allow Faxworld GbR to deduct, as input tax, the VAT of just under DEM 13 000 incurred on its input transactions. In a tax notice of 5 January 1998, the Finanzamt justified that refusal by stating that Faxworld GbR was not to be regarded as a trader within the meaning of Paragraph 2 of the UStG 1993 since the only output transaction which it intended to effect was the business transfer to the company to be established, which transfer is, under Paragraph 1(1a) of the UStG 1993, not deemed to be a taxable supply.
- However, the Finanzgericht (Finance Court) delivered a judgment granting Faxworld GbR’s application challenging the Finanzamt’s decision, on the ground that that partnership was an undertaking and, as such, was entitled to deduct the input tax. The principle of neutrality of VAT required the deduction of the input tax even though, as a Vorgründungsgesellschaft, Faxworld GbR never intended to use the input services procured in order to effect taxable transactions itself.
- It is against that judgment that the Finanzamt has brought an appeal on a point of law before the Bundesfinanzhof, claiming that Faxworld GbR is not entitled to deduct because it is not a trader since at no time did it intend to provide taxable services itself and because Faxworld AG’s activities cannot be attributed to it.
- The Bundesfinanzhof, which, for its part, is inclined to recognise Faxworld GbR’s right to deduct the input tax, takes the view, first, that the supplies to Faxworld GbR in connection with the planned establishment of the capital company are costs which, by their very nature, are part of the economic activity of the business as a whole (Case C‑408/98 Abbey National [2001] ECR I‑1361, paragraphs 35 and 36).
- Second, the Bundesfinanzhof takes the view that, if the transfer by Faxworld GbR of all its assets to Faxworld AG, which was its only output transaction, must be regarded as a ‘transfer of a totality of assets’ within the meaning of Article 5(8) of the Sixth Directive and not as a taxable transaction for the purposes of Article 17(2) of that directive, it would seem appropriate to link the input supplies of Faxworld GbR to the planned transactions of Faxworld AG.
- However, observing that, according to the judgment in Abbey National, a taxable person may deduct only the VAT on input supplies used for the purposes of its own taxable transactions and that, therefore, account cannot be taken of the transactions of the recipient of the transfer, the Bundesfinanzhof points out that, in the case at issue in the main proceedings, the legal distinction between Faxworld GbR and Faxworld AG is merely the result of the particular features of German civil law relating to the establishment of companies. Moreover, the national court points out that the principle of fiscal neutrality underlying the system of VAT precludes economic operators carrying on the same activities from being treated differently as far as taxation is concerned, and takes the view that the particularities of German civil law relating to the establishment of companies cannot result in the loss of a right to deduct tax in the preparatory phase (Case C‑216/97 Gregg [1999] ECR I‑4947, paragraph 20).
Questions
Is a partnership which has been established for the sole purpose of forming a limited company entitled to deduct input tax paid on goods and services procured by it if, after that company has been formed, that partnership effects by formal act a transfer for consideration of the procured goods and services to the subsequently founded limited company and, from the outset, did not intend to carry out any other output transactions and if, in the Member State concerned, a transfer of a totality of assets is not deemed to be a supply of goods or services (first sentence of Article 5(8) and Article 6(5) of the Sixth Directive …)?
AG Opinion
Where
– a Member State has made use of the option in Articles 5(8) and 6(5) of the Sixth VAT Directive, so that a transfer of a totality of assets is treated as not being a supply of goods or services, and
– goods and/or services are acquired by one natural or legal person (the transferor) for the sole purpose of setting up but not operating a business, and of transferring the assets of that business to another natural or legal person (the transferee) who intends to use those assets to carry out taxable transactions,
the right to deduct VAT paid or payable on the goods and/or services acquired vests in principle in
– the transferor where the burden of the tax has not been passed on to the transferee in the transfer price, and
– the transferee where the burden of the tax has been passed on to him in the transfer price
Decision
A taxable person whose sole object is to prepare the economic activity of another taxable person and who has not effected any taxable transaction may exercise a right to deduct in relation to taxable transactions carried out by the other taxable person.
A partnership established for the sole purpose of founding a capital company is entitled to deduct the input tax paid on supplies of goods and services where its only output transaction in the performance of its object was to effect by formal act the transfer for consideration of the supplies obtained to that company once founded and where, because the Member State concerned has exercised the options provided for in Articles 5(8) and 6(5) 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, as amended by Council Directive 95/7/EC of 10 April 1995, a transfer of a totality of assets is not deemed to be a supply of goods or services.
Summary
A partnership established solely for the purpose of establishing a capital company may deduct input tax on the supply of goods and services if its sole act at a later stage, in accordance with its statutory purpose, was the transfer of the goods and services concerned to a transaction for consideration to that capital company after it has been established and where, as a result of the Member State concerned having made use of the possibilities provided for in Articles 5(8) and 6(5) of the Sixth Directive no supply of goods or services takes place upon the transfer of the generality of goods.
Source
Similar ECJ cases
Newsletters
