Flashback on ECJ cases C-284/03 (Temco Europe) – Passive provision of spaces or surfaces in buildings constitutes ‘rental of immovable property’

On November 18, 2004, the ECJ issued its decision in the case C-284/03 (Temco Europe).

Context: Sixth VAT Directive – Article 13B(b) – Exempt transactions – Letting of immovable property – Licence to occupy.

Article in the EU VAT Directive

Article 13(B)(b) of the Sixth VAT Directive (Articles 135(1)(l) and 135(2) of the EU VAT Directive 2006/112/EC).

Facts

Temco Europe SA is liable to VAT in respect of its property cleaning and maintenance business … .It is the owner of a property at 107 to 117 Chaussée de Ruisbroeck. Between the end of 1993 and the beginning of 1994 it had refurbishment work carried out to the building at number 111 and deducted the VAT for which it was invoiced on that work. It has no place of business in the building. Temco Energy Management Company SA, Publi-round SA and Petrus SA are companies belonging to the same group. Together with Temco Europe SA they are subject to a common central management.
On 1 February 1994, Temco Europe SA entered into three contracts [“the contracts”] with those three companies which the parties thereto described as “transfers”, under which Temco Europe SA allowed each transferee to carry on its activities in the property, as allocated by the board of directors of the transferor, without the transferee having individual rights over any specific part of the property. Neither evidence of the transferees’ activities nor the allocation resolutions of the board of directors of the transferor have been produced.
The contracts have been entered into for the duration of the transferee’s activities, and the latter is bound to use the premises exclusively for its activity in compliance with the internal rules laid down by the transferor. The transferor’s board of directors, however, is entitled at any time without notice to require the transferee to vacate the premises referred to in the transfer.
The transferee is responsible for all expenses required for its activity. Gas and electricity are calculated according to consumption and communal outgoings in accordance with the area occupied. The transferee is also liable for repairing deterioration of the premises occupied by it on the basis of criteria set by the transferor’s board of directors.
Rent is payable annually and set at BEF 3 500 per m² in the part fitted out as offices and BEF 1 000 per m² in the part fitted out for storage plus 0.4% of the transferee’s turnover exclusive of VAT and BEF 5 000 per annum for each person employed.
The parties expressly excluded application of Article 1709 of the code civil.
The internal rules establish the provisions for access to the building, cleaning, the rights to affix advertising signs and to unlimited access for persons authorised by the transferor and the duty on transferees to ensure that there is:
- connection to telephone, water, gas, electricity and heating services, where applicable in agreement with the other occupiers;

- access for all occupiers to drinks machines, to the canteen and to the showers;

- access to the driveways and car parks;

- responsible storage of items and use of drains and sewers.
Temco Europe SA has provided no relevant information on the performance of those contracts.
In a report drawn up on 30 September 1996, the assistant auditor of the VAT authority stated that:
- in respect of two of the occupiers the contracts were entered into after publication of the transfer of their registered offices to the building in issue;

- no provision in the contracts defined the transferees’ activities or the use to be made of the premises;

- there was no monitoring of the portion of the rent linked to turnover, which proportion represented for Petrus SA 7%, for Publi-round SA 6% and for Temco Energy SA 0% of the rent.

- the occupiers have a key to access the building and the building has no security guard or concierge, with the effect that the restriction on access referred to in the internal rules is purely formalistic.

It is not disputed that the companies remained in occupation of the buildings whilst proceedings were pending.’
Following an inspection by the administration de la TVA, de l’Enregistrement et des Domaines (VAT, Registration and Property Authority) (‘the Authority’), the latter concluded that the contracts were in reality lettings of immovable property exempt from VAT under Article 44(3)(2) of the VAT Code, which is the provision transposing Article 13B(b) of the Sixth Directive, and that accordingly the deduction of VAT on the refurbishment work on the building at number 111 Chaussée de Ruisbroeck was not justified.
As a result, the Authority demanded payment from Temco Europe of EUR 137 125.53 (BEF 5 531 639) in respect of VAT which it alleged to have been wrongly deducted, of EUR 13 708.51 (BEF 553 000) representing the amount of a fine, together with interest at the legal rate on those sums.
As Temco Europe refused to pay those sums, a summons was issued against it by the Authority. Temco Europe lodged a defence against that summons, and, by judgment of 29 November 2000, the Tribunal de première instance de Bruxelles (Brussels Court of First Instance) (Belgium) annulled it. The Belgian State appealed against that judgment before the court of appeal.
The Cour d’appel de Bruxelles (Brussels Court of Appeal) considered the concept of ‘letting of immovable property’ within the meaning of Article 13B(b) of the Sixth Directive in relation to contracts such as those that had been concluded in the main proceedings. The national court states in that regard:
- ‘In the present case the defendant, the transferor, and the transferees entered into contracts on unequal terms by which the transferees were granted a licence to occupy the property. Those contracts were clearly put in place in order not to come within the scope of the rental and letting of immovable property.
- One cannot examine those contracts, however, without taking into account the close link between those companies, all sharing the same management, which enables the transferees to enjoy the benefit of continuity of occupation and fair performance of the terms of the contracts.
- The performance of the contracts has shown that the transferees have continuous and unrestricted access to the premises and that they enjoy a high degree of security in occupying their offices and storage premises.’

Questions

May Article 13B(b) of the Sixth Directive be interpreted to mean that transactions, corresponding in Belgian law to a contract of indefinite duration by which one company, through a number of contracts, simultaneously grants associated companies a licence to occupy a single property in return for a payment set partially but essentially on the basis of the area occupied, where the inherent insecurity of a licence is absent owing to the fact that the transferee and the transferor are under common management, constitute a letting of immovable property within the meaning of Community law, or, in other words, does the independent Community law concept of the “letting of immovable property” in Article 13B(b) of the Sixth Directive cover use, for consideration, of an immovable asset for purposes other than those of the taxpayer’s business – which definition is adopted in Article 44(3)(2) in fine of the [VAT Code] – that is to say, the grant under a licence of indefinite duration of a non-exclusive right of occupation in return for a monthly payment, albeit fluctuating and partly dependent on the profits of one of the contracting parties, where the inherent insecurity of a licence is absent owing to the fact that the transferee and the transferor are under common management?

AG Opinion

(1) The letting of immovable property referred to in Article 13B(b) 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 a legal transaction whereby the owner of an immovable property assigns the use and enjoyment thereof to another person, to the exclusion of all others – including the owner – for a period of time, in exchange for payment of a price. The decision as to whether a transaction fulfils those requirements is a matter for the national court which, for that purpose, must take account of all the elements of the transaction, in addition to the material circumstances in which it takes place, in particular the possible intent to defraud or the possibility of tax avoidance, the following being irrelevant:

(a) the legal classification which the parties attribute to the agreement;

(b) the number of transferees, the existence of only one, or more than one, contract relating to the same property, and, where appropriate, the specific allocation of an area or the attribution of notional shares or proportions;

(c) the greater or lesser indeterminacy of the term of the agreement and the expiry thereof, it being permissible for the period not to be expressly agreed upon or for it to be dependent upon consent by one of the parties, or both, or upon an event outside their control;

(d) the fact that the undertakings on each side of the legal relationship may belong to a single business group and be under common management;

(e) the way the rent is determined and the parameters used for its determination; in particular, any failure to specify the duration of the transfer.

(2) Articles 6(2)(a) and 13B(b) of the Sixth Directive must be interpreted as precluding national legislation which allows a general exemption from value added tax for the exploitation, whatever the legal nature thereof, of immovable property appropriated to the taxable person’s business which, having given rise to a right of deduction, is used for purposes other than the taxable person’s business.

Decision

Article 13B(b) 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 (OJ 1977 L 145, p. 1) must be interpreted as meaning that transactions by which one company, through a number of contracts, simultaneously grants associated companies a licence to occupy a single property in return for a payment set essentially on the basis of the area occupied and by which the contracts, as performed, have as their essential object the making available, in a passive manner, of premises or parts of buildings in return for a payment linked to the passage of time, are transactions comprising the ‘letting of immovable property’ within the meaning of that provision and not the provision of a service capable of being categorised in a different way.

Summary

Transactions whereby a company, by means of several agreements, simultaneously grants to several of its affiliates a precarious right to use the same building against payment of a fee determined mainly on the basis of the area occupied, constitute ‘rental of immovable property’, where those agreements , as they are performed, essentially involve the passive provision of spaces or surfaces in buildings, for remuneration related to the passage of time, and not the provision of a service qualifying for any other qualification.

Source