On June 30, 2022, the ECJ issued the decision in the case C-56/21 (ARVI ir ko).
Context: Reference for a preliminary ruling — Tax legislation — Value added tax — Directive 2006/112/EC — Article 137 — Possibility of opting for tax liability in the case of exempt transactions — Conditions governing the right of option — Member States’ discretion — Meaning of the form — Consequences of an infringement of formal requirements
Articles in the EU VAT Directive
Article 137 & 188(2) of the EU VAT Directive 2006/112/EU
Article 137 (Exemption)
1. Member States may allow taxable persons a right of option for taxation in respect of the following transactions:
(a) the financial transactions referred to in points (b) to (g) of Article 135(1);
(b) the supply of a building or of parts thereof, and of the land on which the building stands, other than the supply referred to in point (a) of Article 12(1);
(c) the supply of land which has not been built on other than the supply of building land referred to in point (b) of Article 12(1);
(d) the leasing or letting of immovable property.
2. Member States shall lay down the detailed rules governing exercise of the option under paragraph 1.
Member States may restrict the scope of that right of option.
Article 188 (Adjustment of deductions)
1. If supplied during the adjustment period, capital goods shall be treated as if they had been applied to an economic activity of the taxable person up until expiry of the adjustment period.
The economic activity shall be presumed to be fully taxed in cases where the supply of the capital goods is taxed.
The economic activity shall be presumed to be fully exempt in cases where the supply of the capital goods is exempt.
2. The adjustment provided for in paragraph 1 shall be made only once in respect of all the time covered by the adjustment period that remains to run. However, where the supply of capital goods is exempt, Member States may waive the requirement for adjustment in so far as the purchaser is a taxable person using the capital goods in question solely for transactions in respect of which VAT is deductible.
Arvi, after selling an old building in May 2015 to a taxable person who was not a registered VAT payer, at a later stage had charged VAT. The central tax authority has pointed out that only VAT registered buyers can opt for a VAT taxable supply. Arvi had no right to subject the sale to VAT. The buyer of the property was registered as a VAT taxable person in June 2015. Arvi argues that the conditions are contrary to the principle of VAT neutrality and the principle of free competition, and is in no way compatible with the objectives of the Directive and the case law of the court.
Article 188(2) of the Directive provides for the possibility not to revise a VAT deduction even if the supply of investment goods is exempt, if the recipient is a taxable person who continues to use the investment goods in question exclusively for transactions for which VAT is deductible. However, Lithuania, as a Member State, has not opted for the option provided for in Article 188(2) of the Directive to waive the requirement for revision. The referring court wonders whether the choice made by the Lithuanian legislature, namely to make the right of option to deduct VAT conditional on the customer being a taxable person registered as a VAT taxable person, safeguards the principles of the directive, having regard to its objectives and substance. The referring court also raises the question whether the choice of the taxable person to charge VAT on the supply of an old immovable property, where that choice does not satisfy the requirement, laid down in Article 32 of the Law on VAT, that the purchaser be registered as a taxable person for VAT purposes, has the effect of enabling that transaction to be classified as a taxable supply of capital goods which does not give rise to an obligation on the part of the supplier of the goods to review the relevant VAT deduction. Furthermore, the question arises whether the tax inspectorate’s requirement that the supplier review the VAT deduction in the circumstances of this case, where the purchaser of the immovable property was registered as a VAT taxable person one month after carrying out the transaction, is consistent with the substance of the Directive and with the principles developed in the Court’s case law.
- Is national legislation under which a VAT taxable person may choose to charge VAT on the exempt supply of immovable property only if that property is transferred to a taxable person identified for VAT purposes at the time of the conclusion of the transaction consistent with the interpretation of Articles 135 and 137 of the VAT Directive and with the principles of fiscal neutrality and effectiveness?
- If the answer to the first question is in the affirmative, is an interpretation of the national legislation which requires the supplier of immovable property to adjust the input tax deducted in respect of the immovable property transferred, where the supplier has opted to charge VAT on the supply of the immovable property but such an option is not possible under national law solely because the purchaser is not identified for VAT purposes, consistent with the provisions of the VAT Directive governing the supplier’s right to deduct and adjustment of the deduction and with the principles of VAT neutrality and effectiveness?
- Do the provisions of the VAT Directive governing the supplier’s right to deduct VAT and the adjustment of deductions and the principle of neutrality of VAT preclude an administrative practice which, in circumstances such as those in the main proceedings, requires the supplier of a property to adjust the input tax deducted on the acquisition or manufacture of the property [or. 6] because the transfer of that immovable property is deemed to be an exempt supply due to the inability to exercise the right of option to charge VAT (namely, the purchaser did not have a VAT identification number at the time the transaction was concluded), where the purchaser of the immovable property had already requested identification for VAT purposes prior to the conclusion of the transaction and was identified for VAT purposes one month after the conclusion of that transaction? Is it relevant in such a case to verify that the purchaser of the immovable property, identified for VAT purposes after the conclusion of the transaction, has actually used the acquired property for activities subject to VAT and that there are no indications of fraud or abuse?
(1) Under Article 137 of Directive 2006/112/EC on the common system of value added tax, a Member State may subject a valid choice of the supplier to waive a VAT exemption to the condition that the the customer is a taxable person identified for VAT purposes. Compliance with this ‘formal’ condition does not infringe the principle of VAT neutrality, nor is it disproportionate.
2) The legal consequence of non-compliance with this “formality” – the adjustment of the deduction of input VAT at the supplier’s office – results from the VAT exemption of the transfer provided for in the VAT Directive. That conclusion is not affected by the fact that, first, the customer was identified for VAT purposes one month later, second, he used the goods to carry out taxable transactions and, third, there was no fraud .
1) Articles 135 and 137 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as not precluding a national regulations which subject the right of a taxable person to opt for the submission to value added tax (VAT) of the sale of immovable property to the condition that this property is transferred to a taxable person who, at the time of the conclusion of the transaction, is already identified for VAT.
2) The provisions of Directive 2006/112 and the principles of fiscal neutrality, effectiveness and proportionality must be interpreted as meaning that they do not preclude national legislation and practice under which the seller of an immovable property is required to regularize the deduction of value added tax (VAT) paid upstream on this property following the refusal to recognize its right to opt for the taxation of this sale on the grounds that, at the date of this, the purchaser did not fulfill the conditions provided for the exercise, by the seller, of this right. If the actual use of the real estate in question by the purchaser in the context of activities subject to VAT is irrelevant in this respect,
Similar/reference ECJ Cases
- C-385/09 (Nidera Handelscompagnie BV) – Right to get a refund of VAT if the taxpayer was not identified as a taxable person for VAT purposes
C-532/16 (SEB bankas) – Judgment – Input VAT deduction adjustment; capital goods
- C-140/17 (Gmina Ryjewo) – Input VAT deduction adjustment after change of use of capital goods
- C‑201/18 (Mydibel SA vs Belgium) – Input VAT, immovable property, sale and lease back