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Flashback on ECJ Cases – C-460/07 (Puffer) – A full deduction VAT and a staggered imposition on the private use of a mixed use building does not infringe the principle of equal treatment

On April 23, 2009, the ECJ issued its decision in the case C-460/07 (Puffer).

Costs for the creation of a building intended for business assets – Use of part of the building for private purposes – Financial advantage compared to non-taxable persons

Context: Sixth VAT Directive – Article 17(2) and (6) – Right to deduct input tax – Construction costs of a building allocated to a taxable person’s business – Article 6(2) – Private use of part of the building – Financial advantage compared to non-taxable persons – Equal treatment – State aid under Article 87 EC – Exclusion from right to deduct


Article in the EU VAT Directive

Articles 6(2)(a), 17(2)(a) and 17(6) of the Sicth VAT Directive (Articles 26, 168 and 176 of the EU VAT Directive 2006/112/EC).

Article 26 (Taxable transaction – Supply of services0
1. Each of the following transactions shall be treated as a supply of services for consideration:
(a) the use of goods forming part of the assets of a business for the private use of a taxable person or of his staff or, more generally, for purposes other than those of his business, where the VAT on such goods was wholly or partly deductible;
(b) the supply of services carried out free of charge by a taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business.
2. Member States may derogate from paragraph 1, provided that such derogation does not lead to distortion of competition.

Article 168 (Origin and scope of right of deduction)
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.

Article 176 (Restrictions on the right of deduction)
The Council, acting unanimously on a proposal from the Commission, shall determine the expenditure in respect of which VAT shall not be deductible. VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.
Pending the entry into force of the provisions referred to in the first paragraph, Member States may retain all the exclusions provided for under their national laws at 1 January 1979 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession.


Facts

  • Over the period from November 2002 to June 2004, Ms Puffer built a single-family house with a swimming pool. From 2003, she used the house as a private residence, with the exception of one part, covering approximately 11% of the building, which she let for business purposes.
  • Ms Puffer treated the building as forming, in its entirety, part of her business and claimed the deduction of the full amount of input taxes charged on the construction of the building.
  • Pursuant to amended VAT assessment notices for the years 2002 and 2003, the Finanzamt (Tax Office), first, refused to take into account for deduction purposes the taxes paid on construction of the swimming pool. Second, in relation to the other building costs, it allowed a deduction of the input tax paid only to the extent of the use of the building for business purposes, that is, 11%.
  • Ms Puffer lodged an objection to those notices which was rejected by the Unabhängiger Finanzsenat on the ground, in particular, that when the Sixth Directive entered into force in Austria, the national legislation excluded the right to deduct input VAT payable in respect of the building costs of the parts of buildings used for private residential purposes and that the national legislature had not waived the option, provided for in Article 17(6) of the Sixth Directive, to retain that exclusion.
  • Ms Puffer then appealed against that decision to the Verwaltungsgerichtshof (Administrative Court). She claims, first, that the treatment of an asset as forming, in its entirety, part of the assets of the business confers a right, pursuant to the case-law of the Court, to the full deduction of VAT and, second, that the conditions set out in Article 17(6) of the Sixth Directive, allowing the Member States to retain an exclusion of the deductions existing when the Sixth Directive came into force, are not satisfied in the present case.
  • Having found that, contrary to Article 17(2) of the Sixth Directive, the Austrian legislation does not allow the full and immediate deduction of VAT on the building costs of a mixed-use building treated as forming, in its entirety, part of the assets of a business, the national court questions whether that provision is compatible with the general principle of equal treatment under Community law.
  • In that regard, the national court points out that the full and immediate deduction of VAT on the building costs of such a mixed-use building and the subsequent imposition of VAT on the expenses pertaining to the part of the building used as a private residence, spread over 10 years, have the effect of granting the taxable person, in respect of that period, an ‘interest-free loan’ not available to a non-taxable person.
  • Consequently, it asks whether the resulting financial advantage, quantified by it at 5% of the net costs of construction of the part of the building used for private purposes, gives rise to the unequal treatment of taxable and non-taxable persons and, within the category of taxable persons, between those who construct a building for purely private purposes and those who construct it, in part, for their business.
  • In addition, the national court asks whether that financial advantage, which is offered to taxable persons carrying out taxable transactions and not to those carrying out only exempt transactions, can constitute a State aid under Article 87 EC in so far as it results from a national measure transposing the Sixth Directive and those two categories of taxable persons are in competition with each other.
  • Finally, the national court raises the question whether, notwithstanding the amendments made by the AbgÄG 1997, the national legislation excluding the deduction of input VAT is covered, as the Austrian tax administration claims, by Article 17(6) of the Sixth Directive.

Questions

  • Does 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 1 (‘the Sixth Directive’), in particular Article 17 thereof, infringe fundamental rights under Community law (the Community-law principle of equal treatment) because it has the effect of enabling persons liable to pay value added tax (VAT) to acquire ownership of residential properties for their own private residential purposes (consumption) for approximately 5% less than other EU citizens, with the final value of that advantage rising indefinitely in line with the level of acquisition and construction costs of the residential property in question? Does such an infringement arise also as a result of the fact that persons liable to pay VAT can acquire ownership of residential properties used for their own private residential purposes – where such properties are used, even minimally, in connection with their business – for approximately 5% less than other taxable persons who do not use their private dwellings, even minimally, in connection with their business?
  • Does national legislation implementing the Sixth Directive, in particular Article 17 thereof, infringe Article 87 EC because, while the legislation does allow persons liable to pay VAT who carry out taxable transactions the advantage referred to in Question 1 in respect of properties which they use for private residential purposes, that advantage is not available to taxable persons whose transactions are exempt?
  • Does Article 17(6) of the Sixth Directive continue to have effect if the national legislature amends a national provision for the exclusion of deductions (in this case, Paragraph 12(2)(1) of the Austrian Umsatzsteuergesetz (UStG) (Law on Turnover Tax) 1994), which is based on Article 17(6) of the Sixth Directive, with the express intention of retaining that exclusion of deductions, and the Austrian UStG would indeed result in the retention of an exclusion of deductions, but – owing to an error in the interpretation of Community law (in this case Article 13B(b) of the Sixth Directive) which was only subsequently identified – the national legislature introduced a provision which, viewed in isolation, would, according to Community law (Article 13B(b) of the Sixth Directive as interpreted in Case C-269/00 Seeling [2003] ECR I-4101), allow a deduction to be made?
  • If the answer to Question 3 is in the negative:
  • Could the effect of an exclusion of deductions (Paragraph 12(2)(2)(a) of the UStG 1994) which is based on the ‘standstill clause’ (Article 17(6) of the Sixth Directive) be restricted if the national legislature amends one of two overlapping national provisions excluding deductions (Paragraph 12(2)(2)(a) of the UStG 1994 and Paragraph 12(2)(1) of the UStG 1994) and subsequently does not proceed further because it finds that it has erred in law?

AG Opinion

(1)      There is no infringement of the principle of equal treatment in the fact that the Community VAT directives entitle a taxable person to full and immediate deduction of input tax on property which he acquires and allocates to his business, then paying output tax progressively on his private use of that property, even if he thus enjoys an identifiable financial advantage over another person acquiring similar property in a private capacity and thus unable to deduct any input tax.

(2)      National legislation implementing the Community VAT directives so as to allow taxable persons such an advantage does not infringe Article 87 EC.

(3)      The standstill clause in Article 17(6) of the Sixth VAT Directive does not cover cases in which a previous exclusion from the right to deduct input tax where output tax was in principle chargeable is subsequently transformed into an exemption from output tax, entailing the impossibility of deducting input tax.

(4)      If a previous exclusion from the right to deduct is thus transformed into an exemption and is therefore not covered by the standstill clause in Article 17(6) of the Sixth Directive, any other exclusion which is dependent for its interpretation and/or application on the existence of the previous exclusion will also not be covered by the standstill clause. However, a self-standing exclusion which was in existence when that directive came into force in the Member State concerned and has not since been modified remains covered by the clause.


Decision

1. Article 17(2)(a) and Article 6(2)(a) 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 do not infringe the general principle of equal treatment under Community law by conferring on taxable persons, by means of a full and immediate right to deduct input value added tax on the construction of a mixed-use building and the subsequent staggered imposition of that tax on the private use of the building, a financial advantage compared to non-taxable persons and to taxable persons who use their property only as a private residence.

2. Article 87(1) EC must be interpreted as not precluding a national measure which transposes Article 17(2)(a) of Sixth Directive 77/388 and which provides that the right to deduct input value added tax payable is confined to taxable persons carrying out taxable transactions, to the exclusion of those carrying out only exempt transactions, in so far as that national measure may confer a financial advantage only on taxable persons carrying out taxable transactions.

3. Article 17(6) of Sixth Directive 77/388 must be interpreted as meaning that the derogation it contains does not apply to a provision of national law which amends legislation existing when that directive entered into force, which is based on an approach which differs from that of the previous legislation and which laid down new procedures. In that regard, it is irrelevant whether the national legislature amended the previous national legislation on the basis of a correct or incorrect interpretation of Community law. The question whether such an amendment of a provision of national law also affects, with regard to the applicability of the second subparagraph of Article 17(6) of the Sixth Directive, another provision of national law depends on whether those provisions of national law are interdependent or autonomous, which is a matter for the national court to determine.


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