Flashback on ECJ Cases – C-234/11 (TETS Haskovo) – Demolition of buildings and replacement by new buildings does not give rise to a review of the VAT deduction

On October 18, 2011, the ECJ issued its decision in the case C-234/11 (TETS Haskovo).

Context: Taxation − VAT − Right of deduction − Contribution in kind − Destruction of property − New buildings — Adjustment

Article in the EU VAT Directive

Article 185(1) in the EU VAT Directive

Article 185

1. Adjustment shall, in particular, be made where, after the VAT return is made, some change occurs in the factors used to determine the amount to be deducted, for example where purchases are cancelled or price reductions are obtained.

Facts

TETS Haskovo is engaged in energy production as well as transporting and distributing heat. It operates a thermal power station in Haskovo (Bulgaria).
On 2 April 2008, Finans inzhenering AD (‘Finans inzhenering’) acquired a set of buildings from the Municipality of Haskovo which included, inter alia, three buildings for energy production (a cooling tower, a chimney and a production building). That acquisition was subject to VAT.
On 4 July 2008, TETS Haskovo increased its share capital in the form of a non-cash contribution. That contribution included the set of buildings owned by Finans inzhenering which had been acquired from the Municipality of Haskovo.
The transfer made by Finans inzhenering was not considered by the revenue office at the regional directorate of the National Revenue Agency in Varna to be a supply of goods as that company had transferred a set of buildings that represented a set of assets.
On 29 July 2009, TETS Haskovo obtained a building permit in connection with work to modernise the Haskovo thermal power station, including demolishing some of the buildings contributed by Finans inzhenering to the share capital of TETS Haskovo, namely a cooling tower, a chimney and a production building. Another company was engaged to demolish the buildings, which took place between 1 January and 28 February 2010. The scrap metal salvaged from the demolition was resold and that transaction was subject to VAT.
During April 2010, TETS Haskovo was the subject of a tax inspection covering the period from 1 November 2009 to 28 February 2010. In the course of that inspection it was found that, before being contributed as a non-cash contribution to the share capital of TETS Haskovo, the buildings in question had been acquired by Finans inzhenering, which had already made a deduction of VAT paid upon the acquisition of the property.
In the light of those findings and having regard, in particular, to the fact that some of the buildings in question in the main proceedings had been demolished, the revenue office at the regional directorate of the National Revenue Agency in Varna considered that there were grounds for adjustment of the VAT deducted as input tax by Finans inzhenering.
By an amended tax assessment notice of 19 July 2010, that office considered that TETS Haskovo, as the legal successor of Finans inzhenering, was liable for a sum of BGN 1 268 581 in respect of the adjustment of the VAT deduction made by Finans inzhenering, and interest on that sum in the amount of BGN 45 606.
An action was brought against that tax assessment notice before the Direktor in which TETS Haskovo claimed that no adjustment should be made in so far as the buildings in question were demolished with the sole aim of creating new buildings in their place which would be used for taxable transactions. On 1 December 2010, the Direktor dismissed the action.
TETS Haskovo thus brought an action against that decision before the Administrativen sad Varna.

Questions

1. How is the expression “destruction of property” for the purposes of Article 185(2) of [the Directive] to be interpreted, and are the motives for the destruction and/or the conditions under which it takes place relevant for the purposes of the adjustment to the deduction made upon acquisition of the property?

2. Is the demolition of capital assets, duly proved, with the sole aim of creating new, more modern capital assets with the same purpose to be regarded as a modification of the factors used to determine the amount to be deducted within the meaning of Article 185(1) of [the Directive]?

3. Is Article 185(2) of [the Directive] to be interpreted as permitting the Member States to make adjustments in the case of the destruction of property where its acquisition remained totally or partially unpaid?

4. Is Article 185(1) and (2) of [the Directive] to be interpreted as precluding a national provision like Article 79(3) of the Law on VAT and Article 80(2)(1) of the [ZDDS], which provides for an adjustment of the deduction made in cases of destruction of property upon the acquisition of which a total payment of the basic amount and the tax calculated was made, and which makes the non-adjustment of a deduction dependent on a condition other than payment?

5. Is Article 185(2) of [the Directive] to be interpreted as ruling out the possibility of an adjustment to the deduction in the case of the demolition of existing buildings with the sole aim of creating new, more modern buildings in their place which fulfil the same purpose as the demolished buildings and are used for transactions which give entitlement to deduction of input VAT?

AG Opinion

(1) Article 187(2) of the VAT Directive must be interpreted as meaning that destruction of capital goods with the aim of creating new, more modern goods with the same purpose does not lead to adjustment of the deduction of input tax where destruction constitutes use for the purposes of taxed transactions within the meaning of Article 168 of the directive.

(2) A national provision which provides for adjustment of deductions in the case of the destruction of capital goods, irrespective of whether it is made for the purposes of taxed transactions, is incompatible with Articles 187(2) and 168 of the VAT Directive.

Decision

Article 185(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the destruction, such as that at issue in the main proceedings, of several buildings intended for energy production and their replacement by more modern buildings which fulfil the same purpose as the demolished buildings does not constitute a change, after the VAT return was made, in the factors used to determine the amount of VAT to be deducted as input tax, and, therefore, does not lead to an obligation to adjust the deduction made.

Summary

The destruction of several buildings intended for the generation of energy and their replacement by more modern buildings with the same purpose do not constitute a change in the elements taken into account after the VAT return to determine the amount of VAT deducted as input tax, and therefore do not entail an obligation to review this deduction.

Source: