Flashback on ECJ Cases – C-511/10 (BLC Baumarkt) – Germany may apply surface ratio for mixed-use VAT deduction

On November 8, 2012, the ECJ issued its decision in the case C-511/10 (BLC Baumarkt).

Context: Sixth VAT Directive – Article 17(5), third subparagraph – Right to deduct input tax – Goods and services used for both taxable and exempt transactions – Letting of a building for commercial and residential purposes – Criterion for calculating the deductible proportion of VAT

Article in the EU VAT Directive

Article 17(5), third subparagraph of the Sixth VAT Directive (Article 173 of the EU VAT Directive 2006/112/EC).

Article 173 (Proportional deduction)
1. In the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to Articles 168, 169 and 170, and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible.
The deductible proportion shall be determined, in accordance with Articles 174 and 175, for all the transactions carried out by the taxable person. 2. Member States may take the following measures:
(a) authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;
(b) require the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;
(c) authorise or require the taxable person to make the deduction on the basis of the use made of all or part of the goods and services;
(d) authorise or require the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph of paragraph 1, in respect of all goods and services used for all transactions referred to therein;
(e) provide that, where the VAT which is not deductible by the taxable person is insignificant, it is to be treated as nil.

Facts

During 2003 and 2004, BLC had a building built which included both living accommodation and commercial premises. After completion of the building, BLC let it, that letting being partly exempt from VAT and partly subject thereto. In its VAT declaration for 2004, BLC carried out a partial deduction of the input tax in relation to that building. To that end, BLC calculated the amount of deductible VAT by applying a proportion determined by reference to the ratio between the turnover in relation to the commercial letting and that arising from other letting transactions (‘the turnover-based method’).
Following a tax inspection, the Finanzamt took the view that, in accordance with Paragraph 15(4) of the UStG, the amount of deductible input VAT had to be determined by reference to the ratio between the area of the commercial premises and that of the premises used for living accommodation. In this case, allocation carried out in accordance with that latter method caused a downward revision of the amount of deductible VAT. The Finanzamt therefore sent an amendment notice to BLC.
BLC brought an action against that amendment notice before the Finanzgericht. That court allowed the action on the ground that the third sentence of Paragraph 15(4) of the UStG was contrary to EU law. Article 17(5)(c) of the Sixth Directive precluded a Member State from providing, as the main criterion, a criterion for allocation other the turnover-based method.
The Finanzamt appealed on a point of law to the Bundesfinanzhof against the decision of the Finanzgericht. The Bundesfinanzhof considers it necessary to determine the question whether one of the possibilities set out in the third subparagraph of Article 17(5) of the Sixth Directive, more particularly that appearing in Article 17(5)(c), authorises Member States to restrict allocation arising from the application of the turnover-based method by providing that that method may be used only where no other economic allocation is possible.

Questions

Is the third subparagraph of Article 17(5) of [the Sixth Directive] to be interpreted as authorising the Member States to prescribe primarily an apportionment criterion other than the [turnover-based] method for apportioning the input tax on the construction of a mixed-use building?

AG Opinion

Article 17(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 must be interpreted as meaning that, in principle, in a case such as that of the apportionment of input tax on the construction of a mixed-use building, it does not preclude the Member States from prescribing primarily an apportionment criterion other than the transaction formula. However, in the circumstances arising from the situation with regard to the national legislation applicable to the case, it is for the national court to ensure in the instant case that that formula is aimed at guaranteeing a more accurate result than the one laid down as the general rule.

Decision

The third subparagraph of Article 17(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 must be interpreted as allowing Member States, for the purposes of calculating the proportion of input value added tax deductible for a given operation, such as the construction of a mixed-use building, to give precedence, as the key to allocation, to an allocation key other than that based on turnover appearing in Article 19(1) of that directive, on condition that the method used guarantees a more precise determination of the said deductible proportion.

Summary

For the calculation of the pro rata for the deduction of input tax on a particular transaction, such as the creation of a mixed-use immovable property, Member States may primarily prescribe a different distribution key than the turnover ratio described in Article 19(1) of the Sixth Directive , provided that the method used ensures that the deduction pro rata is determined more accurately.

Source: