On June 26, 2003, the ECJ issued its decision in the case C-442/01 (KapHag).
Context: Sixth VAT Directive – Scope – Supply of services for consideration – Admission of a member to a partnership in consideration of payment of a contribution in cash.
Article in the EU VAT Directive
Article 2(1) of the Sixth VAT Directive (Article 2(1) of the EU VAT Directive 2006/112/EC).
1. The following transactions shall be subject to VAT:
(a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;
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(b) the intra-Community acquisition of goods for consideration within the territory of a Member State by:
(i) a taxable person acting as such, or a non-taxable legal person, where the vendor is a taxable person acting as such who is not eligible for the exemption for small enterprises provided for in Articles 282 to 292 and who is not covered by Articles 33 or 36;
(ii) in the case of new means of transport, a taxable person, or a non-taxable legal person, whose other acquisitions are not subject to VAT pursuant to Article 3(1), or any other non-taxable person;
(iii) in the case of products subject to excise duty, where the excise duty on the intra-Community acquisition is chargeable, pursuant to Directive 92/12/EEC, within the territory of the Member State, a taxable person, or a non-taxable legal person, whose other acquisitions are not subject to VAT pursuant to Article 3(1);
(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such;
(d) the importation of goods.
- KapHag is a partnership (Gesellschaft bürgerlichen Rechts) governed by German civil law; its partners are LOGOS Grundstücks-Treuhand GmbH (LOGOS 1), LOGOS Zweite Grundstücks-Treuhand GmbH (LOGOS 2) and Dr Moegelin, Dr Tiemann and Dr Mehnert.
- KapHag’s object was to acquire a development right (Erbbaurecht) in respect of a plot of land in Berlin (Germany), to erect thereon buildings forming part of a shopping centre, to exploit those buildings by leasing or managing them and to maintain them. This development right was acquired by LOGOS 1 and LOGOS 2, within KapHag. On 2 August 1991, Dr Moegelin and Dr Tiemann became partners in KapHag.
- KapHag was intended to take the form of a closed property fund. Partners could be admitted up to a total amount of DEM 38 402 000, plus 5% premium. The general contractual terms (general terms) agreed on 1 October 1991 referred to KapHag’s partnership agreement and to other agreements concluded or to be concluded by it.
- On 12 November 1991, Dr Mehnert announced his intention to join KapHag and to contribute a total amount of DEM 38 402 000. On 13 November 1991, the partners in KapHag decided to delete a part of the general terms and agreed on a definitive version of KapHag’s partnership agreement and on other parts of the general terms.
- By a fee note of 19 December 1991, Dr Severin, a lawyer, invoiced the plaintiff for DEM 75 000, plus VAT of DEM 10 5000, for providing legal advice and drafting the partnership agreement. The legal advice related to the fund concept and the formation of the partnership.
- In its 1991 VAT return, KapHag deducted the abovementioned VAT payment as input tax.
- Following an audit, the Finanzamt Charlottenburg, by decision of 17 February 1998, disallowed that deduction; it relied on paragraphs 4(8)(f) and 15(2) of the UStG.
- KapHag lodged an objection and then an appeal, both of which were rejected.
- KapHag then appealed to the Bundesfinanzhof on a point of law.
- The Bundesfinanzhof took the view that when a partnership admits a partner in consideration of a contribution in cash or in kind, it makes a supply of services effected for consideration within the meaning of Article 2(1) of the Sixth Directive which is exempt under Article 13B(d)(5) of that directive. However, it considers that that concept is questionable, since a partner is admitted not on the basis of a bilateral contract between the new partner and the partnership but on the basis of a partnership agreement concluded between partners, so that, from the viewpoint of civil law, the new partner might be regarded as obtaining his share in the partnership not from the partnership but from the other partners. It is for that reason, in particular, that legal commentators conclude that there is no supply for consideration by the partnership in such a situation.
- On the assumption that there is a supply by the partnership and that this supply must be exempt in accordance with Article 13B(d)(5) of the Sixth Directive, the question arises as to whether it constitutes a transaction in respect of which Articles 17 and 19 of the Sixth Directive provide for deduction of input tax. That would not be so if the issue of shares in the partnership constituted an incidental transaction within the meaning of the second sentence of Article 19(2) of the Sixth Directive. The Bundesfinanzhof inclines to the view that there was such an incidental transaction in the present case, but points out that it would be contrary to the common market, with free movement of capital, if the raising of a partnership’s own capital by the issue of partnership shares were to have different fiscal consequences in the various Member States.
1. Where a partnership admits a partner on payment of a capital contribution in cash, does it effect a supply to him for consideration within the meaning of Article 2(1) of Directive 77/388/EEC?
2. If so, is it an incidental transaction for the purposes of the second sentence of Article 19(2) of Directive 77/388/EEC, and is the taxable person entitled to rely on that provision, according to which such incidental transactions do not exclude deduction of input tax?
(1) Answer the first question as follows: Where a partnership admits a partner in exchange for a contribution in cash, it is not making a supply for consideration within the meaning of Article 2(1) 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 and, accordingly, it is not carrying out a taxable transaction.
(2) Not answer the second question, as it is devoid of purpose.
A partnership which admits a partner in consideration of payment of a contribution in cash does not effect towards that person a supply of services for consideration within the meaning of Article 2(1) 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.
A partnership that takes on a new partner against payment of a cash contribution does not provide a service for consideration.
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