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Flashback on ECJ Cases – Joined Cases C-538/08 & C-33/09 (X Holding and Oracle Nederland) – Dutch VAT deduction exclusion decree (”BUA”) is confirm EU VAT legislation

On April 15, 2010, the ECJ issued its decision in the  Joined Cases C-538/08 & C-33/09 (X Holding and Oracle Nederland).

Context: Sixth VAT Directive – Right to deduct input tax – National legislation excluding certain categories of goods and services from the right to deduct – Option for Member States to retain rules excluding the right to deduct which were in existence when the Sixth VAT Directive entered into force – Amendment after that directive had entered into force


Article in the EU VAT Directive

Article 17(6) of the Sixth VAT Directive (Article 176 of the EU VAT Directibe 2006/112/EC).

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

C-538/08

  • During the period between 1 January 1997 and 31 December 1999, X Holding purchased 34 passenger cars from car dealers. It retained the cars for a limited period, after which it sold them.
  • X Holding deducted in full the VAT which it had been charged when it purchased those cars. It paid on declaration the VAT charged on the supply of each car.
  • On 10 July 2001, an investigation was opened into the accuracy of the VAT returns submitted by X Holding during the years in question. In a report dated 13 November 2002, the finance inspectorate concluded that most of the cars purchased had not been used for the purposes of the company and that X Holding had therefore wrongly claimed deduction of the input VAT paid. Consequently, an additional VAT assessment in the amount of NLG 887 852 (EUR 402 889) was imposed.
  • X Holding lodged an objection against that decision. In the course of the subsequent review, the finance inspectorate concluded that 4 of the 34 cars had been purchased and used in the context of the business exclusively for commercial purposes. In those circumstances, the deduction of the input VAT paid on the acquisition of those four cars was allowed. The additional VAT assessment was therefore reduced to NLG 856 605 (EUR 388 710).
  • X Holding brought proceedings against that decision before the Gerechtshof Amsterdam (Regional Court of Appeal, Amsterdam). That court, having ruled that the 30 cars which were the subject of an additional VAT assessment had been used for both business and private purposes, dismissed the action.
  • The Hoge Raad der Nederlanden (Supreme Court of the Netherlands), hearing the appeal on a point of law brought against the judgment of the Gerechtshof Amsterdam, pointed out that Article 11(4) of the Second Directive allowed Member States to exclude certain goods and services from the deduction system, in particular those capable of being exclusively or partially used for the private needs of the taxable person or those of his staff. That provision therefore allowed Member States to exclude from that system certain categories of motor vehicles, but did not allow them to exclude from it all goods in so far as they are used for the private purposes of the taxable person. Thus, the option provided applies only to maintaining exclusions from deduction with regard to categories of expenditure defined by reference to the nature of the goods or services rather than by reference to the use to which they are put or the manner in which they are used.
  • The Hoge Raad der Nederlanden noted that the restriction of the deduction provided for in Article 1(1)(c) of the VAT Decree also applies to goods and services used ‘for other personal purposes of the staff [of the trader]’ and to payments of wages in kind. As the system concerns all goods for private use, the Hoge Raad considered that restriction to be, on the whole, inadequately defined and too broad. However, it noted that the provision describes some categories of goods and services more specifically, in particular goods and services used to provide opportunities for private transport to the staff of the trader.

C-33/09

  • In May 2005, Oracle provided, in return for payment, food and drink to its staff. It also secured the services of a disc-jockey for a staff function and arranged for accommodation to be found for one of its employees. By way of a business gift, Oracle also invited third parties to a golfing event. In addition, it placed at the disposal of some of its staff cars which belonged to the company or which the company had leased, partly in return for consideration.
  • In its VAT declaration for May 2005, Oracle identified VAT in the amount of EUR 62 127 as non-deductible; the total amount of VAT it paid for that month amounted to EUR 9 768 326.
  • The said amount of EUR 62 127 related to the following items:
    • leasing cars
      • without contribution from staff member          EUR 8 480
      • with contribution from staff member                   EUR 41 520
    • own cars                                                       EUR 306
    • mobile phones                                                       EUR 6 358
    • catering                                                                 EUR 3 977
    • entertainment                                                       EUR 850
    • accommodation                                              EUR 380
    • business gifts                                                       EUR 256
  • Oracle subsequently lodged a complaint, submitting that it had in fact a right to deduct the VAT relating to those expenses.
  • The Inspector rejected that complaint as unfounded.
  • Oracle brought an action against that decision before the Rechtbank te Haarlem (District Court, Haarlem).
  • The Rechtbank te Haarlem held that the Inspector had been wrong not to allow the deduction of input VAT in respect of the costs of mobile phones, the costs of real estate brokerage and the payment for a golfing event, given that, in respect of those costs, the restriction of the deduction had not been adequately defined. By contrast, the Rechtbank te Haarlem took the view that the other categories of non-deductible expenses were adequately defined and that, consequently, the Inspector had been right to refuse the deduction of input VAT in respect of the items at issue.
  • Both Oracle and the Inspector appealed against that judgment to the Gerechtshof Amsterdam.
  • Before the Gerechtshof Amsterdam, Oracle maintained, inter alia, that the applicable provisions of the domestic legislation at issue, in excluding or restricting the right to deduct VAT on the supply of the goods and services in question in the main action, were contrary to Article 11(4) of the Second Directive and to Article 6(2) of the Sixth Directive. For his part, the Inspector claimed that the refusal of deduction of VAT was based on a provision which had been introduced in the Netherlands before the entry into force of the Sixth Directive, in accordance with the option given to Member States by Article 17(6) of that directive, which is still applicable.

Questions

C-538/08

(1)      Must Article 11(4) of the Second Directive and Article 17(6) of the Sixth Directive be interpreted as meaning that a Member State wishing to take advantage of the possibility for which those provisions provide of (retaining) the exclusion of deduction with respect to categories of expenditure which are described as “providing the opportunity for private transport” has satisfied the condition requiring the designation of a category of adequately defined goods and services?

(2)      If the answer to the first question is in the affirmative, do Article 6(2) and Article 17(2) and (6) of the Sixth Directive leave room for national legislation such as that at issue, which was adopted before that directive entered into force and under which a taxable person may not deduct in full the VAT paid on the acquisition of certain goods and services which are used partly for business purposes and partly for private purposes of the staff, but may do so only to the extent that the VAT is attributable to use for business purposes?

C-33/09

(1)      Are Article 11(4) of the Second Directive and Article 17(6) of the Sixth Directive to be interpreted as meaning that a Member State wishing to make use of the possibility offered by those articles of (retaining) the exclusion of deduction in respect of categories of expenditure described as [follows]:

–        “the provision of food and drink to the staff of the trader”;

–        “giving business gifts or other gifts to persons in relation to whom, if they had been charged or were to be charged the relevant tax, such tax would be entirely or mainly non-deductible”;

–        “providing the staff of the trader with accommodation”;

–        “providing the staff of the trader with opportunities for recreation”,

has satisfied the condition requiring the designation of a category of adequately defined goods and services?

(2)      If the answer to the first question is in the affirmative for one of the categories listed, do Article 6(2) and Article 17(2) and (6) of the Sixth Directive leave room for a national statutory provision, such as that at issue, which was enacted before the Sixth Directive entered into force and on the basis of which a taxable person may not deduct in full the turnover tax paid on the acquisition of certain goods or services because a fee was charged in respect thereof which incurred value added tax, but only an amount up to the amount of tax owed in respect of that supply?

(3)      If, in respect of “the provision of food and drink”, the condition is satisfied which requires the designation of a category of adequately defined goods and services, does Article 17(6) of the Sixth Directive preclude an amendment to an existing exclusion of the deduction, from which amendment it seems likely that in principle the scope of the exclusion will be restricted but where it cannot be ruled out that in an individual case in a particular year the scope of the restriction of the deduction might be extended, in particular through the flat-rate nature of the amended scheme?


AG Opinion

(1)      Article 11(4) of Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes – Structure and procedures for application of the common system of value added tax, and Article 17(6) 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, are to be interpreted as meaning that a Member State which has made use of the possibility offered by those articles of excluding deduction in respect of categories of expenditure described as:

–        ‘providing the staff of the employer with the opportunity for private transport’,

–        ‘the provision of food and drink to the staff of the employer’,

–        ‘the provision of accommodation for the staff of the employer’,

has satisfied the condition requiring the designation of a category of adequately defined goods and/or services, by reference, even implicitly, to the nature of those goods and/or services.

On the other hand, the exclusion, by the Member State, of the right to deduct input VAT in respect of categories of expenditure described as:

–        ‘providing the staff of the employer with opportunities for recreation’,

–        ‘[giving] business gifts or other gifts … to persons in relation to whom, if they had been charged or were to be charged the relevant turnover tax, such tax would be entirely or mainly non-deductible’,

does not satisfy that condition.

(2)      Article 17(6) of the Sixth Directive is to be interpreted as meaning that it allows a Member State to retain a partial exclusion from the right to deduct input VAT in respect of expenditure relating to certain goods or services, introduced by national legislation enacted before the entry into force of the Sixth Directive.

(3)      Article 17(6) of the Sixth Directive is to be interpreted as meaning that it allows Member States to introduce, after the entry into force of the directive, an amendment to the exclusion from the right to deduct VAT on a category of expenditure, such as that relating, in the main proceedings in Case C‑33/09, to the provision of food and drink by the taxable person to members of his staff, which is intended, in principle, to restrict the scope of the exclusion but where it cannot be ruled out that, in an individual case in a particular year which is not relevant to the main proceedings, it might extend the scope of the exclusion through the flat-rate nature of the amended provision.


Decision

1. Article 11(4) of Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes – Structure and procedures for application of the common system of value added tax and Article 17(6) 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 not precluding the tax legislation of a Member State from excluding from deduction value added tax which relates to categories of expenditure concerning, on the one hand, the provision of ‘private transport’, ‘food’, ‘drink’, ‘accommodation’ and ‘opportunities for recreation’ to the members of staff of a taxable person and, on the other hand, the provision of ‘business gifts’ or ‘other gifts’.

2. Article 17(6) of Sixth Directive 77/388 must be interpreted as not precluding national legislation, enacted before the Sixth Directive entered into force, under which a taxable person may deduct value added tax paid on the acquisition of certain goods and services used partly for private purposes and partly for professional purposes not in full but only in proportion to their use for professional purposes.

3. Article 17(6) of Sixth Directive 77/388 must be interpreted as not precluding an amendment by a Member State, after the entry into force of that directive, to an existing exclusion from the right of deduction, designed in principle to restrict the scope of that exclusion but in respect of which it cannot be ruled out that, in an individual case in a particular tax year, the scope of that exclusion might be extended by reason of the flat-rate nature of the amended scheme.


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