Flashback on ECJ Cases C-72/05 (Wollny) – Use of immovable property belonging to a business for private purposes of the taxable person

On September 14, 2006, the ECJ issued its decision in the case C-72/05 (Wollny).

Context: Sixth VAT Directive – Article 11A(1)(c) – Use of property forming part of the assets of a business for private purposes by a taxable person – Treatment of that use as a supply of services for consideration – Determination of the taxable amount – Definition of full cost to the taxable person of providing those services

Article in the EU VAT Directive

Article 11A(1)(c) of the Sixth VAT Directive (Article 75 of the EU VAT Directive 2006/112/EC).

Article 75 (Taxable amount – Supply of goods or services)
In respect of the supply of services, as referred to in Article 26, where goods forming part of the assets of a business are used for private purposes or services are carried out free of charge, the taxable amount shall be the full cost to the taxable person of providing the services.

Facts

In 2003, the Hausgemeinschaft Jörg und Stefanie Wollny, a household made up of Mr and Mrs Wollny (‘the household’), had a building constructed which was to form in its entirety part of the assets of its business. That building comprises the privately used rooms of the two members of the household and the rooms of a tax adviser’s office which were let to one of those members. The part which is let constitutes 20.33% of the building. That letting is subject to VAT.
In its provisional VAT returns for December 2003 and for the months of January to March 2004, the household deducted the entire value added tax charged to it in connection with the costs of constructing the building. Relying on the rate of depreciation for wear and tear of buildings as laid down in Paragraph 7(4)(2)(a) of the EStG, it considered that the taxable amount for the private use of 79.67% of the building was a monthly amount equal to 1/12 of 2% of the construction costs apportionable to the privately used part of the building.
Relying on a circular of the Bundesministerium für Finanzen (German Ministry of Finance) of 13 April 2004 (BStBl. I 2004, p. 468), the Finanzamt Landshut (tax office, Landshut) took the view that the taxable amount should be established by reference to the length of the period of adjustment for deductions concerning VAT provided for in Paragraph 15a of the UStG, namely 10 years. It therefore corrected the household’s calculation and fixed the taxable amount per month for VAT in respect of the private use of part of the building at 1/12 of 10% of the construction costs apportionable to that part.
The Finanzamt Landhut having dismissed the household’s objections to the tax prepayment notices issued in accordance with the calculation set out in the previous paragraph, the household brought an action before the Finanzgericht München (Finance Court, Munich).
That court takes the view that a decision in the case before it depends on determining the taxable amount relating to the private use of a building which has been allocated, in its entirety, to the household’s business. Observing that Article 11(A)(1)(c) of the Sixth Directive does not define the concept of ‘full cost’, it is unsure of the meaning to be given to that concept.
In that regard, it observes that the Court’s judgments in Case C-230/94 Enkler [1996] ECR I-4517, and Case C-269/00 Seeling [2003] ECR I‑4101, paragraph 54, include factors some of which tend towards the applicant’s view and others of which tend towards that of the German tax authorities.

Questions

How is the term “full cost” in Article 11(A)(1)(c) of the [Sixth Directive] to be interpreted? Does the full cost for the privately used dwelling in a building forming, in its entirety, part of the assets of a business comprise, in addition to recurring expenses, annual depreciation for the wear and tear of buildings in accordance with the applicable national rules and/or the annual proportion of the acquisition and production cost – calculated on the basis of the applicable national period for adjustment of deductions – that has given rise to a right to deduct value added tax?

AG Opinion

Article 11(A)(1)(c) of the Sixth Council Directive 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, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as meaning that it does not preclude national legislation whereby the taxable amount, for VAT purposes, in respect of the private use of part of a building forming, in its entirety, part of the assets of a business, is fixed annually as a portion of the acquisition or construction costs, determined by reference to the period for the adjustment of deductions, provided for in accordance with Article 20 of the Sixth Directive 77/388, as amended. The taxable amount must include the acquisition costs of the land on which the building was constructed, where that acquisition was subject to VAT and the taxable person deducted the VAT.

Decision

Article 11(A)(1)(c) 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, as amended by Council Directive 95/7/EC of 10 April 1995, is to be interpreted as meaning that it does not preclude the taxable amount for VAT in respect of the private use of part of a building treated by a taxable person as forming, in its entirety, part of the assets of his business from being fixed at a portion of the acquisition or construction costs of the building, established in accordance with the length of the period for adjustment of deductions concerning VAT provided for in Article 20 of that directive.

That taxable amount must include the costs of acquiring the land on which the building is constructed when that acquisition has been subject to VAT and the taxable person has deducted that tax.

Summary

Use of immovable property belonging to a business for private purposes of the taxable person — Equating that use with services provided for consideration — Determination of the taxable amount

It is permissible that the taxable amount of VAT for the private use of part of a building fully incorporated by the taxable person into his business is set at part of the acquisition or formation costs of this building, determined on the basis of the duration of the period for adjustment of VAT deduction determined in accordance with Article 20 of the Directive.

This taxable amount should include the purchase costs of the land on which the building is erected, where this purchase was subject to VAT and the taxable person has been able to deduct this VAT.

Source