ECJ C-612/21 Gmina O. (Municipality of O.) – Judgment – A municipality is not a taxable person due to a project to increase the proportion of renewable energy sources

On March 30, 2023, the ECJ issued the judgment in the case C-612/21 Gmina O. (Municipality of O.).

An appeal on a point of law brought by a municipality against an advance tax ruling in which the municipality was deemed to be a taxable person for VAT purposes with respect to services consisting in the installation of renewable energy source systems

Context: Request for a preliminary ruling – Tax legislation – Value added tax – Directive 2006/112/EC – Articles 2, 9 and 13 – Services for consideration – Meaning of ‘taxable person’ – Economic activity – Typological approach – A body governed by public law which organises the installation of renewable energy sources in a municipality for the residents in return for a contribution from the latter of 25%, with 75% of the costs being reimbursed by a subsidy from a third party – Transactions performed in the exercise of public authority – No significant distortions of competition

Articles in the EU VAT Directive

Artciles 2, 9 and 13 of the EU VAT Directive 2006/112/EC

Article 2 (Subject matter and scope)
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;
(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.

Article 9 (Taxable person)
1. “Taxable person” shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.
Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as “economic activity”. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.

Article 13
1. States, regional and local government authorities and other bodies governed by public law shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with those activities or transactions.
However, when they engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as nontaxable persons would lead to significant distortions of competition.
In any event, bodies governed by public law shall be regarded as taxable persons in respect of the activities listed in Annex I, provided that those activities are not carried out on such a
small scale as to be negligible.

Facts

Gmina O. (Municipality of O., Poland; ‘the Municipality’) is a local authority which is responsible for its own administration. It is also registered as a taxable person for VAT purposes.
Together with three other municipalities, the Municipality entered into a partnership agreement in order to implement a project consisting in the installation of renewable energy source systems (‘RES’) in those four municipalities (‘the Project’).
One of the municipalities, acting as Project leader, entered into a co-financing agreement with the provincial authority on behalf of all the partners. The resources themselves come from an EU fund. The co-financing received is transferred to the individual partners within the scope in which it is granted to them.
The co-financing is only intended to cover part of the eligible costs. The decision on how to fund the remaining costs of the Project is at the discretion of each municipality. The co-financing received by the Municipality covers the expenditure related to the Project and may only be used to fund the expenditure necessary for the implementation of the Project. The Municipality was granted co-financing that amounted to 75% of the total eligible costs of the Project.
The main objectives of the Project are to increase the share of RES in total energy production, reduce emissions of atmospheric pollutants, promote the use of solar energy and stimulate the use of RES among individual customers through the installation of environmentally friendly RES systems. Within the framework of the Project, the Municipality is implementing ‘Poland’s Energy Policy until 2030’, adopted by the Council of Ministers on 10 November 2009, under which RES are to account for 20% of energy produced.
Under the Project, photovoltaic panels, air source heat pumps for domestic water heating and solar thermal collectors will be installed on properties belonging to both individuals and legal persons. The Municipality has entered into agreements with individuals (residents) as property owners who wish to benefit from the installation of renewable energy sources. The property owners are required to pay their contribution to the Municipality’s bank account by the agreed date.
According to the agreement concluded with the property owners, all RES systems will be owned by the Municipality for the duration of the Project, that is to say, for five years from the date of receipt by the Municipality of the last payment under the co-financing agreement and the partnership agreement. After that period, the ownership of the RES systems will be transferred to the property owners. For the duration of the Project, property owners will not be able to dispose of the RES systems. Also, the Municipality may not dispose of, or dismantle, the installations during that period, as this could entail having to return the co-financing received. The property owners will be able to use the RES systems at no additional charge as per the terms and conditions of the agreement entered into. The Municipality has been authorised by each property owner to act on the property owner’s behalf before the competent administrative authorities when applying for any permits required by law in order to construct the installation on the owner’s property.
The Municipality has undertaken to select the contractor, set the work schedule, exercise ongoing site supervision, conduct final acceptance inspections and perform the financial settlement of the Project.
The contribution paid by the property owners will be their only payment to the Municipality in connection with the implementation of the Project. That contribution represents part of the eligible costs of the specific RES system, that is to say, the consideration due to the contractor for that specific system. This part is 25% of the eligible costs, and the agreement with the property owner also lays down the maximum amount of the property owner’s contribution. This means that their actual contribution may also be lower than 25% of the eligible costs.
Property owner contributions do not go towards supervision and promotional costs – those eligible costs are covered by the Municipality from its own resources and from the co-financing received. The RES systems will be installed by a contractor which will be selected by way of an open tender procedure held under public procurement regulations.
The contract will be concluded between five parties: the contractor and the four contracting municipalities. The contract will indicate the scope and type of RES systems to be installed for each individual municipality. Each municipality will settle accounts with the contractor separately, with the contractor invoicing each municipality in accordance with the scope of work it has contracted.
It will not be possible to obtain additional co-financing if the contractor’s bid is higher than anticipated. However, the amount of co-financing will be lower if the price due to the contractor is lower than that assumed in the application for co-financing. The Project co-financing agreement with the provincial authority does not impose any obligation on the Municipality to obtain contributions from the property owners and does not refer to the amount of their payments.
The co-financing is granted to cover part of the eligible costs (including promotion and supervision costs) incurred by the Municipality in connection with the Project and the Municipality will settle those costs with the institution providing the co-financing. The amount of co-financing is determined by the amount of eligible costs incurred by the Municipality for purchases related to the Project.
The Municipality requested an advance tax ruling as regards its recognition as a taxable person for VAT purposes with respect to services consisting in the installation of RES systems. In its view, the services provided are not subject to VAT because they are performed under provisions of public law and not as part of economic activity. Consequently, the property owners’ contribution and the co-financing obtained do not constitute consideration for the taxable services rendered.
In the advance tax ruling of 7 August 2019, the Polish tax authorities found that the Municipality’s position was incorrect. It indicated that the Municipality would be acting as a taxable person for VAT purposes with respect to the activities in question. Neither the fact that the Municipality is performing its own tasks nor the purpose of the Project could result in the absence of taxation for VAT purposes, since the performance of the activities in question must also be subject to specific public-law regulations which pertain to the exercise of public authority.
The Municipality appealed against this advance tax ruling. The court of first instance dismissed the Municipality’s action. In the court’s view, the non-equivalence of contributions is essentially a feature of all civil-law relationships in which the price of goods or services is ‘subsidised’. The court likewise did not share the Municipality’s view according to which the purpose of the activities undertaken is not to achieve profit, but rather to increase the share of RES in total energy production. In the court’s view, the achievement of the second objective does not preclude the achievement of the first. The Municipality is reimbursed by the property owners for 25% of the eligible costs incurred, and thus the installation involves the financial participation of the property owners. The fact that the Municipality does not make a profit likewise does not affect the assessment of whether those activities fall within the scope of economic activity.

Questions

1. Must the provisions of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1 as amended), in particular Articles 2(1), 9(1) and 13(1) thereof, be interpreted as meaning that a municipality (a public authority) acts as a taxable person for VAT purposes in carrying out a project whose objective is to increase the proportion of renewable energy sources by means of entering into a civil-law contract with property owners, under which the municipality undertakes to install renewable
energy source systems on their property and – after a certain period of time has elapsed – to transfer the ownership of those systems to the property owners?
2. If the answer to the first question is in the affirmative, must European cofinancing received by a municipality (a public authority) for the implementation of projects involving renewable energy sources be included in the taxable amount within the meaning of Article 73 of that directive?

AG Opinion

(1) Article 2(1)(a) and (c) of the VAT Directive must be interpreted as meaning that, in order to determine between whom there is a supply of goods or services in return for consideration, an overall assessment of the existing legal relationships must be carried out first and foremost. If this reveals a direct link between the payment by a third party and the supply of goods or services, there is a supply ‘for consideration’.

(2) The second subparagraph of Article 9(1) of the VAT Directive must be interpreted as requiring that these specific activities be compared with those of a taxable person typical of the professional category in question.

(3) The second subparagraph of Article 13(1) of the VAT Directive must be interpreted as meaning, first, that a substantive assessment must be carried out to determine whether transactions have been carried out in the exercise of public authority. Therefore, it may be irrelevant that one of the contracts was concluded under civil law, because all other parts of the activity were not carried out under the same legal conditions as those applicable to other private economic operators. Secondly, significant distortions of competition are to be ruled out if the public service activities are of such a nature as to ensure that private economic operators are not prevented from supplying consumers, but are involved in it.

Decision

Article 2(1), Article 9(1) and Article 13(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value tax added,

should be interpreted as:

does not constitute a delivery of goods and a provision of services subject to value added tax the fact for a municipality to deliver and install, through the intermediary of a company, renewable energy systems for the benefit of its resident owners who have expressed the wish to be equipped with them, when such activity is not intended to obtain revenue of a permanent nature and only gives rise, on the part of these residents, to a payment covering at most a quarter of the costs incurred, the balance being financed by public funds.

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