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Flashback on ECJ Cases – C-98/07 (Nordania Finans and BG Factoring) – Leased goods routinely sold on termination to be included in VAT partial exemption calculation

On March 6, 2008, the ECJ issued its decision in the case C-98/07 (Nordania Finans and BG Factoring).

Context: Sixth VAT Directive – Article 19(2) – Calculation of the deductible proportion – Exclusion of amounts of turnover attributable to the supplies of capital goods used by the taxable person for the purposes of his business – Notion of ‘capital goods used by the taxable person for the purposes of his business’ – Vehicles purchased by a leasing company to be leased and subsequently sold on termination of the respective leasing contracts)


Article in the EU VAT Directive

Article 19(2) in the Sixth VAT Directive (Article 174(2) and (3) in the EU VAT Directive 2006/112/EC).

Article 174
1. The deductible proportion shall be made up of a fraction comprising the following amounts:
(a) as numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible pursuant to Articles 168 and 169;
(b) as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.
Member States may include in the denominator the amount of subsidies, other than those directly linked to the price of supplies of goods or services referred to in Article 73.
2. By way of derogation from paragraph 1, the following amounts shall be excluded from the calculation of the deductible proportion:
(a) the amount of turnover attributable to supplies of capital goods used by the taxable person for the purposes of his business;
(b) the amount of turnover attributable to incidental real estate and financial transactions;
(c) the amount of turnover attributable to the transactions specified in points (b) to (g) of Article 135(1) in so far as those transactions are incidental.
3. Where Member States exercise the option under Article 191 not to require adjustment in respect of capital goods, they may include disposals of capital goods in the calculation of the deductible proportion.


Facts

  •  Nordania Finans and BG Factoring are two companies belonging to the same group and arose out of the restructuring of that group following the demerger, in 2001, of Erhvervsfinans.
  • In the period 1995 to 1998, Erhvervsfinans operated a business involving the financial leasing of cars, which was liable to VAT. In 1998, that business related to 4 500 vehicles. Erhvervsfinans also had a business involving the provision of financial services, which was VAT-exempt. It thus had to calculate a proportion in order to establish the amount to which the partial deductibility of VAT on its overall costs related.
  • For the purpose of that calculation, Erhvervsfinans took into consideration the turnover from the sale of the vehicles upon termination of the respective lease contracts. It took the view that those vehicles were not ‘capital goods used by the taxable person for the purposes of his business’ within the meaning of Article 19(2) of the Sixth Directive.
  • By decision of 17 November 1999, the Danish local tax authorities objected to that assessment, taking the view that the vehicles did constitute such goods and that the turnover from the sale of those vehicles could therefore not be taken into consideration in the calculation of that proportion.
  • Erhvervsfinans lodged an appeal against that decision before the Landsskatteret (National Tax Tribunal) which, by order of 27 April 2001, upheld its claim.
  • Skatteministeriet lodged an appeal against that order before the Østre Landsret (Eastern Regional Court), which, as it took the view that the relevant vehicles were capital goods, reversed the order of the Landsskatteret by judgment of 16 December 2003.
  • Nordania Finans and BG Factoring, which had in the meantime become the successors in law to Erhvervsfinans, lodged an appeal against that judgment before the Højesteret (Supreme Court) on 9 February 2004.

Questions

Is the expression ‘capital goods used by the taxable person for the purposes of his business’ contained in Article 19(2) 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,1 to be interpreted as covering goods which a leasing undertaking purchases with a view both to leasing and resale upon termination of the leasing contract?

 


AG Opinion

The expression ‘capital goods used by the taxable person for the purposes of his business’ in Article 19(2) 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 including goods purchased by a leasing undertaking with a view, first of all, to leasing them and, subsequently, to reselling them at the end of the leasing contracts, in the case where the sale of the goods at the end of the lease contracts forms an integral part of the usual business activities of that undertaking.


Decision

Article 19(2) 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, is to be interpreted as meaning that the notion of ‘capital goods used by the taxable person for the purposes of his business’ does not include vehicles which a leasing undertaking purchases with a view, as in the case in the main proceedings, to leasing them and subsequently selling them upon termination of the respective leasing contracts, as the sale of such vehicles at the end of those contracts is an integral part of the usual business activities of that undertaking.


Summary

Vehicles that are purchased and leased by the leasing company and then sold after the lease contract has expired are not excluded from the pro rata calculation 

The concept of ‘investment goods used by the taxable person in the course of his business’ does not include vehicles which a leasing company purchases in order to lease them and then sell them at the end of the lease contracts, since the sale of such vehicles after these contracts form part of the usual economic activities of this company.


Source:


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