On October 6, 2005, the ECJ issued its decision in the case C-243/03 ( Commission v France).
Context: VAT – Deduction of input tax paid – Capital goods financed by subsidies
Summary
- Background and Legal Context: The European Commission initiated action against France for failing to comply with EU law by implementing a special rule that limited the deductibility of VAT on capital goods financed by subsidies. This issue arose under Articles 17 and 19 of the Sixth Council Directive (77/388/EEC), which governs VAT.
- Main Issue: The central question was whether France’s restriction on the right to deduct VAT based on the financing of capital goods by subsidies was compatible with EU VAT law. The Commission argued that this limitation was not permitted under the Sixth Directive, which provides a broad right to deduct VAT.
- Arguments Presented: The Commission contended that the French rule constituted an unauthorized limitation on the right to deduct VAT, as the Directive does not allow restrictions based on the source of financing (like subsidies). The French Government defended its position by asserting that the limitation was necessary to ensure that the depreciation of subsidized assets was reflected in taxable transactions.
- Court’s Decision: The CJEU ruled in favor of the Commission, declaring that by imposing a special rule that limited the deductibility of VAT on capital goods financed by subsidies, France had failed to fulfill its obligations under Articles 17 and 19 of the Sixth Directive. The Court emphasized that the right to deduct VAT should not be restricted in a manner not provided for in the Directive.
- Implications of the Ruling: The ruling reinforced the principle that Member States cannot impose additional conditions on the right to deduct VAT that are not explicitly allowed by EU law. It established that limitations on VAT deductions must be clearly defined in the Directive, and any national rules that introduce further restrictions are incompatible with EU legislation. France was ordered to pay costs for the proceedings.
Articles in the EU VAT Directive
Articles 11A(1)(a), 17(2), 17(5) and 19(1) of the Sixth VAT Directive (Articles 73, 168, 173, 174, 175 of the EU VAT Directive 2006/112/EC)
- Article 11A(1)(a): This article outlines that the taxable amount for VAT includes everything that constitutes the consideration for supplies of goods and services, including subsidies that are directly linked to the price of such supplies.
- Article 17(2): This article provides that a taxable person is entitled to deduct from the VAT they are liable to pay the VAT due or paid in respect of goods or services supplied to them, insofar as those goods and services are used for the purposes of their taxable transactions.
- Article 17(5): This article addresses the right to deduct VAT for goods and services used for both taxable transactions (where VAT is deductible) and exempt transactions (where VAT is not deductible). It stipulates that only a proportion of VAT attributable to the taxable transactions may be deductible, and this proportion is to be determined in accordance with Article 19.
- Article 19(1): This article provides the rules for calculating the deductible proportion of VAT. It states that the proportion deductible is made up of a fraction where the numerator includes the turnover from transactions with deductible VAT and the denominator includes all transactions, including those that are exempt from VAT and subsidies.
Questions/issues raised by the European Commission
The Commission sought a declaration from the Court that France had failed to fulfill its obligations under Community law, specifically under Articles 17 and 19 of the Sixth VAT Directive. The issue centered on a special rule introduced by France that limited the deductibility of VAT on the purchase of capital goods financed by subsidies.
Specific Concerns Included:
- Limitation of Deductibility: The Commission argued that the French rule imposed a restriction on the right to deduct VAT that was not provided for by the Sixth Directive. The Directive allows for deductions based on the use of goods for taxable transactions without regard to the source of financing.
- Applicability to Fully Taxable Persons: The Commission pointed out that the limitation affected all taxable persons, including those who only conducted taxable transactions (fully taxable persons). This was seen as incompatible with the Directive, which does not allow VAT deductions to be restricted based on how the capital goods were financed (e.g., through subsidies).
- Lack of Provision in the Directive: The Commission emphasized that the Sixth Directive does not include provisions allowing for deductions to be limited based on the origin of the funds used for acquiring capital goods or based on conditions related to the financing of those goods.
Overall, the Commission’s central contention was that the French VAT rules unlawfully restricted the right to deduct VAT, undermining the uniformity and neutrality principles intended by the EU VAT system.
AG Opinion
By introducing a special rule limiting the deductibility of value added tax on the purchase of capital goods on the ground that they were financed by subsidies, the French Republic has failed to fulfil its obligations under Community Law, and in particular Articles 17 and 19 of the 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.
Decision
1. Declares that, by introducing a special rule limiting the deductibility of value added tax on the purchase of capital goods where they were financed by subsidies, the French Republic has failed to fulfil its obligations under Community law, in particular under Articles 17 and 19 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;
2. Orders the Republic of France to pay the costs;
3. Orders the Kingdom of Spain to pay its own costs.
Source
Other ECJ cases referred to in the decision
- Case 50/87, Commission v. France (1988): This case addressed the limitations on the right to deduct VAT and emphasized that any restrictions must be explicitly provided for by the Sixth Directive.
- Case C-62/93, BP Supergas (1995): This case reiterated the principles surrounding the right to deduct VAT, confirming that limitations on deductions must comply with the established rules in the Sixth Directive.
- Case C-338/98, Commission v. Netherlands (2001): This case highlighted that Member States must apply the provisions of the Sixth Directive without imposing additional limitations not specified in the Directive.
- Case C-16/00, Cibo Participations (2001): This case discussed the conditions under which expenses must have a direct link to taxable transactions in order to qualify for VAT deductions.
- Case C-204/03, Commission v. Spain (2005): Although this case was a subsequent judgment, it was referenced in the context of the interpretation of Article 19 of the Sixth Directive concerning mixed taxable persons and the treatment of VAT deductions.
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