Flashback on ECJ Cases C-110/94 (INZO) – Commissioning of a profitability study is indeed an economic activity

On February 29, 1996, the ECJ issued its decision in the case C-110/94 (INZO).

Context: Tax provisions ° Harmonization of laws ° Turnover tax ° Common system of value added tax ° Economic activities within the meaning of Article 4 of the Sixth Directive ° Carrying out of a profitability study by a company contemplating the commencement of an economic activity ° Subsequent withdrawal of the status of taxable person ° Not permissible except in cases of fraud or abuse

Summary

Facts of the Case: Intercommunale voor Zeewaterontzilting (INZO) commissioned a profitability study for a proposed desalination project but ultimately abandoned the project and entered liquidation. The Belgian tax authority demanded the repayment of VAT previously deducted based on the initial intent to engage in an economic activity.
Questions to the Court: The national court sought clarification on whether the commissioning of the profitability study could be considered an economic activity under Article 4 of the Sixth Directive and whether INZO could lose its status as a taxable person retroactively after deciding not to proceed with the project.
Court’s Decision: The Court ruled that the commissioning of a profitability study is indeed an economic activity within the meaning of Article 4. Furthermore, it determined that the status of taxable person cannot be revoked retroactively unless there is evidence of fraud or abuse.
Justification of the Decision: The Court emphasized the principle of legal certainty, stating that the rights and obligations of taxable persons should not depend on subsequent events occurring after the tax authority has granted their status. It reinforced that VAT neutrality must be maintained, ensuring businesses are not penalized for preparatory actions taken with the intent to engage in taxable activities.
Implications: This ruling confirms that initial investment expenditures and preparatory activities, like profitability studies, can qualify as economic activities for VAT purposes, safeguarding businesses’ ability to deduct VAT incurred even if the intended transactions do not materialize.

Articles in the EU VAT Directive

Article 4(1) and (2) of the Sixth Directives provide as follows:

“1. ‘Taxable person’ shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or the results of that activity.

2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered as an economic activity.

Facts

Article 22(1) of the directive provides that: “Every taxable person shall state when his activity as a taxable person commences, changes or ceases”.
Inzo was founded in 1974 by, among others, the provinces of East and West Flanders and a number of municipalities. Its objects were defined as developing and exploiting processes for the treatment of sea water and brackish water and turning them into drinking water with a view to its distribution.
To that end, Inzo acquired certain capital goods and commissioned a study on the profitability of a project for the construction of a desalination plant. It paid VAT in respect of those activities, in particular on the study. That tax was subsequently repaid to it by the tax authority pursuant to Article 76 of the Belgian VAT Code.
The study of the project identified numerous profitability problems and some investors withdrew, whereupon in 1988 the project was abandoned and Inzo was put into liquidation. Consequently, it never commenced the activity envisaged.
In 1983, the tax authority found in the course of a tax inspection that Inzo had not carried out any taxable transaction. It therefore claimed repayment of the VAT recovered by Inzo between 1978 and 1982, that is to say BFR 4 913 001, plus a fine of BFR 736 500 and default interest.
Inzo contested that claim before the Rechtbank van Eerste Aanleg, Bruges. Referring in particular to the judgment of the Court in Case 268/83 Rompelman v Minister van Financiën [1985] ECR 655, Inzo claimed that it had indicated by unequivocal acts that it intended regularly to carry out taxable transactions. It referred in this connection to its articles of association and the fact that it had recruited staff, established an organization to enable its objects to be attained and obtained certain loans.
In the proceedings before the Rechtbank the tax authority essentially argued in response that Inzo was not a “taxable person” within the meaning of Articles 4 and 17 of the Sixth Directive. It contended that commissioning of the study could not be described as an act unequivocally indicating Inzo’ s intention subsequently to move to a commercial phase, because its articles of association allowed it to confine itself merely to performing that study and its members had reserved the right to decide not to proceed after the study had been carried out.

Questions

Is the activity of a company established with a specific object (‘ seeking and researching, establishing, exploiting and promoting all processes for the treatment of sea water and brackish water, and obtaining and selling water’ ), an activity which in this case extended only to commissioning and paying for a wide-ranging profitability study dealing with the process to be developed, which demonstrated the non-profitable nature of the project and which immediately resulted in the liquidation of the company, to be regarded as an economic activity within the meaning of Article 4(1) and (2) of the Sixth Council Directive of 17 May 1977?

AG Opinion

The activity of a company with a view to a future economic activity of the company may not be regarded as an economic activity within the meaning of Article 4(1) and (2) of the Sixth Directive of 17 May 1977 once it becomes clear that the company has been wound up without having embarked on any economic activity.

Decision

Article 4 of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization 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 meaning that:

° where the tax authority has accepted that a company which has declared an intention to commence an economic activity giving rise to taxable transactions has the status of a taxable person for the purposes of VAT, the commissioning of a profitability study in respect of the envisaged activity may be regarded as an economic activity within the meaning of that article, even if the purpose of that study is to investigate to what degree the activity envisaged is profitable, and that

° except in cases of fraud or abuse, the status of taxable person for the purpose of VAT may not be withdrawn from that company retroactively where, in view of the results of that study, it has been decided not to move

to the operational phase, but to put the company into liquidation with the result that the economic activity envisaged has not given rise to taxable transactions.

Source