Flashback on ECJ cases C-291/92 (Finanzamt Uelzen/Armbrecht) – Private-use part of mixed-use property falls outside VAT

Facts

Mr Dieter Armbrecht was a hotelier in Germany who owned a single property comprising a guesthouse, a restaurant and rooms used as his private dwelling. In 1981 he agreed to sell the property for DM 1,150,000 “plus 13% VAT”. He maintained that the VAT reference in the notarial deed related solely to the business parts of the building, and that he neither charged nor received VAT on the parts used as a private dwelling. [eur-lex.europa.eu] [eur-lex.europa.eu] [eur-lex.europa.eu]

In his 1981 VAT declaration, Mr Armbrecht treated the sale of the business parts as taxable but entered the proceeds of DM 157,705 attributable to the private dwelling as tax-free. Following an inspection, the Finanzamt Uelzen took the view that he should also have paid tax on the sale of the dwelling. He appealed successfully to the Finanzgericht, which held that – contrary to the position under the German Civil Code – for VAT purposes there were two separate goods where a property was used partly for business and partly as a dwelling, and that, having charged the purchaser no VAT on the private dwelling, he was not liable for VAT on it. [eur-lex.europa.eu] [eur-lex.europa.eu] [eur-lex.europa.eu]

The matter then reached the Bundesfinanzhof (Federal Finance Court, Germany), which referred three questions to the Court of Justice under Article 177 of the EEC Treaty, on the interpretation of Articles 5(1), 17(2) and 20(2) 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. [eur-lex.europa.eu]

Issue (Questions Referred)

The Bundesfinanzhof referred the following three questions: [eur-lex.europa.eu]

1. Where an immovable property is disposed of, does the portion of the property used for business purposes constitute a separate item of supply for the purposes of Article 5(1) of the Sixth VAT Directive (77/388/EEC)?
2. Is an immovable property, of which part of the rooms are used for private purposes and part for business purposes, used wholly for the purposes of the taxable transactions of the business under Article 17(2) of the Sixth Directive, or is it also possible for just the portion used for the business to be assigned to the business?
3. Can the adjustment of the input-tax deduction under Article 20(2) of the Sixth Directive be limited to the portion of an immovable property used for business purposes?

Decision

The Court rules that where a taxable person, within the meaning of Article 2(1) of the Sixth Directive (77/388/EEC), sells property part of which he had chosen not to allocate to his business but to reserve for his private use, he does not act as a taxable person with respect to the sale of that part; consequently, that transaction is not liable to VAT. No provision of the Directive precludes a taxable person from retaining part of an item of property amongst his private assets and thereby excluding it from the VAT system. In such a case, the apportionment between the business part and the private part must be based on the proportions of business and private use in the year of acquisition, and not on a geographical division; the taxable person must, moreover, demonstrate an intention to keep part of the property amongst his private assets throughout his period of ownership. Where that choice was made at the time of acquisition, only the business part is taken into account for the application of Article 17(2) (right to deduct input tax), and the adjustment of deductions under Article 20(2) must be limited to that part. [eur-lex.europa.eu] [eur-lex.europa.eu] [eur-lex.europa.eu] [eur-lex.europa.eu]

In answer to the questions referred to it by the Bundesfinanzhof by order of 28 April 1992, hereby rules:

1. Where a taxable person sells property part of which he had chosen to reserve for his private use, he does not act with respect to the sale of that part as a taxable person within the meaning of Article 2(1) 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.

2. Where a taxable person sells property part of which he had chosen at the time of acquisition not to assign to his business, only the part of the property assigned to his business is to be taken into account for the application of Article 17(2) of the said directive.

3. The adjustment of the input-tax deduction under Article 20(2) of the said directive must be limited to the part of the property assigned to the business.

 

Argumentation (Key Points)

• Scope of “acting as a taxable person” (Article 2(1)): The sale of the privately reserved part is placed outside the VAT system because, in respect of that part, the seller does not act in the capacity of a taxable person – a condition inherent in the notion of a taxable transaction. [eur-lex.europa.eu]
• Freedom to keep goods in the private sphere: The Court finds nothing in the Directive that prevents a taxable person from excluding a part of an item of property from the VAT system by retaining it amongst his private assets, confirming the option to allocate mixed-use goods only partially to the business. [eur-lex.europa.eu]
• Method of apportionment: Allocation between business and private use must follow the use ratios in the year of acquisition, rejecting a purely geographical (physical) division of the building as the operative test. [eur-lex.europa.eu]
• Continuity of intention: The taxpayer must manifest, throughout the period of ownership, the intention to retain part of the property amongst his private assets, ensuring the private allocation is genuine and not merely asserted at the point of sale. [eur-lex.europa.eu]
• Consequences for deduction and adjustment: Where the private allocation was chosen at acquisition, only the business part is relevant for exercising the right to deduct under Article 17(2), and any adjustment under Article 20(2) is correspondingly confined to that business part, preserving coherence between the initial deduction and its later correction. [eur-lex.europa.eu]
• Underlying issue identified by the Advocate General: As framed in the Opinion of Advocate General Jacobs, the core question was whether, when a taxable person sells a guesthouse put to both business and private use and waives the exemption otherwise available under Article 13(B)(g) of the Sixth Directive, he must pay tax on the portion of the proceeds attributable to the privately used parts. [eur-lex.europa.eu]

Source

• Judgment of the Court of 4 October 1995, C-291/92 (EUR-Lex, CELEX 61992CJ0291) [eur-lex.europa.eu]
• Opinion of Advocate General Jacobs delivered on 6 April 1995, C-291/92 (EUR-Lex, CELEX 61992CC0291) [eur-lex.europa.eu]
• Sixth Council Directive 77/388/EEC of 17 May 1977 (EUR-Lex)

Similar ECJ Cases

• C-97/90 (Lennartz) – establishes the taxpayer’s option to allocate capital goods used for mixed purposes wholly or partly to the business; expressly cited alongside Armbrecht in later national jurisprudence on allocation choices. [dejure.org]
• C-320/88 (Shipping and Forwarding Enterprise Safe BV) – interprets Article 5(1) and the concept of “supply of goods” as transfer of the right to dispose as owner, relevant to identifying what is supplied on disposal of immovable property. [research.w…-online.de]
• C-342/87 (Genius Holding) – limits the right to deduct to VAT actually due, reflecting the same principle that VAT consequences follow the substantive taxable status of a transaction. [eur-lex.europa.eu]

Reference to the Case in the Other EU Member States

The ruling has been repeatedly relied upon in German jurisprudence: the Bundesfinanzhof has cited Armbrecht (together with Lennartz) on the taxpayer’s allocation options for mixed-use immovable property – for example in decisions on input-tax apportionment for mixed-use buildings and on the documentation of the allocation choice (e.g. BFH XI R 43/13; XI R 31/09; XI R 7/19; XI R 3/19). Beyond Germany, the judgment is widely referenced in EU-law commentary on the scope of VAT and mixed-use assets. [dejure.org] [eur-lex.europa.eu]