Flashback on ECJ Cases C-97/90 (Lennartz) – Minimal business use still permits VAT deduction

On 11 July 1991, the ECJ issued its judgment in the case C-97/90 (Hansgeorg Lennartz v Finanzamt München III). [eur-lex.europa.eu]

Facts

Hansgeorg Lennartz was a tax consultant in Munich. During 1985 and 1986, he worked partly as an employee and partly as a self-employed tax consultant, submitting annual VAT declarations for his independent activity.

In 1985, he purchased a motor car for DM 20,206.15 plus VAT of DM 2,826.86. During that year, he used the car mainly for private purposes and approximately 8% for business purposes. On 1 July 1986, he opened his own tax consultancy office and contributed the car to the business. In his 1986 VAT declaration, he claimed a retrospective deduction of DM 282.98, calculated as 6/60ths of the VAT paid on the car.

The claim was based on Paragraph 15a of the German Umsatzsteuergesetz 1980, which implemented Article 20(2) of the Sixth Council Directive 77/388/EEC of 17 May 1977. That provision governed adjustments to deductions concerning capital goods over a five-year adjustment period. [eur-lex.europa.eu]

The Finanzamt München III refused the adjustment. It relied on a German administrative practice under which business use representing less than 10% of total use was generally disregarded. The Finanzgericht München considered that Mr Lennartz had initially acquired the car solely for private purposes and was therefore not entitled to an adjustment when the car was subsequently used for business purposes.

The Finanzgericht nevertheless questioned whether that interpretation was compatible with the Sixth Directive. By order of 24 January 1990, it stayed the proceedings and referred several questions to the Court of Justice under Article 177 of the EEC Treaty. The referring court was therefore the Finanzgericht München, rather than a national supreme court. [eur-lex.europa.eu]

Issue (Questions Referred)

The Finanzgericht München asked, in substance:

Does Article 20(2) of the Sixth Directive apply to capital goods that are used for taxable transactions at some point during the five-year adjustment period, or must the goods have been used or allocated for business purposes from the time of acquisition?
If business use from the time of acquisition is required, does Article 20(2) apply to mixed-use capital goods only where the business use reaches a specified minimum proportion in the year of acquisition?
If allocation to the business at acquisition is required, does that allocation depend on the taxable person’s intention or actual use, when must the intended or actual business use begin, and must the business use reach a specified minimum proportion?

AG Opinion

(1) (a) Article 20(2) of the Sixth VAT Directive applies only where a person acquires capital goods in his capacity as a taxable person, that is to say, with the specific intention of using the goods for the purposes of his economic activity within the meaning of Article 4 of the directive.
(b) Whether, in a particular case, a taxable person has such an intention is a question of fact to be determined by the national authorities having regard to all the circumstances of the case, including the nature of the goods concerned and the period between the acquisition of the goods and their use for the purpose of the taxable person’s business.
(2) A taxable person who uses goods for the purposes of an economic activity has the right on the acquisition of those goods to deduct input tax in accordance with the rules laid down in Article 17, however small the proportion of business use. A rule or administrative practice imposing a general restriction on the right of deduction in cases where there is limited, but none the less
genuine, business use constitutes a derogation from Article 17 of the Sixth Directive and is valid only if the procedural and substantive requirements of Article 27(1) or Article 27(5) of the directive are met.

Decision

The Court rules that Article 20(2) of the Sixth Directive applies where a person acquires capital goods in the capacity of a taxable person and allocates them to an economic activity within the meaning of Article 4. Whether goods were acquired for an economic activity is a question of fact to be determined from all the circumstances, including the nature of the goods and the period between acquisition and business use. A taxable person who genuinely uses goods for an economic activity is entitled to deduct input VAT under Article 17, however small the proportion of business use. A general restriction for limited business use is valid only if the conditions governing derogations in Article 27(1) or Article 27(5) are satisfied. Given its answer to the first question, the Court found no need to address the second question. [eur-lex.europa.eu]

Argumentation (Key Points)

The capacity in which the purchaser acts is determined at acquisition. Under Article 17(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977, the right to deduct arises when the deductible tax becomes chargeable. The existence of that right therefore depends on whether the purchaser was acting as a taxable person at that moment. Goods acquired exclusively in a private capacity do not generate a deduction right. [eur-lex.europa.eu]
Article 20 does not create a deduction right. Article 20(2) only establishes the method for calculating adjustments to an initial deduction concerning capital goods. It cannot create a deduction where none arose at acquisition or convert VAT connected with non-taxable private transactions into deductible VAT under Article 17. [eur-lex.europa.eu]
Immediate business use is not required. Referring to Case 268/83, Rompelman, the Court observes that preparatory activities, including the acquisition of operating assets, may constitute economic activities. A person may therefore acquire goods as a taxable person even if the goods are not immediately used for taxable activities.
The purchaser’s intention is assessed objectively. Whether the goods were acquired for an economic activity must be determined from all relevant circumstances. The Court specifically identifies the nature of the goods and the period between acquisition and their use for the taxable person’s economic activity. The five-year adjustment period does not itself determine the original capacity in which the goods were acquired. [eur-lex.europa.eu]
Mixed private and business use does not justify a minimum threshold. Under Article 6(2)(a), read with Article 11A(1)(c) of the Sixth Directive, private use of business goods for which VAT was wholly or partly deductible is treated as a supply of services for consideration. Accordingly, a taxable person who allocates mixed-use goods to the business may, in principle, deduct the input VAT, while private use is addressed through output taxation. [eur-lex.europa.eu]
Member States cannot introduce an unauthorised deduction restriction. Referring to Case 50/87, Commission v France, the Court states that the deduction right must be exercised immediately and that limitations are permitted only where expressly authorised by the Directive. The absence of a provision establishing a minimum-use threshold prevented such a restriction from being implied.
Anti-evasion measures require the prescribed derogation procedure. Article 27(1) and Article 27(5) allowed special derogating measures, including measures intended to prevent tax evasion or avoidance. However, the German 10% practice had neither been notified under Article 27(5) nor authorised by the Council under Article 27(1). Following Case 5/84, Direct Cosmetics, an unnotified and unauthorised derogation could not be relied upon against a taxable person.

Source

Similar ECJ Cases

Case 268/83, Rompelman – Preparatory activities, including acquiring operating assets, may constitute economic activity.
Case 50/87, Commission v France – The deduction right cannot be restricted without an express Directive basis.
Case 5/84, Direct Cosmetics – An unnotified derogation cannot be enforced against a taxable person.
Case C-291/92, Armbrecht – Addresses the allocation of mixed-use property between business and private assets. [vatupdate.com]
Case C-415/98, Bakcsi – Concerns the treatment and disposal of a motor car used for both business and private purposes. [curia.europa.eu]

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No case-specific prior VATupdate.com article on C-97/90 was identified. The case forms part of VATupdate.com’s broader materials on ECJ VAT case law and the right to deduct: