On Dec 11, 2008, the ECJ issued its decision in the case
Context: Sixth VAT Directive – Article 6(2) – Supplies of services carried out free of charge by a taxable person for purposes other than those of his business – Right to deduct VAT – Second subparagraph of Article 17(6) – Member States’ option to retain exclusions from the right to deduct which were provided for under their national laws when the Sixth Directive came into force
Summary
Facts/Background:
- Danfoss A/S and AstraZeneca A/S, two companies in Denmark, provided free meals to business contacts and staff during work meetings held in their company canteens.
- The Danish tax authority (Skatteministeriet) refused to reimburse the companies for VAT paid on these meals, arguing that the meals constituted “hospitality” and thus fell under exclusions from the right to deduct VAT as per national law.
- The companies challenged this refusal, stating that prior to the implementation of the Sixth VAT Directive, an administrative practice allowed for VAT to be assessed on a cost price basis, which included full deductibility of VAT.
Questions to the Court:
- Does the second subparagraph of Article 17(6) of the Sixth Directive allow a Member State to deny the right to deduct VAT on meals provided to business contacts and staff if such an exclusion existed in national law prior to the directive’s enactment?
- Is the historical context of VAT treatment for company canteens relevant in determining the right to deduct?
- Can the provision of free meals to business contacts and staff be classified as a supply of services for consideration under Article 6(2) of the Sixth Directive?
Decision:
- The ECJ ruled that the second subparagraph of Article 17(6) of the Sixth Directive prevents a Member State from applying an exclusion from the right to deduct VAT on meals provided free of charge if that exclusion was not enforced at the time the directive came into force.
- The Court clarified that the provision of meals could be considered a supply of services for consideration under Article 6(2) only if the meals were not provided for strictly business-related purposes.
- It held that meals provided to staff in the context of work meetings could generally be considered for private use unless it was necessary for the employer to provide them to ensure that meetings run smoothly.
Arguments of the Court:
- The Court emphasized the principle of neutrality in VAT, stating that the right to deduct VAT is fundamental and should not be limited unless explicitly stated in the directive.
- It noted that since the administrative practice prior to the directive allowed for full deductibility, the subsequent legislative changes that limited this right were inconsistent with the directive’s objectives.
- The Court distinguished between meals provided for business purposes and those for private use, emphasizing that the classification of meals as supplies of services depends on the circumstances under which they are provided.
- Ultimately, the Court reinforced that national laws must align with EU directives, and any increase in exclusions post-directive enactment is not permissible if it contradicts the directive’s intent.
Article in the EU VAT Directive
Article 6(2) and 17(6) of the Sixth VAT Directive. Article 26, 176 of the EU VAT Directive 2006/112/EC.
Article 26 (Supply of services)
1. Each of the following transactions shall be treated as a supply of services for consideration:
(a) the use of goods forming part of the assets of a business for the private use of a taxable person or of his staff or, more generally, for purposes other than those of his business, where the VAT on such goods was wholly or partly deductible;
(b) the supply of services carried out free of charge by a taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business.
2. Member States may derogate from paragraph 1, provided that such derogation does not lead to distortion of competition.
Article 176 (Restrictions on the Right of Deduction)
The Council, acting unanimously on a proposal from the Commission, shall determine the expenditure in respect of which VAT shall not be deductible. VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.
Pending the entry into force of the provisions referred to in the first paragraph, Member States may retain all the exclusions provided for under their national laws at 1 January 1979 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession.
Facts
- Danfoss is a limited liability company incorporated under Danish law with headquarters in Denmark and establishments in several countries. The company produces and markets industrial automation products for use in the regulation of refrigeration and heating systems. Food and drinks are sold to staff in its canteens, which are also used for the provision, free of charge, of meals for business contacts during meetings held on company premises and meals for staff in conjunction with work meetings held within the company.
- AstraZeneca is a pharmaceutical company which, as part of its sale and marketing activities, invites doctors and other health professionals to meetings in order to pass on knowledge relating to epidemiological fields and the positioning and use of its pharmaceutical products. Depending on the starting time and duration of the meetings, which can range from a few hours to whole days, participants are offered meals free of charge in the company’s canteen, which is otherwise used for the sale of food and beverages to staff.
- The cases in the main proceedings arise from actions brought before the Vestre Landsret (Western Regional Court) by those two companies against the Skatteministeriet concerning the treatment, for VAT purposes, of the provision of meals free of charge by the companies’ canteens for business contacts and staff in the course of work meetings. For AstraZeneca, the case relates to the period from 1 October 1994 to 31 December 1999; for Danfoss, it relates to the period from 1 October 1996 to 30 September 2001.
- With respect to those two companies, the administrative practice which had applied since 1978 meant that VAT was assessed on the basis of the cost price of the provision of those meals. All purchases for the canteens were deemed to be used for purposes of the taxable transactions, with the result that the VAT on those purchases was deductible in full from the canteens’ VAT liability.
- Given that the Landsskatteret disallowed that administrative practice in 1999 and took the view, set out in paragraph 14 of the present judgment, that VAT had to be assessed on the actual consideration received rather than on a cost price, the companies requested a refund of the VAT which had been assessed on the basis of the cost price of the meals provided free of charge to business contacts and staff in the course of work meetings, amounting to DKK 5 920 848.19 for Danfoss and DKK 825 275 for AstraZeneca.
- The Skatteministeriet refused those claims for refunds, on the ground that it regarded the provision of meals to business contacts as ‘hospitality’ covered by the deduction exclusion in Paragraph 42(1)(5) of the VAT Law, and the provision of meals to staff in conjunction with work meetings as ‘food’ covered by the exclusion in Paragraph 42(1)(1) of that Law.
- However, since Danfoss and AstraZeneca had deducted in full the VAT on their canteen purchases, in accordance with the abovementioned administrative practice, the Skatteministeriet found that those meals – as an application for private use – had to be subject to VAT, in accordance with Paragraph 5(2) of the VAT Law. According to the Skatteministeriet, given that that tax on application for private use had to be assessed on the cost price, just like VAT under the disallowed administrative practice, it was not appropriate to reimburse the VAT amounts in question.
- Danfoss and AstraZeneca challenged the existence of a legal basis for the assessment of VAT on the so-called ‘applications for private use’ and the legality of the limitation of the right to deduct under the VAT Law.
Questions
- (1) Is the second subparagraph of Article 17(6) of the Sixth VAT Directive to be interpreted in such a way that it is a condition for the refusal by a Member State of a right to deduct [VAT] on supplies used for the provision of meals to business contacts and staff in a company’s canteen in connection with meetings that there was, prior to the entry into force of the directive, authority under national legislation for the deduction refusal in question and that this authority was applied in practice by the tax authorities in such a way that the right to deduct [VAT] on these supplies was refused?
- (2) Does it have any significance in answering Question 1 that company-operated canteens were not subject to VAT under the national VAT rules in force in the Member State in question before the implementation of the Sixth VAT Directive in 1978, that the national deduction exclusion rules were not changed by the implementation of the Sixth VAT Directive, and that it was exclusively as a result of the fact that company-operated canteens became subject to VAT on the implementation of the Sixth VAT Directive that the deduction exclusion rule could become relevant to that type of business?
- (3) Is an exclusion from the right to deduct “retained” within the meaning of the second subparagraph of Article 17(6) of the Sixth VAT Directive if, from the implementation of the Sixth VAT Directive in 1978 until 1999, as a result of an administrative practice such as that described in the main proceedings there was a right to deduct VAT on the expenditure in question?
- (4) Are subparagraphs (a) and (b) of Article 6(2) of the Sixth VAT Directive to be interpreted in such a way that the provision covers the supply of meals by the company free of charge to business contacts in its own canteen in connection with meetings at the company?
- (5) Are subparagraphs (a) and (b) of Article 6(2) of the Sixth VAT Directive to be interpreted in such a way that the provision covers the supply of meals by the company free of charge to its staff in its own canteen in connection with meetings at the company?
AG Opinion
- In answer to question 4: Articles 5(6) and/or 6(2) of the Sixth VAT Directive cover the supply of meals by a taxable business free of charge to business contacts in its own canteen when the meal serves principally purposes other than those of the business. However, such supplies are also capable of serving principally the purposes of the business, in particular if they are intended to enhance the efficiency of meetings in which the recipients are participating, and in such cases are not covered by those provisions.
- In answer to question 5: Those same provisions cover the supply of meals by a taxable business free of charge to an employee in its own canteen when the meal serves principally the employee’s own private purposes. However, such supplies are also capable of serving principally the purposes of his employer’s business, in particular if the employee is required by the constraints of the business to forgo any choice he would otherwise have enjoyed and to consume such a meal, and in such cases are not covered by those provisions.
- However, supplies may not in any event be treated as effected for consideration under Articles 5(6) and/or 6(2) of the Sixth VAT Directive unless any VAT paid on goods or services forming part of the taxable amount in the event of such treatment is wholly or partly deductible.
- In answer to questions 1 to 3: Under the second subparagraph of Article 17(6) of the Sixth VAT Directive, a Member State may not ‘retain’ an exclusion from deduction with respect to expenditure for which a right to deduct was recognised by administrative practice on the date when the directive came into force, even if the exclusion was provided for in theory under national legislation. Nor may a Member State, having once allowed deduction of VAT on certain expenditure after the directive came into force, subsequently revert to excluding the same expenditure from the right to deduct, even if such an exclusion had been provided for when the directive came into force.
Decision
1. The second subparagraph of Article 17(6) 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 precluding a Member State from applying, after the entry into force of the Sixth Directive, an exclusion from the right to deduct input value added tax on expenditure in respect of meals provided by company canteens free of charge to business contacts and staff in the course of work meetings, where, at the moment when the Sixth Directive entered into force, that exclusion was not actually applied to that expenditure because of an administrative practice of taxing services provided by company canteens at cost price, that is to say, the price of the raw materials plus the cost of wages for preparation and sale of the food and drinks and the administration of the canteens, in return for the right to deduct input value added tax in full.
2. Article 6(2) of Sixth Directive 77/388 must be interpreted in such a way that, on the one hand, it does not cover the provision, free of charge, of meals in company canteens to business contacts in the course of meetings held on the company premises where objective evidence indicates – this being a matter for the referring court to determine – that those meals are provided for strictly business-related purposes. On the other hand, Article 6(2) applies in principle to the provision, free of charge, of meals by a company to its staff on its premises, unless – this likewise being a matter for the referring court to determine – the needs of the company, such as the need to ensure that work meetings are run smoothly and without interruptions, require the employer to ensure that meals are provided.
Source
Other ECJ Cases referred to
- Joined Cases C-177/99 and C-181/99 Ampafrance and Sanofi: This case established principles regarding the entry into force of the Sixth Directive and how it applies to Member States’ VAT laws.
- Case C-40/00 Commission v. France: This case discussed the principles related to the retention of national exclusions from the right to deduct VAT and the need for Member States to align their national laws with the objectives of the Sixth Directive.
- Case C-409/99 Metropol and Stadler: This case provided guidance on the right to deduct VAT, emphasizing that any limitations must be strictly interpreted and that the right to deduct is integral to the VAT system.
- Case C-280/04 Jyske Finans: This case reiterated that Member States may retain existing legislation regarding exclusions from the right to deduct VAT until the Council has established a Community system of exclusions.
- Case C-20/91 de Jong: This case established that taxable persons must pay VAT when applying goods or services for their own private use, ensuring they do not benefit unduly compared to ordinary consumers.
- Case C-230/94 Enkler: This case confirmed that certain transactions where no consideration is received should be treated as supplies of goods and services for VAT purposes.
- Case C-415/98 Bakcsi: This case further examined the application of VAT principles regarding the treatment of supplies where consideration is not received.
- Joined Cases C-322/99 and C-323/99 Fischer and Brandenstein: These cases discussed the implications of VAT treatment for supplies and the necessity for consistency in VAT law interpretation.
- Case C-412/03 Hotel Scandic Gåsabäck: This case clarified the criteria under which services provided without charge could be classified for VAT purposes.
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