Flashback on ECJ Cases C-381/97 (Belgocodex) – Member States may withdraw the VAT option for property letting

Facts

• Belgocodex SA was a Belgian company that acquired a 25% share in a complex consisting of land and buildings in 1990. The buildings were renovated for use as offices and shops. The renovation work took place between 1990 and 1993, and the contractor charged VAT on its services. [eur-lex.europa.eu], [eur-lex.europa.eu]
• Belgocodex did not occupy the building itself. It let the property to a taxable person that used the premises for its economic activities. Belgocodex deducted the input VAT relating to the renovation work on the basis that the letting was subject to VAT under the option introduced into Belgian law. [eur-lex.europa.eu], [eur-lex.europa.eu]
• The Belgian Law of 28 December 1992 inserted Article 44(3)(2)(c) into the Belgian VAT Code. That provision made VAT applicable to certain lettings of buildings to taxable persons where the lessor opted to tax the transaction. The legislation entered into force on 1 January 1993, but the necessary implementing measures were never adopted. [eur-lex.europa.eu], [eur-lex.europa.eu]
• The Belgian provision was based on Article 13C(a) of the Sixth Council Directive 77/388/EEC of 17 May 1977, which allowed Member States to give taxable persons a right to opt for taxation of the letting and leasing of immovable property. Article 13B(b) of that Directive established the basic rule that the leasing or letting of immovable property was exempt from VAT. [eur-lex.europa.eu], [eur-lex.europa.eu]
• By the Law of 6 July 1994, Belgium repealed Article 44(3)(2)(c) of the VAT Code retroactively from 1 January 1993. Belgium therefore withdrew the option to tax and restored the VAT exemption for the lettings concerned. [eur-lex.europa.eu], [eur-lex.europa.eu]
• Following an inspection in 1995, the Belgian VAT administration disallowed the VAT deductions claimed by Belgocodex for the period from 1 July 1990 to 31 December 1994. The principal amount was BEF 1,852,365, plus interest for late payment and fines. The VAT administration considered that the letting of immovable property was an exempt activity that did not give rise to an input VAT deduction. [eur-lex.europa.eu]
• Belgocodex challenged the adjustment before the Tribunal de Première Instance de Nivelles. It argued that it had obtained the right to deduct under the Law of 28 December 1992 and that the retroactive withdrawal of the option to tax was contrary to the EU VAT directives. The Tribunal stayed the proceedings and referred a question to the ECJ under Article 177 of the EC Treaty. [eur-lex.europa.eu], [eur-lex.europa.eu]

Questions

The Tribunal de Première Instance de Nivelles referred the following question:

Does Article 2 of the First Council Directive 67/227/EEC of 11 April 1967, which establishes the principle of the common system of VAT, prevent a Member State that has exercised the possibility under Article 13C of the Sixth Council Directive 77/388/EEC and granted its taxable persons a right to opt for taxation of certain lettings of immovable property from subsequently abolishing that option and fully reintroducing the exemption? [eur-lex.europa.eu], [eur-lex.europa.eu]

Decision

In answer to the question referred to it by the Tribunal de Première Instance de Nivelles by judgment of 3 November 1997, hereby rules:

Article 2 of the First Council Directive (67/227/EEC) of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes is to be interpreted as not precluding a Member State which

– has availed itself of the possibility provided for by Article 13C 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 and

– has thus granted its taxpayers the right to opt for taxation of certain lettings of immovable property

from abolishing, by a subsequent law, that right of option and thus reintroducing the exemption.

It is for the national court to determine whether a breach of the principle of protection of legitimate expectations or of the principle of legal certainty has been committed by the retroactive repeal of a law in respect of which the implementing decree has not been adopted.

Argumentation (Key Points)

• Exemption is the basic rule: Article 13B(b) of the Sixth Directive required Member States to exempt the letting and leasing of immovable property. Article 13C(a) allowed Member States to reintroduce taxation by granting taxable persons an option. The option was therefore a possibility available to Member States, not a permanent obligation once exercised. [eur-lex.europa.eu], [eur-lex.europa.eu]
• Wide discretion for Member States: The Court holds that Member States have extensive discretion under Article 13B and Article 13C. They may assess whether an option to tax is appropriate in light of the circumstances existing in their country at a particular time. That freedom is not limited in time and is not made irreversible merely because a different policy choice was made previously. [eur-lex.europa.eu]
• Reference to Becker: The Court refers to https://curia.europa.eu/juris/liste.jsf?num=8/81, in which it had held that Member States could allow persons benefiting from an exemption to waive it in all cases, within certain limits or subject to detailed conditions. This discretion also permits a Member State to withdraw the option and return to the exemption. [eur-lex.europa.eu]
• Fiscal neutrality did not make the option irreversible: Belgocodex argued that exempting a letting to a taxable business interrupted the deduction chain and increased the VAT burden. The Court acknowledges that fiscal neutrality is inherent in the common VAT system and requires comparable economic activities to be treated alike. However, the harmonised exemption system in the Sixth Directive expressly permitted the exemption for immovable property letting. Fiscal neutrality could not therefore be used to make Belgium’s earlier decision to introduce an option to tax irreversible. [eur-lex.europa.eu]
• Relationship between the First and Sixth Directives: Once the Sixth Directive had established a harmonised system of VAT exemptions, the provisions of that system could not be set aside by relying on the general VAT principles in Article 2 of the First Directive. The exemption for property letting and the possibility of an option to tax formed part of that harmonised framework. [eur-lex.europa.eu], [eur-lex.europa.eu]
• No analogy with transitional exemptions: The Court distinguishes https://curia.europa.eu/juris/liste.jsf?num=C-35/90. That case concerned transitional exemptions under Article 28 of the Sixth Directive. Once such a transitional exemption had been abolished, it could not be restored. Article 13C was different because the Member States’ ability to introduce or withdraw an option to tax was not subject to a transitional time limit. [eur-lex.europa.eu]
• Legitimate expectations and legal certainty: The principles of protection of legitimate expectations and legal certainty form part of the EU legal order and must be respected when Member States exercise powers conferred by EU directives. However, the ECJ considered that the national court was best placed to determine whether those principles had been infringed by the retroactive repeal, particularly because the Belgian implementing decree required to exercise the option had never been adopted. [eur-lex.europa.eu], [eur-lex.europa.eu]
• No anti-abuse finding: The judgment does not base the withdrawal of the option on tax evasion, avoidance or abuse. The case concerns the scope of the Member State’s legislative discretion and the protection of legitimate expectations following retroactive legislative change. [eur-lex.europa.eu], [eur-lex.europa.eu]

Source

• Full judgment in Case C-381/97, Belgocodex SA v Belgian State [eur-lex.europa.eu]
• Opinion of Advocate General Alber, delivered on 17 September 1998 [eur-lex.europa.eu]
• Sixth Council Directive 77/388/EEC of 17 May 1977
• Council Directive 2006/112/EC, Articles 135(1)(l) and 137

Similar ECJ Cases

• C-8/81 – Confirms that Member States may permit taxable persons to waive a VAT exemption within limits and subject to detailed rules. [eur-lex.europa.eu]
• C-35/90 – Concerns the prohibition on restoring an exemption abolished under the transitional arrangements in Article 28 of the Sixth Directive; distinguished in Belgocodex. [eur-lex.europa.eu]
• C-155/94 – Referenced regarding fiscal neutrality and the requirement that economic activities be treated in the same way. [eur-lex.europa.eu]
• C-396/98 – Examines whether a taxable person retains an input VAT deduction where a later legislative amendment withdraws the option to tax before the intended letting begins. [vatupdate.com]
• C-487/01 – Develops the Belgocodex principles in the context of withdrawing the option to tax, adjustment of deductions, legal certainty and legitimate expectations. [vatupdate.com]

Reference to the Case in the Other EU Member States

The judgment was expressly considered in the Netherlands in the references that led to Joined Cases C-487/01 and C-7/02, Gemeente Leusden and Holin Groep. The Dutch Hoge Raad noted that Belgocodex allowed a Member State to abolish an option to tax property letting but left the national court to examine compliance with legitimate expectations and legal certainty. The later joined cases further clarified the consequences of such legislative changes for input VAT adjustments. [vatupdate.com]

Newsletters

• Flashback on ECJ Cases C-487/01 (Gemeente Leusden) and C-7/02 (Holin Groep) [vatupdate.com]