VAT-free or not VAT-free: ECJ on Uniformity of the service vs. apportionment requirement for operating equipment

Overview

The German Federal Fiscal Court (BFH) has referred a question to the ECJ for a preliminary ruling regarding the tension between the uniformity of the service and the apportionment requirement. In the case, a stable building for turkey farming has been leased together with the permanently installed equipment and machinery. In this context, it is questionable whether the entire revenue is exempt from VAT or whether the remuneration has to be divided into a part that is exempt from VAT and a part that is subject to VAT.

Facts of the case

The plaintiff leased a stable building for turkey farming with permanently installed equipment and machines, which are specially adapted equipment elements for the contractual use as turkey farming barn. The plaintiff assumed that the leasing of the barn building and the equipment and machinery were exempt from VAT entirely. In principle, the VAT Directive and the German VAT Act provide an exemption for the leasing and letting of immovable property. However, certain transactions - such as the letting of permanently installed equipment and machinery - are excluded from this exemption. The German tax office was of the opinion that the lease fee, which is attributable to the leasing of the installed equipment, is subject to VAT. In the appeal proceedings, however, the tax court assumed that the lease of the installed equipment and machinery was overall tax-exempt and thus also in the context of the lease in question. This point of view was justified with reference to an ECJ ruling according to which a single supply of a service exists if a building offered for rent with accompanying services objectively forms a whole in economic terms.

Submitted question

In the next step, the German Federal Fiscal Court dealt with the case, referring the following question to the ECJ for a preliminary ruling: Does the tax liability for the letting of permanently installed equipment and machinery covers only the isolated (stand-alone) rental of such equipment and machinery, or also the letting (leasing) of such equipment and machinery which is tax-exempt on the basis of (and as an ancillary service to) a leasing of a building between the same parties?

Assessment of the German Federal Fiscal Court

At the outset, the German Federal Fiscal Court states that, in principle, according to the established case law of the ECJ, a transaction should not be split artificially. There is a single supply where two or more elements or acts supplied by the taxable person to the customer are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split. The German Federal Fiscal Court cites the following arguments as regards the application of the uniformity of the service:

• In a previous judgment, the ECJ ruled in connection with vehicle parking spaces (note: vehicle parking spaces, as well as operating facilities, are generally excluded from the VAT exemption) that the letting of the property and the letting of the vehicle parking space constitute a "single economic transaction", meaning that thus an overall VAT exempt service is provided.
• In another case, the ECJ ruled that the transfer of inventory, which in principle does not fall under the VAT exemption, can be an ancillary service to a VAT-exempt lease of a building. In this case, the character of the ancillary service led to an otherwise non-existent VAT exemption.
• The German Federal Fiscal Court also cited another case in which the underlying services were a guided tour of a stadium combined with a subsequent visit to a museum of the soccer club. Purely visiting the museum was not possible. In this context, the ECJ ruled that a single service consisting of two separate components, a main service and an ancillary service, to which different VAT rates apply if they were provided separately, is taxable only at the VAT rate applicable to that single service.

As a consequence, the exclusion from the VAT exemption for operating equipment would only apply to the isolated transfer of equipment and machinery.

As an argument for the application of the apportionment rule, the German Federal Fiscal Court argued that the lease of land and the lease of machinery and equipment differ in nature. The argument in favor of this view could be that the leasing of equipment and machines contradicts the passive character of the lease. As a consequence, the remuneration would have to be split into a VAT-exempt and a taxable part.

Conclusion

The decision of the ECJ remains awaited eagerly. Moreover, this decision will also be relevant for Austrian cases, as the exemption and the exclusion are implemented in the national VAT law.