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Recent Irish and Court of Justice of the European Union Cases

Indirect Tax Matters February 2021

An update and our view on some recent CJEU decisions regarding VAT related cases

Ireland – Appeal Commissioners’ Cases

06TACD2021 – Appellants v Revenue Commissioners – 3 December 2020

In this case, the Appellants (a husband and wife) purchased a van for use as part of their farm partnership trade. They are registered for VAT under the partnership name “husband & wife” and sought to reclaim VAT of €3,926 in respect of the van as part of the partnership’s May/June 2017 return. The underlying invoice was addressed to “husband/wife” and the vehicle was paid for under the shared bank account of the Appellants. However, the Department of Transportation advised that the vehicle could not be registered in “the name of more than one registered owner” and therefore the vehicle was registered in the husband’s name only.

Following an aspect query, Revenue then disallowed VAT recovery in respect of the vehicle, on the basis that it had been registered in the husband’s name only, as opposed to being registered in the partnership’s name. The Appellants appealed this decision to the Tax Appeals Commission.

Subsequent to this, the supplier who sold the van to the Appellants provided Revenue with a copy of the original sales invoice and it was addressed to the husband in his own name, as opposed to the partnership. Revenue therefore held that the invoice provided to them as part of the aspect query was an amended invoice that did not comply with the VAT invoicing regulations surrounding dating and sequential numbering.

The commissioner ruled in favour of the Appellants. In coming to his conclusion, the commissioner referred to the Pannon VAT case (Case C-368/09) and determined that the fact that the invoice did not bear full technical compliance with the statutory regulations does not necessarily render them invalid. He therefore disregarded Revenue’s arguments surrounding the invalidity of the underlying invoice provided during the aspect query. Additionally, the commissioner also found there was no basis for Revenue to disallow VAT recovery due to the vehicle being registered in the husband’s name alone, as the expense was clearly incurred for the Appellants’ farm partnership. Therefore, the commissioner found that the VAT amount arising on the purchase of the vehicle should be recoverable.

EU – CJEU

CJEU (Case C-77/19): Kaplan International Colleges UK Ltd v HMRC – 18 November 2020

This UK case involved a review of the territorial scope of the cost sharing exemption provided under Article 132(1)(f) of the VAT Directive. In this regard, Article 132 (1)(f) provides that:

“Article 132
1. Member States shall exempt the following transactions:
(f) the supply of services by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity, where those groups merely claim from their members exact reimbursement of their share of the joint expenses, provided that such exemption is not likely to cause distortion of competition;”

In this case, Kaplan is the UK established holding company for the Kaplan corporate group, nine subsidiary companies established in the UK that run higher education colleges, an activity that qualifies for VAT exemption under Article 132(1)(i). All UK entities are members of a UK VAT group. Before October 2014, Kaplan incurred foreign agency costs on behalf of the group and supplies made by Kaplan to the subsidiaries were found to qualify under the cost sharing exemption. In October 2014, the group established Kaplan Partner Services Hong Kong Limited (‘KPS’), a company limited by shares established in Hong Kong, owned equally by the nine Kaplan colleges as members. All costs from that date were addressed to KPS and no VAT was charged, as Hong Kong does not have a VAT system. The costs were then charged to the various subsidiaries, with KPS seeking exact reimbursement for their share of the cost incurred.

HMRC found that this arrangement could not qualify for the cost sharing exemption and this decision was appealed by the Kaplan group. As such, a number of complicated questions were raised to the CJEU surrounding whether the cost sharing exemption can apply to services provided by entities established outside of the EU and whether the existence of a UK VAT group complicated matters.

Judgement

The Court agreed with the earlier AGO in this case and found that:

  • The cost sharing exemption could not extend to a group which is established outside of the EU; 
  • The cost sharing exemption does not, by itself, cause a distortion of competition unless it is applied inappropriately.
    In this regard, indications of “inappropriate use” includes: 
    • That the group supplies similar services for consideration to non-group members and is outwardly operating in the market as a competitor and not as a co-operative corporate group; 
    • That the group only passes on purchased services (i.e. it does not provide tailored services to its members); 
    • That the group was created solely with a view to optimising the VAT recovery position rather than to establish a group built on the sharing of costs to avoid a competitive disadvantage.
  • It was also found that tax authorities had the burden of proof to evidence that “inappropriate use” had taken place;

It was therefore found that supplies made by KPS to the Kaplan UK VAT group could not qualify for VAT exemption under the cost sharing exemption.

CJEU (C655/19): LN – 20 January 2021

This Romanian case focuses on the taxable status of mortgagees-in-possession (“MIP”) and whether the sale of property by an MIP constitutes an “economic activity” for VAT purposes. This is a vital point in confirming whether such sales are within the scope of VAT.

LN lent €80,000 to a third party, who failed to repay him. The loans were secured by mortgages over three residential properties, and enforcement proceedings under Romanian law resulted in them being auctioned off to LN, who resold the properties in 2011 and 2012. In 2016, during a tax audit, the Romanian tax authorities found that the sales made by LN should have been subject to VAT and these operations were classified as an economic activity of a permanent nature carried out with a view to obtaining revenue.

Upon proceeding through the Romanian Courts, the Court of Appeal decided to refer the following questions to the CJEU:

"1) Does Article 2 of the [VAT Directive] preclude the operation by which a taxpayer who, as a creditor, is awarded a building seized in the context of a procedure execution and, subsequently, sells it with a view to recovering the amount loaned is considered as an economic activity consisting in the exploitation of a tangible or intangible asset with a view to obtaining permanent income from it?

2) Can the person who carried out such a legal transaction be regarded as a taxable person within the meaning of Article 9 of the [VAT Directive]? "

In their response, the Court identified that an “economic activity” under Article 9(1) is defined as including “the exploitation of a tangible or intangible good with a view to obtaining income from it having a permanent character”, while the mere exercise of the right to property by its owner cannot, by itself, constitute an economic activity.

Applying these established principles to the current case, the Court found that:

  • The sales made by LN were carried out with a view to recovering the outstanding amount of debt on the defaulted loan; 
  • As LN’s objective was to recoup the value of the loans, it was found not to have taken active steps to market the land and, in particular, had not mobilised resources similar to those deployed by a producer, trader or service provider (i.e. the sale of the properties by LN did not constitute an economic activity for the purposes of Article 9(1)).
  • Rather, the sales made by LN related to the simple exercise of the right of ownership and of the sound management of LN’s private assets, and, consequently, do not come within the framework of the exercise of an economic activity;
  • It should be noted that the dispute in the main proceedings as set out by the referring court and its questions for a preliminary ruling do not relate to sales of property considered to be a direct extension of an economic activity granting of a loan that would be exercised by LN.

Accordingly, the Court held that “the operation by which a person is awarded a building seized in the context of a forced execution procedure initiated for the recovery of a loan previously granted and, subsequently, proceeds to the sale of this building does not does not, in itself, constitute an economic activity when this operation comes under the simple exercise of the right to property as well as the sound management of private assets, so that the said person cannot, under the said operation, be considered as a taxable person.”

CJEU (Case C-42/19): Sonaecom SGPS SA v Autoridade Tributária e Aduaneira- 12 November 2020

This Portuguese case concerned the VAT recovery position of transactions that did not ultimately take place. The applicant in this case is a holding company which holds shares in and provides management services to companies operating in the telecommunications, media, software and systems integration markets.

In 2005, Sonaecom incurred advisory costs relating to an intended acquisition of Cabovisão, a third party telecommunications operator, but this proposed transaction never took place. Additionally, the applicant also incurred costs associated with engaging an investment bank to raise a bond loan of €150m to fund further acquisitions of companies. However, when these investments did not take place, the funds raised by Sonaecom were used to make a loan to its parent company Sonae SGPS. In both cases, Sonaecom recovered VAT on these costs on the basis that it intended to raise taxable management services to the purchased companies once they were acquired.

The Portuguese tax authorities challenged this position on the basis that the intended taxable management services were never actually provided as they did not proceed with the intended investments. Upon appeal, the following questions were raised to the CJEU:

  • Are costs relating to a market study commissioned with a view to acquiring shares deductible if the proposed transaction never took place?; and
  • Is the payment of a commission to an investment bank for the organising and putting together of a bond loan a deductible expense if that loan was allegedly taken out with a view to acquiring new investments but, when the proposed transactions failed to take place, the funds were loaned to the parent company of the group?

In consideration of the first question, the Court drew from the Ryanair (C-249/17) and Larentia + Minerva (C-108/14) cases and found that such costs are recoverable, even if the intended transaction did not ultimately take place.

With regard to the second query, the Court held that there was a direct and immediate link between the commission paid to the bank and the actual use of the funds (e.g. the provision of a loan to its parent company) that did not occur in respect of query 1 above. Accordingly, the Court found that “a mixed holding company whose involvement in the management of its subsidiaries is recurrent is not entitled to deduct input VAT on the commission paid to a credit institution for organising and putting together a bond loan, which was intended for making investments in a given sector, where those investments did not ultimately take place and the capital obtained by means of that loan was paid in full to the parent company of the group in the form of a loan.”

Therefore, Sonaecom is entitled to VAT recovery in respect of the market study costs relating to the failed transaction, but not in respect of the commission paid to the investment bank, where the funds were used to provide a loan to its parent company.

CJEU (Case C-288/19): - QM v Finanzamt Saarbrücken - 20 January 2021

This referral from Germany involves the provision of company cars to staff who live cross border. QM is a Luxembourg established investment fund management company that made two cars available to its staff who live in Germany. QM was subject to the simplified tax scheme in Luxembourg whereby it was not entitled to claim VAT recovery in respect of cars made available to its employees without consideration. It is not clear whether QM would have been entitled to VAT recovery in Germany in respect of these vehicles.

Of the two employees, one did not pay anything, while the other sacrificed some of his annual salary to receive use of the car. The cars were used for both professional and private purposes. The German tax authorities sought to argue that the provision of the cars to staff constituted a supply in Germany to which German VAT should arise.

The question raised to the court was whether a supply for VAT purposes occurred when QM made these cars available for both staff members when it was known that they both lived in Germany and, if so, did it constitute the hiring of a means of transport for the purposes of Article 56(2) of the VAT Directive.

In respect of the first supply, the Court found that the provision of the car to the fund manager was not a supply for VAT purposes as (i) there was no consideration paid for the supply (e.g. by way of a salary sacrifice) and (ii) the fact that the car was a benefit in kind did not create a consideration.

However, it was found that the second supply was, in fact, a supply for VAT purposes as the salary sacrifice constituted a consideration for the supply of the use of the vehicle. Accordingly, the provisions of Article 56(2) of the VAT Directive applies where the employee has been given the permanent right to use that vehicle for private purposes for a period that exceeds 30 days (i.e. they are liable for German VAT in respect of the second supply).

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