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Recent Irish and Court of Justice of the European Union Cases

ITM Newsletter July 2022

CJEU (Case C-9/20): Kollaustraẞe – February 2022

Grundstücksgemeinschaft Kollaustraße 136 (GK) rented a property in Germany from a landlord which operated cash accounting. Rent under the lease was deferred for four years, so GK did not pay rent for 2009-12 until 2013-16, and it did not claim input tax credit until it made the payments. The German tax authorities assessed GK on the basis that it should have recovered input tax in 2009-12 (and by the time of the enquiry it was time-barred from correcting its VAT position for those years). The CJEU disagreed with this approach. Under Article 167 of the Principal VAT Directive, a right to input tax deduction arises when the tax becomes chargeable. The court considered the wording, context, and objective of Article 167, and concluded that if VAT becomes chargeable on receipt of payment, the right of deduction arises at the same time.

Pilsetas zemes dienests (C-598/20) – February 2022

After the restoration of Latvian independence in 1991, land which had been nationalised during the Soviet era was returned to its former owners. However, where property had been constructed on the land, the restored owners of the land had to lease it to the owners of the property. In Pilsetas zemes dienests (“PZD”), the CJEU has ruled by reasoned order that such compulsory leases should be regarded as a supply of property for VAT purposes, as the landowner was granting a right of exclusive occupation to the owner of the building (for consideration and for a defined period). The CJEU further noted that EU Member States were permitted, generally, to limit VAT exemption to the rental of residential accommodation. Although the property built on PZD’s land was a multi-family residential building, PZD was leasing the land rather than the building, and its supply could therefore be excluded from the property exemption and subject to VAT. In light of this, the ruling by the domestic Latvian court that the owner of the building should pay a specified amount of rent which did not take VAT into account may be called into question. However, as matters stand, PZD is potentially faced with having to account for output tax out of the rent effectively set by the court on a gross basis.

EC v UK (valuation of footwear and textile imports from China) – March 2022
Following the abolition of quotas on the import of textiles and clothing from China in 2005, the European Anti-Fraud Office (“OLAF”) became concerned that shell companies were being set up to import clothes into the EU from China at an extreme undervalue. OLAF created a tool to help Member States calculate the lowest acceptable price for clothes but considered that the UK had failed to use it properly, meaning that the fraud shifted wholesale to the UK. The CJEU has ruled that the UK failed to apply effective customs control measures, meaning that it did not make the correct amount of duty (“traditional own resources”) available to the Commission. The CJEU did not approve the amount of the Commission’s claim (which was for €2.6 billion for the period from 2011 to 2017). The CJEU considered that a calculation based on statistical data could be used, but the method had to be sufficiently precise and reliable. The Commission had not established the quantum to the requisite legal standard for the whole period and would therefore need to recalculate its claim.

Dyrektor Izby Skarbowej w L. (C-697/20) (disaggregating farming business) – April 2022

WG and her husband jointly owned a farm in Poland on which six poultry houses had been built. The husband operated a business using four of them and claimed the exemption from VAT under the agricultural flat rate scheme (“FRS”). WG, who operated her business from the other two houses, opted out of the FRS and submitted a claim for repayment of excess input tax. The Polish tax authorities refused the claim on the basis that WG’s decision to opt out of the FRS should also apply to her husband (whose four poultry houses were presumably operating profitably). The CJEU has determined that the mere fact that the farm was owned jointly did not mean that WG and her husband were not operating their own independent businesses. The referring court had noted, for instance, that WG operated a separate bank account for her business and managed the resources for her poultry houses separately. However, it recognised that the Polish tax authorities might deny the FRS to WG’s husband if it was necessary to prevent an abuse if it could not be countered by other means (e.g., if a disproportionate amount of the expenditure was being allocated to WG’s business, but this could not be countered by requiring appropriate evidence). Furthermore, the CJEU noted that the FRS was meant to be an administrative simplification. If it was no more complicated for both businesses to account for VAT conventionally than it was for one of them to apply the FRS exemption, then Poland was entitled to exclude WG’s husband from the FRS.

Berlin Chemie A. Menarini SRL (fixed establishment through associate) – April 2022

In 2011 Berlin Chemie set up a Romanian subsidiary (BCAM) to deal with marketing, regulatory, and legal issues relating to sales of drugs in Romania. BCAM did not charge Romanian VAT on these services on the basis that Berlin Chemie was established in Germany. However, the Romanian Tax Authorities assessed BCAM for VAT of €8.9m, interest of €1.3m, and penalties of €799k, on the basis that the human and technical resources used by BCAM also constituted an establishment for Berlin Chemie in Romania. This is a circular logic, which would potentially have increased the incidence of subsidiaries having to charge local VAT on invoices to their parent companies in other jurisdictions. Fortunately, the CJEU has not accepted the RTA’s approach. Berlin Chemie might have had an establishment in Romania if it had the power to dispose of BCAM’s human and technical resources as if they were its own. However, even though Berlin Chemie controlled BCAM (it owned it and was its only customer under a long-term contract), BCAM was supposed to use its own resources for its own needs. The CJEU did not appear to consider that the close relationship between Berlin Chemie and BCAM warranted treating BCAM’s resources as if they belonged to Berlin Chemie, as a matter of economic and commercial reality. More fundamentally, the CJEU was clear that the resources used by BCAM (as supplier) could not simultaneously determine where Berlin Chemie (as its customer) was established. BCAM had been correct to treat its supplies to Berlin Chemie as cross-border supplies, and had been right not to charge Romanian VAT.

I GmbH (C-228/20) (private healthcare exemption) – April 2022

Hospital and medical care are VAT-exempt if it takes place in a public hospital or if it takes place under comparable social conditions in a duly recognised private hospital. Germany limited the exemption to private hospitals which were included in the government’s hospital plan or which concluded care supply contracts with certain public health insurance funds. The Finance Court for Lower Saxony was concerned that this favoured older established private hospitals over new hospitals such as the neurology facility run by I GmbH (which was not included in the government plan until July 2012). The CJEU has now ruled that Germany’s operation of the healthcare exemption breached the principle of fiscal neutrality, as it resulted in similar private hospitals which supplied similar services under social conditions comparable to the public sector being treated differently for VAT purposes. The CJEU acknowledged that establishing whether “social conditions” were comparable to the public sector could consider the regulatory conditions under which private hospitals operated, performance indicators relating to staff, premises, equipment, and management efficiency, and the method for calculating charges for private care. But exemption should not be dependent simply on whether I GmbH had secured a place on a government hospital plan or had managed to conclude a contract with a public health insurance fund.

Grafendorfer: interest on export refund and duty repayments – CJEU – April 2022

In 2012, the German customs authorities denied Gräfendorfer GmbH refunds on the export of poultry carcasses on the basis that they were not of fair marketable quality; in 2013 they imposed anti-dumping duty on F. Reyher GmbH on the basis that fastenings it imported from Indonesia had originated in China; and in 2014 they assessed Flexi Motagetechnik GmbH for incorrectly classifying bolt hooks for dog leads. All three decisions were incorrect, but in each case, it was several years before the mistake was accepted and the duty was returned to the companies. Article 241 of the Union Customs Code states that EU Member States are not normally required to pay interest as well. The CJEU has ruled, however, that taxpayers have a right to interest when duty has been collected in breach of EU law, and the exception in Article 241 UCC did not apply where EU law had been breached. It did not matter whether the breach was established by domestic courts or by the CJEU, as the purpose of awarding interest is to compensate businesses for the unavailability of money which they were wrongly deprived of. For that reason, Germany could not pay interest only from the time when taxpayers started proceedings to recover the duty. The companies were entitled to interest, from the date that the duty was incorrectly collected (or the export refund denied) by the customs authorities.

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