Insights

Recent Irish and Court of Justice of the European Union Cases

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

C-552/16 – “Wind Inovation 1 v Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika”, 9 November 2017

Wind Inovation, a Bulgarian company, went into liquidation.  Under Bulgarian law, as soon as a company went into liquidation it was compulsory for the company to be removed from the VAT register and to calculate and repay any VAT previously recovered on assets held at the date of removal from the VAT register.  However as Wind Inovation, despite its liquidation, had not ceased trading and continued to engage in economic activities it was required to immediately re-register for VAT. In accordance with Bulgarian law, a taxpayer is entitled to deduct the VAT calculated on the removal from the VAT register subject to the conditions that the person will use the assets for ongoing taxable transactions and that the tax originally due is actually paid.  Repaying the VAT and claiming it back again did however create a cash-flow cost for the company which it could ill afford.  The company therefore challenged its obligation to cancel its VAT registration and reregister immediately in the circumstances.

Following the dismissal of an objection brought by Wind Inovation against its removal from the VAT register, an appeal was made to the Administrative Court of Sofia. Wind Inovation contended that its compulsory removal from the register, despite the fact that it would be required to immediately re-register and the requirement that upon re-registration it would only be entitled to deduct the VAT calculated upon removal if that VAT had actually been paid placed it at a disadvantage to other traders who hold assets as part of their ongoing business activities and who would not be required to make such a payment.

Upon referral from the national court, the CJEU ruled in favour of the taxpayer, stating that national legislation requiring the compulsory removal could only apply to circumstances where the company was no longer engaged in economic activities and therefore does not require an ongoing VAT registration, as otherwise, an unfair restriction would be placed on that companies right to deduct which would not be placed on other traders.

The case demonstrates the CJEU’s commitment to ensuring that VAT deduction is not delayed or otherwise interfered with by the Member States.  This case adds to case law by the CJEU that VAT on both preparatory and windup costs in a business are fully deductible.

C-507/16 – “Entertainment Bulgaria System EOOD v Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika”, 15 November 2017

Entertainment Bulgaria System EOOD (EBS) a Bulgarian established company, was registered for VAT in Bulgaria only as a result of the receipt of reverse charge services from suppliers in other Member States. While EBS had taxable activities in other Member States, it had no taxable activities in Bulgaria. The Bulgarian tax authority, sought to deny EBS input deduction on the reverse charge VAT due on the basis that national legislation precluded the right to deduct under such VAT registrations i.e. where the taxpayer was not registered on the basis of domestic taxable turnover.

The CJEU found that national legislation could not preclude the taxpayer’s right to deduct reverse charge VAT even where the taxpayer had no taxable transactions in that Member State. However, the Court also held that Member States could prevent input deduction in cases where a tax deduction scheme operated in that jurisdiction for companies that had not breached the domestic VAT registration threshold.

C – 308/16, “Kozuba Premium Selection sp. z o.o v Dyrektor Izby Skarbowej w Warszawiw, 16 November 2017

In 2005, an associate of Kozuba contributed a residential property located in Poland, which had been erected in 1992, to the company. One year later, Kozuba refurbished the property at a cost of 55% of its initial value. Upon completion in 2007, Kozuba included the building in its fixed asset register under the heading ‘show home.’

When Kozuba subsequently sold the building in 2009, they considered the sale VAT exempt on the basis that it was the supply of an old building.

The Polish tax authority disagreed and contended that the sale was not exempt from VAT on the basis that the property was no longer old, given that it had been upgraded and that since that upgrade it had not been subject to a “first occupation” i.e. used for the purpose of any taxable activities by Kozuba.

The CJEU ruled that Polish law which provided that the first occupation of a property arose only in the context of a taxable transaction was contrary to EU law but that the VAT exemption could be denied in the case of a conversion of a property, where the costs of conversion exceeded 30% of the initial value of the property. Each country has specific rules regarding the VAT treatment of property and these are notoriously complex and we would always recommend VAT advice is sought for property transactions.

C-251/16 – “Edward Cussens and Others v T. G. Brosman”, 22 November 2017

This case concerned the application of the principle of abuse of rights for VAT purposes (as provided for in Halifax C—255/02) to property transactions entered into by the appellants.

The taxpayers in this case entered into a long lease with a connected company upon which VAT was chargeable and the connected company subsequently leased back the properties on a short lease. The leases were subsequently surrendered and the properties sold. In accordance with Irish legislation in force at the time the sales were exempt from Irish VAT.

Irish Revenue took the view that the leases entered into by the taxpayers were artificially created in order to avoid the subsequent sales being exempt from VAT and sought to disregard the lease transactions on the basis that they lacked commercial reality and thus were an abuse of rights. The taxpayers appealed the assessment through the Irish courts arguing that in the absence of national legislation giving effect to the prohibition of abusive practices, the argument could not succeed against them to impose a greater VAT liability that that which was provided for under national law as this would infringe on their rights under the principles of legal certainty and legitimate expectations.

The CJEU ruled that the principle that abusive practices are prohibited was directly effective against individuals, even where no national legal measure existed to enforce it and therefore the Irish courts must look at the transactions considered to be abusive (i.e. the lease transactions in view of Irish Revenue) to determine whether a tax advantage had accrued to the taxpayer and if so, the final sales of the properties may be subject to VAT.

An interesting aspect of the finding by the CJEU is that it appears that the Court is saying that the VAT concerned must be collected using national VAT law and not EU law.  In its reference of the case to the CJEU the Supreme Court held that there were no provisions of national law which could be used to assess VAT on the transactions.  It will be interesting to see if the Supreme Court will change the meaning and effect of Irish national law to authorise collection of the tax in the context of a VAT Directive which the CJEU has held, yet again in the Cussen case, still does not bind individuals.

C – 246/16, “Enzo Di Maura v Agenzia delle Entrate – Direzione Provinciale di Siracusa”, 23 November 2017

Mr Di Maura made a reduction on his VAT payable amount when one of his clients was declared bankrupt and failed to pay an invoice for €35,000.

The tax authority rejected Mr Di Maura’s adjustment on the basis that it was not certain that the debt would not be honoured based solely on the fact that the customer had been declared bankrupt. In accordance with Italian law it was required that an adjustment to the amount of VAT payable could only be allowed following an unsuccessful insolvency action against the customer.

The CJEU concluded that the principle of proportionality must be upheld when restricting a taxpayer’s right to reduce the VAT payable in the case of bad debts and that the requirement for insolvency proceedings to be concluded, which may last longer than ten years, would amount to a disproportionate restriction.

C-42/17 – “Criminal proceedings against M.A.S. and M.B.”, 5 December 2017

This case concerned the CJEU’s 2015 judgement in the case of Tarrico (C-105/14). In Tarrico, the CJEU found that the Italian government could disapply national legislation providing for a limitation period on criminal prosecutions, the case related to VAT fraud where the time limit imposed by national law to prosecute for fraud meant that it was likely to have an adverse effect on the fulfilment of the Member State’s obligation to ensure that national law provides for penalties which are effective to deter fraud.

The Italian Constitutional Court returned to the CJEU in the M.A.S and M.B. case in order to clarify whether as provided for in Tarrico, they could disapply the time limits imposed by national law even where there was no specific legal basis for the disapplication, the time limit formed a part of substantive criminal law and the disapplication would breach the overriding principles of the Italian Constitution.

In a complete reversal of its decision in Taricco the CJEU held that the disapplication of national time limits in criminal cases would infringe the fundamental rights of the defence and in those circumstances national law could not be set aside.  In a confusing move the Court, while quite obviously overturning the Taricco judgment purported to uphold that judgment by saying that as per Tarrico, that national provisions could be disapplied to ensure effective and deterrent criminal penalties, in the case of fraud, unless such disapplication would breach the principles of legal certainty, precision of law or because of the retroactive application of law.  This is confusing because the CJEU held, in MAS, that such an action by the Member State would in fact breach fundamental EU rights of the accused person whereas the same Court in Taricco stated that taking such an action would not breach those rights.  As a result the CJEU, in cases involving identical facts, has found that the disapplication of law does not infringe fundamental rights and does infringe fundamental rights but appears to be saying that both of these contradictory judgments are still good law.

C-499/16 – “AZ v Minister Finansów”, 9 November 2017

The Polish Supreme Court sought a ruling from the CJEU on whether the provision of Polish VAT law which provides for a reduced rate of VAT (8%) on pastries and cakes with a use-by-date or best before date that does not exceed 45 days infringes on the principal of fiscal neutrality.

CJEU in its judgement confirmed that the selective application of reduced rates of VAT is justified since these rates are exceptions to the general rule but only as long as the conditions required for the application of the reduced rate precisely define the category of goods included. In addition, the Court reiterated that the selective application of reduced rates of VAT is subject to the condition that the principle of fiscal neutrality is not infringed.

This principle provides that similar goods and services which are in competition with each other must be treated the same for VAT purposes. The assessment must be made from point of view of the average consumer and therefore goods are in competition where they have similar characteristics, meet the same needs for consumers and where any differences between products would not have a significant influence on the consumers’ choice between products.

The Court ruled that it was for the Polish court to determine if the expiry date being fixed at below or over 45 days would have a significant influence on the average Polish consumer when choosing to buy pastries and cakes. If it did not, then the application of different VAT rates might influence a consumers’ decision and as a result the principle of fiscal neutrality would preclude the application of different VAT rates.

C – 305/16, “Avon Cosmetics Limited v The Commissioners for Her Majesty's Revenue and Customs”, 14 December 2017

Avon manufactures and sells cosmetic products to independent representatives. The sales to these representatives are at a price below the retail value and are subject to VAT. The retail sales made by the representatives are in most cases not subject to VAT as generally the representatives are not VAT registered as they are below the taxable turnover threshold. As a result, the difference between the retail selling price and the discounted price paid by the representatives is not subject to VAT.

However, by powers granted under a special derogating measure, HMRC were permitted to require Avon to account for VAT based on the open market value of the goods to the final consumer. Avon challenged the HMRC’s right to impose open market value rules arguing that the VAT charged to the representatives would have been deductible if they were registered for VAT. Avon also contended that the derogation itself breached the principles of proportionality, equal treatment and fiscal neutrality.

In this case the Court ruled against Avon, asserting that the derogation was permissible on the basis it was appropriate and proportionate to combat tax avoidance.

C-500/16 – “Caterpillar Financial Services sp. z o.o. v Dyrektor Izby Skarbowej w Warszawie”, 20 December 2017

As a result of an unfavourable judgment of the Polish Supreme Court in a case involving similar supplies to that provided by Caterpillar and upon receipt of a notice from the Polish tax authority of its intention to begin an inspection, Caterpillar submitted corrected invoices and paid over VAT on insurance contributions which it had previously treated as exempt from VAT.

In 2013, following the CJEU’s judgement in the case of BGZ Leasing (C-224/11), which confirmed similar insurance contributions as exempt from VAT, Caterpillar sought a refund of the VAT which it had paid and which related to VAT periods from December 2005 to December 2011. The tax office refused the claim for the refund relating to the period from December 2005 to November 2007 on the basis of the expiry of the five-year limitation period for such requests set down in Polish Law.

The CJEU in its judgement determined that the five-year limitation period was not contrary to EU law concluding that the time limit imposed by the Polish authorities did not deprive Caterpillar of the opportunity to enforce its rights before the national courts. The CJEU in delivering its decision relied upon the fact that Caterpillar in the first instance could have refused to pay the tax and contested any order for payment through legal action or Caterpillar could have paid the tax upon request by the tax authority and brought an action through the Polish Courts before the expiry of the five-year limitation period. 

C -462/16, “Finanzamt Bingen-Alzey v Boehringer Ingelheim Pharma GmbH & Co. KG”, 20th December 2017

In Germany, pharmaceutical manufacturers are entitled to reduce the taxable amount of supplies on statutory discounts given to pharmacies under the system of statutory public health insurance.

The German tax authority while accepting the right to make an adjustment to VAT payable as a result of discounts given to public health providers, rejected Boehringers right to make a similar adjustment on discounts given to private health insurers on the basis that the private health insurers were not the final consumer.

The Court ruled that in accordance with the judgement in Elida Gibbs (C-317/94), that Boehringer was entitled to reduce the taxable amount of its supplies for discounts given to private health insurers on the basis that the private health insurers reimburse the costs of the medicinal products incurred by insured persons and as such the private health insurer is to be regarded as the final consumer.

C-463/16 – “Stadion Amsterdam CV v Staatssecretaris van Financiën’’, 18 January 2018

This case concerned the VAT treatment of Stadion Amsterdam’s “World of Ajax” tour, which comprised a guided tour of the stadium and a visit to the AFC Ajax museum. At the time of the supply it was not possible to visit the museum as a standalone service. Stadion Amsterdam treated the admission charge as the supply of a single service which benefitted from the reduced rate of VAT (6%) as the supply of a cultural service.

Following a tax inspection, the tax authority held that this was single supply for VAT purposes, made up of a principal element (the guided tour) and an ancillary element (the museum visit) and therefore in accordance with VAT law the entire price was subject to same VAT rate. The tax authority contended that the VAT rate which should have been applied, being the rate applicable to the principal element, was the standard rate of VAT (21%). The ancillary element, the museum tour, if supplied as a standalone service would have been subject to the reduced rate of VAT (6%).

The Supreme Court of the Netherlands referred to the CJEU to confirm if in the case of a single supply for VAT purposes, where the single price charged can be split between the two distinct elements making up that single supply, it is permissible that each element can benefit from the VAT rate which would apply if the supplies were made separately (i.e. one subject to the standard rate and the other the reduced rate).

The CJEU ruled against the taxpayer and held that in the case of a single supply, the VAT rate applying to the whole consideration was the rate which applied to the principal element of the supply. As a basis for its ruling the court considered its judgement in CPP (C349/96) that to split a supply, which is a single supply for VAT purposes, would be artificial and distort the functioning of the VAT system.

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