INTERNATIONAL TAX PLAZA - CJEU rules in Case C-16/14 Property Development Company (Sixth VAT Directive - Article 11A - Application of a building for an activity exempt from VAT)

(April 23, 2015)

On April 23, 2015 the European Court of Justice (CJEU) ruled in Case C‑16/14 Property Development Company NV versus Belgische Staat (ECLI:EU:C:2015:265).

Is interim interest which, according to Article 35(4) of [Fourth Directive 78/660], may be included in production costs to the extent that it relates to the period of production, part of the taxable amount of an application within the meaning of Article 5(6) of [the Sixth Directive], that is to say, part of the “cost price” within the meaning of Article 11A(1)(b) of the Sixth Directive and/or incidental expenses within the meaning of Article 11A(2) thereof ?

The dispute in the main proceedings and the question referred for a preliminary ruling

· Between 1991 and 1994, Prodeco had constructed an office building with the intention of selling it. That building accordingly appeared as stock in the accounts. In valuing that stock, in accordance with the valuation rules laid down by it Prodeco included the interim interest as an asset.

· The interim interest comprised interest paid at the rate payable under the loan agreement entered into for the purpose of construction of the building, on the amounts of the loan released during construction.

· Prodeco deducted the VAT that it had paid on supplies of goods and services in connection with the construction of the building.

· In anticipation of the sale of the building in question, which finally took place in 2000, Prodeco had rented out parts of it from and after 1995. In the course of that economic activity it took no account the application of Article 12(1)(3) of the VAT Code in its tax declarations, a matter which was treated as an infringement of that provision during a check carried out by the Belgian tax authorities in 1998.

· Prodeco paid part of the amount of VAT demanded by the Belgian tax authorities, namely EUR 1 178 498, representing the total amount of VAT previously deducted from the incoming invoices relating to the construction of the building.

· However, it refused to pay the other part of the VAT also demanded by the Belgian tax authorities, namely EUR 554 416.67. That amount was calculated on the basis of interest paid by Prodeco under the loan agreement which enabled it to finance the construction of the building.

· In 2004, an order for payment was served on Prodeco for the last mentioned amount of VAT. It brought proceedings challenging the payment order before the Rechtbank van eerste aanleg te Antewerpen (Court of First Instance, Antwerp) which dismissed the action by judgment of 9 May 2008.

· Prodeco brought an appeal against that judgment before the Hof van beroep te Antwerpen (Court of Appeal, Antwerp). By judgment of 16 February 2010, that court declared the appeal well founded as far as concerns the interim interest which, in the view of that court, does not form part of the taxable amount in cases where Article 12(1)(3) of the VAT Code applies.

· The Belgian tax authorities brought an appeal in cassation against that judgment. By judgment of 19 January 2012, the Hof van Cassatie (Court of Cassation) set aside that judgment as regards the question of interim interest and referred the case to the Hof van beroep te Gent (Court of Appeal, Ghent).

· The Hof van beroep te Gent observes that, in support of its decision that interim interest must be part of the taxable amount, the Hof van Cassatie relied on the judgment in Muys’ en De Winter’s Bouw- en Aanemingsbedrijf (C‑281/91, EU:C:1993:855). In that judgment, the Court held that, where a supplier of goods or services grants his customer deferral of payment of the price in return for payment of interest until delivery, that interest constitutes part of the consideration obtained for the supply of goods or services within the meaning of Article 11A(1)(a) of the Sixth Directive.

· The Hof van beroep te Ghent takes the view that, although the Hof van Cassatie gave a clear ruling, the question remains whether or not interim interest must be taken into consideration.

· According to the Hof van beroep te Gent, the judgment in Muys’ en De Winter’s Bouw- en Aanemingsbedrijf (C‑281/91, EU:C:1993:855), concerning the interpretation of Article 11A(1)(a) of the Sixth Directive, is not necessarily relevant in a case such as that in the main proceedings. Interim interest should be regarded rather as being part of the ‘cost price’ which appears among the reference values mentioned in Article 11A(1)(b) of the Sixth Directive, or should be treated as ‘incidental expenses’ within the meaning of Article 11A(2).

· Article 35(4) of Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54(3)(g) of the Treaty on the annual accounts of certain types of companies (OJ 1978 L 222, p. 11) points in favour of that conclusion. That provision, which was transposed into Belgian law by Article 22a, first paragraph, of the Royal Decree of 8 October 1976 relating to the annual accounts of undertakings, stated that ‘[i]nterest on capital borrowed to finance the production of fixed assets may be included in production costs to the extent that it relates to the period of production’.

· Moreover, the principle of neutrality should also be taken into account. In that regard, the Hof van beroep te Gent draws attention to the fact that interim interest is not subject to VAT and, therefore, unlike supplies and services occasioned by the construction of the building, could not be subject to a deduction of VAT.

· In those circumstances, the Hof van beroep te Gent decided to stay the proceedings and to refer the following question to the Court for a preliminary ruling:

‘Is interim interest which, according to Article 35(4) of [Fourth Directive 78/660], may be included in production costs to the extent that it relates to the period of production, part of the taxable amount of an application within the meaning of Article 5(6) of [the Sixth Directive], that is to say, part of the “cost price” within the meaning of Article 11A(1)(b) of the Sixth Directive and/or incidental expenses within the meaning of Article 11A(2) thereof ?’

· By letter of 8 October 2014, the Court Registry sent a request for clarifications to the referring court as regards, in particular, whether, in the view of that court, the taxable transaction at issue in the main proceedings is covered by the situation referred to in Article 5(6) of the Sixth Directive or one of the situations referred to in Article 5(7) thereof. The referring court was also requested to verify whether the relevant reference value in the case in the main proceedings is the cost price or the purchase price of similar goods.

· In its answer, received at the Court on 11 February 2015, the referring court stated that the application by Prodeco of the building at issue for the economic activity exempt from VAT, comprising its rental, falls within the situation referred to in Article 5(7)(b) of the Sixth Directive and that, among the reference values mentioned in Article 11A of the Sixth Directive, the reference value relevant for the resolution of the dispute in the main proceedings is the purchase price of similar goods within the meaning of Article 11A(1)(b).

The CJEU ruled as follows:

Article 11A(1)(b) 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 must be interpreted as meaning that, in a case such as that at issue in the main proceedings, the taxable amount for the calculation of VAT on an application, within the meaning of Article 5(7)(b) thereof, of a building that the taxable person has constructed, is to be the purchase price, at the time the application is made, of buildings whose location, size and other essential characteristics are similar to those of the building in question. In that regard, it is irrelevant whether part of the purchase price is due to interest on borrowed capital.

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