(September 29, 2015)

On September 29, 2015 the Court of Justice of the European Union (CJEU) ruled in the Case C‑276/14 Gmina Wrocław versus Minister Finansów (ECLI:EU:C:2015:635).

 

In the light of Article 4(2), in conjunction with Article 5(3) [TEU], may an organisational entity of a municipality (a local government body in Poland) be regarded as a taxable person for purposes of VAT when it engages in activities other than as a public authority within the meaning of Article 13 of [the VAT] Directive …, notwithstanding the fact that it does not satisfy the criterion of autonomy (independence) set out in Article 9(1) of that directive?

 

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

·        The dispute between the Municipality of Wrocław and the Minister concerns the tax status in relation to VAT of municipal budgetary entities which are linked to that municipality.

 

·         It is apparent from the file submitted to the Court that the Municipality of Wrocław carries out the tasks entrusted to it in accordance with the Law of 8 March 1990 on municipalities (Dz. U. z 2001 r. nr 142, poz. 1591 ze zm.) via 284 budgetary entities and local and regional budgetary establishments, including, inter alia, schools, cultural centres, district inspectorates and police services.

 

·        Wishing to obtain a statement by the Minister of his position on the question as to whether it is the municipality or the budgetary entity which must be regarded as a taxable person for the purposes of VAT where such an entity carries out activities coming within the scope of VAT, the Municipality of Wrocław requested that the Minister give an individual written interpretation of the Law on VAT. According to that municipality, the fact that only the municipality satisfies the criteria laid down in Article 15(1) and (2) of the Law on VAT as regards independent engagement in economic activities must lead the tax administration to take the view that only the municipality may be subject to VAT for the economic activities carried out by such an entity.

 

·        In his individual written interpretations, the Minister considered however that, since budgetary entities which are separate from the organisational structure of the Municipality of Wrocław engaged independently in economic activities, as determined by objective criteria, and in doing so carried out activities subject to VAT, they had to be regarded as being themselves taxable persons for the purposes of VAT.

 

·        The Municipality of Wrocław then brought before the Regional Administrative Court of Wrocław (Wojewódzki Sąd Administracyjny we Wrocławiu) actions for the annulment of those individual written interpretations, which were dismissed. That municipality then brought an appeal on a point of law against those judgments before the Supreme Administrative Court (Naczelny Sąd Administracyjny).

 

·        Taking the view that the appeal raised serious questions, the Supreme Administrative Court (ordinary composition) decided to refer that case to the chamber in extended composition in order for it to rule on the issue of the treatment of a municipal budgetary entity as a taxable person for the purposes of VAT.

 

·        That chamber in extended composition took the view that, in order to determine whether a municipal budgetary entity carries out an economic activity independently, first, it is necessary to consider both the national rules on VAT and the VAT Directive. As regards Article 9(1) of that directive, that chamber noted that there is a certain difference in the various language versions of that provision, some using the expression ‘independently’ and others using the expression ‘autonomously’. In connection with those differences in wording, academic writing emphasises the importance of a teleological interpretation of that provision, taking the view, in accordance with the case-law of the Court of Justice, that an entity independently engaging in economic activities should be regarded as a taxable person for purposes of VAT. Secondly, that chamber found that it is necessary to analyse the legal status of such an entity in the light of the Polish Constitution.

 

·        As regards the analysis of that legal status, the chamber in extended composition observed, in essence, that a municipality, as a basic unit of local government, has legal personality and has rights of ownership and other property rights, whereas a municipal budgetary entity is an organisational structure without legal personality. According to that chamber, it is for the municipality to take decisions regarding the establishment, field of activity, affiliation and dissolution of such an entity.

 

·        That chamber in extended composition noted that a municipal budgetary entity does not own its own property but manages certain assets of the property owned by the municipality, which the latter has entrusted to it. Any activities which may be subject to VAT are carried out in the name and on behalf of the municipality, within the limits of the resources which the latter allocates to them in a given year in the budgetary decision.

 

·        In addition, that chamber observed that such an entity’s expenditure is covered directly by the municipal budget and that its revenue is assigned to the accounts of that same municipality. Accordingly, in financial terms, there is no link between the financial results generated by the economic activities carried out by a municipal budgetary entity and the expenditure incurred by them and therefore there are no financial risks connected with activities subject to tax. The scale of a municipal budgetary entity’s expenditure is thus not dependent upon the amount of that entity’s earnings; moreover, it cannot dispose of any income which it has earned. Likewise, a budgetary entity does not bear liability for damage caused by its activities; that liability is borne solely by the municipality.

 

·        In the light of those considerations, the Supreme Administrative Court (extended composition) decided, in response to the question raised by the ordinary chamber of that court, that, under national law, a municipal budgetary authority was not a taxable person for the purposes of VAT because of its lack of autonomy when carrying out economic activities.

 

·        However, the Supreme Administrative Court (ordinary composition) harbours doubts as to whether, under EU law, the same inferences concerning VAT liability may be drawn from the lack of autonomy of bodies governed by public law which carry out activities subject to VAT.

 

·        In that regard, the Supreme Administrative Court states that the case-law of the Court of Justice on the criterion of independence concerns natural persons and that the Court of Justice has not yet ruled on the relationship between the criterion of independence forming part of the general definition of a taxable person in Article 9(1) of the VAT Directive and the specific rules laid down in Article 13 of that directive in relation to bodies governed by public law, and more specifically on whether that criterion must be fulfilled for such a body to be regarded as a taxable person for the purposes of VAT in respect of its activities which do not fall within the exercise of public authority.

 

·        Furthermore, that court also raises the question as to how those two provisions should be interpreted in the light of the principle of institutional autonomy and the principle of subsidiarity, as set out in Articles 4(2) and 5(3) TEU.

 

·        In those circumstances the Supreme Administrative Court decided to stay the proceedings and to refer the following question to the Court of Justice for a preliminary ruling: 

‘In the light of Article 4(2), in conjunction with Article 5(3) [TEU], may an organisational entity of a municipality (a local government body in Poland) be regarded as a taxable person for purposes of VAT when it engages in activities other than as a public authority within the meaning of Article 13 of [the VAT] Directive …, notwithstanding the fact that it does not satisfy the criterion of autonomy (independence) set out in Article 9(1) of that directive?’

 

·        Pursuant to the third paragraph of Article 16 of the Statute of the Court of Justice of the European Union, the Polish Government requested the Court to sit as a Grand Chamber.

 

The CJEU ruled as follows: 

Article 9(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that bodies governed by public law, such as the municipal budgetary entities at issue in the main proceedings, cannot be regarded as taxable persons for the purposes of value added tax in so far as they do not satisfy the criterion of independence set out in that provision.

 

For further information click here to be forwarded to the text of the ruling as published on the website of the CJEU, which will open in a new window.

 

Did you know that in our section CJEU Rulings we have made a selection of rulings of the CJEU? We have organized these rulings based on the subject they relate to (e.g. Freedom of establishment, Free movement of capital, Indirect taxes on the raising of capital, etc).

 

 

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