On June 9, 2016 the Court of Justice of the European Union (CJEU) judged in Case C‑332/14 Wolfgang und Dr. Wilfried Rey Grundstücksgemeinschaft GbR versus Finanzamt Krefeld (ECLI:EU:C:2016:417).
This request for a preliminary ruling concerns the interpretation of Articles 17, 19 and 20 of 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: uniform basis of assessment (OJ 1977 L 145, p. 1), as amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18) (‘the Sixth Directive’).
The request has been made in proceedings between Wolfgang und Dr. Wilfried Rey Grundstücksgemeinschaft GbR (‘Rey Grundstücksgemeinschaft’) and Finanzamt Krefeld (Tax Office, Krefeld) concerning the method of calculating the deduction entitlement for value added tax (‘VAT’) due or paid in respect of goods and services used for the construction, maintenance, use and conservation of a mixed-use building that serves, in part, to carry out transactions in respect of which VAT is deductible and, in part, to carry out transactions in respect of which VAT is not deductible (‘a mixed-use building’).
The dispute in the main proceedings and the questions referred for a preliminary ruling
· During the period from 1999 to 2004, Rey Grundstücksgemeinschaft, a property partnership governed by civil law, demolished an old building on a plot of land owned by it and constructed a building for residential and commercial use there. The building was completed in 2004 and contains six residential and commercial units and ten underground parking spaces. Some of those units and spaces were let as early as October 2002.
· In the tax years for the period from 1999 to 2003, Rey Grundstücksgemeinschaft calculated its entitlement to deduct VAT paid for the demolition and construction works by applying an allocation key based on the ratio between the turnover generated by the activity, subject to VAT, of letting the commercial units and associated car parking spaces and the turnover arising from the other, VAT-exempt, letting transactions (‘the turnover-based allocation key’). Using that key, the deductible portion of the VAT was 78.15%. Following two actions brought before the Finanzgericht Düsseldorf (Finance Court, Düsseldorf, Germany) concerning the amount of VAT deductible for the 2001 and 2002 tax years, the Tax Office, Krefeld, accepted that allocation key.
· In 2004, some parts of the building at issue in the main proceedings which had originally been envisaged to be used for carrying out taxed transactions were ultimately let exempt from VAT. In order to adjust the input tax deductions made, Rey Grundstücksgemeinschaft declared in its return for the 2004 tax year an amount by way of adjustment which it determined by applying the turnover-based allocation key. In that return, Rey Grundstücksgemeinschaft also declared some deductible amounts of VAT which had been paid on goods and services purchased for the use, conservation and maintenance of the building. The total amount of VAT that had to be refunded to Rey Grundstücksgemeinschaft was, according to its calculations, around EUR 3 500.
· By tax amendment notice of 1 September 2006, the Tax Office, Krefeld, objected to that outcome on the ground that, following the entry into force, on 1 January 2004, of the third sentence of Paragraph 15(4) of the UStG, the turnover-based allocation key can be applied only if it is not possible to have recourse to another method for the economic allocation of mixed-use goods and services. Since the Tax Office, Krefeld, considered that it is possible and more precise to determine the economic allocation of goods and services used for the demolition or construction of a building by having recourse to an allocation key corresponding to the ratio between the floor area in square metres of the commercial premises and that of the premises for residential use (‘the floor area-based allocation key’), Rey Grundstücksgemeinschaft should, in its view, have applied that key. Consequently, it set the VAT deduction percentage at 38.74%, which corresponds to the part of the total floor area of the building whose letting is taxable, and fixed the amount of VAT to be refunded to Rey Grundstücksgemeinschaft for 2004 at around EUR 950.
· The Finanzgericht Düsseldorf (Finance Court, Düsseldorf) partially annulled that tax amendment notice on the ground that the floor area-based allocation key could be applied only in respect of VAT payable on costs incurred from 1 January 2004. Consequently, it fixed the amount of VAT to be refunded to Rey Grundstücksgemeinschaft for 2004 at just over EUR 1 700.
· Both parties to the main proceedings appealed on a point of law against that decision to the Bundesfinanzhof (Federal Finance Court).
· According to the referring court, the dispute arises, in the first place, from questions connected with the Court’s interpretation of Article 17(5) of the Sixth Directive in the judgment of 8 November 2012 in BLC Baumarkt (C‑511/10, EU:C:2012:689).
· The referring court observes that, in that judgment, the Court of Justice held that it is possible to have recourse to a method for allocating mixed-use goods and services that is different from the method, based on turnover, provided for by the Sixth Directive only if that method enables the deduction entitlement to be determined more precisely. The method consisting in determining the part of the building for which VAT has been incurred and applying an allocation key only for the amounts of VAT which do not relate specifically to any of those parts or which relate to the common parts of a mixed-use building would produce more precise results. Consequently, the referring court wonders whether such a method should be preferred.
· Also, the referring court observes, in essence, that in paragraph 19 of the judgment of 8 November 2012 in BLC Baumarkt (C‑511/10, EU:C:2012:689) the Court of Justice stated that a Member State may have recourse to a method for allocating mixed-use goods and services other than the method provided for by the Sixth Directive only for a ‘given transaction, such as the construction of a mixed-use building’. The divergent method adopted by the German tax authorities in order to allocate goods and services used for the construction or acquisition of a mixed-use building is also applied to the goods and services purchased for the use, conservation or maintenance of such buildings. Consequently, the referring court raises the question whether it is compatible with the Sixth Directive to apply one and the same method to both those categories of expenditure.
· In the second place, the referring court establishes that, whilst the Court of Justice has already had occasion to acknowledge that a legislative amendment may give rise to the obligation to adjust certain VAT deductions, it has hitherto ruled only on legislative amendments affecting the very existence of the right to deduct. That being so, doubt remains as to whether Article 20 of the Sixth Directive precludes legislation of a Member State in so far as that legislation requires a VAT adjustment following the amendment by that State of the method for allocating VAT paid on mixed-use goods and services.
· In the third place, the referring court is uncertain whether, in the circumstances of the main proceedings, the principles of the protection of legitimate expectations and of legal certainty preclude a VAT adjustment being made. It notes, first of all, that the German legislation does not include an express provision according to which the entry into force of the third sentence of Paragraph 15(4) of the UStG is liable to give rise to adjustments. Next, that legislation does not lay down transitional arrangements, although it follows from paragraph 70 of the judgment of 29 April 2004 in Gemeente Leusden and Holin Groep (C‑487/01 and C‑7/02, EU:C:2004:263) that the adoption of such arrangements is required when the persons to whom a new rule is addressed are liable to be surprised by its immediate application. Finally, the method for assigning mixed-use goods and services that was used by Rey Grundstücksgemeinschaft had been accepted, for the 2001 and 2002 tax years, by the tax authorities, following proceedings before the Finanzgericht Düsseldorf (Finance Court, Düsseldorf).
· In those circumstances, the Bundesfinanzhof (Federal Finance Court) decided to stay proceedings and refer the following questions to the Court of Justice for a preliminary ruling:
‘1. The Court of Justice of the European Union has ruled that the third subparagraph of Article 17(5) of [the Sixth Directive] allows Member States, for the purposes of calculating the proportion of input VAT deductible for a given operation, such as the construction of a mixed-use building, to give precedence, as the key to allocation, to an allocation key other than that based on turnover appearing in Article 19(1) of the Sixth Directive, on condition that the method used guarantees a more precise determination of that deductible proportion (judgment of 8 November 2012 in BLC Baumarkt, C-511/10, EU:C:2012:689).
(a) At the time of acquisition or construction of a mixed-use building, for the purposes of calculating more precisely the deductible amounts of input tax, must inputs the basis of assessment of which is part of the acquisition or construction costs be attributed initially to the (taxable or exempt) turnover of the building and only the remaining input tax be attributed by reference to a floor area-based or turnover-based allocation key?
(b) Do the principles established by the Court of Justice in its judgment of 8 November 2012 in BLC Baumarkt (C‑511/10, EU:C:2012:689) and the answer to the foregoing question apply also to amounts of input tax on inputs for the use, conservation or maintenance of a mixed-use building?
2. Is Article 20 of the Sixth Directive to be interpreted as meaning that the adjustment provided for in that provision as regards the initial input tax deduction applies also to circumstances in which a taxable person has attributed input tax arising from the construction of a mixed-use building in accordance with the [turnover-based allocation key] provided for in Article 19(1) of the Sixth Directive and permitted by national law, and during the adjustment period a Member State subsequently provides that a different allocation key is to take precedence?
3. If the answer to the previous question is in the affirmative: Do the principles of legal certainty and of the protection of legitimate expectations preclude the application of Article 20 of the Sixth Directive if, for cases of the type described above, the Member State has neither expressly required input tax to be adjusted nor adopted any transitional arrangements, and if the input tax attribution applied by the taxable person in accordance with the [turnover-based allocation key] had previously been recognised by the Bundesfinanzhof (Federal Finance Court) as being generally appropriate?’
The CJEU judged as follows:
1. Article 17(5) of 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: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as meaning that, where a building is used in order to carry out certain output transactions in respect of which value added tax is deductible and others in respect of which it is not, the Member States are not required to prescribe that the input goods and services used for the construction, acquisition, use, conservation or maintenance of that building must, in a first stage, be assigned to those various transactions when such assignation is difficult to carry out, in order that, in a second stage, only the deduction entitlement due in respect of those of the goods and services which are used both for certain transactions in respect of which value added tax is deductible and for others in respect of which it is not is determined by applying a turnover-based allocation key or, provided that this method guarantees a more precise determination of the deductible proportion, on the basis of floor area.
2. Article 20 of Sixth Directive 77/388, as amended by Directive 95/7, must be interpreted as requiring valued-added-tax deductions made in respect of goods or services falling within Article 17(5) of that directive to be adjusted following the adoption, during the adjustment period in question, of a value-added-tax allocation key used to calculate those deductions that departs from the method provided for by the directive for determining the deduction entitlement.
3. The general principles of EU law of legal certainty and of the protection of legitimate expectations must be interpreted as not precluding applicable national legislation which does not expressly prescribe an input tax adjustment, within the meaning of Article 20 of the Sixth Directive, as amended by Directive 95/7, following amendment of the value-added-tax allocation key used to calculate certain deductions or lay down transitional arrangements although the input tax allocation applied by the taxable person in accordance with the allocation key applicable before that amendment had been recognised as generally reasonable by the supreme court.
For further information click here to be forwarded to the text of the judgment as published on the website of the CJEU, which will open in a new window.
The opinion in this case as delivered on November 25, 2015 by Advocate General P. Mengozzi can be found here.
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