Uudenkaupungin kaupunki.

• Jurisdiction: European Union
• Date: 30 March 2006
• Court: Court of Justice (European Union)

Case C-184/04

Proceedings brought by

Uudenkaupungin kaupunki

(Reference for a preliminary ruling from the Korkein hallinto-oikeus)

(VAT – Deduction of input tax – Capital goods – Immovable property – Adjustment of deductions)

Summary of the Judgment

1. Tax provisions – Harmonisation of laws – Turnover taxes – Common system of value added tax – Deduction of input tax

(Council Directive 77/388, Arts 20(2) and (5))

2. Tax provisions – Harmonisation of laws – Turnover taxes – Common system of value added tax – Deduction of input tax

(Council Directive 77/388, Arts 13(C), 17 and 20)

3. Tax provisions – Harmonisation of laws – Turnover taxes – Common system of value added tax – Exemptions provided for in the Sixth Directive

(Council Directive 77/388, Arts 13(C) and 17(6))

1. Article 20 of Sixth Directive 77/388 on the harmonisation of the laws of the Member States relating to turnover taxes must be interpreted as meaning that, subject to the provisions of Article 20(5) thereof, it requires Member States to make provision for adjustment of deductions of value added tax on capital goods.

(see para. 35, operative part 1)

2. Article 20 of Sixth Directive 77/388 on the harmonisation of the laws of the Member States relating to turnover taxes must be interpreted as meaning that the adjustment provided for therein is also applicable where the capital goods were first used in non-taxable activity that was not eligible for deduction and were then used in activity, subject to value added tax, during the adjustment period.

Application of the adjustment mechanism depends on the existence of a right to deduct based on Article 17 of the Sixth Directive. The use to which capital goods are put merely determines the extent of the initial deduction and the extent of any adjustments in the course of the following periods, but does not affect whether a right to deduct arises. It follows that the immediate use of the goods for taxable supplies does not in itself constitute a condition for the application of the system of adjustment of deductions. Furthermore, adjustment of the deduction also applies necessarily where alteration of the right to deduct depends on a deliberate choice on the part of the taxpayer, such as exercise of the option provided for in Article 13(C) of the Sixth Directive.

(see paras 37, 39-40, 42, operative part 2)

3. The second subparagraph of Article 13(C) and Article 17(6) of Sixth Directive 77/388 on the harmonisation of the laws of the Member States relating to turnover taxes must be interpreted as meaning that a Member State which gives its taxable persons the right to opt for taxation of the letting of a property is not permitted by those provisions to exclude deduction of value added tax on immovable property investments made before that right of option is exercised, where the application to exercise that option has not been made within six months of the property being brought into use.

Since under the first subparagraph of Article 13(C) of the Sixth Directive it is possible for taxable persons to opt for taxation of the letting of immovable property, the exercise of that option must lead not only to taxation of the letting but also to deduction of the relevant input taxes on the property concerned. Moreover, restricting deductions in connection with taxable transactions after the right of option has been exercised would affect, not the ‘scope’ of the right of option which Member States may restrict pursuant to the second subparagraph of Article 13(C) of the Sixth Directive, but the consequences of exercising that right. That provision does not therefore permit Member States to restrict the right to deduct provided for in Article 17 of the Sixth Directive or the need to adjust such deductions under Article 20 of that directive.

As regards the option given to Member States by the second subparagraph of Article 17(6) of the Sixth Directive, it applies only to maintaining exclusions from deduction with regard to categories of expenditure defined by reference to the nature of the goods or services acquired rather than by reference to the use to which they are put or the way in which they are used.

(see paras 44, 46-47, 49, 51, operative part 3-4)

JUDGMENT OF THE COURT (First Chamber)

30 March 2006 (*)

(VAT – Deduction of input tax – Capital goods – Immovable property – Adjustment of deductions)

In Case C-184/04,

REFERENCE for a preliminary ruling under Article 234 EC from the Korkein hallinto-oikeus (Finland), made by decision of 16 April 2004, received at the Court on 19 April 2004, in the proceedings brought by

Uudenkaupungin kaupunki,

THE COURT (First Chamber),

composed of P. Jann, President of the Chamber, K. Schiemann (Rapporteur), N. Colneric, J.N. Cunha Rodrigues and E. Levits, Judges,

Advocate General: C. Stix-Hackl,

Registrar: H. von Holstein, Deputy Registrar,

having regard to the written procedure and further to the hearing on 22 June 2005,

after considering the observations submitted on behalf of:

– Uudenkaupungin kaupunki, by M. Pikkujämsä, asianajaja,

– the Finnish Government, by T. Pynnä and E. Bygglin, acting as Agents,

– the Italian Government, by I.M. Braguglia, acting as Agent, and P. Gentili, avvocato dello Stato,

– the Commission of the European Communities, by L. Ström van Lier and I. Koskinen, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 15 September 2005,

gives the following

Judgment

1 The reference for a preliminary ruling concerns the interpretation of the second subparagraph of Article 13(C), the second subparagraph of Article 17(6) and Article 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’).

2 In essence, it raises the question whether, in the light of the Sixth Directive, adjustment of the deduction of input value added tax (‘VAT’) paid in respect of capital goods should be permitted where immovable property has first been used in non-taxable activity and then in taxable activity after the right of option within the meaning of Article 13(C) of the Sixth Directive has been exercised.

3 The reference has been made in the course of an appeal on a point of law brought by Uudenkaupungin kaupunki (the town of Uusikaupunki, ‘Uusikaupunki’) against a decision of the Helsingin hallinto-oikeus (Helsinki Administrative Court), by which the latter dismissed Uusikaupunki’s appeal against two decisions taken by the Lounais-Suomen verovirasto (South-West Finland Tax Office) on applications submitted by Uusikaupunki for the adjustment of deductions and a refund of VAT.

Legal context

The Sixth Directive

4 Article 5(6) and (7) of the Sixth Directive reads as follows:

‘6. The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration. However, applications for the giving of samples or the making of gifts of small value for the purposes of the taxable person’s business shall not be so treated.

7. Member States may treat as supplies made for consideration:

(a) the application by a taxable person for the purposes of his business of goods produced, constructed, extracted, processed, purchased or imported in the course of such business, where the value added tax on such goods, had they been acquired from another taxable person, would not be wholly deductible;

(b) the application of goods by a taxable person for the purposes of a non-taxable transaction, where the value added tax on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with subparagraph (a);

(c) except in those cases mentioned in paragraph 8, the retention of goods by a taxable person or his successors when he ceases to carry out a taxable economic activity where the value added tax on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with subparagraph (a).’

5 Article 6(2) and (3) of the Sixth Directive provides:

‘2. The following shall be treated as supplies of services for consideration:

(a) the use of goods forming part of the assets of a business for the private use of the taxable person or of his staff or more generally for purposes other than those of his business where the value added tax on such goods is wholly or partly deductible;

(b) supplies of services carried out free of charge by the taxable person for his own private use or that of his staff or more generally for purposes other than those of his business.

Member States may derogate from the provisions of this paragraph provided that such derogation does not lead to distortion of competition.

3. In order to prevent distortion of competition and subject to the consultations provided for in Article 29, Member States may treat as a supply of services for consideration the supply by a taxable person of a service for the purposes of his undertaking where the value added tax on such a service, had it been supplied by another taxable person, would not be wholly deductible.’

6 Under Article 13(B)(b) of the Sixth Directive, Member States are to exempt the letting of immovable property from VAT. Under Article 13(C) of that directive, Member States may allow taxpayers a right of option for taxation in cases of letting of immovable property. According to the second subparagraph of that Article 13(C)...