Finanzamt Oschatz v Zweckverband zur Trinkwasserversorgung und Abwasserbeseitigung Torgau-Westelbien

VAT – Reduced rate – Respondent supplying water to towns – Whether reduced rate of VAT applying to connection of water system to mains connection – Council Directive 77/388 – Ruling accordinglyThe respondent, a municipal association for the supply of drinking water and sewage disposal, ensured the supply of drinking water and the disposal of sewage on behalf of various towns and municipalities. Its activities included, inter alia, the collection, piping, treatment and supply of drinking water to the owners of buildings that were connected to the water supply network. It laid mains connections at the request of its customers, for which it received a single fee that corresponded to the cost of the work. The connection remained the respondent’s property. Assuming that the laying of a connection was distinct from the supply of water, the appellant tax office applied to it the standard rate of VAT laid down by national legislation. The respondent appealed to the Finance Court, claiming that a mains connection should be subject to the same reduced rate of VAT as applied to the supply of water.The court upheld the respondent’s action on the basis that the supply of water and the laying of the mains connection constituted a single service of “water supply”, within the meaning of the national legislation that transposed the Council Directive 77/388 (the Sixth Directive). The appellant appealed to the Federal Finance Court, which proceeded on the basis that, in laying a mains connection, the respondent acted as a trader in accordance with the national legislation. However, it also acted pursuant to its public law statutes and under public law, which argued against its being subject to VAT, in the light of article 4(5) of the Sixth Directive. The court was inclined to the view that the laying of mains connections formed part of water supplies with regard to the rate of VAT applicable. However, it considered that that question depended upon the interpretation of article 12(3)(a) of the Sixth Directive and of category 2 of annex H thereto. Accordingly, it decided to stay the proceedings and referred them to the European Court of Justice for a preliminary ruling. Held: The court made a preliminary ruling.Pursuant to article 4(5) of the Sixth Directive and point 2 of annex D and article 12(3)(a) and category 2 of annex H, the laying of a mains connection of water consisting of the installation of piping permitting the connection of a building’s water system to the fixed water supply network formed part of the “supply of water” and “water supplies”, as defined therein. Thus, a body governed by public law acting as a public authority was a taxable party in respect of that transaction for VAT purposes. Moreover, member states might apply a reduced rate of VAT to concrete and specific aspects of water supplies, such as the laying of mains connections, provided that they complied with the principle of fiscal neutrality inherent in the common system of VAT.Article 12(3)(a) did not require that provision to be interpreted as meaning that the reduced rate could be charged only if it was applied to all aspects of the water supplies covered by annex H, so that a selective application of the reduced rate could not be excluded provided that there was no risk of distortion of competition. However, the introduction and maintenance of reduced rates of VAT that were lower lower than the standard rate fixed in article 12(3)(a) were permissible only if they did not infringe the principle of fiscal neutrality inherent in the common system of VAT, which precluded treating similar goods and supplies of services in competition with each other differently for VAT purposesT Martin, acting as agent, appeared for the appellant; F Schmidt, Steuerberater, appeared for the respondent; M Lumma and U Forsthoff, acting as agents, appeared for the German government; IM Braguglia, acting as agent, assisted by G Fiengo, avvocato dello Stato, appeared for the Italian government; D Triantafyllou, acting as agent, appeared for the European Commission.Eileen O’Grady, barrister