Value added tax – Deduction – European law – Appellant acquiring land and buildings intending to demolish buildings and develop the site – Whether appellant entitled to deduct VAT relating to acquisition of buildings – Whether demolition of buildings entailing adjustment to initial deduction of VAT relating to acquisition of buildings – Preliminary ruling made – Preliminary ruling made
The appellant company acquired land and buildings in Romania. In accordance with the contract for sale, a demolition permit for the buildings was also transferred to the appellant. The appellant carried out demolition works and a planning certificate was issued with a view to obtaining a building permit to develop a residential complex on the land.
The appellant deducted the VAT relating to all the land and buildings purchased and drew up a VAT return showing a negative balance with an option for reimbursement. Following a tax audit, the tax authority (AFP) raised a tax assessment on the basis that the demolition of the buildings made it necessary to adjust the VAT relating to the demolished buildings which had been deducted. The appellant challenged the tax assessment, claiming that its intention had been to acquire the land solely for the purposes of developing a residential complex so that the purchase of the buildings on the land was unavoidable. Therefore the appellant did not adjust the VAT for the purchase of the buildings, which it had initially deducted, because their demolition had been part of its investment plan and the residential project was intended to be used to carry out taxed transactions.
The authority rejected that complaint on the ground that the appellant had unlawfully deducted the VAT relating to those buildings, since it had purchased them not for the purposes of carrying out taxed transactions, but only to demolish them. When the appellant appealed, the national Court of Appeal stayed the proceedings and referred to the European Court of Justice for a preliminary ruling on the interpretation of articles 167 and 168 (the right to deduct VAT) and article 185 (adjustment of initial deduction) of Council Directive 2006/112.
Held: The preliminary ruling was made.
(1) It was clear from the wording of article 168 that, to qualify for the right to deduct, the person concerned had to be a “taxable person” within the meaning of the 2006 VAT Directive and the goods and services supplied had to be used for the purposes of taxed transactions. Under article 9(1), a “taxable person” was defined by reference to “economic activity” which might include several consecutive transactions and preparatory acts, such as the acquisition of business assets. Therefore the purchase of immovable property had to be regarded as economic activity. Further, a person who incurred investment expenditure with the intention, confirmed by objective evidence, of engaging in economic activity within the meaning of article 9(1) had to be regarded as a taxable person. Acting in that capacity, he was entitled, in accordance with article 167 et seq, immediately to deduct the VAT payable or paid on the investment expenditure incurred for the purposes of the transactions which he intended to carry out and which gave rise to the right to deduct. Accordingly, it was the acquisition of goods by a taxable person acting as such that gave rise to the application of the VAT system and the deduction mechanism. The use to which the goods or services were intended to be put merely determined the extent of the initial deduction to which the taxable person was entitled under article 168 and the extent of any adjustments in the following periods.
(2) In this case, it was clear that the appellant’s purchase of the land and buildings constituted a preparatory act whose purpose, as demonstrated by the issue of the building permit, was the construction of a residential complex on the land in the course of the appellant’s property development activities. In making that purchase, the appellant had performed an economic activity as a taxable person, within the meaning of article 9(1). As soon as it had acquired the land and buildings, the appellant indicated its intention to demolish the buildings in order to develop a residential complex on the land. That intention was confirmed by the objective evidence of a demolition permit being transferred to the appellant which, before even submitting its VAT return, had carried out demolition works and obtained a planning certificate, with a view to obtaining a building permit for the new residential complex.
(3) The replacement of dilapidated structures with more modern buildings which were then used for taxable output transactions did not break the direct link between the input acquisition of the buildings and the economic activities carried out thereafter by the appellant. The acquisition of those buildings and their subsequent destruction with a view to building more modern new ones was a series of linked transactions for the purposes of subsequent taxable transactions in the same way as the acquisition of new buildings and their direct use.
(4) The rules relating to the adjustment of deductions were an essential element of the system established by the 2006 VAT Directive in that they sought to ensure the accuracy of deductions and the neutrality of the tax burden. Article 185(1) established the principle that such an adjustment was made in particular where, after the VAT return was made, some change occurred in the factors used to determine the amount to be deducted. However, in the present case, the demolition of the buildings did not constitute a change within the meaning of article 185(1) since that demolition was envisaged by the appellant upon acquisition of the buildings. Accordingly, the demolition of buildings, acquired together with the land on which they were constructed, with a view to developing a residential complex in place of those buildings did not result in an obligation to adjust the initial deduction of the VAT relating to their acquisition.
A Lefter, V Ra?doi and M Mitroi, avocat¸i, appeared for the appellant; RH Radu, R-I Munteanu and I Bara, acting as agents, appeared for the Romanian Government; C Soulay and L Bouyon, acting as agents, appeared for the EC Commission.
Eileen O’Grady, barrister