Judgment of 16 February 2012, E.ON Asset Management, C-118/11

Atanas Mihaylov[1]

 

Typically, Bulgarian developers that intend to construct a building (e.g. mall, commercial centre, administrative building, etc.) design and construct the technical infrastructure (e.g. road infrastructure, sewage, etc.) on municipality/state-owned land at their own risk and cost. As the resulting infrastructure becomes property of the respective municipality or the State, it is clear that the developers provide, in fact, a service free of charge to the municipality/the State. In such cases, the following question arises: are such developers entitled to deduce the VAT paid in relation to the expenses incurred for such transactions.

Trying to solve the problem, Bulgarian courts referred a preliminary question to the ECJ on the compatibility with EU legislation of the provision of the Bulgarian VAT act which denies the right to VAT deduction for such free of charge transactions. In its judgement in case C-118/11, the ECJ ruled that such a provision is compatible with EU legislation, provided that goods categorized as capital goods are not allocated to the assets of the undertaking.

Further, the article analyzes the relevant case law of the ECJ in respect to the inclusion of capital goods in the assets of the undertaking. It is clear that the ECJ distinguishes between (i) assets which are included in the business of the tax payer and thus are part of the VAT system (and subject to input VAT recovery), and (ii) assets which are held by the tax payer for private use and which are left outside the VAT system (and hence input VAT recovery is not allowed).

The article then examines the meaning of the phrase “allocated to the assets of the undertaking”. Reference is made to the International Accounting Standards which specify how assets are recognized in the books of the tax payer: in order for an asset to be recognized (i) it should be probable that future benefits will arise for the tax payer from the asset (i.e. the asset should be related to the business of the tax payer) and (ii) the cost of the asset should be reliably measured. Therefore, a conclusion may be drawn that if an asset is recognised as such in the books of the tax payer, then the asset should be considered to be included in the business of the taxpayer as this is a pre-condition for such recognition.

It is submitted that that the cost for construction of the technical infrastructure in favour of the municipality/the State is actually a cost related to the construction of the building and under the International Accounting Standards it should be reported as a part of the cost of the building. As such its VAT treatment should follow the status of the building, i.e. if the building is considered as part of the business of the tax payer, the input VAT on this expense should be recovered exactly as the input VAT on all other expenses (e.g. design, construction, etc.); to the contrary, if the building is held for personal use, the input VAT recovery should not be allowed.

The recent case law of the Bulgarian tax authorities and the Bulgarian Supreme Administrative Court is also examined. It is argued that the Supreme Administrative Court does not look at the construction of the infrastructure as part of the acquisition costs of the building, but as a separate transaction. Further, it is pointed out that the Supreme Administrative Court recognizes that the construction of the infrastructure will be used for the business of the tax payer but does not allow input VAT recovery on the costs because the court focuses on the free of charge character of the transaction. It is submitted that this is not compatible with the case law of the ECJ and that it may lead to a double payment of VAT by the tax payer.

It is also submitted that it follows from the judgment in case C-118/11 that one should first look into the question of whether the asset in relation to which the costs for the construction of infrastructure free of charge are incurred, is part of the business of the tax payer or not. If they are part of her or his business, any restriction to the right to deduct the input VAT of such costs would be contrary to EU law.

 

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Линк към цялата статия на български език: БЕЗВЪЗМЕЗДНО ИЗГРАЖДАНЕ НА ЕЛЕМЕНТИ НА ТЕХНИЧЕСКАТА  ИНФРАСТРУКТУРА В ОБЩИНСКИ ИЛИ ДЪРЖАВНИ ИМОТИ В СВЕТЛИНАТА НА ПРАВОТО НА ЕС

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[1] Lawyer at Wolf Theiss.