On 27 March 2019, the Court of Justice of the European Union (ECJ) delivered the judgement between Mydibel S.A. and État Belge, concerning the adjustment of input VAT deduction.
SUMMARY OF THE FACTS
Mydibel’s economic activity is the production of potato-based products and is, on that basis, subject to VAT. It is the owner of several buildings in respect of which it has deducted in full the taxes charged on construction, alteration and renovation invoices. In order to increase its liquidity, Mydibel and two financial institutions entered into sale and lease back transactions, not subject to VAT, relating to those buildings, which were divided into two lots. For each lot, Mydibel and those financial institutions entered into two agreements. First, Mydibel entered into an agreement establishing an emphyteutic right over those buildings in favour of the two financial institutions, subject to immediate payment of emphyteutic rent and an annual emphyteutic rent. Second, it entered into a real property leasing agreement in respect of the buildings, under which the financial institutions granted Mydibel the use of the buildings at issue, in return for payment of a quarterly rent plus interest, with a purchase option on expiry of the lease.
Following a VAT inspection, the Belgian tax authorities disallowed the initial deduction of VAT on the buildings at issue made on the basis of the sale and lease back transactions and submitted the adjustment decision including the payment for errors in deduction of VAT, a proportional fine and default interest.
Mydibel brought an action for annulment of the adjustment decision before the Court of First Instance (the tribunal de première instance du Hainaut, Belgium), that declared the action admissible and partly well founded, and held that the fine and default interest were not due, dismissing the remainder of Mydibel’s application. Mydibel brought an appeal against that judgment before the Court of Appeal (the Cour d’appel de Mons, Belgium).
QUESTIONS REFERRED TO THE ECJ
(1) Must Articles 14, 15, 168, 184, 185, 187 and 188 of [the VAT Directive] be interpreted and applied as meaning that there is, or is not, to be a revision/adjustment of VAT on immovable property acquired as capital goods which was initially deducted correctly, where that immovable property acquired as capital goods was the subject of a sale and lease back transaction, given that:
- The sale and lease back is created by the combined and simultaneous grant of an emphyteutic right (being a temporary right in rem) by the taxable person to two financial institutions and of a lease by those two institutions to the taxable person;
- That sale and lease back is a purely financial transaction designed to increase the liquidity of the taxable person
- The sale and lease back transaction was not subject to VAT;
- The immovable property acquired as capital goods remained in the possession of the taxable person and was used for the taxable activity of the taxable person in an uninterrupted and permanent manner both before and after the transaction?
(2) Does an interpretation and application of the above-mentioned provisions leading to a revision/adjustment of the VAT initially deducted comply with the principle of neutrality of VAT and/or with the principle of equal treatment?
CONCLUSION BY THE ECJ
The Court upheld that the Articles 184, 185, 187 and 188 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2009/162/EU of 22 December 2009, must be interpreted as not imposing an obligation to adjust value added tax (VAT) on a building which was initially deducted correctly, where that property was the subject of a sale and lease back transaction not subject to VAT in circumstances such as those at issue in the main proceedings.
Additionally, the Court upheld that an interpretation of Articles 184, 185, 187 and 188 of Directive 2006/112, as amended by Directive 2009/162, as imposing an obligation to adjust the value added tax (VAT) initially deducted in circumstances such as those at issue in the main proceedings complies with the principles of VAT neutrality and equal treatment.
For more information on this case, please contact:
Franco Falzon C.P.A. LL.M
Olga Ivanova LL.M
T: +356 2010 7771
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