Tax alert no. 10 – CJEU: Court of Justice of the EU decisions in the field of VATT, regarding sale and lease back and VAT exempt exports
In this issue:
Court of Justice of the EU decisions in the field of VAT, regarding sale and lease back and VAT exempt exports
CJEU Case C-201/18 Mydibel SA
CJEU Case C-275/18 Milan Vins
ECJ case C-201/18 Mydibel SA
The case analyzed if Directive 2006/112/EC (VAT Directive) provides for the obligation that a taxable person adjusts the VAT deducted in connection with immovable property, when such assets have been the object of a transaction that was not subject to VAT involving the sale of immovable assets to financial institutions and immediate lease back, made with the view of increasing the cash flow of the taxable person (sale and lease back).
Obligation to adjust
The Court found that in the case at hand the taxable person continued using the immovable property for economic activities, meaning that the purchases made for construction, alteration or renovation of immovable property for which VAT was deducted continued to support his taxable operations. Therefore, there were no changes in the factors used to determine the level of the deduction that the taxable person is entitled to.
The transactions that involve sale and lease back of immovable property have a purely financial nature and form a single supply, that does not allow the financial institutions to dispose of the immovable property as owner.
As a conclusion, the Court ruled that the VAT Directive must be interpreted as not imposing an obligation to adjust VAT initially deducted in connection with immovable property in the case when it has been the object of a sale and lease back transaction that was not subject to VAT, in circumstances such as those analyzed by the Court.
ECJ case C-275/18 Milan Vins
During a two-years-period, a taxable person established in the European Union (EU) sold goods to clients established outside the EU and shipped them by post, without submitting VAT returns or placing the goods under a customs procedure, as he deemed those supplies exempt from VAT. The taxable person stated that he had available documents issued by the postal service that prove that the goods left the EU territory and that they have been in fact supplied to a third country.
The national court has addressed certain preliminary questions to the Court with the view of clarifying (i) if the right to benefit from VAT exemption in case of goods intended to be exported can be made conditional upon placing the respective goods under a specific customs procedure and (ii) if such national legislation could be justified as a condition for the purpose of preventing tax evasion, avoidance or abuse in VAT matters.
VAT exemption for supply of goods outside the EU
The Court ruled that national legislation that does not allow granting exemption from VAT on goods that have not been placed under an export customs procedure, although it is not disputed that the goods were in fact exported for the purposes of the VAT Directive (i.e the right to dispose of the goods as owner was transferred to the buyer, the supplier established that the goods were dispatched or transported outside the EU and consequently the goods left the territory of the EU) does not observe the principle of proportionality.
According to case-law of the Court, there are only two situations in which failure to meet a formal requirement may result in the loss of entitlement to an exemption from VAT, such as (i) if the taxable person has intentionally participated in tax evasion which has jeopardised the operation of the common system of VAT and (ii) if the effect of the breach makes it impossible to prove with conclusive evidence that the substantive requirements have been satisfied.
Failure to place goods intended for export under export customs procedure could often have the effect of preventing the tax authorities from verifying that the goods have in fact left the EU territory and, therefore, the reality of the export and observance of the substantive conditions must be established to the satisfaction of the competent tax authorities.
Nevertheless, the Court has concluded that the VAT Directive precludes the national provision analysed in the case a hand, in a situation in which it was established that the substantive conditions for the application of the exemption have been satisfied, in particular the one requiring that the goods concerned actually left the territory of the EU.
Implications and how we can help
Sale and lease back operations may become an important solution to improve cash flow under the current market conditions. Therefore, whenever the case, we recommend clients to review the transaction from a VAT perspective, to ensure effectiveness both from a business and VAT perspective.
Export operations and application of the VAT exemption is a major subject under high scrutiny of the tax authorities. Therefore, taxable persons must actively use the Court case law, with the view of successfully defending the VAT exemption for past and future exports.
EY Romania is in position to proactively support clients with such issues and defend the position taken in respect of past activities, should it be challenged by the tax authorities.
Nina Sava, Senior Tax Manager, Indirect Tax
For additional information, please contact:
Alex Milcev, Partner – Head of Tax&Legal
Ernst & Young SRL
Bucharest Tower Center Building,
22nd Floor, 15-17 Ion Mihalache Blvd.,
Sector 1, 011171, Bucharest, Romania
Tel: (40-21) 402 4000, Fax: (40-21) 310 7124