Judgment summary
This case concerns a request for a preliminary ruling from the Hof van Cassatie (Belgium) on the interpretation of Articles 14, 19, 24, 29 and 184 to 190 of Council Directive 2006/112/EC (the VAT Directive) and the principle of neutrality of VAT (1).
The dispute arose between A&P Deco NV and the Belgische Staat concerning whether the special scheme for the transfer of a totality of assets under Articles 19 and 29 of the VAT Directive applies to an immovable property let concomitantly with the transfer of a business, where that property is used by the transferee for the taxable activity taken over, and, if so, the effect of that scheme on the adjustment of VAT deductions under Articles 184 to 190 (2).
The Court held that the transferor of the business, who lets the immovable property to the transferee exempt from VAT, must adjust the VAT deduction it had applied to the acquisition, construction, renovation or improvement of that property, even though the transferee continues to use the property for the taxable activity taken over (62).
Background
A&P Deco NV, a taxable person for VAT purposes, carried on business as a garden centre in business premises it owned. It had those buildings constructed in 2004 and 2005 and carried out renovation and customisation works from 2008 to 2011, deducting the VAT charged on those transactions (23).
On 23 January 2013, under Article 11 of the VAT Code, A&P Deco transferred its business to WR Woestijnroos BV, also a taxable person for VAT purposes, as a transfer of a totality of assets. On the same day, A&P Deco let the buildings in which it had carried on the garden centre business to WR Woestijnroos, which continued that business there (24).
Following an inspection, the Belgian tax administration adjusted, pro rata temporis, the VAT initially deducted in respect of the works on the buildings, on the ground that the letting constituted an economic activity exempt from VAT under Article 44(3)(2) of the VAT Code and therefore did not give rise to a right to deduct VAT (25).
Four adjustment statements and four orders were drawn up and served, to which A&P Deco objected. The rechtbank van eerste aanleg Limburg, afdeling Hasselt dismissed A&P Deco's action as unfounded on 13 February 2020 (27), and the hof van beroep te Antwerpen dismissed the subsequent appeal on 21 September 2021 (28).
A&P Deco brought an appeal on a point of law before the Hof van Cassatie, arguing that the fiction under Articles 19 and 29 of the VAT Directive, whereby the transferee is treated as the successor to the transferor, transfers the obligation to adjust the initially deducted VAT to the transferee, so that no adjustment should be made by the transferor in respect of the parts of the premises let to and used by the transferee for the taxable activity taken over (29).
Core dispute
The core question was whether Articles 14, 19, 24, 29 and 184 to 190 of the VAT Directive and the principle of VAT neutrality preclude an adjustment, by the transferor of a business, of the VAT deduction applied to the acquisition, construction, renovation or improvement of business premises, where those premises are made available to the transferee by a commercial lease concluded at the same time as the transfer of the business, and continue to be used by the transferee for the taxable activity taken over (31, 32).
A&P Deco contended, in essence, that because the transferee is treated as successor to the transferor under Articles 19 and 29, the obligation to adjust the VAT deduction should also pass to the transferee, so that the transferor-landlord should not have to adjust the deduction relating to the leased premises (29).
Court findings
The Court recalled that the right to deduct VAT is a fundamental principle of the common system of VAT, intended to relieve the taxable person entirely of the burden of VAT due or paid in the course of economic activities, and that the adjustment mechanism under Articles 184 to 190 is intended to enhance the precision of deductions so as to ensure neutrality, establishing a close and direct relationship between the right to deduct and the use of goods for taxable output transactions (33, 34, 36).
Because A&P Deco let part of the immovable property, previously used for taxable output transactions, to the transferee, and that letting activity is exempt from VAT under the applicable Belgian legislation, the factors used to determine the right to deduct changed, so that a proportional adjustment of the initial deduction must be carried out (38). The Court distinguished this situation from Mydibel (C-201/18), where the owner retained use of the property for taxable output transactions notwithstanding a sale and lease back (39).
The Court further noted that requiring the tenant to adjust a deduction applied by the landlord would be tantamount to making the tenant pay a tax debt pertaining to a transaction in which it had no involvement (40).
Turning to the effect of Articles 19 and 29, the Court held that although a transfer of a totality of assets can include intangible elements such as a pre-existing letting right, such a right must exist prior to the transfer. Where the transferor, as owner, enters into a new commercial lease with the transferee upon the transfer, it creates a new right rather than transferring a pre-existing one, and such a right cannot be regarded as forming part of the transfer of a totality of assets (52, 53, 54).
Consequently, the transferor-landlord remains bound by the obligation to adjust, notwithstanding that the transferee carries on the taxable activity taken over in the context of the transfer of a totality of assets (55). The Court distinguished Faxworld (C-137/02) as concerning a very different factual context, namely a Vorgründungsgesellschaft with no intention of carrying out taxable transactions itself (56, 57).
The Court also found that this interpretation is supported by the principle of neutrality of VAT: continuing to grant the initial deduction where goods are now used for exempt transactions, such as letting, would undermine that principle, and the transferor-landlord, after the transfer and letting, is in a position comparable to that of a third party letting a commercial building to the transferee, who likewise cannot deduct input tax (60, 61).
Outcome
The Court ruled that Articles 14, 19, 24, 29 and 184 to 190 of Directive 2006/112/EC and the principle of neutrality of VAT must be interpreted as meaning that, where, in the event of the transfer of a business as a transfer of a totality of assets, the transferor lets the immovable property to the transferee exempt from VAT, and that property continues to be used by the transferee for the taxable activity taken over, an adjustment must be made, by the transferor, to the VAT deduction applied to the acquisition, construction, renovation or improvement of that immovable property (62, operative part).
The decision on costs was left to the referring court, as the proceedings before the Court constituted a step in the action pending before that court (63).
Major issues / areas of contention
- Whether the special scheme for a transfer of a totality of assets or part thereof under Articles 19 and 29 of the VAT Directive applies to a concomitant, separate letting contract of an immovable property linked to a business transfer.
- Whether the transferor of a business, who lets the business premises to the transferee exempt from VAT, must adjust the VAT deduction previously applied to the acquisition, construction, renovation or improvement of that property.
- Whether a letting right created by the transferor at the time of the transfer can be regarded as a pre-existing intangible element forming part of the transfer of a totality of assets.
- Whether the fiction that the transferee is treated as successor to the transferor under Articles 19 and 29 transfers the transferor's obligation to adjust VAT deductions to the transferee.
- Whether the principle of VAT neutrality is undermined by requiring the transferor-landlord to adjust the deduction while the transferee continues the taxable activity taken over.
- The applicability and limits of the earlier case-law in Mydibel (C-201/18) and Faxworld (C-137/02) to the facts at issue.