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ABSTRACT
The difference between consideration and income is relevant for VAT purposes. A supply of goods or a provision of services is subject to VAT if it is carried out for consideration. An activity is economic when it is carried out for the purposes of obtaining income on a continuing basis. Supplying goods or services for consideration does not mean that such an activity is economic for VAT purposes and the person who carries it out is a taxable person. To this end, income has to be yielded from the activity. The Court of Justice of the European Union has recently addressed the issue of the difference between income and consideration in two similar cases. Starting from these cases, the article analyses the concepts of consideration, economic activity and taxable person, and their mutual relationships, with a view to explaining when carrying out transactions for consideration gives rise to an economic activity relevant for VAT purposes and, as a consequence, the person who runs the activity becomes a VAT taxable person.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1 Case C-520/14 Gemeente Borsele v Staatssecretaris van Financiën [2016] ECLI:EU:C:2016:334 and Case C-263/15 Lajvér Meliorációs Nonprofit Kft and Lajvér Csapadékvízrendezési Nonprofit Kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága [2016] ECLI:EU:C:2016:392.
2 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax [2006] OJ L347/1 (‘the VAT Directive’).
3 Relevant case law is considered through the following analysis.
4 Article 168(1) of the VAT Directive provides that the right of deduction can be exerted, ‘In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person’, i.e. the right of deduction of input VAT calls for an activity to be within the scope of VAT.
5 See Gemeente Borsele (n 1), Opinion of AG Kokott, para 11.
6 Gemeente Borsele (n 1), para 13.
7 Ibid.
8 Ibid, para 17.
9 See Lajvér Meliorációs and Lajvér Csapadékvízrendezési (n 1), para 11.
10 Ibid, para 14.
11 Lajvér Meliorációs and Lajvér Csapadékvízrendezési (n 1), para 16.
12 Ibid, para 19.
13 A right that ‘is intended to relieve the trader entirely of the burden of the VAT due or paid in the course of all his economic activities’ so that ‘all economic activities, whatever their purpose or results, provided that they are, in principle, themselves subject to VAT, are taxed in a neutral way’. CJEU Case C–277/14 PPUH Stehcemp sp. J. Florian Stefanek, Janina Stefanek, Jarosław Stefanek v Dyrektor Izby Skarbowej w Łodzi [2015] ECLI:EU:C:2015:719, para 27. See also case law cited therein.
14 Article 168 of the VAT Directive provides that, as a general rule, only a taxable person is entitled ‘to deduct … from the VAT which he is liable to pay [output VAT] the VAT due or paid to him in respect of supplies to him of goods or services carried out or to be carried out by another taxable person [input VAT]’.
15 Alan Schenk, Victor Thuronyi and Wei Cui, Value Added Tax: A Comparative Approach (Cambridge University Press, 2nd edn, 2015) 152 (emphasis added).
16 On the other hand, ‘Only taxable persons, who must apply for registration, can issue VAT invoices, which entitle buyers of taxable supplies to a credit for the tax shown on the invoice’. Sijbren Cnossen, ‘A VAT Primer for Lawyers, Economists, and Accountants’ (2009) 55 Tax Notes International 319, 326.
17 Ben JM Terra and Julie Kajus, A Guide to the European VAT Directives 2014 (IBFD 2014) para 9.2.1.
18 Lajvér Meliorációs and Lajvér Csapadékvízrendezési (n 1), para 33.
19 See Ben JM Terra and Peter J Wattel, European Tax Law (Kluwer Law International, 6th edn, 2012) 308.
20 Case C-186/89 W M van Tiem v Staatssecretaris van Financiën [1990] ECLI:EU:C:1990:429, para 18 (emphasis added).
21 In the case of Götz, the CJEU held that ‘“Economic activity” is defined in Article 4(2) of the Sixth Directive [Article 9(1) second subparagraph of the VAT Directive] as including all activities of producers, traders and persons supplying services, inter alia the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis’. This purpose has been ‘treated by the case-law as applying not only to the exploitation of property, but to all of the activities referred to in Article 4(2) of the Sixth Directive [Article 9(1) second subparagraph of the VAT Directive]. An activity is thus, generally, categorised as economic where it is … carried out in return for remuneration [i.e. consideration] which is received by the person carrying out the activity’. Case C-408/06 Landesanstalt für Landwirtschaft v Franz Götz [2007] ECLI:EU:C:2007:789, para 18 (emphasis added). The same principle has been reiterated in the case under analysis of Lajvér Meliorációs and Lajvér Csapadékvízrendezési, whose para 24 reads as follows: ‘under the second subparagraph of Article 9(1) of Directive 2006/112 [the VAT Directive] … the term “exploitation” refers to all transactions, whatever may be their legal form, by which it is sought to obtain income from the goods in question on a continuing basis’ (emphasis added).
22 Lajvér Meliorációs and Lajvér Csapadékvízrendezési (n 1), para 38. On these grounds, the CJEU dispelled any doubt of the referring court about the fact that the Companies’ investments being largely financed by national and EU funds may have had any bearing on whether the activity pursued by the Companies was to be regarded as an economic activity.
23 Case C-32/03 I/S Fini H v Skatteministeriet [2005] ECLI:EU:C:2005:128.
24 Ibid, para 19.
25 The other requisites set out in Article 9(1) for a person to be a taxable person – the independence of the person, and purpose and results of their activity – are not addressed in the present analysis since they came up in neither the cases at issue.
26 Gemeente Borsele (n 1), para 21.
27 That the term ‘consideration’ used in the VAT Directive is synonymous with ‘payment’ can be deduced by comparing the wording of Article 2(1)(c) of the VAT Directive with Article 2(a) of the Second VAT Directive – Second Council Directive 67/228/EEC of 11 April 1967 on the Harmonisation of Legislation of Member States Concerning Turnover Taxes. Structure and Procedures for Application of the Common System of Value Added Tax [1967] OJ 71/1303. Article 2(a) of the Second VAT Directive provides that it is subject to VAT, ‘The supply of goods and the provision of services within the territory of the country by a taxable person against payment’.
28 It is worth noting that this condition – ‘not for free’ – does occur in the cases at issue. Neither the Municipality nor the Companies provided services for free. See para 2 above.
29 Case C-16/93 R J Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994] ECLI:EU:C:1994:80 (emphasis added).
30 Ibid, para 14.
31 See Case 102/86 Apple and Pear Development Council [1988] ECLI:EU:C:1988:120.
32 Ibid, para 12.
33 The CJEU’s direct-link doctrine is not discussed in the present analysis. For a study of this topic, see, inter alia, Terra and Kajus para 8.4.4; Ad van Doesum and Gert-Jan van Norden, ‘The Right To Deduct under EU VAT’ (2011) 22 International VAT Monitor 323; Christian Amand, ‘When Is a Direct Link?’ (1996) 3 VAT Monitor.
34 Case C-520/10 Lebara Ltd v Commissioners for Her Majesty’s Revenue and Customs [2012] ECLI:EU:C:2012:264.
35 Ibid, para 31.
36 Ibid (emphasis added).
37 Ibid (emphasis added).
38 See below, para 3.3 et seq.
39 With reference to the EU VAT law, the fact that consideration is a necessary condition for a supply of goods or services to be subject to VAT can also be derived by converse inference from Articles 18(a) and 21 of the VAT Directive as to supply of goods, and Article 27 as to services. Under the specific circumstances laid down in these Articles, a self-supply of goods or services – i.e. a supply without consideration – is deemed subject to VAT in spite of its not being carried out for consideration. Therefore, it needs specific provisions to make a self-supply of goods or services subject to VAT. In absence of such provisions, these supplies would be outside the scope of VAT as carried out without consideration.
40 Schenk, Thuronyi and Cui (n 15) 104.
41 The need for a base of assessment for a transaction to be subject to VAT was stressed by the CJEU in the case of Hong-Kong Trade Development Council. The CJEU held that ‘Where a person’s activity consists exclusively in providing services for no direct consideration, there is no basis of assessment and the free services in question are therefore not subject to value added tax’. Case 89/81 Staatssecretaris van Financiën v Hong-Kong Trade Development Council [1982] ECLI:EU:C:1982:121, para 10.
42 See para 45.
43 Case C-412/03 Hotel Scandic Gåsabäck AB v Riksskatteverket [2005] ECLI:EU:C:2005:47 (emphasis added).
44 Ibid, para 22.
45 Lajvér Meliorációs and Lajvér Csapadékvízrendezési (n 1), para 45 (emphasis added).
46 Pursuant to Article 73 of the VAT Directive, ‘In respect of the supply of goods or services … the taxable amount [base of assessment] shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer’.
47 This conclusion tallies with the opinion of Terra and Kajus. According to the Authors, ‘Since also a low or even too low turnover is turnover … also (too) low consideration falls within the scope of VAT’. Terra and Kajus (n 17) 8.4.2.
48 Lajvér Meliorációs and Lajvér Csapadékvízrendezési (n 1), para 41.
49 School transport the Municipality, engineering works the Companies. See para 2 above.
50 Only one third of the beneficiaries of the services provided by the Municipality paid a fee and the Companies received just ‘modest fees’ for their services. See para 2 above.
51 See Hotel Scandic (n 43), para 22.
52 Gemeente Borsele (n 1) para 21.
53 Ibid.
54 See ibid.
55 Case C-246/08 Commission of the European Communities v Republic of Finland [2009] ECLI:EU:C:2009:671.
56 Gemeente Borsele (n 1), Opinion of AG Kokott, para 41.
57 Commission v Finland (n 55), para 50.
58 The CJEU did not clarify what the term fee meant nor the reason why a fee should not be charged with VAT. There is no apparent justification for a fee not to be taxed, as it seems deducible by converse inference from Article 13 of the VAT Directive. This Article provides that ‘States, regional and local government authorities and other bodies governed by public law shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with those activities or transactions’. If a fee were an amount falling outside the scope of VAT, there would be no reason for an ad hoc provision to exclude a fee from taxation. According to the Oxford English Dictionary, one of the possible definitions of a fee is ‘The sum which a public officer … is authorized to demand as payment for the execution of his official functions’. ‘Fee, n.2’ <http://www.oed.com/view/Entry/68943> accessed 3 December 2016 (emphasis added). Generally, such a sum has no link with the cost of the services provided and does not reflect their market value, so that the sum cannot be seen as consideration paid against a provision of services. As far as this analysis is concerned, it is assumed that, since the case of Commission v Finland dealt with services provided by public legal aid offices, the CJEU used the term fee with the aforesaid meaning.
59 See Apple and Pear (n 31), para 12.
60 Commission v Finland (n 55), para 51.
61 The CJEU has devolved to the referring court the task of assessing whether the remuneration received by the Companies ‘does not only partly remunerate the services supplied’. See Meliorációs and Lajvér Csapadékvízrendezési (n 1), para 49.
62 See para 2 above.
63 See para 3.3.2 above.
64 Gemeente Borsele (n 1), para 28 (emphasis added).
65 See, to that effect, Gemeente Borsele (n 1), Opinion of AG Kokott, para 44.
66 Reference to the relationship between income and profit is made in the case of Meliorációs and Lajvér Csapadékvízrendezési. The Companies maintained rightly in their act of appeal before the Hungarian Supreme Court that ‘There is no requirement for an activity to be profit-making in order for it to be regarded as an “economic activity”’. See para 2 above.
67 Case C-219/12 Finanzamt Freistadt Rohrbach Urfahr v Unabhängiger Finanzsenat Außenstelle Linz [2013] ECLI:EU:C:2013:413, para 25.
68 Gemeente Borsele (n 1), Opinion of AG Kokott, para 60.
69 According to Terra and Kajus, that ‘An economic activity [for VAT purposes] … does not necessarily have to be a business activity designed to make a profit’ can also be deduced ‘by the fact that the [VAT] Directive describes non-profit-making organizations as taxable persons’. Terra and Kajus (n 17) 9.1.2.
70 Council Directive 67/228/EEC (n 27).
71 Case C-142/99 Floridienne SA and Berginvest SA v Belgian State [2000] ECLI:EU:C:2000:623.
72 Ibid, para 28 (emphasis added).
73 Terra and Kajus (n 17) 9.1.2. (emphasis added).
74 Floridienne and Berginvest were two holding companies that had received share dividends and interest on loans from their subsidiaries. The CJEU took the view that neither the receiving of dividends nor of interest could be considered an economic activity of the holding companies since such payments did not amount to the exploitation of tangible or intangible property for the purposes of obtaining income on a continuing basis.
75 That is, activities ‘of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions’.
76 Terra and Kajus (n 17) 9.1.2.
77 Gemeente Borsele (n 1), Opinion of AG Kokott, para 45 (emphasis added). The AG went on explaining that ‘there is no reason not to subject to VAT sales at below cost price which, in certain circumstances, are necessary and reasonable in business. Nor is pricing which is in some way based on the income or assets of a customer, such as, for example, the discounts which businesses offer for students or pensioners, eligible for exemption from VAT’.
78 On the assessment of VAT tax base.
79 Gemeente Borsele (n 1), Opinion of AG Kokott, para 46 (emphasis added).
80 The same principle applies to a supply of goods.
81 Gemeente Borsele (n 1), Opinion of AG Kokott, para 45 (emphasis added).
82 See para 3.3 above.
83 The advocated need for carrying out an activity for consideration in order for the status of a taxable person to be acquired is supported by the judgment in the case of Hong-Kong Trade Development Council (n 41). The CJEU neatly ruled that ‘a person who habitually provides services for traders, in all cases free of charge, cannot be regarded as a taxable person’ (emphasis added).
84 Case 268/83 DA Rompelman and EA Rompelman-Van Deelen v Minister van Financiën [1985] ECLI:EU:C:1985:74.
85 Ibid, para 23 (emphasis added).
86 Case C-110/94 Intercommunale voor zeewaterontzilting (INZO) v Belgian State [1996] ECLI:EU:C:1996:67.
87 Ibid, para 20.
88 On these grounds, the CJEU ruled that even mere preparatory acts were in themselves economic activities whether or not the projected economic activity would actually commence.
89 Fini (n 23).
90 Ibid, para 17 (emphasis added).
91 See Rompelman (n 84), para 24; INZO (n 86), para 17; Fini (n 23), para 17.
92 Gemeente Borsele (n 1), Opinion of AG Kokott, para 50 (italics in original).
93 Ibid (emphasis added).
94 See para 3.3 above.
95 Hotel Scandic (n 43), para 22.
96 Article 2(1) limits the scope of VAT to transactions for consideration carried out ‘within the territory of a Member State by a taxable person acting as such’.
97 See para 3.2 above.
98 See para 3.5.3 above.
99 Lajvér Meliorációs and Lajvér Csapadékvízrendezési (n 1), para 16.
100 See Case 50/87 Commission of the European Communities v French Republic [1988] ECLI:EU:C:1988:429, para 21.
101 Gemeente Borsele (n 1), Opinion of AG Kokott, para 66 (emphasis added).
102 Tax refunds due to the fact that input VAT exceeds output VAT.
103 Gemeente Borsele (n 1), Opinion of AG Kokott, para 66.
104 Ibid, para 45.
105 Lajvér Meliorációs and Lajvér Csapadékvízrendezési (n 1), para 14.
106 Ibid, para 49.
107 See para 3.3 above.
108 Tolsma (n 29), para 14.
109 As to the meaning of the word fee as far as the present analysis is concerned, see footnote 58.
110 Gemeente Borsele (n 1), para 33.
111 Commission v Finland (n 55).
112 Lajvér Meliorációs and Lajvér Csapadékvízrendezési (n 1), para 49.
113 Gemeente Borsele (n 1), para 28 (emphasis added).
114 Tolsma (n 29), para 14.