Is the letting of a building including operating equipment a single supply? (ECJ case C-516/21 Finanzamt X)
Brigitte Jakoby
by Brigitte Jakoby
In the case Finanzamt X, the plaintiff leased a building for turkey breeding with permanently installed equipment including special fixtures for feeding, an industrial conveyor spiral, heating and ventilation systems, and special lighting systems. The plaintiff argued that the letting was wholly exempt from VAT. On the other side, the German tax authority took the view that 20% of the remuneration was for leasing the machinery and equipment, and therefore subject to VAT.
The Federal Finance Court of Germany (BFH) would prefer to take the position that the provision of equipment and machinery is a supply ancillary to the provision of the building and should be exempt on the same basis as the rental of the building. But the BFH has been uncertain regarding this interpretation because of Article 135 (2) (c) of the VAT Directive. This article states that the rental of permanently installed equipment and machines is excluded from VAT exemption.
The following question arose for the BFH – must Article 135 (2) (c) of the VAT Directive be interpreted as not to be applied to the letting of permanently installed equipment and machinery where the letting constitutes a supply ancillary to a principal supply of the leasing of a building, carried out under a leasing agreement concluded between the same parties, and those supplies form a single economic supply?
The European Court of Justice (ECJ) decided the following:
Although, for VAT purposes, every transaction must normally be regarded as distinct and independent, a transaction which comprises a single supply from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system. There is a single supply where several elements or acts supplied by the taxable person to the customer are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split.
Article 135 (2) (c) of the VAT Directive must be interpreted as not applying to the letting of permanently installed equipment and machinery where that letting constitutes a supply ancillary to a principal supply of leasing a building, carried out under a leasing agreement concluded between the same parties and exempt under Article 135 (1) (l) of the VAT Directive, and those supplies form a single economic supply.
The consequence of the ECJ’s decision is that in cases of mixed letting one must examine whether there is a uniform and therefore entirely VAT-exempt letting, or whether there are separate individual supplies subject to VAT. However, any separation of the various elements of the supply should not be artificial. An ancillary supply is typically characterised by the fact that it does not represent a separate purpose for the customer. A review is advised for such complex cases, especially because the VAT exemption has as the consequence that there will be no input VAT deduction for the purchase of the operating equipment and machines.
In 1987, Brigitte Jakoby started collaborating with her husband Eugen Jakoby, also a German chartered accountant and German certified tax advisor. Since 1996, she has been a senior partner at Jakoby Dr. Baumhof. Contact Brigitte.
Jakoby Dr Baumhof – Wirtschaftsprüfer Steuerberater Rechtsanwälte is a medium-sized, interdisciplinary company located in the south of Germany, with offices in Rothenburg ob der Tauber, located in Northern Bavaria, and Ebersberg, near Munich.
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