Advocate General Opinions of the European Union Court of Justice

In Gmina Wroclaw (C-604/19), the Advocate General was asked to opine on whether a payment from a usufructuary of a piece of and to the owner of the legal title to the land which resulted in the usufructuary becoming the outright owner of the land, was subject to VAT. The municipality of Wroclaw was of the owner of some land subject to a third-party perpetual usufruct (a civil law concept, similar to the common law concept of a lease) requiring the payment of an annual fee by the usufructuary (akin to a lessee). As part of a reform of the law of property, the usufructuary was able, on payment of a ‘transformation fee’ to consolidate its rights into full property ownership so that it was able to sell the land as well as to use it.

The Advocate General opined that the transformation fee was consideration for a taxable supply. The Advocate General explored different analyses of the nature of the transaction but favoured an approach which found that the transformation fee was further consideration for the original supply of the land by the municipality.

The Advocate General did not think that the municipality was ‘acting as a public authority’ (which might have precluded the transaction from being subject to VAT); although the Polish law governing the transformation required the municipality to carry out an administrative procedure, the transformation fee was not fixed by the municipality under a special legal regime.

DLA Piper comment: In this case, the Advocate General's conclusion seems to be rightly based on the previous VAT assessment of the monthly fees and contains a valuable discussion of the ‘right of disposal’ concept for the purposes of the VAT Directive. The Advocate General applies an overall economic assessment. Contrary to the opinion of the plaintiff, the conversion of the usufructuary right into property is therefore relevant under VAT law, namely to be assessed as a continuation of an already existing supply. According to the Court’s case-law, a supply of goods covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were its owner. If the recipient of a supply cannot dispose of property ‘as owner’, this does not exclude a supply if he can at least deal with it ‘like an owner’. It is therefore immaterial to the concept of supply of goods whether ‘legal’ ownership is transferred. Accordingly, the ‘right of disposal’ for the purposes of the VAT Directive cannot be equated with ‘legal’ ownership. A supply of goods is not precluded in the absence of a transfer of ownership under civil law. The economic right of disposal was acquired by the current owners upon the transfer of the right of perpetual usufruct. The perpetual usufructuary is able to use the land as owner. The transfer of perpetual usufruct has thus been correctly regarded by all the parties as a taxable supply of goods, such that the annual fees are subject to VAT. Now, the payments still relate to the supply of the land. The previous perpetual usufructuary continues to pay a fee for the acquisition of the right of disposal over the land. The transformation transaction consists merely in a modification of the object of the supply. Originally the consideration was paid for perpetual usufruct alone, now it is for perpetual usufruct consolidated into ownership.

In WEG Tevesstrabe (C-449/19), the taxpayer was an association of property owners in Germany which managed a mixed-use property estate consisting of 20 rental apartments, a public authority department and a municipal building. The property owners themselves were a private company, a public authority and a municipality and therefore each a legal person. The taxpayer association constructed a combined heat and power unit on the estate from which it generated electricity, sold electricity to a power company and supplied heating services to the property owners. The German tax authority disallowed the taxpayer’s claim for an input tax deduction in respect of the costs of generating the heating on the basis that, under German law, the supply of heating by associations of property owners to property owners is exempt from VAT. The German court however referred to the Court of Justice the question of whether the Principal VAT Directive permitted German law to exempt such a supply.

The Advocate-General noted that it was clear that the heating services were supplied to the three legal owners and not to the residential tenants of the apartments. The Advocate General did not agree with an argument put forward by the German government and the Commission that the ‘identity of persons’ between the parties making up the association and the parties receiving the heating supply meant that there could be no economic activity; the heating was being supplied by one legal entity to three other legal entities and the overlap in economic interests was irrelevant. The Advocate General also rejected the argument that the supply of heating could somehow be subsumed within the exemption for the leasing of immovable property; the Advocate General stated that the former is simply a “completely different activity” which has “something to do with property but that is just about it.”

Remarking on the lack of factual detail provided in the case (for example what the owners paid for the heating and how the payment was calculated), the Advocate General went on to answer the question referred based on two different assumed scenarios.

Firstly, if it were the case that the association supplied the heating to the owners collectively by heating the common areas (in return for payment), the association would likely be carrying out its functions for the benefit of and in the common interest of the estate as whole. In the view of the Advocate General there would therefore, in those circumstances, be no supply since the benefit to each owner would be insufficient for there to be a direct link between the consideration given and service received.

Secondly, if it were the case that the association supplied heating to the individual areas of the estate owned by each owner, in return for payment, there would be a commensurate ‘benefit’ to the individual owner and hence a supply would exist for VAT purposes. Germany would be precluded from exempting such a supply given that the VAT Directive does not envisage its exemption.

It was therefore up to the referring court to assess the details of the arrangement between the association and its owners.

DLA Piper comment: The Advocate General Opinion on the current case leads to a complex calculation regarding the amount of the input tax return. Taxpayers having a comparable structure to the current case should revisit their calculation details.

As each legal entity is legally autonomous, the Advocate General has pointed out correctly that it is irrelevant who the persons behind the association of property owners are and whether those are the same persons receiving the heating supply. Therefore no identity of the persons and no self-supply could be assumed. Further, the supply of heating and the leasing of immovable property are different supplies/services and cannot be summarised into one supply/service.

However, the differentiation between the heating supply in regard to the collective and the individual areas seems to be very strict and should only apply in cases were the property owners are not legally obliged to cover the costs and charges of the supplier (here: associations of property owners). The Advocate General explains that he does not deem the existence of a legal obligation to pay one´s part of the overall expenses as determinative of whether ‘commensurability of benefit’ exists.

In general, under German law, there is usually a legal obligation of the property owners to pay their part of the total charges and costs incurred by the supplier. Therefore, in such cases no differentiation between supplies for the collective and the individual areas should be made.

Property owners who are not are not legally obliged to cover the costs and charges of their supplier, have to check their current calculation of input tax returns in light of this Advocate General´s Opinion.