Option for Member States to retain rules excluding the right to deduct which were in existence when the Sixth VAT Directive entered into force

Both X Holding BV and Oracle brought cases to the Dutch National Courts in respect of the right to deduct VAT for certain categories of expenses.

X BV Holding

X Holding BV lodged an objection against the decision of the Inspector, that most of the cars it had purchased had not been used for the purpose of the company, and therefore X Holding BV wrongly claimed deduction for the input VAT paid. X BV Holding brought its case to the Supreme Court. The Court on hearing the appeal pointed out that Article 11(4) of the Second Directive allowed Member States to exclude certain goods and services from the deduction system, in particular those capable of being exclusively or partially used for the private needs of the taxable person or those of his staff. It was also noted that the restriction of the deduction provided for in Article 1(1)(c) of the VAT decree also applies to goods and services used ‘for other personal purposes of the staff and to payments of wages in kind’. As the system concerned all goods for private use, the Court considered that the restriction was inadequately defined and too broad. The Court stayed proceedings and referred the issue to the ECJ for a preliminary ruling.

Oracle

Oracle's claim to deduct VAT relating to expenses of cars, mobile phones, catering, entertainment, accommodation and business gifts was rejected by the Inspector. Oracle brought its case to the District Court which held that the Inspector had been wrong not to allow the deduction of input VAT in respect of the costs of mobile phones, the costs of real estate brokerage and the payment of a golfing event, as the restriction of the deduction had not been adequately defined. The other categories of non-deductible expenses were adequately defined and consequently the Inspector was right to refuse the deduction in respect of these items.

Both Oracle and the Inspector appealed the judgment of the District Court to the Regional Court of Appeal; Oracle maintained that the applicable provisions of the domestic legislation at issue, in excluding or restricting the right to deduct VAT on the supply of the goods and services were contrary to Article 11(4) of the Second Directive and to Article 6(2) of the Sixth Directive. The Inspector claimed that the refusal of deduction of VAT was based on a provision which had been introduced in the Netherlands before the entry into force of the Sixth Directive, in accordance with the option given to Member States by Article 17(6) of that directive, which is still applicable. The Regional Court of Appeal referred the issue to the ECJ for a preliminary ruling.

The question put to the ECJ for both cases was whether Article 11(4) of the Second Directive and Article 17(6) of the Sixth Directive authorises Member States to exclude certain goods and services listed in national legislation from the right to deduct input VAT, regard being had to the fact that legislation was applicable when the Sixth Directive entered into force.

Judgment

Under Article 17(6) of the Sixth Directive, Member States may retain their existing legislation in regard to exclusion from the right to deduct VAT until such time as the EU Legislature established a common system of exclusions. EU law does therefore not yet contain any provision listing the expenditure excluded from the right to deduct VAT. However, the ECJ held that this Article presupposed that the exclusions which Member States retained were lawful under the Second Directive, which predated the Sixth Directive. The option given to Member States by Article 17(6) of the Sixth Directive assumes that those Member States adequately define the goods or services excluded from the right to deduct.

In the X BV Holdings case, the particular category of transaction related to goods and services used to offer private transport and the provision of a vehicle to transport staff members. The characteristics of such transactions were considered to constitute an adequate description. In Oracle's case, all of the categories of expenses were considered consistent with the system of derogations by Article 17(6) of the Sixth Directive.

In each of the two cases Article 17(6) of the Sixth Directive was interpreted as not precluding national legislation, enacted before the Sixth Directive entered into force, under which a taxable person may deduct VAT paid on the acquisition of certain goods and services used partly for private purposes and partly for professional purposes not in full, but only in proportion to their use for professional purposes.

In Oracle's case, the ECJ held that where, after the entry into force of the Sixth Directive, a Member State amends the scope of existing exemptions from deduction so as to reduce that scope and thereby brings its legislation into line with the objective of the Sixth Directive, that legislation must be considered to be covered by the derogation in the second subparagraph of Article 17(6) of the Sixth Directive and is not in breach of Article 17(2).

The full text of this judgment is available at http://curia.europa.eu/jcms/jcms/j_6/