ECJ C-604/19 (Gmina Wrocław) – Judgment – VAT On Conversion Of ...

On February 25, 2021, the ECJ issued its decision on the case ECJ C-604/19 (Gmina Wrocław). This case deals with the VAT impact on conversion of perpetual usufruct into a right of ownership.

Our other posts about this case can be found HERE.

Articles EU VAT Directive

Articles 2(1)(a), 13, 14(2)(a) of Council Directive 2006/112/EC

Articles 2(1)(a) – Taxable transaction

1. The following transactions shall be subject to VAT: (a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;

Articles 13

1. 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. However, when they engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as nontaxable persons would lead to significant distortions of competition. In any event, bodies governed by public law shall be regarded as taxable persons in respect of the activities listed in Annex I, provided that those activities are not carried out on such a small scale as to be negligible. 2. Member States may regard activities, exempt under Articles 132, 135, 136 and 371, Articles 374 to 377, Article 378(2), Article 379(2) or Articles 380 to 390c, engaged in by bodies governed by public law as activities in which those bodies engage as public authorities.

Articles 14(2)(a)

Article 14 2. In addition to the transaction referred to in paragraph 1, each of the following shall be regarded as a supply of goods: (a) the transfer, by order made by or in the name of a public authority or in pursuance of the law, of the ownership of property against payment of compensation;

Facts

The Polish municipality of Wrocław owned real estate with perpetual usufruct. Under Polish VAT law, the establishment of perpetual usufruct on lots constitutes a supply of goods, so VAT should have been charged on the annual fees paid by the usufructuary.

Pursuant to the Polish transposition law, the right of perpetual usufruct on built-up plots with residential use is converted into a right of full ownership on these plots as of January 1, 2019. Under the Conversion Law, holders of the perpetual usufruct rights who have become owners must pay a conversion fee to the government to which the parcel in question belonged. The Municipality of Wrocław stated that the fees paid by the new owners of the plots under that law are not subject to VAT.

According to the CJEU, the conversion under national legislation of the right of perpetual usufruct on real estate into a right of full ownership against payment of a fee is a supply of goods within the meaning of Article 14 paragraph 2 under a VAT Directive.

A municipality that owns real estate acts as a taxable person within the meaning of Article 9 (1) VAT Directive, and not as a government within the meaning of Article 13 (1) VAT Directive, when the right of perpetual usufruct on that real estate is national law is converted into a right of full ownership against payment of compensation to that municipality, enabling it to derive lasting profit from it, subject to the verifications to be carried out by the referring court.

Question

Does the transformation of the right of perpetual usufruct into immovable property ownership rights by operation of law, such as in the circumstances of the present case, constitute a supply of goods within the meaning of Article 14(2)(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax,  read in conjunction with Article 2(1)(a) thereof, which is subject to value added tax (‘VAT’)?

If the answer to Question 1 is in the negative, does the transformation of the right of perpetual usufruct into immovable property ownership rights by operation of law constitute a supply of goods within the meaning of Article 14(1) of Directive 2006/112, read in conjunction with Article 2(1)(a) thereof, which is subject to VAT?

Does a municipality that charges fees for the transformation of the right of perpetual usufruct into immovable property ownership rights by operation of law, such as in the circumstances of the present case, act as a taxable person within the meaning of Article 9(1) of Directive 2006/112, read in conjunction with Article 2(1)(a) thereof, or as a public authority within the meaning of Article 13 of that directive?

AG Opinion

AG KOKOTT delivered on 3 September 2020 her opinion about this case.

(1) The transformation of the right of perpetual usufruct into immovable property ownership rights by operation of law, such as in the case at issue, constitutes a supply of goods within the meaning of Article 14(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in conjunction with Article 2(1)(a) thereof, which is subject to value added tax (VAT).

(2) A municipality that charges fees for the transformation of the right of perpetual usufruct into immovable property ownership rights by operation of law, such as in the circumstances of the present case, acts as a taxable person within the meaning of Article 9(1) and not as a public authority within the meaning of Article 13 of Directive 2006/112.

Decision

1.      Article 14(2)(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the transformation of the right of perpetual usufruct into full immovable property ownership rights provided for by national legislation against payment of a fee constitutes a supply of goods within the meaning of that provision.

2.      Directive 2006/112 must be interpreted as meaning that, where the transformation of the right of perpetual usufruct into full immovable property ownership rights provided for by national legislation takes place against payment of a fee to the municipality which owns the property, enabling it to obtain income therefrom on a continuing basis, that municipality, subject to the verifications to be made by the referring court, acts as a taxable person within the meaning of Article 9(1) of that directive, and not as a public authority for the purposes of Article 13(1) of that directive.

Source

• Curia

Reference to the case in the EU Member States

• Poland – Minister of Finance issued a general interpretation regarding VAT on the transformation of the right of perpetual usufruct of land into the right of ownership

Newsletters

• BTW jurisprudentie in Dutch
• Francisco Javier Sánchez Gallardo
• prawo.pl
• Deloitte
• MDDP

ECJ (European Court of Justice) Supply of goods Taxable person Taxable transaction