On VAT And Public Entities (one More Dose Of Lack Of Neutrality ...

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In its judgment of today, 25-2-2021, C-604/19, Gmina Wrocław, the ECJ has returned to pronounce on the application of VAT by public entities.

It is described in the judgment that certain usufruct rights over land with a duration of 99 years, whose holders had to pay an annual fee to the owner public entities, were transformed into full ownership rights over said land. The new owners of the land had to pay a transformation fee over a period of 20 years, although it could be paid in one go.

The first issue analysed has been the nature of the operation, for which the CJEU has confirmed its condition of delivery of goods in accordance with art.14(2)(a) of the VAT Directive as transfer of full ownership over the land in question in exchange for an amount.

The subject to VAT of operations has been completed with the analysis of its reference to economic activity.

At this point, the ECJ has insisted on the continuity of income, recalling the consideration as an economic activity of any operation, regardless of its legal form, that has the purpose of obtaining continuous income over time (judgments of 6-10-2009, SPÖ Landesorganisation Kärnten, C‑267/08, or 2-6-2016, Lajvér, C‑263/15, in line with the most recent of 12-17-2020, WEG Tevesstraße, C-449/19).

This has been indicated even for the case that the payment of the canon was made in one go, taking into account that it corresponded to the remaining years until the expiration of the 20-year period.

Similarly, any type of relevance has been subtracted from the fact that the operations had their origin in a specific regulation or that an active management aimed at obtaining this income was lacking.

Regarding acting as a public authority and the possible non-taxation of operations in accordance with art.13 of the VAT Directive, specifically related to operations carried out by public bodies, the ECJ has recalled its conditions of application, the exception when competition is distorted and the need to make a strict interpretation of this exception. Nothing new.

According to settled jurisprudence, this non-subjection requires direct action by the public body and acting as a public authority.

Regarding this last point (the first one was undisputed), it has been insisted on the exercise of prerogatives of public power that allows proving that this activity is acting as a public authority (judgment of 29-10-2015, Saudaçor, C-174/14, among others).

Considering that in the disputed operations the Municipality of Wroclaw did not make use of prerogatives of public power, that it did not have decision-making powers with regard to the scope of application of this transformation and its modalities of application, that it did not determine the fee that the usufructuaries had to pay as a public authority, by virtue of its own public law regime and in the context of an administrative procedure, it has been concluded that the activities carried out could not be considered to imply the exercise of prerogatives of public power.

This last point is where breach in the principle of neutrality in the regime provided for public bodies activities in the VAT Directive arises:

- First, because the prerogatives of public law bodies having been defined in the legal systems of the EU Member States, differences between them result in differences in the VAT levy. These differences, in a tax that is supposed to be harmonized in which its defining concepts have been considered as EU law autonomous concepts, which must be alien to the normative action of the EU States, does not seem very coherent.

- Likewise, because the prohibition of the distortions of competition as a consequence of the non-subjection that we are commenting on, established by the art.13 of the VAT Directive, has been defined by the ECJ in a somehow confusing way, being relevant that the last outcome issued on the issue, judgment of 19-1-2017, National Roads Authority, C-344/15, exclude this distortion due to the impossible appearance of private competitors as a consequence of the circumstances of the national market that could be distorted. Without removing logic from the ECJ's conclusion, it is obvious that this makes possible that similar operations, carried out in different States, to receive different treatments due to the different configuration of the markets and the intervention in them by public bodies.

I am afraid that this is not the only area in which the application of VAT by public bodies leads to gaps in the principle of neutrality. Another good example is the outsourcing of activities to companies controlled by public bodies, in which the jurisprudence of the ECJ, depending on how it is interpreted and applied, can lead to business schemes that, if implemented by private entities, would most likely have to lead to the application of the relevant anti-abuse provisions.

Years ago, the European Commission announced a possible review of this issue. Unfortunately, it does not appear to be among its more short-term priorities, so presumably the EU Member States will have to tackle the issue.

Additional information about some of those topics can be found in the book "ECJ case-law on VAT", also available electronically, which will be shortly updated and whose link is attached:

https://www.efl.es/catalogo/manuales-juridicos/ecj-case-law-on-vat

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