VAT and public bodies: Infringement proceedings against Ireland, Spain and Finland
European Commission - IP/06/1815 15/12/2006
Brussels, 15 December 2006
The European Commission has decided to refer Ireland to the European Court of Justice on its treatment of public bodies as non taxable persons for VAT purposes. In addition reasoned opinions have been addressed to Spain concerning its treatment of certain services supplied by "registradores de la propiedad" and to Finland as regards certain services provided by public legal aid offices. If these two Member States do not comply with the respective reasoned opinions, the Commission may decide to refer the matters to the European Court of Justice.
According to consistent case-law of the European Court of Justice, the scope of VAT is very wide as in principle any transaction carried out in the framework of an economic activity is subject to the tax. As regards transactions made by public bodies (the State, regional and local governments and others) they will be subject to VAT, unless certain conditions are met (namely, that the body in question be governed by public law and that it act in its capacity as a public authority). Even where these conditions are fulfilled, the Sixth VAT Directive calls for subjection to the tax of the transactions made by public bodies where a different VAT treatment would lead to significant distortions of competition.
Ireland: treatment of public bodies as non taxable persons for VAT purposes
While, according to the Sixth VAT Directive, public bodies should be treated as taxable persons in a number of cases (see above), under Irish VAT legislation public bodies are not deemed to be taxable persons even where the relevant criteria to this effect are fulfilled. Accordingly, when they engage in the supply of goods and services they neither charge VAT nor are they entitled to deduct the VAT incurred on their costs.
The Commission issued (see IP/06/1058) a Reasoned Opinion requesting that Ireland amend its legislation within two months of its receipt. Since Ireland has failed to do so, the Commission has decided that it will, in accordance with article 226 of the EC Treaty, refer the matter to the European Court of Justice.
The Court of Justice (see Case C-430/04) has recently confirmed that the relevant provisions on public bodies in the Directive have "direct effect"; i.e. taxable persons in competition with public bodies which are not being treated as taxable persons are entitled to rely on those provisions before the national tax authorities
Spain: services supplied by "registradores de la propiedad" consisting of the calculation and collection of certain taxes
The "registradores de la propiedad" are professionals chosen and entrusted by the Spanish State with the management of the immovable property registry. In that capacity they provide services to the public which are subject to VAT.
In addition to that, the "registradores de la propiedad" have been entrusted by the regional governments in Spain with certain tasks relating to the inheritance and property transfer taxes, basically their calculation and collection. In return for providing those services to the regional governments, the "registradores" receive a remuneration consisting of a percentage of the taxes collected. According to the current practice in Spain, these services are not subject to VAT.
The Commission, after having given the Spanish authorities the opportunity to submit their observations with a letter of formal notice, has taken the view that even in the context of this activity the "registrador" acts as an independent professional (and not as a public body) who organizes autonomously both human and material resources with the aim of providing the services requested by his client (the regional government). The consequence is that the aforementioned services are subject to VAT.
In this regard, the Commission recalls that the European Court of Justice has already ruled (Case 235/85), with regard to Dutch notaries, that services supplied by that category of professionals (who, like the "registradores", perform functions entrusted by the public authorities) are subject to VAT. Furthermore, the same Court decided that services supplied in Spain by "zonal tax collectors" to the local authorities were equally subject to VAT (Case C-202/90). This latter judgment is particularly relevant, since the collectors supplied services (the calculation and collection of local taxes, in return for a remuneration made of a percentage of the taxes collected) clearly similar to those at stake in the present proceedings.
The Commission has issued a reasoned opinion requesting that Spain amend its current practice within two months of its receipt.
Finland: services supplied by public legal aid offices in return for consideration
In Finland, depending on the applicant's financial situation, legal aid may be given totally free of charge or against a partial contribution to the costs. In addition, the legal aid system in force in that Member State provides that, as regards matters to be heard by a court of law, the recipient of legal aid may choose to be assisted by a private attorney or by an attorney working as an employee of a public legal aid office.
According to the current practice in Finland, legal aid provided by an attorney working for a public office in return for a partial contribution is not subject to VAT. However, when the recipient of legal aid has chosen to be assisted by a private attorney, the same services fall within the scope of the tax and are charged VAT.
The Sixth VAT Directive calls for subjection to the tax of services provided by public authorities where a doing otherwise would give rise to significant distortions of competition. The Commission, after having given the Finnish authorities the opportunity to submit their observations with a letter of formal notice, has understood that this different VAT treatment granted to essentially identical services has given rise to such distortions to the detriment of private attorneys. For that reason, it has issued a reasoned opinion requesting that Finland amend its current practice within two months of its receipt.
Commission cases' reference numbers are 2004/4084 (Ireland), 2004/2175
(Spain) and 2004/4282 (Finland).