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Brussels, 31 January 2008

VAT- Commission tackles Germany over taxation of withdrawals for private use of immovable property from business assets

The European Commission has decided to send Germany a formal request to change its law regarding the VAT taxation of withdrawals for private use of immovable property from business assets. The withdrawal of land or buildings from business assets is subject to VAT pursuant to German administrative instructions while the Commission opines that they should be VAT exempt. The Commission's request is in the form of a Reasoned Opinion, the second stage of the infringement procedure under Article 226 of the EC Treaty. If the relevant rules are not amended within two months in order to comply with the reasoned opinion, the Commission may decide to refer the matter to the European Court of Justice.

According to Article 135(1)(j) of the VAT Directive (2006/112/EC), any supplies of buildings made after their first occupation are exempt from VAT. The exemption in Article 135(1)(k) of that directive covers the supplies of land which has not been built on. Article 16 of the VAT Directive equates inter alia the withdrawal of an object by a taxable person from his business for private use with a supply for consideration, for VAT purposes.

Under the German administrative VAT guidelines, withdrawals of real estate are treated as supply of goods for consideration but cannot benefit from the VAT exemption applied on supply of buildings or lands..

The Commission is of the opinion that withdrawals of immovable property should be VAT exempt.

The Commission considers the German interpretation laid down in their administrative VAT guidelines to be inconsistent with Article 16 and 135 (1) (j) and (k) of the VAT Directive. It is of the opinion that the principles of the Court's judgment in the "Seeling" case cannot be applied to withdrawals of immovable property. According to the Commission, by that decision it was established that private use of immovable property forming part of business assets is not tax exempt as it does not involve letting and the relevant provision of the VAT Directive cannot be applied by analogy. Nor does the Commission consider that the mentioned judgment justifies taxation of the withdrawals in question. In the case of a withdrawal of immovable property during the adjustment period, the input tax deduction is corrected by adjusting the input tax, which intends to ensure neutrality of VAT. Furthermore, input tax deductions are neutralised by the tax charged on private use over the entire period of such use. Additionally, acquisition or construction costs can be spread over the relevant input tax adjustment period for the purpose of determining the VAT assessment base concerning the private use. Consequently, the Commission concludes that the exemption of supplies of buildings and land under the conditions laid down in Article 135(1)(j) and (k) of the VAT Directive also applies to withdrawals of immovable property forming part of business assets.

The German authorities argue that the taxation is justified by the interpretation of the judgment of 8 May 2003 of the European Court of Justice in the "Seeling" case (C-269/00). They advocate that if the principles of that ruling were applied mutatis mutandis, the transaction of immovable property could be exempt only if it involved a sale to a purchaser.

The Commission's case reference number is 2005/4909.

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