European VAT: Is Sale of an Asset Used for Private Purposes Taxable Under VAT? - Pakistan
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General principles on ‘Taxability’, ‘Jurisdiction’, ‘Taxable person’, ‘Taxable event’, Taxable supply, Tax exemption, Adjustments, etc bear a common phraseology among different jurisdictions, hence understanding of the general principles elucidated by courts of different jurisdiction will extend us new grounds for understanding the complexities of issues arising between taxpayer and tax department.
For example I picked up a case from EEC jurisdiction. One Mr Armbrecht,1 a hotelier, owned a building comprising a guesthouse, a restaurant, and premises used as a private dwelling. In 1981, he sold the building and opted to pay VAT on his business supplies. However, he did not charge VAT with respect to the part of the building he used
1. Finanzamt Uelzen v Dieter Armbrecht, ECR 1995: 1-02275.
as a dwelling. In his tax return for the year 1981, Armbrecht claimed an exemption of tax to the extent of value related to that part of the property which was not used for business purpose, but used for private consumption. As a consequence of an audit, a Tax Officer rejected the claim of Armbrecht by treating the property as a single unit and raised the demand for VAT. The court of the first instance accepted the plea of the taxpayer and ordered that so much of the transaction as it relates to the private consumption was not taxable. The Tax Officer challenged the validity of said order by way of an appeal. The appellate court not sure about the impact of EU Directive on the subject stayed the proceedings and referred the matter to ECJ.2
Confronted with the issue, the European Court of Justice ruled that where a taxable person sells property, part of which he had chosen to reserve for his private use, he did not act with respect to the sale of that part as a taxable person. The apportionment between the part allocated to the taxable person’s business activities and the part retained for private use must be based on the proportions of private and business use in the year of acquisition and not on a geographical division. The taxable person has to throughout his period of (ownership of the property in question), demonstrate an intention to retain part of it among his private assets. The adjustment of the input tax deduction3 must be limited to the part of the property assigned to the business.
Next question in this regard arose in respect of tax adjustment. The court
2. See Article 177 of the EEC Treaty.
3. Under Article 20(2) of the Sixth Directive (Article 187 of the VAT Directive).
ruled, the adjustment of the input tax deduction4 is limited to the part of the property assigned to the business. The court considered the questions referred by the Bundesfinanzhof (Appellate Court). In fact the German court had asked for the ECJ’s opinion on the following issues:
1) Where an immovable property is disposed of, does the portion of the property used for business purposes constitute a separate item of supply for the purposes of Article 5(1) of the Directive?
2) Is an immovable property of which part of the rooms are used for private purposes and part for business purposes used wholly for the purposes of taxable transactions of the business under Article 17(2) of the Directive, or is it also possible for just the portion used for the purposes of the business to be assigned to the business?
3) Can the adjustment of the input-tax deduction under Article 20(2) of the Directive be limited to the portion of an immovable property used for business purposes?
Accordingly, the court considered the arguments of both the parties. The German government maintained that it had the right to legislate and charge VAT tax by treating the (sold) property as one unit. The court considered Article 2(1) of the sixth directive and observed, the provisions of said Article provide that a taxable person has to act “as such” or in other words sale transaction must be business oriented in order to attract levy of
4. Id.
tax. The court also interpreted Article 17(2)(a) of the sixth directive and stated that for seeking an adjustment of tax, the goods and services are to be meant for business purposes. The court further observed that adjustments are allowable to the extent the goods or services are meant for business purposes. The court further observed that tax will be chargeable on that part of sale which was in furtherance of business. The court observed that tax adjustment5 was admissible to that portion of sold product that was assigned to business, thus the input tax adjustment is permissible only to that extent. The most significant paragraph of the Judgment observed:-
“…There is no provision in the EC Directive which precludes a taxable person who wishes to retain part of an item of property amongst his private assets from excluding it from the VAT system…”
This interpretation of the court makes it possible for a taxable person to choose whether or not to integrate into his business, for the purposes of applying the directive with regard to part of an asset which is given over to his private use. The approach concurs with one of the basic principles of the EC Directive, namely that a taxable person must bear the burden of VAT only when it can be related to goods or services which he uses for private consumption and not for his taxable business activities. The availability of that option does not impede the application of another rule stated by the Court in Lennartz Case6, to the effect that capital goods used both for business and private purposes may nonetheless be treated as business goods
5. Id. n3.
6. Lennartz v Finanzamt Muenchen III (C-97/90) ECR I-3795 (1991).
and the VAT on such goods is, in principle, wholly deductible.
The ECJ Advocate General did point out, an apportionment between the part allocated to the taxable person’s business activities and the part retained for private use must be based on the proportions of private and business use in the year of acquisition and not on a geographical division. The taxable person therefore must (throughout his period of ownership of the property in question), demonstrate an intention to retain part of it amongst his private assets.
It is evident that where a taxable person chooses to exclude part of an item or property from his business assets, that part never forms part of those assets. The owner cannot, therefore, be regarded as using goods forming part of his business assets.7 Consequently, that part, which is not used for providing taxable business services or deliveries, does not fall within the scope of the VAT system.8
Hence the right to deduct input tax9 applies only to the part of the asset which is assigned to the business, and the adjustment of that deduction must be limited to that part of the asset.
The court settled the following issues:
1. Where a taxable person sells property part of which he had chosen to reserve for his private use, he does not act with respect to the sale of that part as a taxable person within the meaning of Article 2(1) of the Sixth Council Directive.
7. For the purposes of Articles 5(6) and 6(2)(a) of the EC Directive.
8. And must not be taken into account for the application of Article 17(2)(a) of the EC Directive.
9. Under Article 17(2) of the EC Directive.
2. Where a taxable person sells property part of which he had chosen at the time of acquisition not to assign to his business, only the part of the property assigned to his business is to be taken into account for the application of Article 17(2) of the said directive.
3. The adjustment of the input-tax deduction under Article 20(2) of the said directive must be limited to the part of the property assigned to the business.
AUTHOR: Zafar Iqbal
Copyright Azimuddin Law Associates
More information about Azimuddin Law Associates
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
1. Finanzamt Uelzen v Dieter Armbrecht, ECR 1995: 1-02275.
as a dwelling. In his tax return for the year 1981, Armbrecht claimed an exemption of tax to the extent of value related to that part of the property which was not used for business purpose, but used for private consumption. As a consequence of an audit, a Tax Officer rejected the claim of Armbrecht by treating the property as a single unit and raised the demand for VAT. The court of the first instance accepted the plea of the taxpayer and ordered that so much of the transaction as it relates to the private consumption was not taxable. The Tax Officer challenged the validity of said order by way of an appeal. The appellate court not sure about the impact of EU Directive on the subject stayed the proceedings and referred the matter to ECJ.2
Confronted with the issue, the European Court of Justice ruled that where a taxable person sells property, part of which he had chosen to reserve for his private use, he did not act with respect to the sale of that part as a taxable person. The apportionment between the part allocated to the taxable person’s business activities and the part retained for private use must be based on the proportions of private and business use in the year of acquisition and not on a geographical division. The taxable person has to throughout his period of (ownership of the property in question), demonstrate an intention to retain part of it among his private assets. The adjustment of the input tax deduction3 must be limited to the part of the property assigned to the business.
Next question in this regard arose in respect of tax adjustment. The court
2. See Article 177 of the EEC Treaty.
3. Under Article 20(2) of the Sixth Directive (Article 187 of the VAT Directive).
ruled, the adjustment of the input tax deduction4 is limited to the part of the property assigned to the business. The court considered the questions referred by the Bundesfinanzhof (Appellate Court). In fact the German court had asked for the ECJ’s opinion on the following issues:
1) Where an immovable property is disposed of, does the portion of the property used for business purposes constitute a separate item of supply for the purposes of Article 5(1) of the Directive?
2) Is an immovable property of which part of the rooms are used for private purposes and part for business purposes used wholly for the purposes of taxable transactions of the business under Article 17(2) of the Directive, or is it also possible for just the portion used for the purposes of the business to be assigned to the business?
3) Can the adjustment of the input-tax deduction under Article 20(2) of the Directive be limited to the portion of an immovable property used for business purposes?
Accordingly, the court considered the arguments of both the parties. The German government maintained that it had the right to legislate and charge VAT tax by treating the (sold) property as one unit. The court considered Article 2(1) of the sixth directive and observed, the provisions of said Article provide that a taxable person has to act “as such” or in other words sale transaction must be business oriented in order to attract levy of
4. Id.
tax. The court also interpreted Article 17(2)(a) of the sixth directive and stated that for seeking an adjustment of tax, the goods and services are to be meant for business purposes. The court further observed that adjustments are allowable to the extent the goods or services are meant for business purposes. The court further observed that tax will be chargeable on that part of sale which was in furtherance of business. The court observed that tax adjustment5 was admissible to that portion of sold product that was assigned to business, thus the input tax adjustment is permissible only to that extent. The most significant paragraph of the Judgment observed:-
“…There is no provision in the EC Directive which precludes a taxable person who wishes to retain part of an item of property amongst his private assets from excluding it from the VAT system…”
This interpretation of the court makes it possible for a taxable person to choose whether or not to integrate into his business, for the purposes of applying the directive with regard to part of an asset which is given over to his private use. The approach concurs with one of the basic principles of the EC Directive, namely that a taxable person must bear the burden of VAT only when it can be related to goods or services which he uses for private consumption and not for his taxable business activities. The availability of that option does not impede the application of another rule stated by the Court in Lennartz Case6, to the effect that capital goods used both for business and private purposes may nonetheless be treated as business goods
5. Id. n3.
6. Lennartz v Finanzamt Muenchen III (C-97/90) ECR I-3795 (1991).
and the VAT on such goods is, in principle, wholly deductible.
The ECJ Advocate General did point out, an apportionment between the part allocated to the taxable person’s business activities and the part retained for private use must be based on the proportions of private and business use in the year of acquisition and not on a geographical division. The taxable person therefore must (throughout his period of ownership of the property in question), demonstrate an intention to retain part of it amongst his private assets.
It is evident that where a taxable person chooses to exclude part of an item or property from his business assets, that part never forms part of those assets. The owner cannot, therefore, be regarded as using goods forming part of his business assets.7 Consequently, that part, which is not used for providing taxable business services or deliveries, does not fall within the scope of the VAT system.8
Hence the right to deduct input tax9 applies only to the part of the asset which is assigned to the business, and the adjustment of that deduction must be limited to that part of the asset.
The court settled the following issues:
1. Where a taxable person sells property part of which he had chosen to reserve for his private use, he does not act with respect to the sale of that part as a taxable person within the meaning of Article 2(1) of the Sixth Council Directive.
7. For the purposes of Articles 5(6) and 6(2)(a) of the EC Directive.
8. And must not be taken into account for the application of Article 17(2)(a) of the EC Directive.
9. Under Article 17(2) of the EC Directive.
2. Where a taxable person sells property part of which he had chosen at the time of acquisition not to assign to his business, only the part of the property assigned to his business is to be taken into account for the application of Article 17(2) of the said directive.
3. The adjustment of the input-tax deduction under Article 20(2) of the said directive must be limited to the part of the property assigned to the business.
AUTHOR: Zafar Iqbal
Copyright Azimuddin Law Associates
More information about Azimuddin Law Associates
View all articles published by Azimuddin Law Associates
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
