The European Court of Justice ruled that, under art. 19(2) of Council Directive 77/388 (‘the sixth directive’), the notion of ‘capital goods used by the taxable person for the purposes of his business’ did not include vehicles which a leasing undertaking purchased with a view to leasing them and subsequently selling them on termination of the respective leasing contracts, as the sale of such vehicles at the end of those contracts was an integral part of the usual business activities of that undertaking.

Facts

The taxpayers were two companies in the same group which arose out of the restructuring of that group following the demerger of Erhvervsfinans (‘E’). From 1995 to 1998, E had operated a business involving the financial leasing of cars, which was liable to VAT. In 1998, that business related to 4,500 vehicles. E also had a business involving the provision of financial services, which was VAT-exempt. It thus had to calculate a proportion to establish the amount to which the partial deductibility of VAT on its overall costs related.

For the purpose of that calculation, E considered the turnover from the sale of the vehicles upon termination of the respective lease contracts. It took the view that those vehicles were not ‘capital goods used by the taxable person for the purposes of his business’ within the meaning of art. 19(2) of the sixth directive. The Danish local tax authorities objected to that assessment on the basis that the vehicles did constitute such goods and that the turnover from the sale of those vehicles could therefore not be taken into consideration in the calculation of that proportion. The National Tax Tribunal upheld E's appeal against that decision.

The tax authorities appealed to the Regional Court which regarded the relevant vehicles as capital goods and reversed that decision. The taxpayers, which had in the meantime become the successors in law to E, appealed to the Supreme Court which stayed the proceedings and referred to the European Court of Justice (ECJ) for a preliminary ruling.

Issue

Whether the expression ‘capital goods used by the taxable person for the purposes of his business’ in art. 19(2) was to be interpreted as covering goods which a leasing undertaking purchased with a view to both leasing and resale upon termination of the respective leasing contracts.

Decision

The European Court of Justice (Fourth Chamber) (ruling accordingly) said that by adopting the provisions of art. 19(2) the Community legislature intended to exclude from the calculation of the deductible proportion the turnover attributable to a sale of goods where that sale was of an unusual nature in relation to the normal activities of the taxable person concerned and did not therefore require the use of goods or services for mixed use in a way that was proportionate to the turnover which it generated. The inclusion of that turnover in the calculation of the deductible proportion would distort the resultant figure in the sense that it would no longer reflect the division of use of goods or services for mixed use as between taxable and exempt activities respectively.

In those circumstances, the notion of ‘capital goods used by the taxable person for the purposes of his business’ within art. 19(2) could not include capital goods the sale of which was, for the taxable person concerned, in the nature of a normal business activity. For the party concerned, the purchase and subsequent sale of such goods meant that it had to use goods and services for mixed use on an everyday basis. Since that sale was part of the normal taxable activities of the taxable person, the turnover attributable to it must be taken into account in the calculation of the deductible proportion in order for that proportion to reflect as accurately as possible the division of use, in respect of those activities, of the goods and services put to mixed use. Otherwise there would be a failure to have regard to the objective of the neutrality of the common system of VAT.

Therefore, if the sale, on termination of the leasing contracts, of the vehicles covered by those contracts was in the nature of a normal activity for the taxable person concerned, who carried out that activity by way of business and as a matter of course, it would be contrary to that objective of neutrality if that taxable person were not actually relieved of the portion of VAT imposed on the overall costs incurred to effect that sale and thus to carry on its usual taxable business activity. It followed that the turnover attributable to such a sale could not be considered to relate to ‘capital goods used by the taxable person for the purposes of his business’ within the meaning of art. 19(2).

To exclude generally from the calculation of the deductible proportion goods which were used for the purposes of a business activity and were distinguishable by their durable nature and their value, such that the acquisition costs were not normally treated as current expenditure but were written off over several years, without taking account of the fact that the sale of those goods, at the end of the leasing contracts, was an integral part of the normal activity of the taxable person, would run directly counter to the objective of neutrality of the common system of VAT.

That was why the definition of the capital goods referred to in art. 19(2), which established the specific rules for the calculation of the deductible proportion, was not necessarily the same as that which was used in respect of the application of the general scheme of deduction established by Council Directive 67/228 (‘the second directive’) (Verbond van Nederlandse Ondernemingen v Inspecteur der Invoerrechten en Accijnzen (Case C-51/76) [1977] ECR 113 distinguished).

Furthermore, the rules for adjustments of deductions established in art. 20 of the sixth directive and the specific rule contained in the last sentence of art. 19(2), which provided for the inclusion, in the calculation of the proportion, of disposals of the capital goods referred to, in the context of those adjustment rules, in art. 20(5), had no bearing on the interpretation of the concept of capital goods excluded from the calculation pursuant to the first sentence of art. 19(2), as that concept had to be given an autonomous and uniform interpretation within the Community.

European Court of Justice (Fourth Chamber).
Judgment delivered 6 March 2008.