Allocation decision for mixed-use capital goods - ECJ ruling "E" and "Z" (C-45/20 und C-46/20)

In 2019, the German Federal Fiscal Court (Bundesfinanzhof, BFH) had referred two cases to the ECJ for a preliminary ruling concerning the exercise of the option to allocate an item to the business and thus to claim the input VAT deduction to that extent. Until now, German law required the allocation decision to be reported to the tax office before the normal deadline for submitting the VAT return. The BFH had doubts as to whether this conformed with EU law. The ECJ confirmed the basic admissibility of a time limit but left it to the BFH to decide whether the length of the specific time limit was commensurate.

The plaintiffs claimed input VAT for the first time on VAT returns that were submitted after the deadline.

The BFH has referred two similar cases to the ECJ: in one case, a private individual had a photovoltaic system installed. A portion of the electricity generated by this system was for his own use and the remainder was fed into the public electricity grid in return for remuneration, thereby making him a VAT taxable person. In the other case, an architect had a single-family house built whose construction plan included an office for the architect. Both plaintiffs had not claimed any input VAT in their preliminary VAT returns for the costs incurred for the construction of the photovoltaic system or the single-family house. They did not submit their annual VAT returns before the deadline applicable for the years in dispute (May 31 of the following year) and claimed the corresponding input VAT on these returns for the first time because they wanted to allocate the photovoltaic system (respectively the single-family house) in part to their business. The responsible tax offices and also the tax courts rejected the input VAT deduction in both cases because the plaintiffs should have notified the tax office of their decision to (partially) allocate the photovoltaic system or the single-family house to their business by the deadline (May 31 of the following year) at the latest. In doing so, they referenced the established BFH case law. The plaintiffs appealed to the BFH.

Previous BFH case law and doubts as to its conformity with EU law

The BFH assumes that the decision to allocate an item to the business must be made when the item is acquired or procured. As such a decision is viewed as an "internal fact" because the tax office cannot know what the taxpayer is thinking), the taxpayer must take tangible steps to make this intention evident. If there is no evidence that the item will be allocated to the business, this cannot be assumed. In this respect, claiming the input VAT deduction could be a strong indication of the allocation. For reasons of practicability, however, the BFH has so far assumed that documenting the allocation decision by claiming the input tax deduction had to be done within the statutory submission deadline for the VAT return.

The BFH's doubts about its previous case law are based primarily on the ECJ ruling in the Gmina Ryjewo case (C-140/17, July 25, 2018). In that case, the ECJ had considered it harmless that a municipality had not expressly stated its intention to use an acquired property for business purposes. Furthermore, the BFH has recognised a regulatory gap in EU law, as Article 168a (1) VAT Directive requires that the item be allocated to the business, but does not contain any regulation regarding exactly how, and by when, this allocation must be documented.

ECJ: Allocation decision does not have to be expressly stated

The ECJ first elaborated on the difference between material and formal requirements for deducting input VAT: if the material requirements are not met, there is no right to deduct input VAT; if formal requirements are not met, this does not automatically apply. If the taxable person wants to claim the input VAT deduction, they must "act as a taxable person" when acquiring or manufacturing the goods in question - translated into the language of German law, this means that they must allocate the goods to the business. That choice is therefore a material condition for deducting the input tax. In accordance with its decision in the Gmina Ryjewo case, the intention could also be made implicitly, i.e., without a clear and express statement. The fact that the architect's building plan showed an office and that, in the case concerning the photovoltaic system, a feed-in contract had been concluded for the resale of the electricity generated could be considered such evidence. However, this would have to be decided by the BFH. The mere fact that the plaintiffs have not yet claimed an input VAT deduction in the preliminary VAT returns does not, in any case, allow the conclusion that they have not allocated the items to their business.

Member States may set a time limit for the notification of the allocation decision

The ECJ clarifies that although making the allocation decision is a material requirement, notifying the tax office of this allocation decision is only a formal requirement for deducting the input VAT. According to settled ECJ case law, formal shortcomings may only lead to the loss of the input VAT deduction if it prevents conclusive proof that the material requirements have been met. For the ECJ, failing to meet the deadline does not indicate a lack of conclusive proof that the plaintiffs made an allocation decision when they acquired the items in question - however, the BFH would also have to examine this.

On the other hand, there clearly must be some type of deadline for exercising the right to deduct the input VAT as the principle of legal certainty demands such. Accordingly, a limitation period such as the one developed by the BFH is not fundamentally incompatible with EU law if it applies to everyone equally and does not make deducting the input VAT practically impossible - which the ECJ does not consider to be problematic here. However, the time limit must also be reasonable enough to provide legal certainty. This means that the time limit must be suitable for imposing sanctions on a negligent taxpayer while affecting the principle of neutrality as little as possible. The BFH will have to decide whether this is the case here.

Conclusion: Many questions left open

The ECJ has clarified that an allocation decision does not have to be expressly stated but can also result from the circumstances. However, it has not defined which circumstances these are and how they should be assessed. It will therefore always depend on the individual case, meaning that no clear guideline can be derived from the case law here.

Member States may, in principle, make the notification of the allocation decision dependent on compliance with a time limit. However, the ECJ has not issued a judgement on whether the deadline of May 31 of the following year provides enough time for the allocation decision, thus leaving the German tax courts with considerable discretion. The fact that the case law links the allocation decision deadline to the statutory submission deadline for the VAT return, and that this time period is now considerably longer than in the reference cases (generally by the end of February of the second subsequent year), is also likely to play a role in the question of what is commensurate for current cases.

Due to the remaining uncertainties, taxpayers should, wherever possible, document their allocation decision and bring it to the attention of the tax office at the latest with the VAT return submitted before the deadline. In cases where this has not been done and the tax office has objected, the ECJ case law discussed here can be used as an argument as it provides more opportunity to draw attention to the facts of the specific individual case.