No input VAT deduction from the purchase of luxury vehicles – BFH judgements V R 26/21 and V R 27/21

The facts

Two VAT-taxable persons – one who traded in scrap metal and the other who took on responsibility for the management and liability of a limited partnership – purchased luxury vehicles and claimed an input VAT deduction for these.  The vehicles were parked covered in an enclosed hall and not registered. They served as an investment and were later to be sold at a profit, although the two entrepreneurs had not engaged in any recognisable sales activities so far.

After the tax office denied the input VAT deduction, the plaintiffs were initially successful in the tax court:  an enterprise is viewed as covering all the commercial activity, and if the status as a VAT-taxable person already exists for other reasons, the acquisition of the cars for the purpose of subsequent sale is also included.

BFH: The cars were only collector's items, so an input VAT deduction is denied

The BFH took a different view. As the input VAT deduction requires that the supply received must be "for the business" according to § 15 (1) sentence 1 no. 1 sentence 1 of the UStG, the input supply received must be used in the context of an economic activity. It is true that the business comprises the entire commercial or professional activity. However, the fact that the main activity (the scrap metal trade or the management/assumption of liability) was an economic activity did not mean for the BFH that this automatically also applied to the acquisition of the cars, even if the acquisition of the cars was to be regarded as an incidental transaction to the other economic activity.  The BFH therefore examined the acquisition of the cars separately to determine whether it served an economic activity.

According to ECJ case law, the mere acquisition and sale of an object do not constitute the use of the object to generate income on a sustained basis, as the only consideration from these transactions is any profit made on the sale of the object. Similarly, the mere exercise of the right of ownership by its holder could not be considered as such an economic activity. This was only different if someone took active steps to sell the car and used similar means as either a producer, trader or service provider. The mere intention to sell when acquiring the cars was therefore not sufficient to assume that this is an economic activity.  Rather, there must be circumstances that show that the taxpayer behaves like an entrepreneur. This was not the case here.

Overall, the plaintiffs' activity was therefore no different from the private acquisition of an asset by a collector with the intention that it will increase in value through the mere passage of time. The input VAT deduction was therefore inadmissible.

Practical implications

The cases decided here differ from the usual disputes in connection with luxury cars: Normally, these cars are driven for business purposes. That they hereby serve an economic activity is therefore beyond doubt.  The input VAT deduction can then fail due to inappropriateness, § 15 (1a) UStG. The fact that the cars in this particular case are not being driven is a unique situation. The relevance of the rulings for other situations lies in the fact that for all types of incedental transactions, it must be examined whether an economic activity actually exists.  The current paragraph 2.7 (2) UStAE (VAT Application Decree) should therefore be treated with caution: According to this, incedental transactions fall within the scope of the business, whereby this includes any activity that the main activity entails, whereby the sustainability is not important. According to the rulings discussed here, this no longer applies without restriction. Occasional activities must be a direct, permanent and necessary extension of the taxable main activity, also lead to acting as a VAT-taxable person, and differ from the actions of a private individual. All a company’s activities that are only occasional should be examined to ensure that they fulfil these criteria.

Dated: 10 February 2023