Different VAT taxation of elements of a single supply - application for preliminary ruling by the ECJ C-516/21

Leasing of real estate is VAT-exempt, leasing of permanently installed equipment and machineryis not

Pursuant to Section 4 No. 12 Sentence 1 German VAT Code, the leasing of real estate, among other things, is exempt from VAT. However, pursuant to sentence 2 of the provision, the VAT exemption does not apply to the leasing of permanently installed equipment and machinery. This is the case even if the equipment/machinery is an integral part of the immovable property. This corresponds with Article 135 (2) of the VAT Directive.

BFH case: Leasing of a turkey barn with permanently installed equipment and machinery

The plaintiff leased a stable building for turkey rearing together with certain permanently installed equipment and machinery, which constituted integral parts of the property, for a uniform fee. Pursuant to Section 4 No. 12 Sentence 1 German VAT Code, only the lease of the turkey barn itself would be VAT-exempt, whereas the lease of the equipment and machinery would be taxable. The uniform fee would have to be divided accordingly.

Leasing of the operating equipment and machinery was a dependent ancillary supply

In the opinion of the BFH, however, the requirements of a single supply were fulfilled at the same time: the permanently installed equipment and machinery were special equipment elements of the turkey barn; these elements merely served to allow the turkey barn to be used under optimum conditions in accordance with the agreement. Thus, the leasing of the permanently installed equipment and machinery was a dependent ancillary supply in relation to the leasing of the turkey barn. The latter is undoubtedly VAT-exempt as it constitutes a lease of real estate.

Precedence of the uniformity of supply or of the requirement to divide the fee?

The BFH has referred the question to the ECJ as to whether the leasing of permanently installed equipment and machinery is only subject to VAT if it is carried out in isolation, or also if it is an ancillary supply in relation to a lease of a building that is exempt from VAT. Accordingly, the ECJ must clarify whether the principle of the uniformity of the supply takes precedence over the requirement to divide the fee – or vice versa.

Inconsistent rulings of the ECJ

The BFH's referral is understandable in view of the contradictory rulings of the ECJ. In the cases Talacre Beach Caravan Sales Ltd. (6 July 2006, C-251/05) and Commission v. France (6 May 2010, C‑94/09), the ECJ had still ruled that elements of a single supply can be taxed differently. The XI Senate of the BFH referred to this in its decision of 24 April 2013 (XI R 3/11). The case concerned Section 4 No. 11 German VAT Code, according to which short-term accommodation, e.g. in hotels, is subject to the reduced VAT rate. This excludes services that do not directly serve the purpose of leasing – such as (according to the legislator's intention) breakfast. In view of the previous rulings of the ECJ, the BFH decided that this statutory requirement to divide the fee is in conformity with EU law and applies even if there is a dependent ancillary supply in relation to the leasing.

In contrast, the subsequent ECJ ruling in the case Stadion Amsterdam CV (18 January 2018, C-463/16) reads differently: the ECJ ruled here that in the case of two supply elements, where one is the principal and the other is the ancillary supply, the overall VAT rate is based on the principal supply. It is not permissible to apply two different VAT rates. The ECJ refers to its earlier decisions here, but argues that the facts and legal issues involved were different. At least with regard to the C-94/09 decision, this is confusing because that case, too, concerned the selective application of a reduced VAT rate.

Keep tax assessments open

Taxable persons who are subject to tax and who provide uniform supplies, the elements of which would be taxed differently on their own, should (continue to) keep the corresponding VAT assessments open if a different VAT treatment than the previous one would be more favourable for them. This applies in particular to entrepreneurs who wish to lease land with permanently installed equipment and machinery without paying VAT overall. The hospitality industry could also benefit if the reduced VAT rate could also be applied to ancillary supplies in relation to the leasing of rooms. However, it will be important here that the strict requirements of a dependent ancillary supply are met.