The Federal Court of Justice (Germany) asked the CJEU about the interpretation of Article 56(1)(a) of the VAT Directive with respect to greenhouse gas emission allowances. Article 56(1) prescribes the place of supply of “transfers and assignments of copyrights, patents, licences, trademarks and similar rights”. The question asked was whether a greenhouse gas emission allowance is a similar right within the meaning of Article 56(1)(a)?
The context of the preliminary reference were criminal proceedings brought in Germany against A and B for being accessories to a scheme that aimed at evading VAT in greenhouse gas emission allowance trading.
The referring court considered that the interpretation of similar right is not so obvious that there is reasonable doubt about it. It viewed allowances are ‘similar’ within the meaning of the provision i.e. corresponding in certain characteristics or comparable to the thing specified, in so far as the rights mentioned in Article 56(1)(a) are characterised by the fact that the holder is granted an absolute right by the legislature such that he has the exclusive authority to use and exploit it, and to exclude others from doing so. In this sense, the referring court noted that emission allowances are comparable to intellectual property rights.
It is pertinent to note that the CJEU has not yet been required to interpret the term similar right.
1. Legal nature of greenhouse gas emission allowances
- It is a controversial issue and Directive 2003/87 does not offer any indications as to the legal nature of such allowances.
- AG Wathelet states that greenhouse gas emission allowances must be considered as intangible personal property to which a regulated property right is attached.
- In his opinion, this property right has the following characteristics:
- it is a right which can be assessed in monetary terms – the price of transferable allowances may fluctuate in line with market supply and demand;
- the ‘usus’ – it is a right which may be used as it enables the holder to carry on an industrial activity;
- the ‘abusus’ – it is a right which can be contractually transferred to another holder. It is also a right that must be recorded in a public register; and
- it is a right limited in time – all allowances will disappear either by offsetting with real emissions or by a request for destruction made by its holder.
2. Comparability of emission allowances with IP rights
- Both are protected rights which are the subject of a document establishing title which the holder can transfer to third parties;
- Both are characterised by the fact that the holder is granted an absolute right by the legislature such that he has the exclusive authority to use and exploit it and to exclude others from doing so, even though the intellectual property right has all the characteristics of a property right (i.e. usus, fructus and abusus) whereas the property right of emission allowances is not capable of producing civil fruits (i.e. fructus, by way of licence);
- both categories contain rights which can be assessed in monetary terms;
- Certain intellectual property rights, like emission allowances, must be recorded in a public register. The exclusivity of the right of exploitation stems from the clear allocation in the emissions trading register. Greenhouse gas emission allowances have a clear electronic identification and may be placed on the account of just one account holder. Consequently, only the account holder is able to dispose of the emission allowance, either by using it to comply with his surrender obligations or by selling it and transferring it to another account holder;
- Both categories of rights are subject to a time limit, even though the ‘life’ of the intellectual property right is longer;
- In both cases, the right holder is no longer authorised to use the right in question after transfer. Consequently, the transfer of greenhouse gas emission allowances benefits its holder economically and may be compared, for VAT purposes, to the transfer of patents, trademarks, licences or copyrights.
3. VAT Position – Article 56(1)(a) Analysis
- The transfer of greenhouse has emission allowances constitutes a supply of services. The transaction at issue is the assignment of intangible property.
- The transfer of emission allowances is to be taxed in the Member State where the recipient is established (country of destination).
- The argument put forward by A at the hearing that the rights mentioned as ‘similar rights’ should be liable to both transfers and assignments, which is not the case with emission allowances, as they can only be transferred, must be rejected. Article 56(1)(a) of the VAT Directive envisages two situations which are not cumulative. Furthermore, as was noted by the Federal Public Prosecutor General at the Federal Court of Justice, in Germany and Austria copyright cannot be transferred (as only a licence is possible).
- Similar does not mean identical.
- Article 56(1)(a) is illustrative and non-exhaustive. The EU legislature manifestly opted not to limit the rights mentioned in that provision only to industrial property rights or to intellectual property in general.
- The list is manifestly not homogenous, as it understands by ‘licences’ a group of various rights of exploitation which may be different from the intellectual property rights expressly mentioned.
- The fact that the rules applicable to greenhouse gas emission allowances are different from those applicable to the rights expressly mentioned in Article 56(1)(a) is immaterial.
- Trademarks and patents must be registered whilst copyright exists from the creation of the protected work. In addition, their respective terms are variable.
- The crucial element is not the comparability of the rights as such, but the comparability of their transfer or assignment. This is the common criterion allowing harmonised taxation of turnover; there can be a taxable supply of services under the Directive only if there is a transfer and in that case the place of supply must be determined.
- The important factor for tax treatment is the potential of these rights to create added value. This condition is met in this case as, through the transfer of allowances, patents or copyrights; the right holder exercises his right of disposal in return for a certain price.
The term ‘similar rights’ must be interpreted as also covering greenhouse gas emission allowances.