CJEU's Gemeente Woerden judgment (C-267/15)

VAT recovery does not depend on the use of the goods and services by the customer and it is not relevant that the value of the output transaction is a fraction of the value of the input transactions.

The Municipality of Woerden ordered the construction of two buildings intended for multipurpose use. It deducted almost all the input VAT charged in respect of the construction of the two buildings. Instead of leasing the buildings to the institutions providing special primary education, the Municipality of Woerden decided to sell them to a foundation. The two buildings, were sold for an amount of approximately 10 percent of the cost price. VAT was charged on the sale of the buildings to the foundation.

The foundation leased part of the buildings (free of charge) to the institutions. The other parts of the buildings were leased to other parties for a considerations. The leases for a consideration were (partly) VAT exempt.

In the case at hand the question arises whether the Municipality of Woerden which has had the buildings constructed and has sold the buildings for a price less than the cost of constructing, has the right to deduct all of the input VAT paid in respect of the construction of the buildings, or only that part of that VAT in proportion to the parts of the buildings that is used by the foundation for economic activities.

The ECJ stated that the right to deduct input VAT on goods and services exists in case the goods and services are used for the purposes of his own VAT taxable output transactions. In that regard, the VAT Directive does not subject the right to deduct input VAT to a condition related to the use of the goods and services by the person who receives those goods and services from the Municipality of Woerden, since that would imply that every transaction of a taxable person with a purchaser who does not carry out an economic activity, such as private individuals, would limit the taxable person’s right to deduct input VAT.

The Municipality of Woerden has the right to deduct all the input VAT, regardless of the use of the goods and services by the foundation and also regardless of the fact that that the value of the output transaction is a fraction of the value of the input transactions.

This case could also be of good use in discussions with the Dutch tax authorities on holding companies. The Dutch tax authorities may sometimes deny the right to deduct input VAT based on the fact that the value of the output transaction is a fraction of the value of the input transactions.