The Court of Justice of the European Union (CJEU) in Lajvér Meliorációs Nonprofit Kft.6 has concluded that a non-profit company that only engaged in commercial activities on an ancillary basis and whose investments had been financed by state aid, could be carrying on an economic activity for the purposes of Article 9 of the VAT Directive.
The applicants in the main proceedings were two “non-profit” companies (the Applicants) which had been established to construct and operate a water disposal system, a reservoir and a rainwater collection system (the Works), on land belonging to members of the Applicants. The Works were financed through state and EU funding and the Applicants subcontracted the construction and maintenance of the Works to another company, Recontír BPM (the Sub-contractor).
In order to maintain the Works, the Applicants agreed to charge their members a modest operating fee for a period of eight years (the Operating Fee). Subsequently, the Sub-contractor issued invoices to the Applicants including VAT for the work carried out and the Applicants sought to deduct this VAT from the amount charged to their members on the Operating Fee. The Hungarian tax authority denied the Applicants the right to deduct the VAT on the basis that they were not carrying out an economic activity and they did not carry out an activity that could be considered as a supply of services for consideration.
The Applicants brought an action disputing the refusal that was dismissed at first instance on the same grounds as those set out by the Hungarian tax authority. The Applicants appealed to the Supreme Court of Hungary. The Supreme Court stayed the main proceedings and referred the following questions to the CJEU for preliminary ruling (summarised for present purposes):
- are the Applicants able to carry out an economic activity where they only engage in commercial activities on an ancillary basis? (Issue 1)
- is the fact that the Applicants receive a significant share of their funding from State aid and that, in the context of the management of their operation, they only obtain income from charging modest fees, relevant for the purposes of carrying out an economic activity? (Issue 2)
- if the answer to Issue 2 is in the negative, must it be considered that the Operating Fee represents consideration for a service and that there is a direct link between the supply of the service and the payment of the consideration? (Issue 3)
- does the fact the management of the Works by the Applicants is performance of a legal obligation prevent it from being regarded as a supply of services for consideration? (Issue 4).
The CJEU confirmed that the Applicants were carrying out an economic activity. It made clear that economic activity is defined as including “all activities of a person supplying services for the purpose of obtaining income from it on a continuing basis”. This definition was satisfied as the Applicants provided the service of operating the Works and this gave rise to remuneration in the form of the Operating Fee. The Operating Fee was obtained on a continuing basis as it was charged over a number of years.
The CJEU concluded that the fact that the Works were largely financed by aids granted by the Member State and the EU could not have a bearing on whether or not the activity pursued by the Applicants is an economic activity. This is because the concept of an economic activity is objective in nature and applies without regard to the purpose of the transaction or the method of financing chosen.
In the CJEU’s view, the Works could only be regarded as a supply of services for consideration if there was a direct link between the services supplied by the Applicants and the Operating Fee received in return. The CJEU said that it was for the referring court to assess, on the facts, whether there was a direct link between the services supplied by the Applicants and the Operating Fee.
In the CJEU’s view, the fact that part of the services provided by the Applicants constituted a legal obligation to maintain public highways has no bearing on the assessment as to whether the services were effected “for consideration”.
The CJEU concluded that:
- the operation of agricultural engineering works, such as those in issue, by a non-profit company which engages in such commercial activities only on an ancillary basis, constitutes an economic activity. This is notwithstanding the fact that those works have in large part been financed by State aid and that their operation gives rise only to revenue from modest fees, provided that that fee can be regarded as having a “continuing basis”
- the operation of agricultural engineering works, such as those in issue, constitutes a supply of services for consideration, on the ground that the services rendered are directly linked to the fee received.
The CJEU, in referring Issue 3 back to the referring court, made clear that if the Operating Fee charged by the Applicants only constitutes partial remuneration for the services supplied, it is likely that it will not be sufficient to establish a direct link between the services supplied and the consideration. This judgment makes clear that the amount of consideration received for a service may be a relevant issue when a court is determining if there is a direct link between the services received and consideration.
A copy of the decision can be found here.