Article 173 of Directive 2006/112/EC states that in case goods or services are used by a taxable person for both transactions for which VAT is deductible as well as for transactions for which VAT is not deductible, only the proportion of the VAT that is attributable to the transactions of which VAT is deductible shall be deductible ("pro rata"). The pro rata normally is calculated based on turnover; total turnover (exclusive of VAT) per year of transactions of which VAT is deductible divided by the total turnover (exclusive of VAT) per year of transactions for which VAT is deductible and transactions for which VAT is not deductible.
However Article 173 Paragraph 2, sub c of the Directive 2006/112/EC provides the possibility for EU member States to authorize or require taxable persons to make the deduction on the basis of the use made of all or part of the goods and services.
In the case at hand Wolfgang und Dr. Wilfried Rey Grundstücksgemeinschaft GbR (“WWRG”) was a German private real estate company concerned with the building of a real property with the intention to use this building for VAT exempt and VAT taxable activities ("mixed use"). WWRG calculated the right to deduct input VAT based on the aforementioned pro rata based on turnover. This was approved by the German Tax authorities. Due to a change in the VAT taxable activities of the building, WWRG applied for a VAT revision. However, the German VAT Act requires that the pro-rata method based on the turnover may only be applied in case no other method is possible. The German tax authorities denied the pro rata method calculated by WWRG for the VAT revision and insisted to calculate the pro rata based on the use of the square meters, since this would lead to a more precise result.
In determining this "use" the German tax authorities, applied a calculation method, which also raised questions. In short the German tax authorities first assessed for which parts of the building the VAT on the costs attributable to those parts could be (fully) deducted (VAT taxable use of those specific parts) or were not deductible (VAT exempt use of those specifics parts). The VAT on the costs which could not be attributed in such way, and thus related to mixed use, was deductible based on a pro rata determined on turnover.
First of all the Advocate-General is of the opinion that an EU Member State cannot give priority to another method of calculation of the right to deduct input in case of mixed use of goods and services, other than the pro rata method based on turnover. Furthermore the Advocate-General is of the opinion that the provisions in the German VAT Act are implemented in too general terms and do not refer to specific transactions or cases. In case an EU Member State not determined accurately the activities for which another method of calculation of the right of input VAT applies, this other method can not be enforced against the VAT taxable person.
With regard to the way of determining a pro rata based on the use instead of turnover, as set out above, the Advocate-General notes that this particular way of determining a pro rata should be allowed.
For now we have to wait on the final ruling of the ECJ. However, should the ECJ also touch base on the method for determining the pro rata based on the use of the building, as used in the underlying case, it will be most interesting to learn how the ECJ rules on this specific method, as it looks like this method could turn out to be beneficial in a number of situations in which buildings are used for VAT taxable as well as VAT exempt use.