Director of the ‘Appeals and Tax and Social Insurance Practice’ Directorate of Sofia v. Iberdrola Inmobiliaria Real Estate Investments, C-132/16 (European Court of Justice (First Chamber))

The Municipality of Tsarevo (Bulgaria), acting as a developer, obtained a building permit in order to reconstruct a waste-water pumping station serving a holiday village. Iberdrola was a private investor that purchased land in that village in order to construct apartments for seasonal use. Iberdrola entered into a contract with the municipality for the reconstruction of the pumping station and subcontracted with a third party to perform that work. The Solfia Administrative Court found that Iberdrola was entitled to deduct input tax respecting the supply from the subcontractor on the basis that the related expenditure formed part of Iberdrola’s general costs of its services irrespective that the work carried out related to a property belonging to the municipality. After an appeal, the Administrative Supreme Court, Bulgaria referred to the Court of Justice the question which the latter (at para. 24) summarized as being in essence:

[W]hether Article 168(a) of Directive 2006/112 must be interpreted as meaning that a taxable person has the right to deduct input VAT in respect of a supply of services consisting of the construction or improvement of a property owned by a third party when that third party enjoys the results of those services free of charge and when those services are used both by the taxable person and by the third party in the context of their economic activity.

Article 168(a) provided:

In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay: … the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;

The Court stated (at paras 33-35):

It is clear … that, without the reconstruction of that pump station, it would have been impossible to connect the buildings …to that pump station, with the result that that reconstruction was essential for completing that project and that, consequently, in the absence of such reconstruction, Iberdrola would not have been able to carry out its economic activity.

Those circumstances are likely to demonstrate the existence of a direct and immediate link between the reconstruction service in respect of the pump station belonging to the municipality of Tsarevo and a taxed output transaction by Iberdrola since it appears that the service was supplied in order to allow the latter to carry out the construction project… .

The fact that the municipality of Tsarevo also benefits from that service cannot justify the right to deduct corresponding to that service being denied to Iberdrola if the existence of such a direct and immediate link is established … .

The Court concluded (at para 41):

… Article 168(a) … must be interpreted as meaning that a taxable person has the right to deduct input value added tax in respect of a supply of services consisting of the construction or improvement of a property owned by a third party when that third party enjoys the results of those services free of charge and when those services are used both by the taxable person and by the third party in the context of their economic activity, in so far as those services do not exceed that which is necessary to allow that taxable person to carry out the taxable output transactions and where their cost is included in the price of those transactions.

A developer (Iberdrola) contracted with a Bulgarian municipality to reconstruct, for free, a waste-water pumping station serving a holiday village at which it was building apartment buildings. At issue was whether Iberdrola was entitled to deduct the VAT borne by it on the pumping-station reconstruction work in accordance with a European VAT provision, which provided such a deduction for inputs to “goods and services [that] are used for the purposes of the taxed transactions of a taxable person.” In the context of answering a referral respecting this question, the First Chamber of the European Court of Justice stated:

It is clear … that, without the reconstruction of that pump station, it would have been impossible to connect the [apartment] buildings …to that pump station, with the result that that reconstruction was essential for completing that [apartment] project… .

Those circumstances are likely to demonstrate the existence of a direct and immediate link between the reconstruction service in respect of the pump station belonging to the municipality … and a taxed output transaction by Iberdrola since it appears that the service was supplied in order to allow the latter to carry out the construction project… .

The fact that the municipality of Tsarevo also benefits from that service cannot justify the right to deduct corresponding to that service being denied to Iberdrola if the existence of such a direct and immediate link is established … .