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News - tax case EC v Kingdom of Spain; EC v French Republic

18 October 2005
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Incompatible

Article 102 of the Spanish law on VAT provided that the proportion rule, under which a certain proportion of a taxable person's input tax is taxable, applied where a taxpayer in the course of his trade carried out non-taxable as well as taxable transactions, and also where any taxpayer received subsidies intended to fund his business.

Incompatible

Article 102 of the Spanish law on VAT provided that the proportion rule, under which a certain proportion of a taxable person's input tax is taxable, applied where a taxpayer in the course of his trade carried out non-taxable as well as taxable transactions, and also where any taxpayer received subsidies intended to fund his business. Article 104(2)(2) provided that where certain goods or services acquired for the purpose of taxable transactions were bought by the taxpayer with the help of a subsidy, the amount of VAT deductible in respect of that item had to be reduced by the same proportion that the subsidy bore the item's total price. The European Commission applied for a declaration that, as a result of these laws, Spain was failing to fulfil its obligations under EC law.
The European Court of Justice said that the Spanish law went beyond the restrictions in Articles 17(2), (5) and 19 of the Sixth Directive. Article 17(5) applied only to mixed taxable persons, but under the Spanish law's Article 102 the proportion rule applied to fully taxable persons. The restriction in Article 104(2)(2) was not provided for at all in the Sixth Directive.
Thus, the European Commission's declaration was made.
In a second case concerning France, an administrative instruction issued by the French authorities said in the case of assets financed by non-taxable equipment subsidies, VAT could only be deducted if a depreciation allowance for the assets was included in the taxpayer's output transaction. The European Commission said that in so doing, the French limited the deductibility of VAT on capital goods where they were financed by subsidies. Thus France was not fulfilling its obligations under EC law.
The European Court of Justice said that the right to deduct was integral to VAT. Article 11(A)(1)(a) of the Sixth Directive provided that subsidies directly linked to the price of goods or services were taxable in the same way as the goods or services. There was no provision for subsidies to be taken into account in the calculation of VAT.
The court granted the Commission's declaration.
EC v Kingdom of Spain (Case C-204/03); EC v French Republic (Case C-243/03), European Court of Justice, 6 October 2005

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