VAT and Immovable Property Saviour Bezzina 16 October

Agenda 1.Definition 2.Transfer of Immovable Property 3.Letting of Immovable Property 4.Construction of Immovable Property 2

1. Definition

Definition – VATA/Civil Code Item 4 Part 5 Schedule 5 VATA: “4. (1) Saving the provisions of paragraph (2) of this item "immovable property" includes any asset that is immovable property by definition of the law.” Article 308 Civil Code: “The things following are immovable by their nature: (a) land and buildings; (b) springs of water; (c) conduits which serve for the conveyance of water in a tenement; (d) trees attached to the ground; 4

Definition – VATA/Civil Code Article 308 Civil Code: cont. (e) fruits of the earth or of trees, so long as they are not separated from the ground or plucked from the trees; (f)any movable thing annexed to a tenement permanently to remain incorporated therewith. Unless a different intention appears from the circumstances, such thing shall be deemed to be so annexed to a tenement if it is fastened thereto by any metal or cement, or if it is otherwise so affixed that it cannot be removed without being broken or damaged or without breaking or damaging the tenement.” 5

Definition – EUVD Article 13(b) CIR 282/2011 (as per CIR 1042/2013): “The following shall be regarded as “immovable property”: (a) any specific part of the earth, on or below its surface, over which title and possession can be created; (b) any building or construction fixed to or in the ground above or below sea level which cannot be easily dismantled or moved; (c) any item that has been installed and makes up an integral part of a building or construction without which the building or construction is incomplete, such as doors, windows, roofs, staircases and lifts; (d) any item, equipment or machine permanently installed in a building or construction which cannot be moved without destroying or altering the building or construction.’;” 6

Definition – EUVD Explanatory Notes – Draft as at 04/06/ What is covered by Article 13b(a)? A specific part of the earth Title and possession What is meant by buildings and constructions under Article 13b(b)? What is meant by fixed to or in the ground (above or below sea level) and which cannot be easily dismantled or moved ? What is covered by Article 13b(c)? Difference between Article 13b(c) and Article 13b(b) Difference between Article 13b(c) and Article 13b(d) What is covered by Article 13b(d)? What is meant by permanently installed under Article 13b(d)? How should it be assessed whether a building or construction is altered or destroyed? 7

2. Transfer of Immovable Property

Transfer of Immovable Property 1.Exemptions 2.Partial Attribution 3.Recent Changes 4.ECJ Cases 9

Transfer – Exemptions EWOC - Item 1.2 Part 2 Schedule 5 VATA: “(2) The transfer of immovable property.” Article 135 EUVD: “1. Member States shall exempt the following transactions:... (j) the supply of a building or parts thereof, and of the land on which it stands, other than the supply referred to in point (a) of Article 12(1);” 10

Transfer – Exemptions Article 12 EUVD: “(a) the supply, before first occupation, of a building or parts of a building and of the land on which the building stands; (b) the supply of building land.” 2. For the purposes of paragraph 1(a), ‘building’ shall mean any structure fixed to or in the ground. 3. For the purposes of paragraph 1(b), ‘building land’ shall mean any unimproved or improved land defined as such by the Member States.” 11

Transfer – Exemptions Article 387 EUVD: “For as long as the same exemptions are applied in any of the Member States which were members of the Community on 30 April 2004, Malta may, in accordance with the conditions applying in that MS on the date of its accession, continue to exempt the following transactions: “(b) without deductibility of the VAT paid at the preceding stage, the supply of buildings and building land, as referred to in point (9) of Annex X, Part B; Item 9 Annex X Part B EUVD “the supply before first occupation of a building, or parts thereof, or of the land on which it stands and the supply of building land, as referred to in Article 12; 12

Transfer – Partial Attribution Input VAT Non-Economic Activity Economic Activity Mixed Supplies Non Allowable Supplies (Non Art 22.4) Allowable Supplies (Art 22.4) Partial Attribution Cannot be claimed 100% Fully Claimable 0% Cannot be claimed 0% 13 Mixed Activity Partial Attribution

Transfer – Recent Changes - PA LN 231of amending Item 8 Schedule 10 VATA “8. Where it appears that the method of attributing input tax laid down in item 6 does not give a fair and reasonable result, the Commissioner may by notice in writing to a registered person direct that the said method shall not apply to the attribution of input tax to the supplies of that person and where such a direction has been given, that person shall adopt such other method of partial attribution as the Commissioner may, in the said notice, prescribe.” 14

Transfer – Recent Changes - EWOC Act 43 of amending Article 22.4 VATA “(a) taxable supplies; (b) exempt with credit supplies; (c) supplies which take place outside Malta which would, if made in Malta, be treated under the provisions of this Act as taxable supplies or as exempt with credit supplies or supplies taxed outside Malta which if made in Malta would have been treated as exempt without credit supplies” 15

Transfer – ECJ Cases C-183/14 Radu Florin Salomie, Nicolae Vasile Oltean - Mr Salomie, Mr Oltean and 5 others formed a partnership to construct & sell 4 apartment buildings in Romania. In 2008/9, out of the 132 apartments constructed on land belonging to the personal assets of one of those persons, 122 were sold, as were a number of car parking spaces. No VAT was charged on these sales. - The tax authorities argued that those transactions constituted an economic activity and sought payment of the VAT due (whilst refusing to refund the input VAT incurred on the basis they were not VAT registered at the time they incurred the expenses). - Salomie & Mr Oltean contended that the principle of legal certainty and legitimate expectations had been infringed given that at the time, neither the Sixth Directive nor the relevant CJEU case-law had been published in the Romanian language and relevant national legislation was not sufficiently clear 16

Transfer – ECJ Cases C-183/14 Radu Florin Salomie, Nicolae Vasile Oltean - The CJEU observed that national provisions were sufficiently clear and precise. As regards legitimate expectations, the CJEU added that given the (large) scale of the project, a prudent and well-informed trader should have at least sought, assurances re: VAT treatment from the national tax authorities. Accordingly, the CJEU held that the principles of legal certainty and legitimate expectations did not preclude the tax authorities from deciding that the transactions in question were subject to VAT. - Finally, the CJEU was asked whether the right to deduct input VAT, due in the context of taxed transactions can be refused to the taxable person, for the sole reason that he was not identified for VAT purposes when he carried out those transactions,. 17

Transfer – ECJ Cases C-183/14 Radu Florin Salomie, Nicolae Vasile Oltean - The court stated that “a taxable person for VAT purposes cannot be prevented from exercising his right of deduction on the ground that he was not identified as a taxable person) “... penalising the failure on the part of the taxable person to comply with the obligations relating to accounts and tax returns by a denial of the right to deduct clearly goes further than is necessary to attain the objective of ensuring the correct application of those obligations, “ - The CJEU concluded that: “Directive 2006/112 precludes, in circumstances such as those of the dispute in the main proceedings, national rules under which the right to deduct input VAT, due or paid on goods and services used in the context of taxed transactions, is refused to the taxable person, who must nevertheless pay the tax that he ought to have recovered, for the sole reason that he was not identified for VAT purposes when he carried out those transactions, so long as he has not been duly identified for VAT purposes and the tax return for the tax due has not been filed.” 18

Transfer – ECJ Cases C-331/14 Petar Kezić t/a Trgovina Prizma - Mr Kezić (a sole trader) purchased, in his private capacity, 7 plots of land. No VAT was incurred on these acquisitions. He obtained permission to build a shopping centre and proceeded with the construction as a sole trader. - Mr Kezić assigned 5 plots to his business and 2 plots to his private assets. He subsequently sold the shopping centre (+ land), only charging VAT on the part (land at issue) relating to business assets. - The tax authorities sought VAT on the sale of the other 2 plots of land. The CJEU held that, in view of the fact that the 7 plots of land acquired by Mr Kezić were, together, a necessary requirement for the construction of the shopping centre and he carried out construction work on the land at issue, the sale of that land formed part of his commercial economic activity. Accordingly, Mr Kezić acted as a taxable person for VAT purposes when selling the land at issue, and that transaction was subject to VAT. 19

3. Letting of Immovable Property

Letting of Immovable Property 1.Exemptions 2.Recent Clarifications 3.Budget 2016 – Environmental Contribution 4.CIR 1042 of ECJ Cases 21

Letting – Exemptions EWOC - Item 1 Part 2 Fifth Schedule VATA: “(1) The letting of immovable property excluding - (a) the letting of or the provision of accommodation in any premises.. required to be licensed in virtue of the MTTSA.. ; (b) the letting of premises & sites for parking vehicles..; (c) the letting of permanently installed equipment and machinery..; (d) the letting of property by a limited liability company to a person registered under article 10 for the purpose of the economic activity of that other person; “(e) the letting of immovable property for not more than thirty days by a taxable person in the course of an economic activity, except for....: 22

Letting – Recent Clarifications IIP Applicants - Item 1 Part 2 Schedule 5 VATA: Article 18 of the Malta Travel and Tourism Services Act states that “no person shall provide accommodation in a house to tourists unless he shall have previously obtained and is in possession of a licence.” Article 2 of the MTTA defines ‘tourist’ as “any person who travels to a place other than that of his usual environment for less than twelve months and who stays at lease one night in the place visited;” 23

Letting – Recent Clarifications IIP Applicants - Item 1 Part 2 Schedule 5 VATA: cont. Applicants for naturalisation as citizens of Malta under the IIP do not qualify to be treated as ‘tourists’ because the obligations imposed by the Subsidiary Legislation provide that, for IIP applicants, Malta becomes their usual environment.’ Hence VAT exemption applies in case of letting of immovable property to IIP applicants. 24

Budget Environmental Contribution Environmental Contribution With effect from 1 April 2016 an environmental contribution of €0.50 per night will be charged to every tourist over 18 years of age (capped at a maximum of €5 per tourist per trip). - Likely to be applicable also to Maltese tourists - Administration/Collection/Enforcement? 25

Letting – CIR 1042 of 2013 Letting connected with immovable property “h) the leasing or letting of immovable property other than that covered by point (c) of paragraph 3 (i.e. advertising services), including the storage of goods for which a specific part of the property is assigned for the exclusive use of the customer; (j) the assignment or transfer of rights other than those covered by points (h) and (i) to use the whole or parts of an immovable property, including the licence to use part of a property, such as the granting of fishing and hunting rights or access to lounges in airports, or the use of an infrastructure for which tolls are charged, such as a bridge or tunnel;” 26

Letting – CIR 1042 of 2013 Letting NOT connected with immovable property “(b) the storage of goods in an immovable property if no specific part of the immovable property is assigned for the exclusive use of the customer; (c) the provision of advertising, even if it involves the use of immovable property; (e) the provision of a stand location at a fair or exhibition site together with other related services” 27

Letting – ECJ Cases C55/14 – Stade Luc Varenne - Whether the grant of the right to use a football stadium constitutes an exempt letting of immovable property - The taxpayer purchased and operated a football stadium (deducting all input VAT incurred in the purchase). - It made the stadium, including the pitch and all related facilities (changing rooms, bar, etc.), available to a football club for a specified number of days per season (i.e. for the club’s home matches), and provided various services connected with the supervision, management, cleaning and maintenance (mowing, grass-sowing, etc.) of those facilities. 28

Letting – ECJ Cases C55/14 – Stade Luc Varenne - The taxpayer charged the football club a flat-rate fee per day for its use of the stadium, of which 20% related to the right of access to the football pitch and 80% related to the aforementioned various services. - Belgian tax authorities took the view that the supply by the taxpayer of the stadium’s facilities to the football club constituted an exempt letting of immovable property. On this basis, the tax authorities considered that the taxpayer was not entitled to recover all of the VAT incurred on the stadium’s purchase 29

Letting – ECJ Cases C55/14 – Stade Luc Varenne CJEU observed that services linked to the practice of sport should, so far as is possible, be considered as a whole. CJEU did not consider that the use of the pitch constituted the main service. Rather, the taxpayer supplied a more complex service. The role of the taxpayer was, therefore, more active than that associated with a passive letting of immovable property. The value of the various services supplied (80% of the overall charge) supported this view. On this basis, the CJEU held that the transaction at issue in this case, considered as a whole, should be classified as a supply of services (taxable) rather than as a letting of immovable property (exempt). 30

Letting – ECJ Cases Case C-42/14 Wojskowa Agencja Mieszkaniowa - VAT treatment of service charges relating to the letting of immovable property. - Taxpayer is a public body letting state property, and providing associated utilities; water, electricity, heating and refuse collection. - Taxpayer contracted with third party suppliers for the provision of utilities and passed on to tenants the costs it incurred applying the VAT rate relevant to each individual utility. - Having contracted with third party suppliers for the provision of utilities (goods) and refuse collection (services), the CJEU held that the taxpayer should be treated as providing those supplies to the tenants. 31

Letting – ECJ Cases Case C-42/14 Wojskowa Agencja Mieszkaniowa - Re: single supply or several distinct supplies, CJEU held that it was important to ascertain, whether the tenant was free to determine its own levels of consumption... the existence of individual meters/billing according to the quantity of goods actually used was an important factor which suggested that the provision of utilities should be regarded as constituting separate supplies from the letting of the property. - Re refuse collection, CJEU held that if the tenant had the choice of supplier/could contract directly with the supplier, that indicates a separate supply. Provided the charge for refuse collection was itemised separately (from rent) on the invoice they should be treated as separate supplies for VAT purposes. 32

Letting – ECJ Cases Case C-42/14 Wojskowa Agencja Mieszkaniowa - Ultimately it is for the national court to make the necessary assessments taking into account all the circumstances of the letting and the accompanying supplies and, in particular, the content of the agreement itself. 33

4. Construction of Immovable Property

Construction of Immovable Property 1.Place of Supply 2.Tax Point - Continuous supplies of services 3.Capital Goods Scheme 4.Tax in Danger/Domestic Reverse Charge 5.ECJ Cases 6.Recent Cases 35

Construction – Place of Supply Item 4 Part 2 Schedule 3 VATA/ Art 47 EUVD: “The place of supply of services connected with immovable property, including the services of experts and estate agents, the provision of accommodation in the hotel sector or in sectors with a similar function, such as holiday camps or sites developed for use as camping sites, the granting of rights to use immovable property and services for the preparation and coordination of construction work, such as the services of architects and of firms providing on-site supervision, shall be the place where the immovable property is located.” 36

Construction – Tax Point Item 2 of Schedule 4 VATA/ Art 64 EUVD: “(2) For the purpose of paragraph (1), when the supply of services gives rise to successive statements of account or payments they shall be treated as performed, up to the value covered by those statements, on the last day of each period to which such statements of account or payments refer: Provided that, when a continuous supply of services does not give rise to statements of account or payments during a year, it shall be regarded as being completed at least at intervals of one year.” 37

Construction – Capital Goods Scheme Subsidiary Legislation : cont. "3. The initial deduction shall be adjusted: (b) in respect of immovable property, during a period of twenty years which shall start to run from the first day of the first month of the tax period during which the right to deduct arises:.... if the goods, both of a capital nature and contracts of works, are not used during the tax period during which the right to deduct arises, the starting date of the period of adjustment will be the first day of the month of the tax period during which the goods are first used.” (2) For the purposes of these regulations, a contract of works consisting of a construction contract shall be deemed to be a supply of goods.” 38

Construction – Capital Goods Scheme Subsidiary Legislation : cont. Adjustments are made when during the reference period: (a) the capital good is used by the taxable person both for private purposes or for the purposes of operations in respect of which VAT is not deductible or VAT is deductible in a proportion other than that of the initial deduction; (b) there are changes in the elements used for the calculation of the deducted input tax; (c) the capital good is subject to a supply for which the value added tax is deductible, insofar as the right to deduct input tax on this good has been limited. 39

Construction – Capital Goods Scheme Subsidiary Legislation : cont. (d) the capital good ceases to exist within the framework of the enterprise, unless it was sold destroyed or stolen; (e) the taxable person becomes a non-taxable person or only carries out operations for which the VAT is not deductible, unless it is proved that the capital good was subject to a supply for which the VAT was deductible. 40

Construction – Tax in Danger Part 5 Schedule 14 VATA: “1. Where, in any particular contract of supply, and in order to secure the regular payment of the tax in terms of the Act, the Commissioner may, by a notice in writing to the parties to the contract direct that the person to whom the supply is made shall be deemed to have made that supply to himself in the course or furtherance of his economic activity and the provisions of the Act, including the obligation to account for and to pay the tax, shall be read and construed accordingly.” 41

Construction – Tax in Danger Art 199 EUVD: “1. Member States may provide that the person liable for payment of VAT is the taxable person to whom any of the following supplies are made: (a) the supply of construction work, including repair, cleaning, maintenance, alteration and demolition services in relation to immovable property, as well as the handing over of construction works regarded as a supply of goods pursuant to Article 14(3);” 42

Construction – ECJ Cases Order C-500/13 - Gmina Międzyzdroje The CJEU has disposed of this Polish referral concerning the capital goods scheme by the issue of an Order of the Court dated 5 June The taxpayer constructed an extension to a sports hall and initially put it to exempt use (without deducting input tax), before subsequently granting a taxable long lease in return for rent. It was settled that the taxpayer was entitled to an input tax refund in respect of the change of use, but the dispute was over whether there should be a one-off adjustment (as the taxpayer contended) or the adjustments should be spread over the remaining nine intervals of the domestic capital goods scheme adjustment period (as the Polish tax authorities contended). The UK Government intervened in this case (in support of the Polish tax authorities) to say that the adjustments should be spread in these circumstances as the capital item had not been disposed of. The CJEU decided the case in favour of the Polish tax authorities. 43

Construction – Recent Cases Administrative Review Tribunal: 63/ XXX Ltd vs DG VAT - Case decided on 30 March /9 XX Ltd constructed 5 villas (3 letting/2 sale) - XXX Ltd claimed 60% (3/5) of construction costs XXX Ltd decided to use all 5 villas for letting - Filed a correction letter with VAT to recoup the 40% not claimed from 2008 – DG VAT refused. - Administrative Review Tribunal upheld XXX Ltd’s claim 44

Abbreviations VATA – VAT Act Cap.406 of the Laws of Malta Civil Code - Civil Code Cap.16 of the Laws of Malta EUVD – Council Directive 2006/112/EC CIR – Council Implementing Regulation EWOC – Exempt without Credit IIP – Individual Investor Programme MTTSA – Malta Travel and Tourism Services Act Cap 409 of the Laws of Malta CGS – Capital Goods Scheme 45

Thank You Saviour Bezzina EY Malta