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New ECJ VAT Ruling in Favour of Taxpayer

15 Jan 2013
On 29 November 2012 the European Court of Justice (ECJ) issued its judgement in the case C-257/11 "SC Gran Via Moinesti srl v. National Agency for Fiscal Administration (ANAF)".

The decision considers the company's right to deduct VAT related to the acquisition of land and buildings without the requirement to adjust such deduction in the event the purchased buildings are demolished, provided that such action is performed with the intention to develop new buildings, where taxable operations will be carried out. Taxand Romania explores the impact of this ECJ ruling for multinationals.

The case of SC Gran Via Moinesti SRL ('GVM'), concerning the deduction of VAT incurred on the purchase of buildings scheduled for demolition, was referred to the ECJ by the Romanian Court of Appeal late last year.

GVM acquired a plot of land and the buildings constructed on it and subsequently carried out demolition works with a view to developing a residential complex. A planning certificate was issued to GVM, with the intention of obtaining a building permit to develop the residential complex on the land at issue. GVM deducted the VAT relating to all of the land and buildings purchased and drew up a VAT return, showing a negative balance with an option for reimbursement.

Following a tax decision, the Bucharest Administration of Public Finance issued a tax assessment stating that, given the demolition of those buildings, it was necessary to adjust the VAT relating to the demolished buildings which had been previously deducted by GVM on the grounds that these buildings were no longer used for performing VAT-able transactions (under the capital goods scheme). Subsequently, after GVM appealed the decision issued by the Bucharest Administration of Public Finance, a second decision of the authorities (this time of the ANAF) stated that GVM did not have the right to deduct the input VAT incurred on the acquisition of the buildings, because its intention was purely to demolish them. The matter was subsequently taken to the Romanian Court of Appeal which referred two questions to the ECJ for a preliminary ruling.

The first question addressed to the ECJ was whether a company's purchase of buildings scheduled for demolition (with the purpose of developing a residential complex) can be qualified as an investment activity, and thus provide for a right to deduct the VAT relating to the acquisition of these buildings. The Court observed that a person who incurs investment expenditure with the intention, confirmed by objective evidence, of engaging in economic activity must be regarded as a taxable person. Secondly, acting in this capacity, the person has the right to immediately deduct the VAT related to the investments and that the destination of such acquisition merely determines the extent of the initial deduction and the extent of any adjustments in the following periods.

In this case, the Court ruled that it was clear that GVM purchase of land and buildings constituted a preparatory act whose purpose, as demonstrated by the issuing of the building permit (before even submitting its VAT return), was the construction of a residential complex on the land. Moreover, the acquisition of those buildings and their subsequent demolition with a view to building more modern ones could be regarded as a series of linked transactions for the purpose of subsequent taxable transactions, per the acquisition of new buildings and their direct use.

The second question put to the ECJ referred to whether the purchaser is obliged to perform a subsequent adjustment of the previously deducted VAT related to the building scheduled for demolition.

According to the Court, an obligation to make an adjustment of an input VAT deduction would be made, where, after the VAT return is submitted, some change occurs in the factors used to determine the amount to be deducted. In this case, the demolition did not represent a change since the demolition was envisaged by GVM on the acquisition of the buildings.

The Court ruled that the demolition of buildings constructed on a plot of land, acquired with a view to developing a residential complex in place of those buildings, does not result in an obligation to adjust the initial deduction of the VAT relating to the acquisition of those buildings.

Your Taxand contacts for further queries are:

Angela Rosca
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Adriana Craciun
T. +40 21 316 06 45

Taxand's Take

This is the first decision focused on a VAT dispute filed by a Romanian company that has been presented before the ECJ, and for its ruling to be in favour of companies carrying out activities in the real estate industry.

The significant growth of the real estate development industry particularly during the period 2007-2008 when the economy was booming has lead to similar transactions, where developers have acquired various plots of land (formerly accommodating factories and other industrial sites) for real estate projects.

This ECJ decision is welcome in the current economic climate, when many developers are struggling due to low market interest in real estate acquisition. This ruling helps them to recover part of the investment costs (some artificially created by similar challenges forwarded by the Romanian tax authorities).

We encourage multinationals with real estate businesses in Romania, to make use of this ECJ decision in order to continue to progress real estate development whilst also benefitting.

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Taxand's Take Author

Angela Rosca