Local taxes and VAT supplies

The CJEU has held that the payment of a local spa tax was not consideration for the provision of spa facilities by a local authority: Gemeinde A v Finanzamt (Case C‑344/22). As such, the municipality concerned was not able to deduct input VAT incurred in relation to the provision of those spa facilities.

Background

The applicant in this case was a state-recognised spa town whose spa administration qualified as a commercial business for the purposes of corporation tax laws. The applicant collected a spa tax in accordance with local by-laws in order to cover the costs of erecting and maintaining the facilities provided for spa and leisure purposes and for organised events.

Persons staying in the municipality who were not resident in the municipality and who were offered the opportunity to use the spa facilities and to participate in the spa events were subject to the spa tax. By contrast, the spa tax was not collected from day visitors, non-local persons or residents working or undergoing training in the municipality.

Taking the view, that the spa tax constituted remuneration for an activity subject to VAT, namely the operation of a spa establishment, the applicant claimed a deduction of the VAT paid on all the services which had been provided to it and which were connected with tourism. This claim was rejected by the German tax authorities except to the extent the input tax was directly attributable to taxable activities such as renting properties. On appeal, the local court held that that the applicant had not acted as a trader in the course of its activity which gave rise to the collection of the spa tax. It observed that, since the operation of the spa facilities in return for the spa tax did not constitute a business activity, its transaction were not liable to VAT and that, consequently, the deduction of the input VAT had to be refused.

The applicant appealed and the question whether the applicant's activities amounted to supplies for consideration was referred to the CJEU.

Decision of the CJEU

The question referred, in essence, was whether Article 2(1)(c) of the VAT Directive must be interpreted as meaning that the provision of spa facilities by a municipality constitutes a 'supply of services for consideration', where, on the basis of municipal by-laws, that municipality imposes a spa tax of a certain amount per day's stay on visitors staying in the municipality, when those facilities are freely and gratuitously accessible to everyone.

The Court noted that a supply of services is carried out 'for consideration' only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the actual consideration for an identifiable service supplied to the recipient. That is the case if there is a direct link between the service supplied and the consideration received.

In this case, however, the Court noted that there did not appear to be a legal relationship in which there was reciprocal performance between (i) the municipality which imposed a spa tax and (ii) those visitors, who are entitled to use the spa facilities made available by that municipality, but which are also freely accessible to everyone, including persons not subject to that tax.

In those circumstances, the payment of the spa tax could not be regarded as consideration for the provision of a service, namely the provision of the spa facilities. The Court's case law made it clear that there is a direct link where two services are mutually dependent on each other, that is to say, that one is made only on condition that the other is also made, and vice versa. Here, the obligation to pay the spa tax is owed by persons liable to pay that tax by virtue of the municipal by-laws and that obligation was not linked to the use of the spa facilities provided by the municipality, but to the stay in the territory of the municipality. The Court noted that visitors staying in the municipality are obliged to pay the spa tax, even when they are staying there for other reasons, such as visiting family members, and did not intend to use the spa facilities.

Furthermore, the spa facilities were freely and gratuitously accessible to everyone, including to residents and day visitors, regardless of whether or not they are required to pay the spa tax.

As a result, the Court has held that the provision of spa facilities by a municipality does not constitute a 'supply of services for consideration' where, on the basis of municipal by-laws, that municipality imposes a spa tax on visitors staying in the municipality, when the obligation to pay that tax is linked not to the use of those facilities but to the stay in the municipal territory and those facilities are freely and gratuitously accessible to everyone.

Comment

The decision appears to be a straightforward application of the requirement for a direct link between the consideration charged and the services or goods supplied for there to be a supply for VAT purposes. Indeed, even if there had been a direct link in this case, it is perhaps questionable whether the activities would have amounted to an economic activity in any event.