The European Court of Justice (ECJ) ruled that for purposes of art. 13(B)(d)(2) of Council Directive 77/388 (‘the sixth directive’) the concept of assumption of obligations excluded from the scope of that provision obligations which were non-pecuniary, such as the obligation to renovate a property.

Facts

B sold a piece of land with a rented apartment building on it and two individuals later executed a similar sale. In the two contracts of sale relating to those transactions, the vendors undertook to carry out the renovation work needed on the buildings concerned. The two individuals also assumed a rent guarantee. Following the sales, the vendors concluded contracts with the taxpayer entitled ‘assignment of a part of the purchase price in return for assumption of obligations’.

By those contracts, the taxpayer assumed responsibility for the vendors’ obligation to renovate the buildings as well as for the rent guarantee in return for a part of the purchase price of those buildings. The taxpayer undertook to indemnify the vendors against all costs and claims to which the purchasers of the buildings were entitled in respect of the renovation works and the rent guarantee.

The two purchasers of the buildings subsequently agreed to release the taxpayer from its obligations in return for payment to them of part of that fraction of the purchase price ceded to it. The profit resulting from that transaction with regard to the contracts concluded with B and with the individuals concerned was to remain with the taxpayer as ‘payment or lump-sum compensation/indemnity in respect of any loss of profit’. The taxpayer declared that profit for VAT purposes.

Following an inspection, the tax authorities deemed the assumption by the taxpayer of the obligation to renovate to be a provision of services subject to VAT. The taxpayer appealed on the basis that neither of the two obligations which it had assumed had actually been carried out and that the transactions at issue should be classed as an ‘assumption of obligations’.

The Revenue contended, conversely, that the provision of Community law relied on referred exclusively to the assumption of pecuniary obligations, whereas the assumption of the obligation to renovate a building came within the category of service obligations. The national court made a reference to the ECJ for a preliminary ruling.

Issue

Whether art. 13(B)(d)(2) of the sixth directive meant that the concept of assumption of obligations excluded from the scope of that provision obligations that were non-pecuniary, such as the obligation to renovate a property.

Decision

The ECJ (Third Chamber) (ruling accordingly) said that the terms used to specify the exemptions provided for by art. 13 were to be interpreted strictly, since they constituted an exception to the general principle that VAT was to be levied on all services supplied for consideration by a taxable person. Those exemptions constituted independent concepts of Community law whose purpose was to avoid divergences in the application of the VAT system from one member state to another. Therefore, Community provisions had to be interpreted and applied uniformly in the light of the versions existing in all the Community languages. The sixth directive did not lay down any definition of the concept of assumption of obligations contained in art. 13(B)(d)(2). A comparative analysis of the different language versions of that provision revealed terminological differences regarding the concept of assumption of obligations. In certain language versions, such as the German, French and Italian, that expression had a general meaning, whereas in others, such as English and Spanish, it clearly referred to pecuniary obligations. The wording used in one language version of a Community provision could not serve as the sole basis for the interpretation of that provision, or be made to override the other language versions since that would be incompatible with the requirement of the uniform application of Community law.

In view of the linguistic differences, the scope of the phrase in question could not be determined on the basis of an interpretation which was exclusively textual. That expression had to be interpreted in the light of the context in which it was used and of the aims and scheme of the sixth directive. As regards the context in which the expression was used, it was clear that the exemption provided for in art. 13(B)(d)(2) concerned, in addition to the assumption of obligations, the negotiation and assumption of credit guarantees or any other security for money and the management of credit guarantees. It was common ground that all those transactions were, by their nature, financial services.

In the present case, the assumption of the obligation to renovate a building was not, by its nature, a financial transaction within the meaning of art. 13(B)(d) and therefore it did not come within the scope of that provision. Moreover, that interpretation was supported by the purpose of the exemption for financial transactions, which was to alleviate the difficulties connected with determining the tax base and the amount of VAT deductible and to avoid an increase in the cost of consumer credit. Since subjecting the assumption of an obligation to renovate a property to VAT did not present such difficulties, that transaction could not be exempted.

Consequently, the conclusion that it was the intention of the Community legislature to exempt from VAT the assumption of non-pecuniary obligations was not supported by the wording, context or purpose of art. 13(B)(d)(2) and it followed that the assumption of such obligations was subject to VAT.

European Court of Justice (Third Chamber).
Judgment delivered 19 April 2007.