Gemeente Woerden (Municipality of Woerden) v. Staatsecretaris van Financiën (Secretary of State for Finance, Netherlands), C:2016:466 (European Court of Justice (10th Chamber) )

The Municipality of Woerden deducted virtually all of the VAT incurred by it in constructing two buildings, which it sold at 10% of its cost to a newly formed foundation (with board members appointed by it and educational institutions). The Foundation provided part of the buildings free of charge to the institutions, and rented the balance, with all of the rents VAT-exempt except for those used by a sports enterprise. The Regional Court of Appeal, Amsterdam held that the sale price invoiced to the Foundation related solely to the parts of the buildings that were leased on a taxable basis, so that the Municipality was acting as an entrepreneur only in respect of 10% of the buildings, and was entitled to deduct only 10% of the VAT charged to it.

The Supreme Court of the Netherlands referred the case for a preliminary ruling on the question, which was summarized (at para. 29) as being “in essence:”

[I]n circumstances…in which a taxable person has had a building constructed and has sold that building for a price less than the cost of constructing it, [is] that taxable person...entitled to deduct all of the VAT paid in respect of the construction of that building, or only a part of that tax in proportion to the parts of the building which its purchaser uses for economic activities.

In finding (at para. 39) that the Municipality was entitled to deduct full input tax regardless of the use made by the purchaser of the property, President Biltgen stated (at paras 36, 41-42):

[T]he VAT Directive does not subject the right to deduct to a condition related to the use of the goods and services at issue by the person who receives those goods and services from the taxable person, since that would imply that every transaction of a taxable person with a purchaser...who does not carry out an economic activity, such as private individuals, would limit the taxable person’s right to deduct input tax. …

[I]t follows from the case-law...that if the supply price is lower than the cost price, the deduction cannot be limited in proportion to the difference between the supply price and the cost price, even if the supply price is considerably lower than the cost price, unless it is purely symbolic… .

The fact that that purchaser allows parts of the building…to be used without charge is of no importance… .

The named Netherlands municipality did not provide two buildings constructed by it to the mostly VAT-exempt building users (e.g., schools) directly. Instead, after a newly-formed non-profit foundation was interposed between it and the users, it sold the buildings to the foundation at 10% of its cost and reported VAT on that below-FMV selling price. In finding that the municipality was entitled to essentially full credit for its VAT costs in constructing the buildings. President Biltgen stated:

[I]f the supply price is lower than the cost price, the [input tax] deduction cannot be limited in proportion to the difference between the supply price and the cost price, even if the supply price is considerably lower than the cost price, unless it is purely symbolic. … The fact that that purchaser allows parts of the building…to be used without charge is of no importance… .

B.C. Sky Train is similar.