Iberdrola - ECJ (1st Chamber) finds that a developer was entitled to VAT credits for reconstructing a sewage plant for free, as this advanced its own project
A developer (Iberdrola) contracted with a Bulgarian municipality to reconstruct, for free, a waste-water pumping station serving a holiday village at which it was building apartment buildings. At issue was whether Iberdrola was entitled to deduct the VAT borne by it on the pumping-station reconstruction work in accordance with a European VAT provision, which provided such a deduction for inputs to “goods and services [that] are used for the purposes of the taxed transactions of a taxable person.” The First Chamber of the European Court of Justice stated:
It is clear … that, without the reconstruction of that pump station, it would have been impossible to connect the [apartment] buildings …to that pump station, with the result that that reconstruction was essential for completing that [apartment] project… .
Those circumstances are likely to demonstrate the existence of a direct and immediate link between the reconstruction service in respect of the pump station belonging to the municipality … and a taxed output transaction by Iberdrola since it appears that the service was supplied in order to allow the latter to carry out the construction project… .
The fact that the municipality of Tsarevo also benefits from that service cannot justify the right to deduct corresponding to that service being denied to Iberdrola if the existence of such a direct and immediate link is established … .
This case may assist in thinking about ETA s. 141.01(4), which deems the occurrence of impenetrable consequence “to the extent that” a supplier acquires a property or service “for the purpose of making the free supply of that property or service or for consumption or use in the course of making the free supply.” It might be considered that Iberdrola was not incurring the pumping-station reconstruction costs for the purpose of or in the course of making a free supply to the municipality but, rather, as inputs to its own apartment project.
Neal Armstrong. Summary of Director of the ‘Appeals and Tax and Social Insurance Practice’ Directorate of Sofia v. Iberdrola Inmobiliaria Real Estate Investments, C-132/16, ECLI:EU:C:2017:683 (European Court of Justice (First Chamber)) under ETA s. 141.01(4).