The Court of Justice of the EU decided on the deduction of input VAT for construction work on public roads carried out free of charge for the benefit of a municipality

The Case

The managing holding company Mitteldeutsche Hartstein‑Industrie AG forms a tax entity with its subsidiaries, A GmbH (“A”) and B GmbH (“B”).

The company A was authorised by a regional administration to reopen and operate a limestone quarry. Granting of the authorisation was subject to the development of access to it by way of a public road belonging to the municipality. The company A agreed to bear all of the costs relating to the extension of that road and the municipality promised to make the extended road available to A to be used, inter alia, by its heavy goods vehicles without restriction, if it remained open to the public. The company B was commissioned to carry out that extension.

The input VAT from the received goods and services related to completion of construction work by the company B was claimed via the filed VAT return. The costs incurred by A GmbH for the works for the extension of the municipal road in question were not taken into account.

The tax authorities held the view that by constructing the extension to the municipal road in question, the respective company had provided the municipality concerned with free-of-charge work subject to VAT and therefore, adjusted its liability accordingly.

CJEU dealt with the following questions:

1. Is a taxable person entitled to deduct input VAT paid for works for the extension of a public road carried out for the benefit of a municipality?

• CJEU mentioned that without the works for the extension of the municipal road in question, it would have been impossible to operate the limestone quarry, from both a practical and legal point of view. It follows from the circumstances of the case at hand that the works for the extension of the municipal road in question were essential in order for the operation of the limestone quarry to come to fruition and that, without those works, the company would not have been able to carry out its economic activity.
• The fact that the public may use the municipal road in question free of charge is, according to CJEU, immaterial. The works for the extension of that road were carried out not for the purposes of the municipality concerned or of public traffic but in order to adapt the municipal road in question to the heavy goods traffic generated by the operation of the limestone quarry by the company.
• If the works for the extension of that road were limited to what was necessary for the mentioned purposes, the right to deduct should be recognised for all the costs resulting from those works, in so far the costs of those works are included in the price of the output transactions carried out by that taxable person.
• By contrast, if those works exceeded what was necessary to ensure the operation of that quarry, the right to deduct would have to be recognised only for the input VAT levied on that portion of the costs that was incurred for the works for the extension of the municipal road in question which was objectively necessary to allow the respective company to carry out its economic activity.

2. Does the authorisation to operate a quarry constitute consideration received by a taxable person which carried out, without monetary consideration, works for the extension of a municipal road?

• The authorisation to operate the quarry was an unilateral decision taken by the regional administration. However, it follows from the case-law of CJEU that a unilateral act by a public authority cannot, in principle, impose a legal relationship entailing reciprocal performance.
• Granting this authorisation therefore does not constitute consideration received by a taxable person which carried out, without monetary consideration, works for the extension of a road belonging to a municipality. Those works thus do not constitute a transaction carried out for consideration.

3. Do the works for the extension of a public road carried out, free of charge, by a taxable person for the benefit of a municipality constitute a supply of goods made for consideration?

• CJEU stressed that the purpose of the provision under which certain transactions for which no real consideration is received by the taxable person are treated as supplies of goods effected for consideration and subject to VAT, is to prevent situations in which final consumption is untaxed.
• Even though the municipal road in question is open to public traffic, the actual end-use of that road should be, according to CJEU, taken into consideration.
• The mentioned company benefits from the works for the extension of that road. They have a direct and immediate link with its overall economic activity which gives rise to taxable transactions. The costs of the input services received and linked to the works for the extension of that road form part of the factors in the cost of the output transactions carried out by the company.
• The works carried out, for the benefit of a municipality, for the extension of a municipal road open to the public but used, in connection with its economic activity, by the taxable person which carried out those works free of charge and by the public, do not constitute a supply of goods made for consideration.

Depending on factual and legal circumstances of each individual case, this judgement may have a favourable impact on VAT treatment of induced investments related to projects of developers, as well as in cases of work carried out without consideration on other person's property, or services used, in addition to the taxable person, by third parties.