Germany: 232. ECJ Voids Exclusion of ITC (Ampafrance)

In its judgement of 19 September 2000, the European Court of Justice (ECJ) held that it is impermissible for the national law of a Member State to deny the input tax credit (ITC) on purchases of accommodations, food, hospitality, and entertainment (joined cases C-177/99 - Ampafrance and C-181/99 Sanofi Synthelabo, hereinafter collectively Ampafrance – IStR 2000, 655). The case decided involved the denial of an input tax deduction under French law. The French provisions are, however, comparable in most respects to the limitations on input tax deductions in force in Germany since 1 April 1999.

This judgement would appear to provide a legal basis for claiming an input tax deduction in situations in which the deduction is currently denied by the letter of German tax law. The judgement is relevant to various cases already pending before the German tax courts at the trial and appeals levels and should in our opinion also permit taxpayers to claim the input tax deduction retroactively.

Citing the Ampafrance decision, the Federal Tax Court has already voided certain provisions of German VAT law on the grounds that they are overridden by EU law (decision of 23 November 2000 - DStR 2001, 23 – see article no. 233.)

In its judgement of 19 September 2000 (Ampafrance S.A. et. al.), the ECJ invalidated the exclusions which France had introduced for input tax deductions on the cost of accommodations (lodging), food, hospitality, and entertainment on the authority of a decision by the European Council. The court held that the exclusions violated the Sixth EC Directive (VAT).

The ECJ holds that, by including cases in which the relevant expenditure is undoubtedly incurred for business purposes, a complete exclusion of the input tax deduction violates the principle that VAT should be neutral in its effects on business. Furthermore, as a measure to prevent tax evasion or avoidance, the exclusion is incompatible with the principle of proportionality. The European Council's authorisation of such exclusions was incapable of overriding these principles, the court stated.

There are no temporal limits on the application of the judgement. This means that the decision applies to all tax assessments that have not yet become final.

With Ampafrance, the ECJ decides a leading case in the taxpayer's favour on the issue of the compatibility of exclusions of input tax credits (deductions) under national law with the law of the European Union.

The judgement of the European Court of Justice relates to French law. However, exclusions of the right to deduct input tax are also contained in § 15 of German VAT law as in force since 1 April 1999:

• Exclusion of ITC on third party presents over DM 75, on third party restaurant expense, and on certain other "prestige" expenditure (§ 15 (1a) no. 1 UStG)
• Exclusion for travel expenses (meals, accommodations, use of employee-owned vehicles – § 15 (1a) no. 2 UStG)
• Exclusion for moving costs (§15 (1a) no. 3 UStG)
• 50% exclusion for a company car where there is also private use exceeding 5% (§15 (1b) UStG)
• Exclusion where business use of an asset is less than 10% (§ 15 (1) sent. 2 UStG)

The validity of all of the above total or partial exclusions of the right to deduct input tax is now doubtful because they rule out an input tax deduction as a matter of principle without giving the taxpayer the opportunity to prove that the expenditure was of a business nature. The tax authorities have already conceded the invalidity of § 15 (1a) no. 2 UStG with respect to meals and accommodations (see article no. 233).

It is true that the 10% limit in § 15 (1) UStG and the 50% exclusion of input tax deductions under § 15 (1b) UStG (which, according the statute's official explanation, is only supposed to apply to cars used by sole proprietors and partners in partnerships for private or other non-business purposes) are authorised by a decision of the European Council dated 28 February 2000. Such authorisation was, however, also present in Ampafrance. The ECJ disregarded the authorisation on the grounds that a complete denial of input tax deduction without opportunity to offer specific proof of business purpose was incompatible with the principle of proportionality. In our opinion, this must apply to the provisions of German law as well. The other exclusions of or limitations on the input tax deduction are not covered by the Council's authorisation. There is thus all the more reason to regard these provisions as incompatible with European law.

One may also argue in light of the ECJ decision that it was impermissible to repeal the input tax deductions on lump sums and standard amounts which were allowed under §§ 36 - 39 of the 1993 the VAT implementing regulations. However, we consider this view questionable since the relevant provisions of the VAT implementing regulations represented a simplification arrangement under national law which need not necessarily meet the standards of European law set forth above and may thus be withdrawn at any time.

Since the ECJ refused to limit the temporal effects of its judgement, the German provisions discussed above would be invalid from the time of their entry into force on 1 April 1999.

In light of the ECJ decision, we recommend that taxpayers claim a full input tax deduction with respect to the amounts referred to above. To the extent permitted by procedural law, this claim should be lodged for the entire period since the relevant provisions took effect.

We consider the chances of success dubious only with respect to the input tax deduction on lump sums and standard amounts. Here, a case by case decision should be made to determine whether it is worthwhile to file a claim to preserve the legal issue.

In filing an administrative appeal, care should be taken to request a stay of collection of assessed tax.

Taxpayers intending to claim a full input tax deduction on travel expenses should make sure that all invoices are or have been issued to the enterprise, not to an employee. The input tax deduction still requires invoices to name the employer as the recipient of the supply. An exception exists only for small invoices of up to DM 200 where it is not necessary to name the recipient of the supply (the business or entrepreneur).

Taxpayers holding invoices or statements for the period from 1 April 1999 to present in which the employee is designated as the recipient of the supply instead of the business (the entrepreneur), should – to the extent the invoice cannot be corrected and large sums are involved – consider requesting the tax authorities to permit the input tax deduction after the fact based on the principle of good faith dealing (§ 242 of the German Civil Code), if necessary on equitable grounds. In support of such a request, it may be argued that, by enacting a statute which conflicted with European Union law, the legislature prevented the business from having the invoices issued in its name. The tax authorities should therefore be estopped from objecting to the incorrect designation of the recipient of the supply, since such an objection would be a breach of good faith and in effect penalise the entrepreneur for having assumed the statute to be valid and failing to cause the invoices to be issued to the business.

If the input tax in question is claimed on quarterly or monthly VAT returns or on annual returns, we recommend calling the tax authorities' attention to this fact to avoid any risk of criminal prosecution.

It is presently unclear whether output tax must be paid for value conferred ("self-supplies"), e.g. on presents with net value in excess of DM 75, if a full input tax deduction is claimed on the input side in reliance on Ampafrance. In our estimation, output VAT does not arise in such cases. However, we once again recommend making this position clear to the tax authorities to avoid any risk of criminal implications.

Based on Ampafrance, the Federal Tax Court has already ruled in the taxpayer's favour with respect to travel expenditure for meals and lodging (see article 233). Appeals are pending before the Federal Tax Court which pose the issue of the exclusion of the input tax deduction on other grounds as well (e.g. the 50% exclusion for vehicles used partly for private and partly for business purposes). We expect the decision of the ECJ to influence the outcome of these proceedings.

Considering the frequently protracted nature of such litigation, taxpayers are urged to consult with tax counsel regarding steps to protect their legal rights regardless of the outcome of these proceedings, e.g. by filing an immediate claim for all related input tax, including claims for past periods where necessary.