ECJ on the sale of private property by spouses

Background

The spouses Mrs E. T. and Mr W. T. were the owners of several agricultural plots of land that they wanted to sell. To this end, they commissioned a commercial agent to divide the land into smaller plots and have this entered in the land register in the name of the couple. He was also responsible for initiating the designation of the plots in the land-use plan from agricultural land to building land, acquiring an additional plot for the access road, developing the land with supply lines and removing elements that were incompatible with the planned use. Finally, he obtained the necessary authorisations, advertised the plots to potential buyers and prepared the documents for the notarised purchase agreements.

The agency agreement established a purchase price for each of the plots. The agent's fee was to consist of the amount by which the actually realised purchase price exceeded this price.

While the spouses regarded the sales as mere management of private assets, the competent Polish tax office was of the opinion that it was a commercial activity. The authority subjected the spouses to VAT individually.

ECJ decision

The ECJ firstly points out that the term "economic activity" is defined very broadly and includes all activities of producers, traders and service providers and, in particular, the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis. In the case of the sale of building plots, it is already clear from previous ECJ rulings that the decisive factor is that the person concerned has taken active steps to market the property. In doing so, he/she must have used measures similar to those used by a producer, trader or service provider. This includes, for example, the development or implementation of proven marketing measures. Such initiatives do not normally take place as part of the management of private property.

The measures described in the present case therefore constitute an economic activity. This is not precluded by the fact that the plots of land were originally acquired for private use.

The involvement of the agent and the special fee agreement had reduced the spouses' economic risk. However, they had borne the ultimate risk that the property would not be sold themselves, so that the independence of their economic activity was not called into question by the involvement of the agent.

In order to determine who is the taxable person in this constellation (the spouses individually or a community consisting of the spouses), the provisions of Polish law must be applied. It was ultimately for the referring national court to decide, but the ECJ was able to provide guidance. The fact that the plots of land were jointly owned by the spouses does not per se prevent them from being subject to separate tax liability. However, it is clear from Polish law that a partnership without legal personality can be treated as an independent taxpayer. Furthermore, the sale of the plots of land required the consent of both spouses, i.e. neither could have sold the plots without the other. This argues in favour of considering the community of spouses as the taxable person, whereby the referring court must additionally examine whether the community also bears the liability risk.

Classification

The ECJ has once again confirmed that the sale of a building plot from private assets can also be an economic activity under certain circumstances. For example, its ruling C-655/19 of 20 January 2021 (simplified) concerned a loan secured on three properties. When the borrower became insolvent, the lender acquired the properties in foreclosure proceedings and sold them on. However, the ECJ ruled that the lender had not carried out any economic activity, as the sales only served to restore its assets and it had not taken any active steps to market them. These marketing activities are therefore the decisive criterion. The difficulty is that even the mere management of private assets, if a property is to be sold, is unlikely to be possible without any marketing activity. The case presented here, C-213/24, involved a great deal of marketing activity, whereas case C- 655/19 is characterised by a particular reference to private assets (the loan), making the decision in these two cases relatively easy. Cases that fall between these two are likely to occur frequently in practice and are more difficult to judge.

Under German law, the mere joint ownership of property by spouses constitutes a so-called community of part-owners. The question of whether a community of part-owners can be a taxable person is controversial in Germany. In its ruling of 22 November 2018 (V R 65/17), the Federal Fiscal Court (BFH), in a departure from its previous case law, decided that a community of part-owners could not be a taxable person due to a lack of legal capacity under civil law. The BFH reiterated this on 7 May 2020 (V R 1/18) and on 28 August 2023 (V B 44/22), also referring to ECJ ruling C-519/21 of 16 February 2023 in the latter decision. According to this, the community members would each provide a proportionate supply. However, the Federal Ministry of Finance (BMF) has not published this new case law in the Federal Tax Gazette II, meaning that the tax authorities are not permitted to apply it. They must adhere to sec. 2.1 para. 2 sentence 2 of the administrative guidelines to the German VAT Code (UStAE), according to which a community of part-owners can be a taxable person.

§ 2 (1) sentence 1 of the German VAT Code (UStG) was amended by the Annual Tax Act 2022 to the effect that the status as a taxable person is independent of legal capacity. This was expressly intended to correct the BFH's 2018 and 2020 rulings, which were considered to be misguided. Nevertheless, in its decision of 2023, the BFH continued to express doubts about the status as taxable person of communities of part-owners.

Overall, the ECJ and BFH currently affirm the legal capacity of fractional partnerships, but the BFH questions this. Taxpayers can rely on the view that is more favourable to them, but should disclose this to the tax office when submitting preliminary or annual VAT returns if they follow the BFH opinion.

It should be noted that spouses who jointly own a property can also form a civil law partnership (GbR). Whether this is the case must be assessed according to company law rules. The main difference is that the parties involved in a GbR do not merely hold a right jointly, but also pursue a common purpose. The partnership agreement can also be concluded implicitly. The GbR can indisputably be a taxable person, but the distinction is not always clear.

In the Polish case decided by the ECJ, the reverse charge procedure would have been applicable to the supply of real estate under German law.

Author: Nadia Schulte