Supplies provided by commissioning associations

Facts

Digipolis was a legal person under public law set up by the two Belgian cities of Ghent and Antwerp and their public social welfare centres. The founding members transferred administrative tasks to Digipolis as a commissioning association. Later, other legal entities under public law that carried out activities in the public interest, such as childcare and urban development, joined this association. Digipolis provided its members (and also third parties) with services in the field of information and communication technology, in particular telematics services, as well as supplies of computer hardware. The members' payments were to be made on a flat-rate basis according to various distribution keys and were only intended to cover the association's costs.

In Belgium, there was an administrative tolerance based on the so-called emanation theory, according to which the association's supplies to its members were considered non-taxable internal supplies – quasi as supplies to itself. The referring Belgian court asked whether this violated the VAT Directive and the principle of VAT neutrality, and whether a distinction should be made in this regard between public-law entities which are no VAT taxable persons and those who are.

General Court ruling

Independent economic activity of a taxable person

The General Court first noted that the association provides supplies to its members for remuneration. The flat-rate distribution keys and the restriction to a cost-covering amount do not alter this. Digipolis carries out an economic activity because the cooperation is long-term and the fees cover the costs in any case, so that they cannot be equated with fees in an amount corresponding to only a small part of the costs. The conditions under which Digipolis provides its supplies are sufficiently similar to those of supplies provided by private economic operators. Digipolis carried out its activities on its own account, under its own responsibility and at its own economic risk – i.e. independently – as it was not in a hierarchical relationship of subordination to the state. Admittedly, its autonomy was de facto limited, among other things, by the fact that its management bodies consisted of representatives of its members. More importantly, however, it was an independent legal entity with its own statutes, registered office, bodies, capital, assets, budget and employees.

Exception for public law institutions within the framework of public authority

Although Digipolis is a public-law institution as a commissioned association, the conditions for treating it as non-taxable are not fulfilled: the General Court sees no evidence that Digipolis carries out the activities in question by exercising sovereign powers. Rather, it appears to carry out its activities under the same conditions as private economic operators. Furthermore, treating Digipolis as a non-taxable person could lead to significant distortions of competition.

Significance of the status of members

The activity of the supplier alone determines whether a taxable supply exists. Whether the recipient of the supply is a VAT taxable persons or not is irrelevant.

In view of the above, the question of neutrality no longer needs to be examined.

Emanation theory

Under Belgian law, the emanation theory leads to a fiction whereby supplies made by the association to its members are treated as non-taxable internal supplies, even if there is no VAT group. This leads to non-taxation not provided for in the VAT Directive, which is inadmissible.

Analysis

The emanation theory is a special feature of Belgian law that has no equivalent in Germany. A VAT group would not be possible under German law, as Digipolis has several members (and thus potential controlling companies) and a multi-parent group is not possible.

In his opinion, the Advocate General had addressed a possible VAT exemption under Article 132(1)(f) of the VAT Directive. This concerns supplies provided to their members by independent associations of persons who carry out an activity that is VAT-exempt or for which they are not taxable persons. However, the supplies provided by the members must be in the public interest and be mentioned in Article 132 of the VAT Directive. According to the Advocate General, the applicants stated at the hearing that certain associated members carry out activities that are not VAT-exempt under Article 132 (activities in the public interest) but under Article 135 of the VAT Directive. At first glance, this seems difficult to imagine in the case of the institutions mentioned, but the exact background is not disclosed. The General Court does not address this issue at all. In Germany, § 4 No. 29 of the Value Added Tax Act (UStG) would apply here. However, if the members do not carry out activities in the public interest, VAT exemption is also excluded under national law. Otherwise, it would be necessary to examine whether this would lead to significant distortions of competition.

Author: Nadia Schulte