Real estate sale-and-leaseback transactions constitute a specific financing technique for companies which allows them to improve their liquidity position. However, such transactions can give rise to a VAT cost for the company if the "sale" to the leasing company is not subject to VAT and takes place during the VAT adjustment period. In that case, part of the VAT initially deducted in respect of the property must be adjusted and refunded. However, in the Mydibel judgment dated 27 March 2019, the European Court of Justice held that such an adjustment is not always required. Here the Court departs from the traditional view of the Belgian tax administration – which means that, in a Belgian context, this judgment is particularly relevant for both past and future transactions.
Mydibel is a Belgian company which owns several buildings and uses them for its VAT taxable activities. Mydibel deducted in full the input VAT on the construction works in respect of the buildings. Some time later, Mydibel entered into sale-and-leaseback agreements with two financial institutions relating to these buildings in order to increase its liquidity.
These agreements stipulate that (i) Mydibel establishes a long lease right ("erfpacht"/"droit d'emphytéose") in favour of the financial institutions for a period of 99 years, subject to registration duties and against a substantial upfront payment, and (ii) Mydibel immediately re-leases the real estate concerned for a non-revocable period of 15 years. Under this leasing agreement, Mydibel will reimburse the upfront payment, plus interest, by means of periodic payments. Mydibel also enjoys a purchase option, which allows it to acquire the long lease right on expiry of the lease for a price corresponding to 10% and 3% respectively of the capital invested by the leasing companies.
Since the sale-and-leaseback transactions were not subject to VAT, the Belgian VAT administration considered that Mydibel should have adjusted the input VAT it initially deducted with respect to the real estate concerned. Consequently, the VAT administration took steps to recover the relevant amount of VAT.
Mydibel disputed this view and initiated legal proceedings. After Mydibel's proceedings were (partially) dismissed by the Court of First Instance, the Court of Appeal of Mons decided to refer the case to the European Court of Justice (case C-201/18).
Decision of the European Court of Justice
Although it is up to the national court to give a final ruling on the matter, the Court of Justice considered that, in the circumstances, Mydibel was not obliged to adjust the VAT initially deducted. The Court came to this conclusion after analysing the applicable principles regarding VAT adjustments.
In accordance with Article 185 of Directive 2006/112/EC (the "VAT Directive"), an adjustment must generally be made if, after the VAT return is filed, the factors used to determine the amount to be deducted have changed. In the present case, both before and after the sale-and-leaseback transactions concerned, Mydibel continued to use the immovable property in an uninterrupted manner for its VAT taxable activities. In those circumstances, the mere establishment of a long lease right which is not subject to VAT does not imply that the factors used to determine the amount to be deducted have changed. Therefore, on the basis of Article 185 of the VAT Directive, no adjustment should be made.
As regards capital goods in particular, Article 188 of the VAT Directive requires an adjustment of the initially deducted VAT to be made if such goods are subject to a VAT exempted supply during the adjustment period. According to established case law of the Court of Justice, the concept of "supply of goods" does not refer to the transfer of ownership in accordance with applicable national law procedures but covers any transfer of tangible property by one party which empowers the other party to actually dispose of it as if it were its owner. In that regard, the Court held that, in the present case, the sale-and-leaseback transactions concerned constitute inseparably linked financial transactions which are intended to increase Mydibel's liquidity. Additionally, Mydibel remained the owner of (the bare ownership of) the buildings and continued to use them for its economic activities in an uninterrupted and permanent manner. In those circumstances, there is no "supply" within the meaning of Article 188 of the VAT Directive. The long lease rights granted to the financial institutions, which in the present case are encumbered with the lease rights granted to Mydibel, do not allow those institutions to dispose of the immovable property concerned as if they owned it.
With this judgment, the Court of Justice reaffirms its autonomous and economic approach to the VAT system and to the concept of a "supply of goods" in particular.
Indeed, the ECJ has already ruled that "where a financial leasing agreement relating to immovable property provides either that ownership of that property is to be transferred to the lessee on the expiry of that agreement or that all the essential powers attaching to ownership of that property are to be enjoyed by the lessee and, in particular, substantially all the rewards and risks incidental to legal ownership of that property are transferred to the lessee and the present value of the amount of the lease payments is practically identical to the market value of the property, the transaction resulting from that agreement must be treated as an acquisition of capital goods" (ECJ 2 July 2015, C-209/14, NLB Leasing; see also: ECJ 16 February 2012, C-118/11, Eon Aset).
In this respect, it is logical that the Court now confirms that no change occurred in the factors used to determine the amount to be deducted, nor is there an exempt supply in a situation where a taxable person, as a result of a sale-and-leaseback transaction relating to immovable property, retains the essential powers attaching to the ownership of that property. Since Mydibel retains the de facto power to dispose of the immovable property as owner and, on a permanent basis, uses it in the context of its VAT taxable activities, no reason exists to adjust the VAT initially deducted as a result of the sale-and leaseback transactions.
This case law offers opportunities to set up sale-and-leaseback transactions in the future without giving rise to any VAT adjustment costs. On the basis of this case law, one could also assess whether or not it is possible to reclaim VAT adjustments paid in the past. Finally, this case law, and the economic approach of the Court of Justice, may also provide opportunities for VAT optimisation in a broader context, such as in the case of the transfer of a business where the transferee is not granted a right in rem but a personal right in respect to the immovable property.