Issues relating to pro rata input tax deduction of mixed-use buildings referred to CJEU

The Federal Court of Finance has asked the CJEU to rule on the calculation of the deductible proportion of VAT for mixed-use buildings

The Federal Court of Finance (BFH) has referred a case to the Court of Justice of the European Union (CJEU) requesting a ruling on the calculation of the deductible proportion of input VAT and the adjustment of such a deduction (reference number: XI R 31/09).

The case involved a taxpayer that carried out both VAT-exempt and taxable rental supplies so that an apportionment of input VAT was necessary. The taxpayer used the “transaction” formula (the turnover-based method) to calculate the deductible input VAT even though German VAT legislation provides for the “area-based” method as from 2004.

The CJEU has specifically been asked to clarify whether input VAT resulting from acquisition or production costs of a building must be allocated to single VAT exempt or taxable supply, with the remaining input tax allocated according to the area-based method or the turnover-based method. The court also has been asked to rule on whether this process should apply to operating costs.

The second question referred to the CJEU concerns the modifications to the allocation method. If the conditions determining input VAT recovery in relation to a building change within 10 years as from the date of its first use, an input tax adjustment will be made for each year of change. The BFH has asked the CJEU to rule on whether a legislative change regarding the preferred calculation method could be considered such a change in conditions, and if so, whether the taxpayer can rely on the principles of legal certainty and confidentiality to prevent a disadvantageous change in calculation method for the past.

Considered in conjunction with other decisions of the BFH, the recent request for a preliminary ruling from the CJEU seems to demonstrate that the BFH has doubts about the unconditional application of the area-based calculation method. Affected taxpayers should examine whether the transaction method could lead to a more beneficial allocation of input VAT recoverable and consider whether there are arguments based on the recent court decisions and pending cases to revise the calculation method.