Order;Information — ECLI:EU:C:2021:971
Date: 2021-12-01
Language of the case: Latvian
Court formation: Eighth Chamber
Subject matter: Taxation;Value added tax
Procedure: Reference for a preliminary ruling
Origin: Latvia

Translation C-598/20 – 1 
Case C-598/20 
Request for a preliminary ruling 
Date lodged: 
13 November 2020 
Referring court: 
Satversmes tiesa (Constitutional Court, Latvia) 
Date of the decision to refer: 
11 November 2020 
Applicant: 
AS Pilsētas zemes dienests 
Institution whose act is contested: 
Latvijas Republikas Saeima (Parliament of the Republic of Latvia) 
      
DECISION 
ON THE REFERENCE TO THE COURT OF JUSTICE OF THE 
EUROPEAN UNION FOR A PRELIMINARY RULING 
[…] [case number] 
Riga, 11 November 2020 
The Satversmes tiesa (Constitutional Court), having held a preliminary hearing to 
examine […] [composition of the referring court] 
the file in the case […] on ‘The compatibility of Article 1(14)(c) of the 
Pievienotās vērtības nodokļa likums (Law on value added tax), in so far as it 
relates to the leasing of land in cases of compulsory leasing, with the first sentence 
of Article 91 and the first three sentences of Article 105 of the Latvijas Republikas 
Satversme (Constitution of the Republic of Latvia)’ […], 
declares: 
1 The case […] is being prepared for consideration by the Constitutional Court. The 
proceedings were commenced following a challenge on grounds of 
EN 
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unconstitutionality brought by the public limited company Pilsētas zemes dienests 
(‘the applicant’). 
The judge […] has requested that a reference be made to the Court of Justice of 
the European Union. 
[…] [procedural matters] 
The Constitutional Court will therefore assess whether there are grounds in the 
case […] for a decision to request a preliminary ruling from the Court of Justice. 
I. Facts of the case 
2 On 29 November 2012 the Saeima (Parliament) passed the Law on value added 
tax, which came into force on 1 January 2013. 
Article 1(14)(c) of the Law on value added tax (‘the contested provision’) 
provides that a supply of services is a transaction which does not constitute a 
supply of goods and that, for the purposes of this law, the leasing of property is 
also deemed a supply of services. 
3 The applicant considers that, in so far as it concerns the compulsory leasing of 
land, the contested provision does not comply with the first sentence of Article 91 
and the first three sentences of Article 105 of the Constitution of the Republic of 
Latvia (‘the Constitution’). 
The applicant is a public limited company. It owns a plot of land on which there 
are multi-family residential buildings that belong to other parties. The plot of land 
was acquired by the applicant in a lawful transaction. A compulsory leasing 
arrangement exists between the applicant and the owners of the multi-family 
residential buildings. The applicant has been registered as a taxable person for the 
purposes of value added tax since 6 January 2002, and one of its principal 
activities is the leasing and management of its own or leased property. 
Under Article 50(1)(3) of the likums ‘Par valsts un pašvaldību dzīvojamo māju 
privatizāciju’ (Law on the privatisation of State and local authority housing), in 
the event of a compulsory lease, the owner of the land and the owner of the multi-
family residential building are required to conclude a lease of the land. The 
amount of rent to which the applicant was entitled for the compulsory lease was, 
in turn, determined by the legislation. In the case at issue, the parties failed to 
reach agreement over the lease and the amount of the rent, and the applicant 
therefore commenced legal proceedings to obtain the rent for the compulsory 
leasing of the land, including the value added tax due, from the owners of the 
housing. The court upheld the claim for payment of the rent for the compulsory 
lease of the land, but dismissed the claim for payment of value added tax. 
The contested provision establishes that the leasing of immovable property, 
including compulsory leasing, is deemed a service that is subject to value added 
PILSĒTAS ZEMES DIENESTS 
 
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tax. This considerably reduces the total income obtained by the landowner from 
leasing an asset that belongs to it, since the applicant is required to pay value 
added tax on the rent received under the compulsory lease to the Exchequer. The 
applicant considers that this is a restriction on its right to property, recognised in 
Article 105 of the Constitution. It also submits that its right to legal equality, 
enshrined in the first sentence of Article 91 of the Constitution, has also been 
breached, since landowners who are not registered as taxable persons for the 
purposes of value added tax are not required to pay this tax on compulsory leases 
of land in comparable circumstances. 
In its opinion, when the legislature was deciding whether the provision of certain 
services should be subject to value added tax, it should have considered whether 
the leasing of immovable property constitutes a service which can, as a general 
rule, be subject to value added tax, particularly in the case of compulsory leases. 
In this regard, it should have taken account of European Union legislation, in 
particular Council Directive 2006/112/EC of 28 November 2006 on the common 
system of value added tax (‘Directive 2006/112/EC’). Article 135(1) of Directive 
2006/112/EC establishes that the leasing of immovable property is not subject to 
value added tax. According to the applicant, the exemption is due to the fact that 
leasing of immovable property is normally a relatively passive activity, which 
does not generate any significant added value. 
4 The institution whose act is contested, the Parliament, argues that the contested 
provision complies with the first sentence of Article 91 and the first three 
sentences of Article 105 of the Constitution. 
Article 2(1) of Directive 2006/112/EC establishes that the supply of services for 
consideration within the territory of a Member State by a taxable person will be 
subject to value added tax. In its opinion, according to the case-law of the Court of 
Justice of the European Union, a service is subject to value added tax only if there 
is a legal connection between the provider of the service and the recipient which 
involves mutual obligations. It contends that the legal relationship of compulsory 
leasing must be deemed a legal relationship created by operation of law between 
the owner of the plot of land and the owner of the building. Under that legal 
relationship, the owner of the plot of land leases the land to the owner of the 
building and, in turn, the owner of the building pays the rent due in respect of the 
compulsory lease to the owner of the plot of land. Therefore, the leasing of land 
under a compulsory lease must be deemed the provision of a service subject to 
value added tax. 
The Parliament states that Article 135(1)(l) of Directive 2006/112/EC stipulates 
that Member States must exempt the leasing and letting of immovable property 
from value added tax. However, Article 135(2) allows Member States to 
implement exclusions from that exemption; in other words, it permits them to 
make provision for cases in which the leasing or letting of immovable property is 
subject to value added tax. The Parliament considers that where a plot of land was 
acquired with the intention of making a profit and in the knowledge of the 
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existence of a compulsory leasing arrangement, the legislature was entitled to 
stipulate that the provision of services is subject to value added tax. Thus, in the 
case of a compulsory lease, the lease is subject to value added tax where the 
services are provided by a landowner who is registered as a taxable subject for the 
purposes of value added tax. In turn, the owner of the building pays the rent stated 
in the invoice, which also includes the appropriate amount of value added tax. 
II. Latvian legislation 
5 The first sentence of Article 91 of the Constitution provides that: ‘All persons in 
Latvia are equal before the law and the courts.’  
The first three sentences of Article 105 provide that: ‘Everyone has the right to 
own property. Property that is subject to ownership rights may not be used in a 
manner contrary to the public interest. The right to own property may be restricted 
only by law.’ 
6 It is the Law on value added tax that determines which persons are liable to pay 
value added tax, which transactions are taxed, and the exemptions from the tax. 
Article 1(14)(c) of the Law on value added tax provides that a supply of services 
is a transaction which does not constitute a supply of goods and that, for the 
purposes of this law, the leasing of property is deemed a supply of services. 
Pursuant to Article 5(1)(2) of the Law on value added tax, supplies of services for 
consideration carried out as part of an economic activity are subject to value 
added tax. An economic activity is any continuing, independent activity 
undertaken for consideration, including the exploitation of property for the 
purposes of obtaining income therefrom on a continuing basis (see Article 4 of the 
Law on value added tax). 
In Article 52(1)(25) of the Law on value added tax, the legislature established that 
the only leasing or rental services that are exempt from value added tax are 
residential tenancies (with the exception of accommodation services at guest 
accommodation facilities: hotels, motels, guest houses, houses used for rural 
tourism, camp sites and tourist accommodation). 
Article 34(7) of the Law on value added tax stipulates that the taxable value of a 
leasing transaction is the sum of all payments established in the lease. 
Article 84(1) of the Law on value added tax provides that every taxable person 
who is registered or required under that law to be registered in the register of 
taxable persons for the purposes of value added tax held by the Valsts ieņēmumu 
dienests (State Revenue Service) and who carries out transactions which are 
taxable in the national territory must pay value added tax to the Exchequer, save 
where the law provides otherwise. A domestic taxable person is entitled not to 
register in the register of taxable persons for the purposes of value added tax held 
by the State Revenue Service if the total value of his or her taxable supplies of 
PILSĒTAS ZEMES DIENESTS 
 
5 
goods and services did not exceed EUR 40 000 during the previous 12 months 
(see Article 59(1) of the Law on value added tax). 
7 Legal relationships based on compulsory shared ownership have existed under 
Latvian law for a considerable time (over 25 years). Regulation of these legal 
relationships was introduced as part of land reform and the privatisation of State 
and local authority property. 
Land reform was a complex and lengthy process which affected the entire Latvian 
economy, and it was determined by historical circumstances […] [reference to 
national case-law]. One of the main objectives of land reform was to re-establish 
social justice; this had been undermined by the Soviet occupying power, which 
had illegally expropriated property belonging to the Latvian people without 
paying compensation […] [reference to national case-law]. Under the land reform 
legislation, which came into force in the early 1990s, after Latvia regained its 
independence, property rights to nationalised land were restored to their former 
owners or the owners’ heirs. However, both during the Soviet occupation and 
following the restoration of independence, those lands, including multi-family 
residential buildings owned by the State and by local authorities, were built on. 
Under the Law on the privatisation of State and local authority housing, passed by 
the Parliament on 21 June 1995, the multi-family residential buildings owned by 
the State and by local authorities were privatised, and property rights over the 
flats, non-residential premises and artists’ workshops in those buildings were 
available for purchase, not only by the owners of the land but also by other 
people. 
Consequently, in the course of land reform and the privatisation of State and local 
authority property, a situation arose in which the former owners or their heirs 
regained property rights over the land, while property rights over the flats and 
other assets located in the multi-family residential buildings owned by the State 
and by local authorities were acquired by other people. 
In Article 14 of the likums ‘Par atjaunotā Latvijas Republikas 1937. gada 
Civillikuma ievada, mantojuma tiesību un lietu tiesību daļas spēkā stāšanās laiku 
un piemērošanas kārtību’ (Law on the entry into force and implementation 
arrangements for the introductory part of the revised Civil Code of the Republic of 
Latvia of 1937 and the parts governing inheritance law and rights in rem) of 7 July 
1992, the legislature provided for an exception to the principle of the unitary 
nature of land and buildings established in Article 968 of the Civil Code, 
according to which a building that is closely linked to the plot of land on which it 
is constructed is deemed to be part of that land. The introduction of the exception 
was linked to land reform and privatisation of State and local authority property, 
and was necessary in order to regulate the legal relationships between the owners 
of the land and the owners of the buildings. 
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In order for a building owner to be able to exercise his or her property rights over 
the privatised property, that person needed to have use of the land required for the 
building. However, the legislature also had to take into account the interests of the 
people who owned the land on which buildings belonging to others were situated. 
The legislature decided to regulate the legal relationships of compulsory shared 
ownership arising between the owners of the land and the buildings by means of 
the concept of compulsory leasing. Article 12(21) of the likums ‘Par zemes 
reformu Latvijas Republikas pilsētās’ (Law on land reform in the cities of the 
Republic of Latvia) and Article 54(1) of the Law on the privatisation of State and 
local authority housing provide that the owner of the plot of land must conclude a 
lease for the land with the owner of the building. The Augstākā tiesa (Supreme 
Court, Latvia) has concluded that, since the legal relationship of compulsory 
leasing between the parties arises by operation of law, its resemblance to a 
contractual relationship is only relative. In other words, where the relevant 
circumstances apply, namely that a building belonging to one person is situated on 
land that belongs to someone else, the relationship between the lessor and the 
lessee is established by operation of law rather than through a voluntary 
agreement. Neither the owner of the land nor the owner of the building can alter 
that situation, to which both of them must have regard […] [reference to national 
case-law]. This legal construct is therefore known as compulsory leasing. 
When the legislature passed the Law on the privatisation of State and local 
authority housing on 21 June 1995, it placed limits on the rent payable for 
compulsory leases. Subsequently, the Law on land reform in the cities of the 
Republic of Latvia also set a maximum permitted amount for the rent payable for 
compulsory leases. The constitutionality of the amount of rent payable for 
compulsory leases has also been examined by the Constitutional Court on several 
occasions. During the period in respect of which the applicant sought rent 
payments, including value added tax, from the owners of the buildings for the 
compulsory lease of the land, the amount of rent payable for compulsory leases 
was set by legislation as follows: in 2016 and 2017, the amount was 6% of the 
cadastral value of the land per annum; from 1 January 2018 the rent for the 
compulsory lease of the land could not exceed 5% of the cadastral value of the 
land per annum, and from 1 January 2019 to 30 April 2019, 4% of the cadastral 
value of the land per annum. Thus, by contrast with relations governed by the free 
market, the legislature used legislation to restrict an owner’s use of his or her 
property. 
From 1 May 2019, Article 12(21) of the Law on land reform in the cities of the 
Republic of Latvia and Article 54 of the Law on the privatisation of State and 
local authority housing establish that the rent payable for the compulsory lease of 
land is to be determined in a written agreement between the parties. If the parties 
cannot reach agreement over the amount of the rent for the compulsory lease, it 
will be determined by a court pursuant to Article 2123 of the Civil Code. 
III. European Union legislation 
PILSĒTAS ZEMES DIENESTS 
 
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8 The third paragraph of Article 288 of the Treaty on the Functioning of European 
Union provides that: 
‘A directive shall be binding, as to the result to be achieved, upon each Member 
State to which it is addressed, but shall leave to the national authorities the choice 
of form and methods.’ 
9 With regard to the objectives of Directive 2006/112/EC, its preamble states that: 
‘(4) The attainment of the objective of establishing an internal market 
presupposes the application in Member States of legislation on turnover taxes that 
does not distort conditions of competition or hinder the free movement of goods 
and services. It is therefore necessary to achieve such harmonisation of legislation 
on turnover taxes by means of a system of value added tax …, such as will 
eliminate, as far as possible, factors which may distort conditions of competition, 
whether at national or Community level. 
(5) A [value added tax] system achieves the highest degree of simplicity and of 
neutrality when the tax is levied in as general a manner as possible and when its 
scope covers all stages of production and distribution, as well as the supply of 
services. It is therefore in the interests of the internal market and of Member 
States to adopt a common system which also applies to the retail trade. 
[…] 
(7) The common system of [value added tax] should, even if rates and 
exemptions are not fully harmonised, result in neutrality in competition, such that 
within the territory of each Member State similar goods and services bear the 
same tax burden, whatever the length of the production and distribution chain. 
[…] 
(35) A common list of exemptions should be drawn up so that the Communities’ 
own resources may be collected in a uniform manner in all the Member States.’ 
10 Article 1 of Directive 2006/112/EC establishes that the principle of the common 
system of value added tax entails the application to goods and services of a 
general tax on consumption exactly proportional to the price of the goods and 
services. 
Article 2 of Directive 2006/112/EC provides that: ‘The following transactions 
shall be subject to [value added tax]: 
[…] 
(c) the supply of services for consideration within the territory of a Member 
State by a taxable person acting as such’. 
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Article 135 of Directive 2006/112/EC establishes exemptions from value added 
tax as follows: 
‘1. Member States shall exempt the following transactions: 
[…] 
(l) the leasing or letting of immovable property. 
2. The following shall be excluded from the exemption provided for in point (l) 
of paragraph 1: 
(a) the provision of accommodation, as defined in the laws of the Member 
States, in the hotel sector or in sectors with a similar function, including the 
provision of accommodation in holiday camps or on sites developed for use as 
camping sites; 
(b) the letting of premises and sites for the parking of vehicles; 
(c) the letting of permanently installed equipment and machinery; 
(d) the hire of safes. 
Member States may apply further exclusions to the scope of the exemption 
referred to in point (l) of paragraph 1.’ 
IV. Reasons why the Constitutional Court has doubts over the 
interpretation of Directive 2006/112/EC 
11 There is no judicial remedy against the decisions of the Constitutional Court and, 
therefore, if the interpretation of EU law is relevant to a decision, the 
Constitutional Court must examine whether the relevant provisions of legislation 
are sufficiently clear or, if they are not sufficiently clear, whether they have 
previously been clarified by the Court of Justice […] [reference to national case-
law]. 
The Constitutional Court will therefore examine the grounds for a reference to the 
Court of Justice of the European Union for a preliminary ruling. 
12 The Constitutional Court has ruled that, pursuant to Article 68 of the Constitution, 
EU law became an integral part of the Latvian legal order when Latvia joined the 
European Union. The third paragraph of Article 288 of the Treaty on the 
Functioning of the European Union establishes that a directive is binding, as to the 
result to be achieved, upon each Member State to which it is addressed, but leaves 
to the national authorities the choice of form and methods. When passing 
legislation to transpose the requirements of European Union directives into 
domestic law, the legislature must therefore have regard both to the general 
principles of law and other provisions of the Constitution and to the principles of 
EU law […] [reference to national case-law]. 
PILSĒTAS ZEMES DIENESTS 
 
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The Constitutional Court has held that making a person liable for tax always 
entails a restriction on the right to property recognised in Article 105 of the 
Constitution […] [reference to national case-law]. In assessing whether the 
restriction on fundamental rights imposed by the contested provision in the 
present case complies with the Constitution, the Constitutional Court must also 
verify whether the legislature complied with EU law when it passed the provision 
in question […] [reference to national case-law]. 
The contested provision establishes that, for the purposes of the Law on value 
added tax, the leasing of property is also deemed to be a provision of services. The 
concept of ‘leasing of property’ used in this provision includes the leasing of 
immovable property. In other words, the leasing of immovable property is also a 
service that is subject to value added tax. The same is true of the leasing of land 
under a compulsory leasing relationship […] [reference to national case-law]. The 
Law on value added tax, together with the contested provision, was introduced 
specifically to implement the requirements of Directive 2006/112/EC. 
Consequently, when the Constitutional Court commences its examination of the 
substance of the case […], it must also assess whether the legislature observed the 
requirements of Directive 2006/112/EC when it passed the contested provision. In 
other words, whether, under that EU legislation, the legislature has the power to 
pass legislation which makes the leasing of land under a compulsory leasing 
arrangement subject to value added tax. 
13 The Court of Justice of the European Union has declared that, pursuant to 
Article 135(1) of Directive 2006/112/EC, the leasing or letting of immovable 
property is exempt from value added tax. The Court of Justice of the European 
Union has defined the concept of ‘the leasing or letting of immovable property’ 
within the meaning of Article 135(1)(l) of Directive 2006/112/EC as the 
conferring by a landlord on a tenant, for an agreed period and in return for rent, of 
the right to occupy that property as if that person were the owner and to exclude 
any other person from enjoyment of such a right (see the judgment of the Court of 
Justice of the European Union of 28 February 2019, Manuel, EU:C:2019:160, 
C-278/18, paragraph 18). 
The Court of Justice of the European Union has stated that the exemption 
provided for in Article 135(1)(l) of Directive 2006/112/EC is to be interpreted 
strictly, since it constitutes an exception to the general principle that value added 
tax is to be levied on all services supplied for consideration by a taxable person. 
As the Court of Justice of the European Union has clarified, that exemption from 
value added tax is due to the fact that the leasing or letting of immovable property, 
whilst being an economic activity, is normally a relatively passive activity, not 
generating any significant added value (see the judgments of the Court of Justice 
of the European Union of 16 December 2010, C-270/09 MacDonald, 
EU:C:2010:780, paragraph 45, and of 2 July 2020, C-215/19 Veronsaajien, 
EU:C:2020:518, paragraphs 38 and 41). 
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The Court of Justice of the European Union has also stated that the Member States 
enjoy a margin of discretion in defining transactions that are, nevertheless, to be 
subject to value added tax by derogation from the exemption for the leasing or 
letting of immovable property. It is consequently a matter for the Member States, 
when transposing Directive 2006/112/EC, to introduce those criteria which seem 
to them appropriate in order to draw the distinction between taxable transactions 
and those which are not, including the leasing or letting of immovable property. 
Article 135(2) of Directive 2006/112/EC gives Member States a broad 
discretionary power to exclude certain services, such as the leasing or letting of 
immovable property, from the exemption (see the judgments of the Court of 
Justice of the European Union of 16 December 2010, MacDonald, C-270/09, 
EU:C:2010:780, paragraph 50, and of 28 February 2018, Imofloresmira, 
C-672/16, EU:C:2018:134, paragraphs 31 and 48). 
Thus, although Article 135(1)(l) of Directive 2006/112/EC provides that Member 
States are to exempt the leasing or letting of immovable property from value 
added tax, paragraph 2 of that article gives Member States the power to introduce 
legislation under which certain transactions involving the leasing and letting of 
immovable property are subject to value added tax. Article 135 of Directive 
2006/112/EC could therefore be interpreted as meaning that a Member State is 
entitled to exercise its discretion in order to provide that the leasing of land under 
a compulsory lease is also subject to value added tax. 
13.1. However, in the present case, account should be taken of the fact that the value 
added tax applies to a transaction whose resemblance to a contractual leasing 
relationship is only relative. 
Article 135(2)(a) to (d) of Directive 2006/112/EC identifies the transactions 
involving the leasing and letting of immovable property on which a Member State 
is required to impose value added tax. The Court of Justice of the European has 
clarified that the common characteristic of these transactions is that they involve 
more active exploitation of immovable property, thus justifying the imposition of 
value added tax (see the judgment of the Court of Justice of the European Union 
of 4 October 2001, Goed Wonen, C-326/99, EU:C:2001:506, paragraph 53). Value 
added tax normally applies to activities of an industrial or commercial nature. 
These activities appear in Article 135(2)(a) to (d) of Directive 2006/112/EC as 
exceptions to the exemption provided for in Article 135(1)(l) of that directive. 
Thus, value added tax is charged on activities that involve the provision of a 
service rather than simply making property available to another person (see the 
judgment of the Court of Justice of the European Union of 18 November 2004, 
Belgian State, C-284/03, EU:C:2004:730, paragraph 20). Although it is an 
economic activity, a passive activity such as leasing or letting property is in 
principle exempt from the tax (see the judgment of the Court of Justice of the 
European Union of 16 December 2010, MacDonald, C-270/09, EU:C:2010:780, 
paragraph 99). 
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As was already noted in section 7 of this decision, the leasing of land in cases of 
compulsory leasing is a different type of leasing relationship which was created as 
a result of historical circumstances, when the land and the buildings on it came to 
be owned by different persons. Compulsory leasing was adopted as a legal 
solution in order to achieve an equitable balance between the various rights and 
legitimate interests of those persons. That legal relationship ― compulsory 
leasing ― arises by operation of law independently of the wishes of the owner of 
the land and the owner of the building. Consequently, in cases of compulsory 
leasing, the leasing of land is manifestly a passive activity, since the owner of the 
land allows the owner of the building to use the land solely by operation of law. A 
passive activity of this type does not generate any added value, and therefore 
could not be subject to value added tax. 
It can therefore be seen from the case-law of the Court of Justice of the European 
Union that, in view of its manifestly passive nature, the leasing of land in cases of 
compulsory leasing could be deemed a transaction that falls within the exemption 
from value added tax provided for in respect of the leasing of immovable property 
by Article 135(1)(l) of Directive 2006/112/EC. 
13.2. The Court of Justice of the European Union has also stressed that, while Member 
States have a wide discretion under Article 135(2) of Directive 2006/112/EC to 
exempt or to tax leasing or letting, when exercising their discretion, the Member 
States must uphold the aims and principles of Directive 2006/112/EC, in particular 
the principle of neutrality of value added tax (see the judgment of the Court of 
Justice of the European Union of 12 January 2006, Turn, C-246/04, 
EU:C:2006:22, paragraph 24). 
The principle of neutrality of value added tax also includes the principle of non-
distortion of competition. This principle precludes similar goods or services which 
are in competition with each other from being treated differently for the purposes 
of value added tax within the territory of a Member State. Similar goods and 
services must be subject to the same tax within the territory of each Member State 
(see the judgments of the Court of Justice of the European Union of 3 May 2001, 
Commission v France, C-481/98, EU:C:2001:237, paragraph 22, and of 
19 December 2019, Segler, C-715/18, EU:C:2019:1138, paragraph 36). 
The contested provision applies to all leasing of land, including the leasing of land 
in cases of compulsory shared property. In other words, if the owner of the plot of 
land is registered or required under the Law on value added tax to be registered in 
the register of taxable persons for the purposes of value added tax, then the leasing 
of that plot of land must be deemed to be a provision of a service that is subject to 
value added tax. While compulsory leasing is a different type of leasing 
relationship, these services could be considered similar from the lessee’s 
perspective: in both cases the lessor makes the plot of land he or she owns 
available to the lessee, and the lessee pays the lessor rent. If the leasing of land in 
cases of compulsory leasing were not subject to value added tax, all other cases of 
the leasing of land would have to be exempt from value added tax. Otherwise, the 
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principle of non-distortion of competition could be infringed, since similar 
services would be subject to different systems of value added tax. 
It could therefore be concluded that the principle of neutrality of value added tax 
precludes exempting the leasing of land in cases of compulsory leasing from value 
added tax where all other instances of the leasing of land are subject to value 
added tax. 
14 Thus, in this case, the interpretation of Directive 2006/112/EC could lead to 
different conclusions: 
(1) In exercising its discretion with regard to determining the leasing or letting 
transactions on which value added tax must nevertheless be paid, the legislature 
was entitled to introduce legislation to make the leasing of land in cases of 
compulsory leasing subject to value added tax. 
(2) Having regard to the compulsory nature of the leasing relationship between 
the owner of the land and the owner of the building, and to the fact that this legal 
relationship arises by operation of law and that the leasing of land is, by its very 
nature, a manifestly passive activity, the leasing of land in cases of compulsory 
leasing must be exempt from value added tax. 
(3) Under the principle of neutrality of value added tax, the legislature was not 
entitled to exempt the leasing of land from value added tax in cases of compulsory 
leasing where all other instances of the leasing of land are subject to value added 
tax. 
Although the Court of Justice of the European Union has interpreted Article 135 
of Directive 2006/112/EC on several occasions, including with regard to the 
leasing or letting of immovable property, it has not so far provided an 
interpretation of that article in respect of the leasing of land in cases of 
compulsory leasing. Moreover, as can be seen from the case-law of the Court of 
Justice of the European Union cited earlier in this decision, the precise 
interpretation and application of Article 135 of Directive 2006/112/EC in the 
present factual and legal circumstances is not so obvious as to leave no scope for 
any reasonable doubt as to whether the legislature could introduce legislation 
under which the leasing of land in cases of compulsory leasing is subject to value 
added tax. 
The Constitutional Court therefore considers that in the present case […] there are 
grounds for a decision to refer the matter to the Court of Justice for a preliminary 
ruling. 
Pursuant to […] Article 267 of the Treaty on the Functioning of the European 
Union, […] [reference to domestic rules of procedure] the Constitutional Court 
issues the following decision: 
PILSĒTAS ZEMES DIENESTS 
 
13 
1. To refer the following questions to the Court of Justice of the European 
Union for a preliminary ruling: 
1.1. Must the exemption from value added tax for the leasing of immovable 
property provided for in Article 135(1)(l) of Council Directive 2006/112/EC of 
28 November 2006 on the common system of value added tax be interpreted 
as meaning that that exemption applies to the leasing of land in the case of 
compulsory leasing? 
1.2. If the answer to the first question is in the affirmative ― that is to say 
that the leasing of land in the case of compulsory leasing is exempt from 
value added tax ― then, where all other instances of the leasing of land are 
subject to value added tax, is such an exemption not contrary to one of the 
principles of Council Directive 2006/112/EC of 28 November 2006 on the 
common system of value added tax, namely the principle of neutrality of 
value added tax? 
2. To stay proceedings until the Court of Justice of the European Union 
issues a decision. 
3. To forward to the Court of Justice of the European Union copies of this 
decision, the appeal document […], the response from the Parliament and the 
additional observations made in the present case […]. 
There is no right of appeal against this decision. 
[…] [signatures]