authorising the Republic of Poland to conclude with the Republic of Ukraine an agreement containing measures derogating from Articles 2(1)(d) and 5 of Directive 2006/112/EC on the common system of value added tax, as regards the maintenance of road bridges on the Polish and Ukrainian border

EXPLANATORY MEMORANDUM

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Pursuant to Article 396 of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereafter 'the VAT Directive'), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to conclude with a third country or an international body an agreement which may contain derogations from the VAT Directive.

By letter registered with the Commission on 7 October 2016, Poland requested an authorisation to conclude an international agreement with Ukraine as regards the territorial application of the VAT system for the maintenance of road bridges on the Polish and Ukrainian border. In accordance with Article 396(2) of the VAT Directive, the Commission informed the other Member States by letter dated 24 January 2017. By letter dated 25 January 2017, the Commission notified Poland that it had all the information necessary to consider the request.

In order to improve traffic between Poland and Ukraine, these countries drew up a draft Agreement between them for the maintenance of road bridges on the Polish and Ukrainian border (hereafter the agreement).

This agreement concerns the maintenance of three road bridges on the Polish and Ukrainian border, all of which are partly on the territory of the Republic of Poland and partly on the territory of the Republic of Ukraine. These bridges form part of the public road system along the frontier between the two countries. Two border road bridges over the River Bug on the Polish and Ukrainian border have been built at Poland’s expense and are owned by Poland: a steel bridge between Dorohusk and Jagodzin which will be maintained by Ukraine and a reinforced-concrete and steel bridge between Zosin and Ustyluh which will be maintained by Poland.

The third road bridge over the River Bug, with steel girders and a reinforced-concrete deck also located between Dorohusk and Jagodzins was built at the expense of both countries and is equally owned by them. Both countries agreed on sharing the maintenance to the extent that each country shall maintain the part of the bridge it owns except for the winter maintenance.

As far as the winter maintenance is concerned, the two countries shall be responsible for the border road bridge, along its entire length in turns: Poland from 1 October of every odd-numbered year until 30 September of every evennumbered year and Ukraine: from 1 October of every even-numbered year until 30 September of every oddnumbered year.

As regards the application of the Polish and Ukrainian VAT legislation, the agreement provides that, for the supply of goods and services intended to be used for the maintenance of border road bridges or parts thereof insofar as Poland is responsible for the maintenance in accordance with the Annex to the agreement, the border road bridge or part thereof are regarded as Polish territory. The agreement further stipulates that for the supply of goods and services intended to be used for the maintenance of border road bridges or parts thereof insofar as Ukraine is responsible for the maintenance in accordance with the Annex to the agreement, the border road bridges or parts thereof are regarded as Ukrainian territory.

The agreement also stipulates that goods imported from the country of one of the Contracting Parties into the country of the other Contracting Party will not be subject to either Polish or Ukrainian VAT on imports if these goods are used for works performed under the agreement.

In accordance with the principle of territorial application laid down by the VAT Directive, the supplies of goods and services in the context of maintenance work for the road bridges carried out on Polish sovereign territory would be subject to VAT in Poland, while such supplies of goods and services for maintenance work carried out on Ukrainian sovereign territory would lie outside the territorial scope of the VAT Directive. If these provisions were applied, it would be necessary to break down transactions on the basis of the territory on which they are carried out. In addition, each importation into Poland from the Ukraine of goods used for the maintenance of a border bridge would be subject to VAT in Poland.

Poland is of the opinion that the application of these rules would involve tax complications for contracting companies responsible for the maintenance of these bridges. It therefore takes the view that the tax provisions of the agreement are justified in order to simplify the contractors' tax obligations.

In light of the above, Poland requests that by way of derogation from Article 5 of VAT Directive, border road bridges or parts thereof be recognised as part of the Polish (or Ukrainian respectively) territory for the purposes of the supply of goods and services and for the import of goods intended for the maintenance of these bridges or parts thereof by either Poland or Ukraine.

The Council has on several previous occasions authorised Member States to conclude agreements with third countries in frontier areas and these agreements, inter alia, included tax provisions similar to those proposed here. Germany was authorised to conclude a number of agreements with Poland, the Czech Republic, and Switzerland as well as Austria with Switzerland.

The Commission agrees that the uniform taxation of maintenance work of the border road bridges or a part thereof, and the waiving of the collection of VAT on imports of goods intended for use in such work, would simplify matters for the contractors compared with application of the normal rules of taxation.

The Commission considers that the agreement in question could possibly have only a minor positive or negative effect on the Union's own resources accruing from VAT. However in view of the tax arrangements laid down in the agreement that aim at an overall balance and in light of previous agreements where an overall compensating balance was sought and taking into account the negligible amounts involved, the Commission considers that this should not be an obstacle to granting Poland the requested authorisation.

Accordingly, the Commission takes the view that Poland should be authorised to conclude the proposed agreement.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY