COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 21.03.1997 
COM(97)120 final 
Proposal for a 
COUNCIL DECISION 
AUTHORISING IRELAND TO APPLY A MEASURE DEROGATING FROM 
ARTICLE 21 OF THE SIXTH DIRECTIVE (77/388/EEC) 
ON THE HARMONIZATION OF THE LAWS OF THE MEMBER STATES 
RELATING TO TURNOVER TAXES 
(presented by the Commission) 

EXPLANATORY MEMORANDUM 
By registered letter sent to the Secretariat General of the Commission on 5 February 
1997, the Irish Government acting on the basis of Article 27 of the Sixth Council 
Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the 
Member States relating to turnover tax - Common system of value-added tax: uniform 
basis of assessment1 , requested authorisation to apply in respect of the surrender, 
including by way of abandonment, or assignment of a long-term lease of property, a 
measure derogating from Article 21 of that Directive. 
Ireland exercices the option under Article 5(3) of the Directive to treat the supply of 
certain interests (i.e. a lease often years or more) in immovable property as a supply of 
goods. It also obtained a derogation under Article 27 (5) to treat the granting of such 
an interest by a lessor as a disposal of the lessor's entire interest in the property. 
Therefore, where a taxable person creates a lease of ten years or more in a developed 
property the supply is taxed, at that time, on the value of the interest disposed of in 
connection with the supply. 
The lessee is, subject to the normal rules of Article 17 of the Directive, entitled to 
deduct the VAT charged. 
Where a person having an exempt activity or a non-taxable person acquires the 
leasehold interest directly from the lessor no problem arises. However, avoidance 
schemes have arisen whereby a taxable person is inserted between the lessor and an 
ultimate user having no right of deduction of the tax (a taxable person carrying out 
exempted activities or a non-taxable legal person) Such an avoidance scheme works as 
follows : 
The lessor grants a 35 years lease to a fully taxable person. The lessee deducts 
the VAT charged and carries out his taxable business from the premises. After 
one year the balance of the leasehold interest is assigned to the person having 
no right of deduction. 
The taxable lessee, having disposed of his leasehold interest, has to charge 
VAT on the supply of the leasehold interest to assigned to the person having 
no right of deduction. However, the Irish administration established out that in 
these situations very often the lessee is liquidated and the VAT charge is not 
collectible. 
The derogation from Article 21(1) would provide that in such circumstances the 
exempt person acquiring the leasehold interest would account for the VAT payable on 
the supply. 
1 OJ No L 145, 13.6.1977, p. 1, as last amended by Directive 96/95/EC, OJ No L338, 28.12.1996, p. 
89 
£ 
While the avoidance schemes are all based on a person having no right of deduction of 
the tax acquiring an interest in property on which the VAT charged on the 
development has been deducted completely, it is also necessary to extend the 
derogation to the surrender or the assignment of a leasehold interest to a taxable 
person. Due to the nature of the VAT charge involved and the fact that the surrender 
or the assignment of a leasehold interest will often arise due to the financial difficulties 
of the lessee the derogation of Article 21(1) should also apply to the surrender or 
assignment of a taxable person to a taxable person. 
The Commission is aware that the actual disposals of the Sixth VAT Directive, giving 
Member States a great deal of discretion in determining the tax treatment to be applied 
to the property sector under national legislation, are not fiinctionning satisfactorily. 
This is illustrated by the fact that several Member States requested and obtained, on 
the bases of Article 27 of the Sixth VAT Directive, authorisation to introduce special 
measures, in order to prevent certain types of tax evasion or avoidance in this field. 
Awaiting a complete revision of the VAT treatment of immovable property on 
Community level, the Commission takes the view that a Member State can be 
authorised to introduce a derogation in their VAT rules on immovable goods, in order 
to ensure its fiinctionning for a limited period, on condition that this derogation 
respects the general conditions of Article 27 of the Sixth VAT Directive. 
The Commission takes the view that the measure planned by Ireland is indeed a 
measure aimed at preventing tax avoidance and evasion within the meaning of Article 
27 of the Directive and that, given the limited scope of the derogation, the special 
measure is proportianate to the aim pursued. 
The Commission considers that Ireland can be authorised to apply the derogation for a 
period expiring on 31 December 1999. In fact, the Commission adopted on 10 July 
1996 a work programme based on a step-by-step approach for progressing towards a 
new common system of VAT (COM (96) 328 final, 22 July 1996). The last package of 
proposals to be put forward by mid-1999, the Commission considers it appropriate to 
reconsider the necessity and the coherence of a specific measure in the framework of 
the global approach of the new common VAT system. 
3 
Proposai for a 
COUNCIL DECISION 
AUTHORISING IRELAND TO APPLY A MEASURE DEROGATING FROM 
ARTICLE 21 OF THE SIXTH DIRECTIVE (77/388/EEC) 
ON THE HARMONIZATION OF THE LAWS OF THE MEMBER STATES 
RELATING TO TURNOVER TAXES 
THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Treaty establishing the European Community, 
Having regard to the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the 
harmonization of the laws of the Member States relating to turnover taxes - Common 
System of value added tax: uniform basis of assessment1, and in particular Article 27 
thereof, 
Having regard to the proposal from the Commission, 
Whereas, under the terms of Article 27(1) of Directive 77/388/EEC, the Council, 
acting unanimously on a proposal from the Commission, may authorise any Member 
State to introduce special measure for derogation from the provisions of that Directive 
in order to simplify the procedure for charging the tax or to prevent certain types of 
tax evasion or avoidance; 
Whereas, by registered letter to the Commission dated 5 February 1997, Ireland 
requested authorisation to introduce a measure derogating from Article 21(1) of the 
Sixth VAT Directive; 
Whereas, in accordance with Article 27(3) of the Sixth VAT Directive, the other 
Member States were informed on 4 March 1997 of the request made by Ireland; 
Whereas Ireland operates a specific system of applying VAT to property based on the 
one hand on the option under Article 5(3) of the Directive to treat the supply of certain 
interests (i.e. a lease often years or more) in immovable property as a supply of goods 
and on the other hand on a derogation authorised under Article 27 (5) to treat the 
granting of such an interest by a lessor as a disposal of the lessor's entire interest in the 
property; 
1 OJ No L 145, 13.6.1977, p. 1, as last amended by Directive 96/95/EC, OJ No L338, 28.12.1996, p. 
89 
4 
Whereas the Community provisions give Member States a great deal of discretion in 
determining the VAT treatment to be applied to immovable goods, its transposition 
have led to considerable variations in the national legislations applied in this field; 
Whereas avoidance schemes have been set up, based on the use of surrender, including 
by way of abandonment of a leasehold interest or assignment of a leasehold interest, 
which result in the avoidance of the VAT where the ultimate acquirer of the property is 
not entitled to a full deduction of VAT; 
Whereas it is also necessary to extend the derogation to the surrender or assignment of 
a leasehold interest to a taxable person having full right of deduction, as the surrender 
or the assignment of a leasehold interest will often arise due to financial difficulties of 
the lessee; 
Whereas the measure envisaged is a derogation from Article 21(l)a of the Sixth VAT 
Directive, whereby the person liable for the tax is the taxable person who carries out 
the taxable transaction; 
Whereas the derogation provides that, where a surrender or assignment of a leasehold 
interest is a taxable supply of goods, the person acquiring the interest is liable for the 
payment of the tax if that person is a taxable person or a non-taxable legal person; 
Whereas this derogation shall ensure a better fiinctionning of the actual VAT regime 
applied by Ireland on immovable goods; 
Whereas, given the limited scope of the derogation, the special measure is 
proportianate to the aim pursued; 
Whereas the Commission adopted on 10 July 1996 a work programme based on a 
step-by-step approach for progressing towards a new common system of VAT (COM 
(96) 328 final, 22 July 1996); 
Whereas the tax treatment of immovable goods is an important issue to be reviewed in 
this programme; 
Whereas the last package of proposals is to be put forward by mid-1999, the 
authorisation is granted until 31 December 1999, in order to permit an evaluation of 
the coherence of the derogation with the global approach of the new common VAT 
system, 
Whereas the derogation has no adverse impact on the European Community's own 
ressources accruing from value added tax; 
HAS ADOPTED THIS DECISION: 
6 
Article 1 
By way of derogation from Article 21(l)a of the Directive 77/388/CEE, Ireland is 
hereby authorised to designate the person to whom the supply is made as the person 
liable to pay the tax where the two following conditions are met : 
a surrender or assignment of a leasehold interest is treated as a supply of goods 
made by a lessee; 
the person acquiring the leasehold interest is a taxable person or a non -taxable 
legal person. 
Article 2 
This authorisation is granted until 31 December 1999. 
This Decision is addressed to Ireland. 
Done at Brussels, 
For the Council, 
The President 
6 
ISSN 0254-1475 
COM(97) 120 final 
DOCUMENTS 
EN 06 09 
Catalogue number : CB-CO-97-110-EN-C 
ISBN 92-78-17200-6 
Office for Official Publications of the European Communities 
L-2985 Luxembourg 
V