OPINION OF ADVOCATE GENERAL

CRUZ VILLALÓN

delivered on 15 September 2011 ( 1 )

Case C-280/10

Kopalnia Odkrywkowa Polski Trawertyn P. Granatowicz, M. Wąsiewicz, spółka jawna

v

Dyrektor Izby Skarbowej w Poznaniu

(Reference for a preliminary ruling from the Naczelny Sąd Administracyjny (Poland))

‛Taxation — Value added tax — Recovery of tax due in respect of transactions carried out with a view to future economic activity — Transaction taxed prior to formation of partnership carrying out the economic activity — Issue of invoices in the name of future partnership and ‘future partners’ — Land purchased by ‘future partners’ contributed in kind to partnership upon formation’

I – Introduction

1. The Naczelny Sąd Administracyjny (Supreme Administrative Court) is referring for a preliminary ruling two questions relating to the scope of the right to recover input value added tax in a situation where there has been a change in the form of the taxable person. More specifically, the Court is being asked whether Council Directive 2006/112/EC on the common system of value added tax (‘VAT’) ( 2 ) permits a partnership to exercise the right to deduct input VAT relating to the purchase of immovable property where the acquisition was not effected by the partnership, but by the persons who would subsequently set it up and become partners in it.

2. Although the Court of Justice has previously had occasion to rule on the problems of interpretation posed by the recovery of input VAT in the context of the commencement of and preparations for economic activity, in this case we must address the specific issues arising where there are two natural persons, whom I will refer to as the ‘future partners’. These persons promote and implement the investment necessary to start a production process which is not carried out by them but by a partnership in which they will be the only members. This particular aspect, namely the existence of ‘future partners’ who act as such even prior to the commencement of economic activity, makes it difficult, on the one hand, to see the right to deduct as belonging to the partnership, since it was not the partnership which paid the VAT. On the other hand, neither is it appropriate to regard the ‘future partners’ as unconditionally entitled to repayment of input VAT since they will not have carried out the actual economic activity and will not therefore be able to pass on the tax to the next stage of the production chain.

3. These difficulties mean that some caution must be exercised when analysing the case-law of the Court of Justice in this area, and also that we must avoid interpreting Directive 2006/112 in a way which, by taking a rather formalistic approach, would actually produce a result which is in conflict with the principles behind it.

II – Legal framework

A – EU law

4. Article 9(1) of Directive 2006/112 defines a taxable person for the purposes of VAT as follows: ‘“Taxable person” shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity. Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as “economic activity”. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.’

5. The right to deduct input VAT is covered by Article 167 et seq. of the directive, with Article 168 being of particular importance in these proceedings. It provides that: ‘In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay: (a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person; (b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18(a) and Article 27; (c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i); (d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22; (e) the VAT due or paid in respect of the importation of goods into that Member State.’

6. Article 178 of Directive 2006/112 sets out the formal conditions for making a deduction, point (a) being worthy of note here: ‘[F]or the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Articles 220 to 236 and Articles 238, 239 and 240.’

B – National law

7. Under Article 15(1) of the Ustawa o podatku od towarów i usług (Law on the tax on goods and services) of 11 March 2004 (Dziennik Ustaw No 54, item 535, as amended; hereinafter, ‘the Law on VAT’): ‘Taxable persons are legal persons, organisational units without legal personality and natural persons pursuing an independent economic activity referred to in paragraph 2, regardless of the purpose or result of such activity.’

8. Article 15(2) of the Law on VAT defines economic activity for the purposes of VAT as follows: ‘Economic activities shall comprise all activities of producers, traders and service providers, including those engaged in the mining of natural resources and in agriculture, as well as the activities of persons exercising the professions, even when the given activity is carried out only once in circumstances indicating an intention to perform such activities frequently. Economic activity shall also include activities consisting in the exploitation of goods or intangible or legal assets on a continuing basis for the purpose of obtaining income therefrom.’

9. Article 86(1) of the Law on VAT, which relates to the right of deduction, provides as follows: ‘In so far as the goods and services are used to conduct taxable transactions, a taxable person within the meaning of Article 15 shall have the right to deduct the amount of input tax from the amount of tax due, subject to Articles 114, 119(4), 120(17) and (19), and Article 124.’

10. Point (1) of Article 86(10) of the Law on VAT concerns the origin of the right of deduction: ‘The right to deduct the amount of input tax shall arise: 1. when the return is drawn up for the period in which the taxable person received an invoice or customs document, subject to points 2 to 4 and subparagraphs 11, 12, 16 and 18.’

11. Article 106(1) of the Law on VAT provides: ‘Taxable persons within the meaning of Article 15 shall be required to issue an invoice confirming, in particular, the sale made, the date of the sale, the unit price excluding tax, the taxable amount, the rate and amount of tax, the amount due and information relating to the taxable person and the customer, subject to paragraphs 2, 4 and 5 and Articles 119(10) and 120(16).’

12. Point (6) of Article 8(1) of the Decree of the Polish Minister for Finance of 27 April 2004 on the implementation of certain provisions of the Law on the tax on goods and services (Dziennik Ustaw No 97, item 970, as amended) provides: ‘The following shall be exempt from tax: 6. non-cash contributions (contributions in kind) made to companies governed by commercial and civil law’.

III – Facts and main proceedings

13. On 22 December 2006 Pawel Józef Granatowicz and Marcin Michal Wasiewicz jointly acquired an open-cast stone quarry — a transaction which was subject to VAT and in respect of which an invoice, bearing the same date, was issued in both names.

14. On 26 April 2007 a partnership agreement was executed by notarial deed, thereby creating the general partnership, the Kopalnia Odkrywkowa Polski Trawertyn P. Granatowicz, M. Wasiewicz, spólka jawna (‘the partnership’), and, at the same time, the partners, Messrs Granatowicz and Wasiewicz, made a contribution in kind to the partnership consisting of the quarry. The notary issued an invoice in the name of the partnership in respect of the execution of the original and six extracts of the notarial deed.

15. The partnership was registered on 5 June 2007 and came into existence for VAT purposes on 14 June of that year.

16. In its June 2007 VAT return the partnership deducted the input VAT relating to the purchase of the quarry and the provision of notarial services, amounting to PLN 289718.

17. Following an inspection, the Polish tax authorities found that there were two irregularities in the return filed by the partnership. The first was that the invoice submitted in respect of the purchase of the immovable property was issued in the name of the ‘future partners’ and not in that of the partnership. The second was that the invoice for the execution of the notarial deed and the six extracts was issued in the name of the partnership, when this had not yet been legally formed.

18. The administrative review proceedings brought by the partnership in respect of the decision of the Polish tax authorities were heard by the Director Izby Skarbowej (Director of the Tax Office), who upheld the contested decision on the same grounds.

19. The partnership then brought an action in the Wojewódzki Sąd Administracyjny w Poznaniu (Regional Administrative Court, Poznań), which court also accepted the arguments of the authorities in relation to both the invoice for the purchase of the property and the invoice for the execution of the notarial deeds.

20. The partnership appealed against the decision at first instance to the Naczelny Sąd Administracyjny, the court now referring the questions for a preliminary ruling.

IV – The questions referred for a preliminary ruling and the procedure before the Court of Justice

21. On 4 June 2010 the Court Registry received the order for reference made by the Naczelny Sąd Administracyjny in which the following two questions are referred for a preliminary ruling: ‘(1) Is an entity, in the persons of future partners, which effects investment expenditure before formal registration of the partnership as an entity governed by commercial law or registration for purposes of value added tax, entitled, following registration of the partnership as an entity governed by commercial law and registration for purposes of value added tax, to exercise, pursuant to Article 9 and Articles 168 and 169 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, the right to deduct input tax incurred in connection with investment expenditure which is used for taxable activities carried out within the framework of the partnership? (2) Does an invoice documenting incurred investment expenditure which was issued to the partners, and not to the partnership, preclude exercise of the right to deduct input tax incurred in connection with investment expenditure as referred to in Question 1?’

22. Observations were submitted by the appellant in the main proceedings and also by the Polish, German and Greek Governments and by the Commission.

23. The representative of the appellant, the agents of the Polish, French and Greek Governments and that of the Commission took part at the hearing held on 22 June 2011.

V – Assessment

A – Preliminary observation

24. At the root of these proceedings is a problem which has already been the subject of a ruling of the Court of Justice. Where a person takes preparatory steps with a view to carrying out an economic activity, a chronological mismatch can occur: on the one hand, the preparatory steps are taken with the aim of carrying out an activity that is subject to VAT, but, on the other, there is at that stage no VAT return allowing the person to deduct the input VAT. In order to provide a solution in these cases, the Court of Justice has held that such persons are entitled to recover the input VAT, even though the economic activity has not, strictly speaking, commenced. In short, the case-law gives the taxable person a right to repayment of the input VAT incurred during the preparatory stages of an economic activity. Once that amount has been recovered the taxable person will obviously not be able to make any deduction when it comes to passing on the tax, but at least this ensures that during the early stages there is a mechanism for recovering input VAT within a reasonable time.

25. It is helpful to emphasise this aspect from the start of this Opinion, since although the Court of Justice is looking at two distinct situations, one of repayment and the other of deduction, it has not made this explicit. In the case-law both methods of recovery are referred to as a ‘deduction’, which blurs the subtle distinctions between the two situations and which, in short, can lead to confusion.

26. This distinction is fundamental if a useful answer is to be given, and, with it in mind, we can go on to analyse the two questions referred for preliminary ruling by the Naczelny Sąd Administracyjny.

B – The first question referred for a preliminary ruling

27. The Naczelny Sąd Administracyjny first asks who has the right of deduction in a situation where a partnership is seeking to exercise the right in respect of investment assets and services on which the VAT was paid by the ‘future partners’ prior to formation of the partnership.

28. Pawel Józef Granatowicz and Marcin Michal Wasiewicz were not partners at the time when the property was acquired, and nor is there any indication in the court records that they acted as such. Nevertheless, it is difficult to deny that they both entered into the transaction as ‘future partners’, in other words, with the intention of forming a partnership shortly afterwards, through which the commercial exploitation of the property would be channelled. Furthermore, this aspect seems far from unusual, but represents common and widely accepted commercial practice. One or more individuals decide to set up an undertaking, they look for and obtain funding, acquire assets and procure services and, once all the essentials for starting up the business are in place, they begin the procedure for setting up the partnership which will embody the business and which will take on the legal relationships connected with it. ( 3 ) The interval of time elapsing between the purchase of the property and the formation of the Kopalnia Odkrywkowa Polski Trawertyn P. Granatowicz, M. Wasiewicz, spólka jawna partnership is something which is common in practice, a fact which makes the Court of Justice’s decision in this case all the more interesting.

29. In short, the reference by the Naczelny Sąd Administracyjny provides an opportunity to describe more precisely the status of ‘future partners’ and partnerships for the purposes of recovering input VAT, but also to delineate the boundaries within which the Member States must work when defining the relationships arising between the two. In order to give a response to the question, it is necessary, by way of introduction, to address briefly the case-law of the Court of Justice, starting, specifically, with the case-law relating to the definition of a taxable person within the meaning of Article 9(1) of Directive 2006/112.

1. The case-law of the Court of Justice applicable to the present case

30. In order to reply to the questions referred for a preliminary ruling in these proceedings, it is appropriate to stress two distinct problems which the Court of Justice has had occasion to consider. The first relates to the right to recover input VAT, which is an option available to any person who incurs investment expenditure by way of preparation for economic activity which will subsequently be carried out by that person. The second concerns the same right, but in circumstances where the economic activity continues, or formally commences, through another person. As we shall go on to see, neither of these problems is precisely applicable to the present case, but the rules which emerge from them will be of interest in providing a useful answer.

31. Firstly, the Court of Justice has given judgment on the issue of who can exercise the right to repayment of investment expenditure during the preparatory stages of the economic activity. In Rompelman ( 4 ) the Court of Justice took a non-formalistic approach to the problem, accepting that, in so far as a person who has not yet commenced economic activity incurs investment expenditure, that person is entitled to claim repayment of the input VAT incurred during these preparatory stages. ( 5 ) This, then, is a situation where there is no change in the person involved, as Mr and Mrs Rompelman had incurred the investment expenditure with the aim of exploiting the immovable property themselves at a later date.

32. Thus, although the term ‘deduction’ is used repeatedly in the Rompelman judgment, we are really looking here at a right to repayment of input VAT, since this is not a case of applying a deduction to the VAT due as a result of a transaction which is part of the production chain. On the contrary, as explained in points 24 and 25 of this Opinion, the Court of Justice is giving Mr and Mrs Rompelman the right to repayment of the input VAT, on condition, of course, that when the economic activity commences at a later date, no deduction is made on the basis of this tax. This solution is consistent with the spirit of Directive 2006/112, since it allows the taxable person to recover the input VAT ‘immediately’, while not imposing a penalty where the preparatory steps for an economic activity are prolonged.

33. The risk that the economic activity never materialises presents no obstacle to this solution, as the Court of Justice held in INZO. ( 6 ) The judgment in that case confirmed the existence of the right to repayment ‘even if it was subsequently decided … not to move to the operational phase but to put the company into liquidation, with the result that the economic activity envisaged did not give rise to taxed transactions’. ( 7 ) In so far as the taxable person does not act as the final consumer, if the economic activity does not materialise for reasons beyond the control of that person, there is still a right to recover the input VAT.

34. The Court of Justice took the view that as far as fraud is concerned, the tax authorities have the resources and the means to ascertain whether the purpose of an activity was genuinely to commence economic activity or not. Furthermore, in these cases the case-law regards Directive 2006/112 as authorising the Member States to ‘claim repayment of the sums retroactively on the ground that those deductions were made on the basis of false declarations’. ( 8 )

35. Later judgments reached the same outcome, confirming that where a taxable person carries out preparatory acts, that person can recover the input VAT incurred in respect of the investment expenditure for the future economic activity. This point is emphatically made in Gabalfrisa and Others, ( 9 )Ghent Coal Terminal, ( 10 )Breitsohl ( 11 ) and Fini H. ( 12 )

36. The second question addressed by the case-law relates to situations where there is a transfer of the totality of assets within the meaning of Article 19 of Directive 2006/112, resulting in the transferee being subrogated to the transferor. In this context the Court of Justice once again applies a non-formalistic and pragmatic approach, which has resulted in it accepting that an entity with legal personality created specifically to carry out acts preparatory to setting up a company is entitled to recover the input VAT incurred in connection with the expenditure. This is the solution reached by the Court of Justice in Faxworld, ( 13 ) thereby allowing the entity created for the purposes of preparation (the Vorgründungsgesellschaft) to claim repayment of the input tax even though the assets and services procured would be used entirely by the company for which they were intended.

37. The judgments in Rompelman, INZO and the other cases concerned persons characterised by the fact that they would be carrying out the economic activity themselves, which is not the case here, since, as the referring court has explained, in these proceedings a change of taxable person has occurred. Similarly, the Faxworld approach is not necessarily applicable to the present case, since in that case there was a transfer of the totality of assets, whereas the ‘future partners’ in the present case have effected a single transaction involving one asset only. Consequently, as the French Government has pointed out, the present case falls outside the scope of Article 19 of Directive 2006/112.

38. Notwithstanding this, the cases referred to demonstrate a purpose in the case-law of the Court of Justice which is capable of extending to a case such as this. The main underlying aim is to preserve the principle of fiscal neutrality, which is an objective also to be found in Directive 2006/112 and which means ensuring that VAT retains its nature as an indirect tax chargeable solely and exclusively on consumption and not on economic activity. ( 14 ) With this aim, both the directive and the case-law of the Court of Justice seek to ensure that the taxable person who pays the VAT throughout the production process is able to recover the tax, which occurs once it has been passed on to the next stage in the production chain. ( 15 ) The priority given to the principle of fiscal neutrality in connection with VAT sometimes requires us to go beyond a formalistic approach, and this is confirmed by a detailed reading of Directive 2006/112 where the EU legislature also opts for the former when weighing up the two principles.

2. The ‘future partners’ as taxable persons within the meaning of Article 9 of Directive 2006/112

39. Our starting point must be to emphasise at the outset that the ‘future partners’ and the partnership are taxable persons within the meaning of Article 9 of the directive. In the case of the partnership this is unquestionable, since the exploitation of the quarry and thus the economic activity which is the basis for applying the tax is conducted through it. It may prove more difficult to establish that the ‘future partners’ are taxable persons, but, as I shall go on to explain, they too have the same status.

40. In fact, persons who acquire assets and procure services for the purpose of making a capital contribution to a partnership upon its formation are not, strictly speaking, part of the production chain, since they do not exploit the assets acquired and do not profit from the transaction at any stage. The role of the ‘future partner’ is simply as a vehicle or a person who, as it were, ‘accidentally’ becomes an economic operator simply by virtue of the fact that there is an interval of time when only that person can represent the future undertaking. Viewed in those terms, the rule in Rompelman would not apply here, since the question at issue in that case related to the status of someone who had not yet commenced an economic activity but who would shortly do so, and would do so in a personal capacity. ( 16 ) The person involved did not change, either in Rompelman or in the later case-law, so that, strictly speaking, the position regarding the status of the person involved is not the same in this case.

41. However, it is clear that the aim of the case-law referred to must be respected as much when an economic activity is already in existence as when it is in the preparatory stages, otherwise there is a risk that the tax will be applied in situations which are difficult to reconcile with the principle of fiscal neutrality. If a ‘future partner’ pays the VAT on a supply of goods and services which are actually intended for the partnership which will be exploiting those goods, either the ‘future partner’ or the partnership must immediately be able to deduct the input tax once passing on has taken place. It is important that this option should be available to the ‘future partner’ or to the partnership, particularly where there is a brief period of time between the supply and the formation of the partnership.

42. This solution applies equally to situations where ultimately the partnership is never formed or does not in fact carry out the activity, as was the case in Rompelman. I regard the reasoning applied in the abovementioned case-law as capable of extension to circumstances where a ‘future partner’ acquires goods or procures a service and does not subsequently form the partnership for justifiable reasons. In such circumstances, the rule in Rompelman requires Member States to provide a mechanism for exercising the right to reclaim the input VAT, which will, evidently, be a right belonging to the ‘future partner’. ( 17 )

43. I therefore take the view that Article 9 of Directive 2006/112, interpreted in the light of the case-law mentioned previously, should be understood as meaning that a ‘future partner’ who acquires assets and procures services and pays the relevant VAT, is a taxable person even where such acquisition or procurement is simply for the purposes of using the assets at a later date to make a capital contribution to a partnership, upon its formation, and with a view to carrying out the economic activity for which the assets were acquired.

3. To whom does the right to deduct belong and what are the rules governing its exercise?

44. Having established the foregoing, the question referred by the Naczelny Sąd Administracyjny would remain unanswered if we were to limit ourselves to confirming that the ‘future partners’ have the status of taxable persons. This status is merely the underlying premiss for providing the referring court with a useful answer, since it remains to be established who precisely is the person entitled to recover the input VAT: the ‘future partners’, the partnership or either one of them, as a matter of choice.

45. With the exception of the French Republic, the Member States submitting observations take the view that the right to recover input VAT belongs exclusively to the ‘future partners’ as the persons acquiring the assets and procuring the services in connection with which the tax was paid. On the other hand, the French Government supports the argument whereby the right can be exercised either by the ‘future partner’ or alternatively by the partnership, in the latter case in circumstances where the ‘future partner’ is unable to do so under national law. The appellant in the main proceedings argues that in all cases the partnership should be the party exercising the right of deduction.

46. The case-law to date does not provide much clarification on this point. The situation bearing most resemblance to that of the present case is to be found in Faxworld, in which the Court of Justice held that a type of German law partnership (a Vorgründungsgesellschaft), whose only purpose was to take the necessary preparatory steps to set up a company immediately thereafter, was entitled to repayment. ( 18 ) The Court’s reply kept strictly to the circumstances of the particular case, in order to keep it within the terms of Article 19 of Directive 2006/112, pursuant to which, ‘[i]n the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and that the person to whom the goods are transferred is to be treated as the successor to the transferor’. In Faxworld, the Federal Republic of Germany had relied on this provision and therefore required that the company, once it had been set up, be the taxable person exercising the right to deduct the input VAT paid by the Vorgründungsgesellschaft. ( 19 ) The Court of Justice did not take the same view and held that the Vorgründungsgesellschaft, as the transferor of a totality of assets or part thereof, was entitled to claim repayment. ( 20 )

47. However, the judgment in Faxworld was addressing a different set of facts to those in this case. First of all, in Faxworld the questions of interpretation revolved around a transfer under Article 19 of Directive 2006/112, while the present case does not involve a transfer of ‘a totality of assets or part thereof’. This distinction is confirmed by the Zita Modes ( 21 ) case, in which the Court of Justice stated that the supply of a single asset, such as the contribution of immovable property in the present case, does not fall within the scope of Article 19. ( 22 ) This is the conclusion quite correctly reached by the French Republic, as it explained at the hearing.

48. It is also worth emphasising another difference vis-à-vis Faxworld: the fact that German law contemplated a specific entity for the purposes of facilitating the process of forming a company is also a material factor in reaching this outcome. The risk of fraud in a system in which there is, so to speak, a perfect substitution of one person for another tends to favour entitling the first such person to recover input VAT, even if that person is not to be the person carrying out the activity. ( 23 )

49. In the case before us, the circumstances are appreciably different from those in Faxworld. As has already been pointed out in point 47 of this Opinion, this is not a case of a transfer of a totality of assets within the meaning of Article 19 of the directive, since the ‘future partners’ are not transferring a business but simply contributing an asset. Furthermore, the usual context in which this article is applied involves two distinct taxable persons, usually two separate economic entities, whereas in the present case there is clearly continuity of activity and also of taxable persons.

50. Consequently, although it is important to take Faxworld into account, it is also important to highlight the basic differences between the two situations, at least when it comes to extending the decision in that case to the present case.

51. In the light of the above, it is evident that a case such as this, which falls outside Article 19 of the directive, but where there is a contribution of assets by the ‘future partners’ to a partnership, involving a de facto identity of taxable persons and continuity of economic activity, demonstrates sufficient special characteristics for the EU legislature to have accorded it special treatment. However, we have already seen that this is not the case and that an unequivocal answer to the issue raised is not to be found in the literal meaning of Directive 2006/112 and nor can one be inferred from it. This silence leads me to the conclusion that Directive 2006/112 gives the Member States wide discretion to adopt the measures which they consider most appropriate and consistent with the aims of the directive. Consequently, the real issue in this case is not so much to determine who is entitled to recover input VAT, but on what terms such a right can be exercised under national law.

52. This approach explains why the Member States submitting observations in the current proceedings have adopted opposing arguments which, furthermore, reflect the practice of their respective legal systems. It comes as no surprise that the French Republic should adopt an argument consistent with that of the appellant, since French law provides for such an outcome, as the agent of the French Republic explained at the hearing. ( 24 ) Similarly, the caution shown by the Federal Republic of Germany in emphasising the need to determine whether the partnership was carrying out any activity prior to its formation, is to be expected from a State which has provided for a special entity, as demonstrated in the Faxworld case, governed by its own specific rules which determine the tax treatment of a situation such as the present. ( 25 )

53. I therefore take the view that Article 168 of Directive 2006/112, in conjunction with Article 9 of that directive, must be interpreted as not precluding a Member State from providing that a partnership is entitled to deduct, in circumstances such as those of the present case, where there is de facto identity of persons and of activity.

54. However, if domestic law precludes this possibility, the ‘future partners’ must be entitled to call for immediate repayment of the input VAT on the terms laid down by the Court of Justice in respect of situations such as those arising in Rompelman, INZO or Ghent Coal Terminal, amongst others. Otherwise an unjustified discrimination would arise simply by virtue of the fact that the persons commencing the activity decide to formalise it shortly afterwards by creating a partnership or company.

55. In the event that Member States choose to provide that the partnership is entitled to make the deduction, this option must, of course, be conditional on the ‘future partners’ having passed on the input VAT to the partnership when making the contribution in kind and this being reflected in the accounts. With that proviso, which is aimed at preventing fraud, as the ‘future partners’ and the partnership are virtually identical, — and that is reflected in the rules on personal liability which characterise a partnership such as the one in question, — and as there is clear continuity of economic activity, there is nothing to prevent Member States from providing that the partnership is entitled to make the deduction.

56. The situation is different where a Member State chooses not to give the partnership the right of deduction provided for in Article 168 of Directive 2006/112, as seems to be the case in the Republic of Poland. ( 26 ) In that case, as mentioned in point 53 of this Opinion, the ‘future partners’ must be entitled to recover the input VAT, either through deduction or repayment, depending on which of the following scenarios applies.

57. First, it could be that, prior to formation of the partnership, the ‘future partners’ actually carry on the taxable economic activity. In this case the VAT is naturally passed on to the next stage in the production chain, which will occur either starting from the time of purchase of the property or shortly thereafter, in so far as there is already an economic exploitation of resources. In this case, the ‘future partners’ are behaving as genuine economic operators and will naturally have a right of deduction, which will be exercised through the relevant regular VAT returns, whilst at the same time the process of forming the partnership continues.

58. Second, and this seems to be the situation in the present case, the ‘future partners’ could wait for the formation of the partnership to be finalised in order to actually commence the economic activity. In this case there is no turnover and no passing on of VAT, but there are preparatory acts directed towards setting up a business activity, which are equivalent, according to the Court of Justice, to an economic activity from the point of view of Directive 2006/112. ( 27 ) This situation is clearly demonstrated in the INZO case, in which it was confirmed that where a company has declared its intention to begin an economic activity giving rise to transactions subject to VAT, the carrying out of a preparatory act, such as a study into the technical and economic aspects of the activity envisaged, ‘may therefore be regarded as an economic activity within the meaning of … the directive, even if the purpose of that study is to investigate the degree of profitability of the activity envisaged’. ( 28 ) According to the Court of Justice, the VAT paid on a profitability study must be recovered by the taxable person, ‘even if it was subsequently decided, in view of the results of that study, not to move to the operational phase but to put the company into liquidation, with the result that the economic activity envisaged did not give rise to taxed transactions’. ( 29 )

59. It is apparent from the above that there is a right of repayment, albeit exceptionally, in circumstances where there has been no business activity and, consequently, no passing on of input VAT. Technically, as indicated in point 32 of this Opinion, this would be a right of repayment and not a right of deduction, but the Court’s interpretation of Articles 9 and 168 of Directive 2006/112 utilises the mechanism of deduction in the absence of any other explicit provision in the directive and in order to preserve the principle of fiscal neutrality.

60. The final argument in favour of this outcome is one of reasonableness, an argument which is again expressed in the INZO case. In that case, the Court emphasised that by taking different approaches to the tax treatment of the same investment activities and distinguishing between businesses already carrying out transactions subject to VAT and other businesses seeking by investment to commence activities which would in future be a source of taxable transactions, ‘arbitrary differences would be established between the latter businesses, in that final acceptance of the deductions would depend on whether or not the investment resulted in taxable transactions’. ( 30 )

61. Having established the above, it is essential that those who embark upon preparatory and investment activities, as the ‘future partners’ in the present case have done, can have recourse to an adequate substantive and procedural mechanism which ensures their right to repayment of input VAT.

62. At the hearing both the Polish Government and the partnership accepted that the ‘future partners’ did not, under Polish law, have a right to repayment, inasmuch as the contribution of the property to the partnership was an exempt transaction. It is for the referring court to ascertain whether, in these circumstances, the exempt nature of the transaction would place either the ‘future partners’ or the partnership in a situation which makes it difficult or impossible to recover the input VAT.

63. It is true, as some of the Member States involved in these proceedings have acknowledged, that giving the ‘future partners’ the right to recover input VAT in a situation such as that described above carries a risk of fraud as a result of an over-relaxation of the rules governing repayment. However, at issue here is a highly specific situation, in which two ‘future partners’ contribute immovable property to a partnership, ( 31 ) in which they are the only partners, through which will be conducted the economic activity for which the assets on which the VAT was paid were acquired. The situation is so limited to a specific set of facts and so easy to verify from an anti-fraud perspective that it would be difficult for a Member State to overlook an abuse on the part of the ‘future partners’ or the partnership. As in the situations arising in Rompelman, INZO and the other cases referred to earlier, the Court takes the view that in these situations, once the formalities marking the commencement of an economic activity have been complied with, the taxable person should not be burdened with the obligation of demonstrating that his conduct is legitimate, but rather the reverse should be the case as it is the national authorities that have the resources to identify fraud in circumstances such as those of the present case. ( 32 )

64. For all these reasons, I take the view that Articles 9 and 168 of Directive 2006/112 must be interpreted as not precluding a Member State from providing that a partnership is entitled to deduct input VAT in specific circumstances such as those in the present case, where two natural persons, acting as ‘future partners’, acquire immovable property which is brought by way of a contribution in kind to a partnership formed subsequent to such acquisition in which those persons are the partners.

65. However, if the Member State does not allow for this possibility, Directive 2006/112 precludes a situation where the ‘future partners’ are unable to claim repayment of the input VAT. In these circumstances, the national authorities must ensure that the ‘future partners’ are in a position to exercise the right to repayment on substantive and procedural terms which do not make it excessively difficult, and in accordance with the principle of fiscal neutrality.

C – The second question referred for a preliminary ruling

66. Having clarified to whom the right to recover the input VAT belongs, we must address the second question referred by the Naczelny Sąd Administracyjny, which concerns the invoices issued for the assets and services in question. As the case-file shows, the invoice for the acquisition of the property was issued in the names of the ‘future partners’, whereas the invoice for the notarial services was issued in the name of the partnership but was dated prior to its formation.

67. As we know, exercise of the right of deduction under Article 168 of Directive 2006/112 is subject to the condition that the taxable person must hold an invoice. This is required under Article 178(a) of the directive and further specified in Article 220(1) thereof, which requires an invoice to be issued in respect of any supply of goods or services by a taxable person to another taxable person. Among the information required to be included on invoices by virtue of Article 226(5) of Directive 2006/112 is ‘the full name and address of the taxable person and of the customer’.

68. As the parties to the main proceedings and several of the Member States participating in the proceedings before the Court of Justice have highlighted, the Court’s case-law has interpreted these provisions of Directive 2006/112 fairly loosely. The objective of this approach is to ensure that any taxable person who has paid VAT has a right of deduction. By making the issue and submission of invoices excessively difficult, a Member State risks hindering the exercise of the right of deduction or even making it impossible, leading to a result which is diametrically opposed to the objectives sought by Directive 2006/112. Consequently, the case-law of the Court of Justice has developed a variant of the principle of proportionality for this type of situation and has stated on several occasions that ‘the formalities thus laid down by the Member State concerned, which must be complied with by a taxable person in order to be able to exercise the right to deduct VAT, should not exceed what is strictly necessary for the purposes of verifying the correct application of the reverse charge procedure’. ( 33 )

69. It is this approach that has led the Court of Justice to limit the Member States’ discretion and to restrict their ability to require that invoices should contain information beyond that contemplated in the directive. ( 34 ) Similarly, the Court of Justice has taken the view that where invoices contain errors or defects which are capable of correction, the taxable person must be allowed to try to make the correction before being denied the right of deduction. ( 35 ) In other words, Member States cannot use the formalities inherent in the invoicing process as a pretext for obstructing the exercise of the right of deduction and, essentially, challenging the principle of fiscal neutrality by taxing economic activity rather than final consumption.

70. Against this background of legislation and case-law, we can tackle the answer to the second question referred by the Naczelny Sąd Administracyjny, which must follow the same format used for the first question referred. Thus, we must employ an analysis which distinguishes between two different situations: that in which the Member State chooses to afford the partnership the right to deduct, or that where it is accepted that the future partners may claim repayment of input VAT.

71. First of all, if national law provides that the partnership is entitled to deduct, it seems clear that the Member State has made a choice to facilitate the transaction rather than burden it with costs, whilst also taking the view that, from a fraud prevention perspective, any irregular conduct will be detected by the usual methods of inspection and fiscal monitoring. Subrogation is automatic in relation to all legal relationships and instruments connected with the change in taxable person, including, logically, invoices.

72. In a subrogation context, to require the subrogated taxable person to submit an invoice in that person’s own name, or to reject an invoice on the grounds that it was issued in the name of the transferring taxable person, which amounts to the same thing, is equivalent to introducing a condition which is difficult, not to say impossible, to meet. Such an outcome would be incompatible with the case-law of the Court of Justice, which has repeatedly stated that, ‘[w]here the tax administration has the information necessary to establish that the taxable person is, as the recipient of the supply in question, liable to VAT, it cannot, in relation to the right of that taxable person to deduct that VAT, impose additional conditions which may have the effect of rendering that right ineffective for practical purposes’. ( 36 ) That would be precisely the case here, since a subrogation in favour of the partnership which did not extend to the invoice issued to the ‘future partners’ for the purchase of the property would amount to an indirect denial of the right of deduction.

73. It is particularly evident that an invoice which is issued to the partnership but is dated prior to its formation is capable of correction so that it is in the names of the partners, and this cannot be used as a reason for refusing to allow the partnership the right of deduction.

74. Second, if the law of the Member State does not provide that the partnership is entitled to deduct, but gives the ‘future partners’ a right to repayment, the first invoice, relating to the purchase of the quarry, presents no problem from the point of view of Directive 2006/112, since it is an invoice issued in the names of the future partners. In relation to the invoice for the formation of the partnership, the answer must, in line with the Commission’s argument, involve the correction of the document, as explained in the preceding point of this Opinion, since the fact that it was issued in the name of the partnership prior to its formation clearly constitutes a justifiable basis for amending it and therefore for exercising the right to recover input VAT.

75. Consequently, if national law requires, in specific circumstances such as those of the present case, either deduction by the partnership, or repayment in favour of the ‘future partners’, a Member State cannot introduce burdens which make it impossible to recover the input VAT, including those relating to the issue and submission of invoices. The national authorities may use necessary and proportionate means to achieve the objectives of Directive 2006/112, including, as the Court of Justice has recently acknowledged, the correction of invoices. ( 37 )

76. For all these reasons, I propose that the Court of Justice reply to the second question referred for a preliminary ruling to the effect that Article 178(a), in conjunction with Article 168 of Directive 2006/112, must be interpreted as precluding a national rule or practice which, in specific circumstances such as those in the present case, prevents the recovery of input VAT: (a) where, in the case of deduction by the partnership, an invoice has been issued either in the names of the ‘future partners’ or in that of the partnership although at a date prior to its formation, (b) or where, in the case of repayment in favour of the ‘future partners’, an invoice has been issued in the name of the partnership at a date prior to its formation.

VI – Conclusion

77. In the light of the foregoing considerations I propose that the Court reply to the Naczelny Sąd Administracyjny as follows: (1) Articles 9 and 168 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as not precluding a Member State from providing that a partnership is entitled to deduct input VAT in specific circumstances such as those in the present case, where two natural persons, acting as ‘future partners’, acquire immovable property which is brought by way of a contribution in kind to a partnership formed subsequent to such acquisition in which those persons are the partners. If the Member State does not allow for that possibility, Directive 2006/112 precludes a situation where the ‘future partners’ are unable to claim repayment of the input VAT. In those circumstances, the national authorities must ensure that the ‘future partners’ are in a position to exercise the right to repayment on substantive and procedural terms which do not make it excessively difficult, and in accordance with the principle of fiscal neutrality. (2) Article 178(a), in conjunction with Article 168 of Directive 2006/112, must be interpreted as precluding a national rule or practice which, in specific circumstances such as those in the present case, prevents the recovery of input VAT: (a) where, in the case of deduction by the partnership, an invoice has been issued either in the names of the ‘future partners’ or in that of the partnership although at a date prior to its formation, (b) or where, in the case of repayment in favour of the ‘future partners’, an invoice has been issued in the name of the partnership at a date prior to its formation.

( 1 ) Original language: Spanish.

( 2 ) OJ 2006 L 347, p. 1.

( 3 ) See Abella Poblet, E., Manual del IVA, 3rd edition, La Ley, 2006, p. 150 et seq.

( 4 ) Case 268/83 [1985] ECR 655.

( 5 ) Ibid., paragraphs 23 and 24.

( 6 ) Case C-110/94 INZO [1996] ECR I-857.

( 7 ) Ibid., paragraph 20.

( 8 ) Ibid., paragraph 24.

( 9 ) Joined Cases C-110/98 to C-147/98 [2000] ECR I-1577.

( 10 ) Case C-37/95 [1998] ECR I-1.

( 11 ) Case C-400/98 [2000] ECR I-4321.

( 12 ) Case C-32/03 [2005] ECR I-1599.

( 13 ) Case C-137/02 [2004] ECR I-5547.

( 14 ) See recitals 5, 7, 13 and 30 in the preamble to Directive 2006/112.

( 15 ) The Court of Justice expresses this idea using a formula, which is well established in case-law, stating that the neutrality of VAT manifests itself through the ‘deduction system[, which] is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of value added tax therefore ensures that all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT, are taxed in a wholly neutral way’. See, inter alia, Rompelman, paragraph 19; Ghent Coal Terminal, paragraph 15; Gabalfrisa and Others, paragraph 44; Case C-98/98 Midland Bank [2000] ECR I-4177, paragraph 19; and Fini H, paragraph 25.

( 16 ) Rompelman, paragraphs 23 and 24.

( 17 ) In his Opinion in Breitsohl, Advocate General Ruiz-Jarabo Colomer stated that ‘a fortiori, the same principle prohibits any discrimination with respect to those latter businesses based on the time at which they requested the deduction of tax — before or after it became apparent that the economic activity envisaged was not going to materialise — or on whether or not the tax authority had formally accorded them the status of a taxable person at the time at which they asked for VAT to be deducted’ (point 47).

( 18 ) See, in this regard, Klenk, F., in Sölch, O., and Ringleb, K., Umsatzsteuergesetz, Kommentar, Beck, 2003, paragraph 482 et seq.

( 19 ) Faxworld, paragraph 35.

( 20 ) Ibid., paragraphs 41 and 42.

( 21 ) Case C-497/01 [2003] ECR I-14393.

( 22 ) Ibid., paragraph 40.

( 23 ) Note that the outcome reached by the Court of Justice is not, prima facie, consistent with the reply given in Case C-408/98 Abbey National [2001] ECR I-1361, despite both cases relating to Article 19 of the directive. As Advocate General Jacobs highlighted in his Opinion of 23 October 2003 in Faxworld, the difference between the two situations lies in the national legal framework in each case and the nature of the transactions respectively carried out. The Court of Justice also took this view, referring with particular emphasis to the ‘precise circumstances’ surrounding the Faxworld case (see paragraph 42 of the Faxworld judgment).

( 24 ) In this regard, see the judgment of the Conseil d’État (Council of State) of 30 April 1980 (No 15506),

( 25 ) In this regard, see the Opinion of Advocate General Jacobs referred to previously, at points 19 to 24.

( 26 ) The Polish Government and the representative of the partnership, as well as the referring court, have stated that this is the outcome contemplated under Polish law.

( 27 ) See Rompelman.

( 28 ) INZO, paragraph 18.

( 29 ) INZO, paragraph 20 (my italics).

( 30 ) INZO, paragraph 22.

( 31 ) According to the information supplied by the Polish Government and by the representative of the partnership, the general partnership contemplated under Polish law is one whose liabilities are borne by both the assets of the partnership and those of the partners, although the liability of the latter is secondary.

( 32 ) ‘If the tax authorities were to conclude that the right to deduct has been exercised fraudulently or abusively, they would be entitled to demand, with retrospective effect, repayment of the amounts deducted’ (Fini H, paragraph 33, which, in turn, refers to Rompelman, paragraph 24; INZO, paragraph 24, and Gabalfrisa and Others, paragraph 46).

( 33 ) Case C-90/02 Bockemühl [2004] ECR I-3303, paragraph 50; Case C-392/09 Uszodaépítő [2010] ECR I-8791, paragraph 38; Joined Cases C-95/07 and C-96/07 Ecotrade [2008] ECR I-3457, paragraph 50; and Case C-274/10 Commission v Hungary [2011] ECR I-7289, paragraph 43.

( 34 ) Bockemühl, paragraph 51; Case C-25/03 HE [2005] ECR I-3123, paragraphs 78 to 82; and Ecotrade, paragraph 64.

( 35 ) Case C-368/09 Pannon Gép Centrum [2010] ECR I-7467, paragraphs 43 and 44.

( 36 ) Bockemühl, paragraph 51.

( 37 ) Pannon, paragraph 44.