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
Date: 1997-03-21
Institutions: European Commission
Subjects: Ireland, VAT, derogation from EU law, property leasing, tax harmonisation

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 
proportianate to the aim pursued; 

is 

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. 

This authorisation is granted until 31 December  1999. 

Article  2 

This Decision is addressed to Ireland. 

Done at Brussels, 

For the Council, 
The President 

6 

ISSN 0254-1475 

COM(97) 120 final 

DOCUMENTS 

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06  09 

Catalogue number  : CB-CO-97-110-EN-C 

ISBN 92-78-17200-6 

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