Proposal for a Council Decision authorising Austria to apply a measure derogating from Article 21 of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes
Date: 2004-07-30
Institutions: European Commission
Subjects: Austria, VAT, auction sale, derogation from EU law, mortgage, real property, tax harmonisation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 30.7.2004 
COM(2004) 535 final 

Proposal for a 

COUNCIL DECISION 

authorising Austria to apply a measure derogating from Article 21 of the Sixth Directive 
77/388/EEC on the harmonisation of the laws of the Member States relating to turnover 
taxes 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

Under  Article  27  of  the  Sixth  Council  Directive  of  17  May  1977  on  the 
harmonisation of the laws of the Member States relating to turnover taxes - Common 
system  of  value  added  tax:  uniform  basis  of  assessment,1  the  Council,  acting 
unanimously on a proposal from the Commission, may authorise any Member State 
to introduce special measures for derogation from the provisions of the Directive, in 
order to simplify the procedure for charging the tax or to prevent certain types of tax 
evasion or avoidance.  

In  a  request  submitted  to  the  Commission  and  registered  by  the  Commission's 
Secretariat-General on 03.03.2004, the Austrian Government sought authorisation to 
introduce three measures derogating from Article 21(1) (a) of Directive 77/388/EEC. 

In  accordance  with  Article  27(2)  of  the  Sixth  Directive,  the  Commission  informed 
the other Member States by letter of 26.03.2004 of the request made by the Austrian 
Government and by letter of 30.03.2004 the Commission notified Austria that it had 
all the information it considers necessary for appraisal of the request.  

Article  21(1)  of  Directive  77/388/EEC,  in  the  version  of  Article  28g  of  the  said 
Directive,  stipulates  that,  under  the  internal  system,  the  taxable  person  supplying 
taxable goods or services is normally liable to pay value added tax (VAT).  

The purpose of the derogation requested by Austria is to make the recipient liable for 
the  value  added  tax  due  in  three  specific  cases:  Firstly  on  the  supply  of  goods 
provided  as  security  by  one  VAT  taxable  person  to  another  in  execution  of  that 
security; secondly on the supply of goods following the cession of the reservation of 
ownership to an assignee and the exercising of this right by the assignee; and thirdly 
on  the  supply  of  immovable  property  in  a  judicial  sale  at  public  auction  to  another 
VAT taxable person, if the supplier has opted for taxation under Article 13 C of the 
6th  Directive.  The  requested  measures  are  to  be  considered  as  measures  to  prevent 
certain types of tax evasion or avoidance in the described sectors. 

Goods  are  often  supplied  as  collateral  by  one  VAT  taxable  person  to  another  in 
execution  of  a  security.  This  usually  reflects  a  situation  where  the  supplying 
guarantor has a limited capacity to settle his debts, including his tax debts. When the 
receiving collateral taker exercises his rights and sells the collateral to a third party, 
this sale also generates a supply from the guarantor to the collateral taker. In this case 
the collateral taker profits both from the proceeds of the sale of the collateral goods 
and the deduction of input tax on the guarantor's transfer to him. He usually does not 
pay  the  guarantor  the  turnover  tax  due  on  the  supply  to  him.  Even  if  part  of  the 
proceeds of the sale is passed on to the guarantor, there is still no guarantee that the 
later will use those proceeds to pay the turnover tax. In fact VAT losses occurred in 
many  cases  where  the  receiving  collateral  taker  could  not  be  refused  his  right  to 
deduct  and  the  supplying  guarantor  could  not  be  held  responsible  because  he  was 
insolvent  or  had  disappeared.  The  number  of  such  cases  prevents  the  Austrian  tax 
administration  to  adopt  exclusively  fiscal  and  non-fiscal  measures  aiming  at 
increasing  administrative  supervision  of  business.  They  would  be  insufficient 

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OJ L 145, 13.6.1977, p.1. Directive last amended by Directive 2003/92/EC (OJ L 260, 11.10.2003, p.8) 

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because  the  Austrian  fiscal  administration  would  not  be  able  to  identify  that  many 
non-compliant operators or achieve identification too late to recover lost VAT. The 
dimension of the problems encountered by the Austrian administration requires legal 
measures. The envisaged liability of the recipient for VAT only concerns businesses 
which can usually exercise their right to deduct and does not cover private persons. A 
similar  derogation  has  already  been  granted  to  Germany  (Council  Decision 
2002/439/EC of 2 June 2002 – OJ L 151/12 of 11 June 2002). 

The  second  scenario  concerns  a  supply  of  goods  following  the  cession  of  the 
reservation  of  ownership  to  an  assignee  and  the  exercising  of  this  right  by  the 
assignee: In cases where a buyer of goods has a limited capacity to settle his debts 
for the purchase, the supplier of the goods may reserve the ownership and cede the 
right to exercise this reservation and the purchase price claim to a third party, usually 
a bank, as a security for a loan granted by the third party to the buyer. If the buyer of 
the goods discontinues settling his debts for the loan, the bank will exercise its right 
of ownership; this involves a supply of the goods from the original buyer to the bank. 
In such a case the bank would usually not pay the original buyer the turnover tax due 
on the supply to it, but use it to settle the original buyer's debt for the loan, with the 
consequence  that  the  Austrian  fiscal  authorities  cannot  recover  VAT  from  the 
original buyer. Even if part of the proceeds of the sale were passed on to the original 
buyer,  there  is  still  no  guarantee  that  the  later  will  use  those  proceeds  to  pay  the 
turnover tax. Therefore this second scenario is similar to the execution of a security 
described above. In fact, in most of these scenarios the original buyers are insolvent 
or  disappear  before  the  Austrian  tax  administration  can  identify  them  and  recover 
VAT.  

The third scenario concerns the supply of immovable property sold at public auction 
to  another  VAT  taxable  person  in  the  course  of  the  judicial  liquidation  of  the 
enterprise that owned the immovable property. The relevant cases are those in which 
the  supplier has  opted for tax liability although at the time  of supply he is not in a 
financial  position  to  pay  the  tax  authorities  the  tax  which  he  has  invoiced  to  the 
purchaser.  The  buyer  can  usually  exercise  his  right  to  deduct  and  the  supplier  will 
pay no VAT to the fiscal authorities. The effect is that the creditors of the seller get 
more money paid back from their debtor than they would normally get if the sale had 
been  exempt  from  VAT.  This  is,  however,  to  the  disadvantage  of  the  fiscal 
authorities, who cannot recover VAT from the supplier because in the meantime he 
has  declared  his  insolvency.  The  dimension  of  the  problem  encountered  by  the 
Austrian administration requires legal measures. Immovable property is a high value 
good;  thus  also  the  taxable  amount  and  the  losses  in  terms  of  VAT  -  even  on  one 
single  transaction  -  are  particularly  high.  The  abolishing  of  the  option  to  render  a 
supply  of  immovable  property  taxable  is  no  solution.  The  value  of  the  immovable 
property usually contains hidden VAT and the maintaining of the option is therefore 
necessary to keep the VAT system neutral. Against this background, it appears that 
the  envisaged  liability  of  the  recipient  for  VAT  is  in  fact  the  most  appropriate 
solution in the specific circumstances and for the particularly high risk involved. The 
requested derogation avoids the loss of VAT because there is no VAT paid from the 
fiscal authorities to one of the economic operators involved. The solution also avoids 
a  double  tax  responsibility  of  supplier  and  recipient,  which  might  involve  a  higher 
economic risk for the recipient if he is jointly liable. The solution relieves the fiscal 
authorities from burdensome recovery procedures, where they could only address the 

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recipient  when  recovery  from  the  supplier  proves  to  be  impossible.  It  renders  the 
fiscal responsibility of a third person like a notary, usually resulting in higher charges 
for supplier and recipient, superfluous. As in practice the derogation will only cover 
supplies between taxable persons, it is limited to specific cases; in fact, the option to 
make  the  supply  taxable,  is  only  used,  where  the  recipient  can  usually  exercise  his 
right to deduct. Similar derogations have already been granted to Germany (Council 
Decisions  2002/439/EC  of  2  June  2002  –  OJ  L  151/12  of  11  June  2002  and 
2004/291/EC of 30 March 2004 – OJ L 94/59 of 30 March 2004). 

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Proposal for a 

COUNCIL DECISION 

authorising Austria to apply a measure derogating from Article 21 of the Sixth Directive 
77/388/EEC on the harmonisation 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,  

the  Sixth  Council  Directive  (77/388/EEC)  of  17 May 1977  on 

Having  regard 
the 
harmonisation of the laws of the Member States relating to turnover taxes - Common system 
of  value  added  tax:  uniform  basis  of  assessment2  and  in  particular  Article 27  paragraph  1 
thereof, 

Having regard to the proposal from the Commission3, 

Whereas: 

(1) 

(2) 

In  a  request  submitted  to  the  Commission  and  registered  by  the  Commission's 
Secretariat-General  on  03.03.2004,  the  Austrian  Government  sought  authorisation  to 
introduce three measures derogating from Article 21(1) (a) of Directive 77/388/EEC, 

The purpose of the derogation requested by Austria is to make the recipient liable for 
the value added tax due in three specific cases: Firstly on the supply of goods provided 
as  security  by  one  VAT  taxable  person  to  another  in  execution  of  that  security, 
secondly on the supply of goods following the cession of the reservation of ownership 
to an assignee and the exercising of this right by the assignee and thirdly on the supply 
of  immovable  property  in  a  judicial  sale  at  public  auction  to  another  VAT  taxable 
person, if the supplier has opted for taxation under Article 13 C of the 6th Directive. 
The requested measures are to be considered as measures to prevent certain types of 
tax evasion or avoidance in the described sectors, 

(3)  Where  goods  are  supplied  as  collateral  by  one  VAT  taxable  person  to  another  in 
execution of a security, this usually reflects a situation where the guarantor supplying 
the goods has a limited capacity to settle his debts, including his tax debts. When the 
collateral taker who received the goods exercises his rights and sells the collateral to a 
third party, this sale also generates a supply from the guarantor to the collateral taker. 
In  such  scenarios  VAT  losses  occurred  in  many  cases  because  the  collateral  taker 
could not be refused his right to deduct and the supplying guarantor could not be held 
responsible  because  he  was  insolvent  or  had  disappeared.  The  dimension  of  the 

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OJ L 145,13.06.1977,p.1., Directive last amended by Directive 2003/92/EC (OJ L 260,11.10.2003,p.8). 
OJ C , , p. . 

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(4) 

(5) 

problems  encountered  by  the  Austrian  administration  requires  legal  measures.  The 
envisaged  liability  of  the  recipient  for  VAT  only  concerns  businesses  which  can 
usually  exercise  their  right  to  deduct  and  does  not  cover  private  persons.  A  similar 
derogation has already been granted to Germany (Council Decision 2002/439/EC of 2 
June 20024). 

In  cases  where  a  buyer  of  goods  has  a  limited  capacity  to  settle  his  debts  for  a 
purchase, the supplier of the goods will reserve the ownership and may cede the right 
to exercise this reservation as well as the purchase price claim to a third party, usually 
a bank, as a security for a loan granted by the bank to the buyer. If the buyer of the 
goods  discontinues  settling  his  debts  for  the  loan,  the  bank  will  exercise  its  right  of 
ownership; this involves a supply of the goods from the original buyer to the bank. In 
such a case the bank would usually not pay the original buyer the turnover tax due on 
the  supply  to  it,  but  use  it  to  settle  the  original  buyer's  debt  for  the  loan,  with  the 
consequence  of  VAT  losses  for  the  fiscal  authorities  because  the  original  buyers  are 
usually insolvent or have disappeared before the tax administration can identify them 
and  recover  VAT.  Therefore  this  scenario  is  similar  to  the  execution  of  a  security 
described above. 

VAT  losses  also  occurred  in  cases  of  supplies  of  immovable  property  sold  at  public 
auction to another VAT taxable person in the course of the judicial liquidation of the 
enterprise that owned the immovable property and where the supplier had opted for tax 
liability although at the time of supply he was not in a financial position to pay the tax 
authorities  the  tax  which  he  has  invoiced  to  the  purchaser.  The  buyer  could  usually 
exercise his right to deduct and the supplier did not pay VAT to the fiscal authorities. 
The  dimension  of  the  problem  encountered  by  the  Austrian  administration  requires 
legal measures. Immovable property is a high value good; thus also the taxable amount 
and the losses in terms of VAT - even on one single transaction - are particularly high. 
The  value  of  the  immovable  property  usually  contains  hidden  VAT  and  the 
maintaining  of  the  option  is  necessary  to  keep  the  VAT  system  neutral.  Against  this 
background, it appears that the envisaged liability of the recipient for VAT is the most 
appropriate  solution  in  the  specific  circumstances  and  for  the  particularly  high  risk 
involved. The requested derogation avoids the loss of VAT because there is no VAT 
paid  from  the  fiscal  authorities  to  one  of  the  economic  operators  involved.  The 
solution also avoids a double tax responsibility of supplier and recipient, which would 
involve a higher economic risk for the recipient and burdensome recovery procedures 
for the fiscal authorities which could only address the recipient, when recovery from 
the  supplier  proved  to  be  impossible.  It  avoids  the  fiscal  responsibility  of  a  third 
person like the notary, which would result in higher charges for supplier and recipient. 
As  in  practice  the  derogation  will  only  cover  supplies  between  taxable  persons,  it  is 
limited  to  specific  cases.  Similar  derogations  have  already  been  granted  to  Germany 
(Council  Decisions  2002/439/EC  of  2  June  20025  and  2004/291/EC  of  30  March 
20046). 

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OJ L 151, 11.06.2002 , p.12 
OJ L 151, 11.06.2002 , p.12 
OJ L 94, 30.03.2004, p.59 

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(6) 

The derogation in question does not affect the amount of  value added tax due at the 
final  consumption  stage  and  has  no  adverse  impact  on  the  European  Communities’ 
own resources from valued added tax 

HAS ADOPTED THIS DECISION:  

Article 1 

By  derogation  from  Article 21(1)(a)  of  Directive  77/388/EEC,  as  amended  by  Article 28g 
thereof,  Austria  is  hereby  authorised  to  designate  the  recipient  of  the  supplies  of  goods 
referred to in Article 2 of this Decision as the person liable to pay value added tax. 

Article 2 

In the following instances the recipient of the supply may be designated as the person liable to 
pay value added tax: 

1. 

2. 

3. 

The supply of goods provided as security by one VAT taxable person to another in 
execution of that security; 

The  supply  of  goods  following  the  cession  of  the  reservation  of  ownership  to  an 
assignee and the exercising of this right by the assignee; 

The  supply  of  immovable  property  sold  at  public  auction  to  another  VAT  taxable 
person  in  the  course  of  the  judicial  liquidation  of  the  enterprise  that  owns  the 
immovable property sold, if the supplier has exercised his right to tax the supply.  

This Decision shall expire on 31 December 2008. 

Article 3 

This Decision is addressed to Austria 

Done at Brussels,  

Article 4 

For the Council 
The President 

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