Proposal for a Council Directive amending VAT Directive 2006/112/EC of 28 November 2006 on the common system of value added tax
Date: 2007-11-07
Institutions: European Commission
Subjects: VAT, basis of tax assessment, delivery, distributive trades, provision of services, tax exemption, tax harmonisation, tax on consumption, tax relief

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 7.11.2007 
COM(2007) 677 final 

2007/0238 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending VAT Directive 2006/112/EC of 28 November 2006  
on the common system of value added tax 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

1)  CONTEXT OF THE PROPOSAL 

110 

•  Grounds for and objectives of the proposal 

Comments from the business world and the Member States have demonstrated the need 
to  amend  several  elements  of  Directive  2006/112/EC  of  28 November  2006  on  the 
common  system  of  value  added  tax  (hereinafter  the  "VAT  Directive").  None  of  the 
amendments calls into question the guiding principles set out in the VAT Directive or 
is sufficiently important to justify on its own a separate proposal for a directive. 

It  has  therefore  been  considered  expedient  to  incorporate  into  a  single  proposal  the 
specific  improvements  that  the  VAT  Directive  seems  to  require.  These  amendments 
concern:  the  VAT  scheme  applicable  to  the  supply  of  natural  gas,  electricity,  heat 
and/or  refrigeration;  the  tax  treatment  of  joint  undertakings  set  up  pursuant  to 
Article 171  of  the  EC  Treaty;  the  taking  into  account  of  certain  consequences  of  EU 
enlargement;  and  the  conditions  under  which  the  right  to  deduct  input  VAT  may  be 
exercised. 

120 

•  General context 

The  current  VAT  scheme  for  gas  and  electricity  is  derived  primarily  from  Directive 
2003/92/EC  of  7 October  2003.  However,  it  has  become  apparent  that  the  technical 
terms  used  in  that  Directive  have  unduly  limited  the  scope  of  the  new  tax  scheme, 
which does not correspond to economic realities, particularly regarding the place where 
VAT  is  levied  on  the  supply  of  natural  gas  and  the  VAT  exemption  for  natural  gas 
imports. It has also become clear that it would be expedient to apply the same rules to 
the  supply  of  heat  and  refrigeration  via  heat  and/or  refrigeration  networks  since  this 
sector functions in a manner similar to the natural gas and electricity sector. 

Pursuant to Article 171 of the EC Treaty, the Community may set up joint undertakings 
or  any  other  structure  necessary  for  the  efficient  execution  of  Community  research, 
technological  development  and  demonstration  programmes.  In  its  decision  of 
19 December 2006 (2006/971/EC), the Council confirmed that, for the implementation 
of 
technological  development  and 
demonstration  activities  (2007-2013),  it  may,  in  particular,  set  up  joint  undertakings 
and  will  be  very  likely  do  so  increasingly  in  the  future.  A  suitable  tax  framework 
should therefore be defined for this type of undertaking. 

the  framework  programme  for  research, 

In the context of their accession Bulgaria and Romania, like other new Member States, 
have been authorised to apply derogations regarding the tax exemption granted to small 
and  medium-sized  enterprises  and  the  VAT  scheme  applicable  to  the  international 
transport  of  passengers.  For  purposes  of  transparency  and  consistency,  these 
exemptions should be incorporated into the VAT Directive. 

Regarding the right of deduction, one of the existing basic principles stipulates that a 
taxable person may deduct VAT on input transactions only in so far as the goods and 
services  are  used  for  his  transactions  that  give  rise  to  the  right  of  deduction.  In  this 
context,  the  Court  of  Justice  of  the  European  Communities  has  ruled  that  taxable 
persons have the right to choose whether to include mixed-use goods, in part or in their 

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entirety, in the assets relating to their economic activity. When taxable persons choose 
to include all of the goods in question in their economic activity, they may immediately 
deduct  all  input  VAT,  irrespective  of  whether  the  good  is  used  simultaneously  for 
business  and  non-business  purposes.  The  non-business  use  of  the  good  will  then  be 
subject to VAT in the same way as a supply of services for consideration on the basis 
of the amount of expenditure incurred. 

In  theory,  each  type  of  choice  made  by  the  taxable  person  should  achieve  a  similar 
result.  However,  it  should  be  noted  that  including  all  mixed-use  goods  in  the 
company's assets and liabilities generally offers cash-flow benefits. Consequently, non-
business  use  lowers  the  tax  burden  by  an  amount  that  could  increase  in  direct 
proportion to the degree of use for non-business purposes. 

This is particularly true for immovable property, given that acquisition costs are often 
very high, that simultaneous business and non-business use is possible and widespread 
and that the economic lifetime of immovable property is, in theory, much longer than 
that  of  other  goods  used  for  business  purposes.  It  therefore  seems  expedient  to  adapt 
the deduction of VAT relating to immovable property in such a way as to ensure that 
the  initial  exercise  of  the  right  to  deduct  input  VAT  more  closely  reflects  the  basic 
principle  described  above  and  to  prevent  certain  constructions  designed  to  create  an 
unjustified cash-flow advantage. 

•  Existing provisions in the area covered by the proposal 

The common VAT system is currently governed by Council Directive 2006/112/EC of 
28 November  2006,  which  is  the  result  of  the  recasting  of  the  Sixth  VAT  Directive 
(77/388/EEC) of 17 May 1977. 

•  Consistency with other Union policies and objectives 

Not applicable. 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

•  Consultation of interested parties 

Because the proposal contains primarily technical arrangements, the consultation took 
place  with  the  Member  States  only  within  the  VAT  Committee  and  Working  Group 
No 1. 

•  Collection and use of expertise 

No recourse to external expertise has been necessary. 

•  Impact assessment 

The  proposal  for  a  Directive  contains  primarily  technical  provisions  that  do  not  call 
into question the important principles on which Community VAT legislation is based. 

Initially,  re-establishing  the  basic  principle  at  the  level  of  the  exercise  of  the  right  of 
deduction  will  result  in  the  elimination  of  potential  differences  between  taxable 

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persons.  Thereafter,  the  rule  will  be  applied  in  a  neutral  manner,  both  for  taxable 
persons and for tax administrations. 

Therefore, an impact study was not necessary. 

3)  LEGAL ELEMENTS OF THE PROPOSAL 

305 

•  Summary of the proposed measures 

As regards the scope of the VAT scheme applicable to natural gas and electricity, it is 
proposed  to  extend  its  scope  to  the  supply  and  import  of  natural  gas  by  all  types  of 
pipeline and by vessels transporting natural gas. It is also proposed to apply the same 
rules  to  the  supply  and  import  of  heat  or  refrigeration  via  heat  and/or  refrigeration 
networks. With regard to the place where VAT is levied on the provision of services, 
the proposal provides for taxation in the Member State of the customer of all services 
related to the supply of access to the electricity, natural gas, heat and/or refrigeration 
networks,  and  not  only  those  services  related  to  access  to  the  distribution  systems. 
Lastly,  the  proposal  simplifies  the  procedure  whereby  Member  States  may  apply  a 
reduced VAT rate to the supply of natural gas, electricity and district heating. 

Concerning  the  joint  undertakings  set  up  under  Article 171  of  the  EC  Treaty,  it  is 
proposed to clarify their tax status in relation to VAT. With regard to undertakings set 
up  at  Community  level  for  the  purpose  of  supporting  Community  research  efforts,  it 
would  be  advisable  to  take  account  of  their  Community  nature  and  of  their  specific 
method of financing. The financing of such enterprises by common funds pursuant to 
Article 185 of the Financial Regulation results in the VAT on input purchases (which, 
as a general rule, do not give rise to a right of deduction on account of the absence of 
any taxable transactions) being added to the national budget in certain Member States 
without  any  justification.  In  order  to  avoid  such  consequences,  these  undertakings 
should be treated like international bodies in as far as they are set up by the European 
Communities, have legal personality and receive contributions that are charged to their 
general budget. It should be specified that the exemption would not apply to the supply 
of goods and provision of services intended for the private use of the members of these 
undertakings. 

In the context of their accession, Bulgaria and Romania were authorised to grant a tax 
exemption  to  small  enterprises  and  to  continue  applying  a  VAT  exemption  to  the 
international transport of passengers. These exemptions should therefore be included in 
the text of the VAT Directive, as is the case for the other Member States. 

Regarding  the  right  of  deduction,  in  order  to  apply  more  effectively  the  principle 
whereby  the  deduction  arises  only  in  so  far  as  the  goods  and  services  concerned  are 
used for the transactions giving rise to the right of deduction, it is proposed to restrict 
the  initial  exercise  of  the  deduction  to  the  proportion  of  effective  business  use  when 
mixed-use  immovable  property  is  included  in  the  company's  assets  and  liabilities.  At 
the  same  time,  an  adjustment  system  is  proposed  in  order  to  reflect  the  variations 
between the business and private (or non-business) use of such immovable property. 

310 

•  Legal basis 

Article 93 of the EC Treaty. 

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320 

•  Subsidiarity principle 

The  subsidiarity  principle  applies  in  so  far  as  the  proposal  does  not  fall  within  the 
exclusive competence of the Community. 

The  objectives  of  the  proposal  cannot  be sufficiently  achieved  by  the  Member  States 
for the reasons below. 

The  areas  affected  by  this  proposal  are  already  covered  by  Community  legislation, 
namely Council  Directive 2006/112/EC of 28 November 2006.  Provisions of existing 
Community legislation can, therefore, be amended only by Community law. 

Member  States  may  not  adopt  national  legislation  that  contradicts  harmonised 
Community legislation unless the latter is amended first. 

The objectives of the proposal may be better achieved through Community action for 
the following reasons. 

Only Community legislation can amend existing Community legislation. 

Action  at  Community  level  is  the  only  effective  mechanism  for  amending  already 
harmonised legislation. 

The proposal does no more than amend the current legal provisions that have proved 
inappropriate. 

The proposal therefore complies with the subsidiarity principle. 

•  Proportionality principle 

The proposal complies with the proportionality principle for the following reasons: 

The  proposed  measures  are  contained  in  a  draft  directive.  VAT,  however,  may  be 
levied  in  one  place  only.  Similarly,  the  rules  governing  the  exercise  of  the  right  to 
deduct VAT should be harmonised. 

The  proposed  measures  mainly  clarify  and  simplify  current  VAT  rules,  thereby 
benefiting traders, individuals and public administrations. 

•  Choice of instruments 

Proposed instrument(s): Directive. 

Other instruments would not have been appropriate for the following reasons. 

As  the  Community  VAT  legislation  to  be  amended  is  contained  in  a  directive,  a 
directive constitutes the most suitable tool for amending it. 

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4)  BUDGETARY IMPLICATION 

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The proposal has no implication for the Community budget. 

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5)  ADDITIONAL INFORMATION 

•  Simplification 

The  proposal  simplifies  the  legislative  framework,  the  administrative  procedures 
applicable  to  (national  or  European)  public  authorities  and  the  administrative 
procedures applicable to entities and private individuals. 

The proposal contains a provision aimed at clarifying the common system of VAT. 

The proposal contains a provision simplifying the procedure to be followed by Member 
States wishing to apply a reduced VAT rate to the supply of natural gas, electricity or 
district heating. 

The  measures  regarding  the  place  where  VAT  is  levied  on  the  supply  of  natural  gas 
simplify matters for undertakings in this sector. 

The  proposal  on  the  right  of  deduction  aims  to  establish  a  system  that  permits 
adjustments in order to reflect changes in the level of business and non-business use of 
immovable property. Consequently, in such cases Article 26 of the VAT Directive will 
no longer apply during the adjustment period to the non-business use of such property, 
in so far as this use did not initially give rise to the right of deduction. The fact of not 
having  to  tax  private  (or  non-business)  use  separately  and  additionally  constitutes  a 
simplification. 

550 

•  Correlation table 

The  Member  States  are  required  to  communicate  to  the  Commission  the  text  of 
national provisions transposing the Directive as well as a table showing the correlation 
between those provisions and this Directive. 

570 

•  Detailed explanation of the proposal by chapter or by article 

VAT scheme applicable to gas, electricity, heat and refrigeration (Article 1(1), (3) 
to (5), (7) and (9)) 

In view of the wording adopted by the Council in 2003, where natural gas is concerned, 
the  special  VAT  scheme  applicable  to  the  supply  and  import  of  natural  gas  and 
electricity applies to supplies and imports via the distribution system only. As a result, 
natural  gas  supplies  and  imports  via  the  pipelines  of  the  transmission  system  are 
excluded from the scheme. Moreover, the special scheme does not currently apply to 
the  supply  and  import  of  natural  gas  by  vessels  designed  for  the  transport  of  natural 
gas, even though such gas is identical to that transported by pipeline and is fed into the 
pipelines of the transmission system following gasification in the port of arrival. Under 
the proposal, the supply and import of natural gas via all types of pipeline and vessel 
would therefore fall within the scope of the special scheme. 

In addition, the first cross-border heat and refrigeration networks have recently become 
operational.  The  same  issues  that  apply  to  the  supply  and  import  of  natural  gas  or 
electricity also apply to the supply and import of heat and refrigeration. The proposal 
for a Directive therefore envisages bringing the VAT scheme for the supply and import 

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of  heat  and  refrigeration  by  heat  and/or  refrigeration  networks  into  line  with  the 
scheme applicable to natural gas and electricity. 

Moreover, with regard to the place where VAT is levied on the provision of services, 
the  current  text  of  Article 56  of  the  VAT  Directive  provides  for  the  application  of  a 
reverse-charge  mechanism  for  the  supply  of  access  to  natural  gas  and  electricity 
distribution  systems  only.  The  proposal  envisages  extending  this  reverse-charge 
mechanism  to  cover  all  provisions  of  services  related  to  the  supply  of  access  to 
electricity,  natural  gas,  heat  and/or  refrigeration  networks,  and  not  only  to  those 
services related to access to the distribution systems. 

The experience gained during the recent implementation of the Article 102 procedure, 
whereby  the  Commission  is  charged  with  deciding  whether  or  not  there  is  a  risk  of 
distortion of competition created by a reduced rate applicable to the supply of natural 
gas and electricity, has shown that the procedure is obsolete and superfluous. Since the 
adoption of Directive 2002/93/EC, Articles 38 and 39 ensure that VAT is levied at the 
place  where  the  natural  gas  supplied  by  the  natural  gas  and  electricity  distribution 
system is actually consumed by the customer. These rules take account of the specific 
nature of this type of transport when determining the place of supply, thereby avoiding 
any  distortion  of  competition  between  Member  States.  This  proposal  would  extend 
these rules to cover the supply of heat and refrigeration via the heat and/or refrigeration 
distribution networks. Nevertheless, given the highly sensitive nature of the sector, it is 
still important to ensure that the Commission and the other Member States are properly 
informed when a Member State introduces a reduced rate. Consequently, it is proposed 
that  a  preliminary  consultation  procedure  involving  the  VAT  Committee  take  place 
whenever a Member State wishes to introduce a reduced rate for the supply of natural 
gas, electricity or district heating. 

VAT scheme applicable to joint undertakings (Article 1(10)) 

To  be  eligible  for  the  exemption  referred  to  in  Article 151  of  the  VAT  Directive,  an 
international body must have been created by at least two States recognised either by 
the EU  or  by  an  existing international  organisation  (acting, if applicable, jointly  with 
other  international organisations or States) within the context of legitimate objectives 
that  are  pursued  jointly  and  are  not  primarily  economic  in  nature.  Joint  undertakings 
may not be regarded as such international bodies. Yet these undertakings are instructed 
to  implement  a  Community  policy  not  only  for  which  Community  funding  enters  in 
play but also to which Member States contribute via their national budgets.  

As a rule, the activities of joint undertakings are not subject to VAT and, consequently, 
the  input  VAT  does  not  entitle  them  to  a  deduction.  In  order  to  avoid  the  impact  of 
taxation  on  their  purchases,  such  undertakings  should  be  treated  like  international 
bodies.  It  is  therefore  proposed  that  a  new  article,  Article 151a,  treating  joint 
undertakings as international bodies be inserted into the VAT Directive. However, only 
bodies  set  up  by  the  European  Communities  that  have  legal  personality  and  receive 
contributions  charged  to  their  general  budgets  are  eligible  for  such  treatment.  The 
exemption would not apply to the supply of goods and services intended for the private 
use of the members of such undertakings. 

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Taking account of certain consequences related to enlargement (Article 1(2), (6), 
(8) and (12) to (16)) 

In the context of their accession, Bulgaria and Romania were authorised to grant a tax 
exemption  for  small  enterprises.  In  the  interests  of  clarity  and  transparency,  this 
exemption has been incorporated into Article 287. Articles 390a and 390b  have  been 
inserted  into  the  VAT  Directive  to  take  account  of  the  authorisation  granted  in  the 
same  context  to  these  new  Member  States to  continue  applying  a  VAT  exemption  to 
the international transport of passengers. 

Arrangements for exercising the right of deduction for goods and services relating 
to certain immovable property (Article 1(11)) 

In the context of the right of deduction, the basic principle provided for in Article 168 
of the VAT Directive stipulates that taxable persons have the right to deduct VAT in so 
far as  the goods and  services  on which VAT has been paid or is payable are used to 
carry out transactions that give rise to the right of deduction. 

The provision aims to clarify the exercise of the right of deduction when it applies to 
immovable property intended to be used simultaneously for business and non-business 
purposes.  This  is  the  case  in  particular  for  VAT  related  not  only  to  acquisitions  of 
immovable property but also to services such as construction, renovation or substantial 
transformations  that,  in  economic  terms,  can  be  placed  on  the  same  level  as  the 
acquisition  or  construction  of  immovable  property.  Simple  repairs  or  improvements 
are, however, excluded from the scope of the proposed measure. 

The  provision  now  stipulates  that,  in  the  situations  described  in  the  preceding 
paragraph,  the  initial  deduction  is  limited  to  the  actual  use  of  the  property  for 
transactions  that  give  rise  to  a  right  of  deduction  when  the  tax  becomes  chargeable. 
Consequently,  for  cases  of  mixed  use,  it  would  no  longer  be  possible  to  deduct 
immediately all input VAT.  

Given this limitation of the deduction for the taxable person, an adjustment system has 
been set up to take into account changes between business and non-business use of the 
immovable  property  concerned  for  a  duration  that  corresponds  to  the  current 
adjustment period for immovable property acquired as capital goods. The new system 
would  apply  to  both  increases  and  reductions  in  business  use.  This  system  would 
replace  the  tax  on  non-business  use  (Article 26  of  the  VAT  Directive)  during  the 
adjustment  period  and  would  set  up  an  adjustment  system  for  taxable  persons  in  the 
event  of  an  increase  in  business  use  relating  to  transactions  giving  rise  to  a  right  of 
deduction.  The  system  functions  in  a  manner  similar  to  the  existing  system  for 
adjusting deductions for capital goods, which adjusts, for the business component, the 
variation in the percentage of transactions that are taxed (and other transactions giving 
rise  to  a  right  of  deduction)  and  exempted  (without  a  right  of  deduction)  during  the 
adjustment period. Concerning the relationship between business and private (or non-
business) transactions, the new adjustment system is applied in parallel to the existing 
adjustment system, without the latter being modified when the immovable property is a 
capital good. 

It is proposed to that Article 168a be inserted into the VAT Directive in order to clarify 
the  manner  in  which  the  right  of  deduction  is  exercised  in  the  case  of  immovable 
property for mixed use. 

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2007/0238 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending VAT Directive 2006/112/EC of 28 November 2006  
on the common system of value added tax 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 93 thereof, 

Having regard to the proposal from the Commission1, 

Having regard to the opinion of the European Parliament2, 

Having regard to the opinion of the European Economic and Social Committee3, 

Whereas: 

(1) 

(2) 

Council Directive 2006/112/EC of 28 November 2006 on the common system of value 
added  tax4  must  be  amended  in  order  to  incorporate  various  amendments  of  a 
primarily technical nature. 

Regarding the provisions on imports and the place where the supply of natural gas and 
electricity is taxed, the special scheme set up under Council Directive 2003/92/EC of 
7 October 2003 amending Directive 77/388/EEC as regards the rules on the place of 
supply of gas and electricity5 does not apply to imports or supplies of natural gas by 
pipelines that are not part of the distribution system, and in particular pipelines in the 
transmission  system  by  which  almost  all  cross-border  transactions  by  pipeline  are 
carried out. The scope of the special scheme should therefore be extended to include 
imports and supplies of natural gas by any pipeline. 

(3) 

The special scheme does not currently apply to imports and supplies of natural gas by 
vessels for transporting natural gas either, even though such gas is identical in terms of 
its  characteristics  to  that  imported  or  supplied  by  pipeline  and  intended,  following 
gasification,  for  transportation  by  pipeline.  The  scope  of  the  special  scheme  should 

1 
2 
3 
4 

5 

OJ C […], […], p. […]. 
OJ C […], […], p. […]. 
OJ C […], […], p. […]. 
OJ  L  347,  11.12.2006,  p.  1.  Directive  as  amended  by  Directive  2006/138/EC  (OJ L 384,  29.12.2006, 
p. 92). 
OJ L 260, 11.10.2003, p. 8. 

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(4) 

(5) 

(6) 

(7) 

therefore  be  extended  to  include  imports  and  supplies  of  natural  gas  by  vessels  for 
transporting natural gas. 

The  first  cross-border  heat  and  refrigeration  networks  are  already  operational.  The 
same issues that apply to the supply and import of natural gas or electricity also apply 
to  the  supply  and  import  of  heat  or  refrigeration.  Under  the  current  rules,  VAT  on 
natural gas and electricity is levied at the place where they are actually consumed by 
the  customer.  The  rules  thus  prevent  any  distortion  of  competition  between  Member 
States.  Consequently,  the  same  scheme  that  applies  to  natural  gas  and  electricity 
should be applied to heat and refrigeration. 

Regarding  the  place  where  VAT  is  levied  on  services,  under  current  legislation  a 
special scheme applies only for the supply of access to the natural gas and electricity 
distribution  systems.  However,  certain  major  gas  and  electricity  consumers  are 
connected directly to the transmission system and not to the distribution system. The 
scope  of  this  special  scheme  should  therefore  be  extended  to  include  all  services 
related to the supply of access to all electricity and natural gas systems and to heat and 
refrigeration networks. 

Experience gained during the recent implementation of the current procedure, whereby 
the Commission is charged with deciding whether a risk of distortion of competition 
exists  as  a  result  of  the  application  of  a  reduced  VAT  rate  to  natural  gas,  electricity 
and district heating, has demonstrated that the procedure is obsolete and superfluous. 
The rules for determining the place of taxation ensure that VAT is levied at the place 
where the natural gas, electricity, heat and refrigeration are actually consumed by the 
customer.  They  thus  prevent  any  distortion  of  competition  between  Member  States. 
Nevertheless, it is still important that the Commission and the other Member States be 
properly  informed  whenever  a  Member  State  introduces  a  lower  rate  in  this  very 
sensitive  sector.  Consequently,  a  prior  consultation  procedure  involving  the  VAT 
Committee is needed. 

The joint undertakings and other structures set up under Article 171 of the EC Treaty 
are  responsible  for  implementing  Community  policies.  In  order  to  avoid  taxation 
benefiting  the  Member  State  where  the  tax  is  payable,  to  the  detriment  of  the  other 
Member  States  and  the  European  Communities,  it  is  necessary  to  grant  the  VAT 
exemption  on  input  purchases  to  joint  undertakings  set  up  by  the  Communities  that 
have legal personality and receive contributions charged to their general budget under 
Council  Regulation  (EC,  Euratom)  No 1605/2002  of  25 June  2002  on  the  Financial 
Regulation applicable to the general budget of the European Communities6. 

(8) 

In the context of their accession, Bulgaria and Romania were authorised to grant a tax 
exemption  to  small  enterprises  and  to  continue  applying  a  VAT  exemption  to  the 
international  transport  of  passengers.  For  purposes  of  clarity  and  consistency,  these 
exemptions must be incorporated into the Directive itself. 

6 

OJ  L  248,  16.9.2002,  p. 1.  Regulation  as  amended  by  Regulation  (EC,  Euratom)  No  1995/2006 
(OJ L 390, 30.12.2006, p. 1). 

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(9) 

Regarding the right of deduction, the basic rule is that this right arises only in so far as 
the goods and services are used by a taxable person for the purposes of his transactions 
that give rise to a right of deduction. This rule must be clarified and strengthened so 
that  taxable  persons  are  dealt  with  in  an  identical  manner  whenever  goods  that  they 
use  for  their  economic  activity  are  not  used  exclusively  for  purposes  related  to  that 
activity. Consequently, the initial exercise of the right of deduction should be limited 
to that use which results in transactions giving rise to a right of deduction when the tax 
becomes chargeable. 

(10) 

In this context, this rule should be applied to immovable property that is supplied to 
the  taxable  person  and  important  services  relating  to  the  property  supplied.  These 
situations  account  for  the  most  significant  cases,  given  the  value  and  economic 
lifetime  of  such  property  and  the  fact  that  mixed  use  of  this  type  of  property  is  a 
common practice. 

(11)  Given the restriction of the initial exercise of the right to deduction and with a view to 
ensuring  an  equitable  deduction  system  for  taxable  persons,  an  adjustment  system 
should be set up to take into account changes in the business and non-business use of 
this immovable property for a period corresponding to the existing adjustment period 
for immovable property acquired as capital goods. 

(12)  Directive 2006/112/EC should be amended accordingly, 

HAS ADOPTED THIS DIRECTIVE: 

Article 1 

Directive 2006/112/EC is hereby amended as follows: 

1) 

Article 2(3) is replaced by the following: 

"3. 
"Products  subject  to  excise  duty"  shall  mean  energy  products,  alcohol  and 
alcoholic  beverages  and  manufactured  tobacco,  as  defined  by  current  Community 
legislation,  but  not  natural  gas  supplied  by  pipeline  or  by  vessels  for  transporting 
natural  gas,  electricity  and  heat  or  refrigeration  supplied  by  heat  and  refrigeration 
networks." 

2) 

Article 13(2) is replaced by the following: 

"2.  Member  States  may  regard  activities,  exempt  under  Articles 132,  135,  136, 
371, 374 to 377, 378(2), 379(2) or 380 to 390b, engaged in by bodies governed by 
public law as activities in which those bodies engage as public authorities. 

3) 

Article 17(2)(d) is replaced by the following: 

"d) 

the supply of natural gas by pipeline or by vessels for transporting natural gas, 
electricity and heat or refrigeration supplied by heat or refrigeration networks, 
in accordance with the conditions laid down in Articles 38 and 39;". 

4) 

Articles 38 and 39 are replaced by the following: 

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"Article 38 

1. 
In the case of the supply of gas by pipeline or by vessel for transporting natural 
gas, electricity and heat or refrigeration supplied by heat or refrigeration networks to 
a  taxable  dealer,  the  place  of  supply  shall  be  deemed  to  be  the  place  where  that 
taxable dealer has established his business or has a fixed establishment for which the 
goods  are  supplied  or,  in  the  absence  of  such  a  place  of  business  or  fixed 
establishment, the place where he has his permanent address or usually resides. 

2. 
For the purposes of paragraph 1, "taxable dealer" shall mean a taxable person 
whose principal activity in respect of purchases of natural gas, electricity and heat or 
refrigeration  is  reselling  those  products  and  whose  own  consumption  of  those 
products is negligible. 

Article 39 

In  the  case  of  the  supply  of  natural  gas  by  pipeline  or  by  vessel  for  transporting 
natural gas, electricity and heat or refrigeration, where such a supply is not covered 
by Article 38, the place of supply shall be deemed to be the place where the customer 
effectively uses and consumes the goods. 

Where all or part of the natural gas, electricity, heat or refrigeration is not effectively 
consumed by the customer, those non-consumed goods shall be deemed to have been 
used and consumed at the place where the customer has established his business or 
has a fixed establishment for which the goods are supplied. In the absence of such a 
place of business or fixed establishment, the customer shall be deemed to have used 
and consumed the goods at the place where he has his permanent address or usually 
resides." 

5) 

In Article 56(1), point h) is replaced by the following: 

"h) 

the provision of access to, and of transport or transmission through, natural gas 
and  electricity  distribution  systems  or  of  access  to  heat  or  refrigeration 
networks and the provision of other services directly linked thereto"; 

6) 

In Article 80(1)(b), the expression "Articles 380 to 390" is replaced by "Articles 380 
to 390b". 

7) 

Article 102 is replaced by the following: 

"Article 102 

After consultation of the VAT Committee, each Member State may apply a reduced 
rate to the supply of natural gas, of electricity or of district heating.". 

8) 

In Article 136(a), the expression "Articles 380 to 390" is replaced by "Articles 380 to 
390b". 

9) 

Article 143(l) is replaced by the following: 

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"l) 

imports  of  natural  gas  by  pipeline  or  by  vessel  for  transporting  natural  gas, 
electricity, and heat or cold by heat or refrigeration networks.". 

10) 

The following Article 151a is added: 

"Article 151a 

For  the  purposes  of  point  (b)  of  the  first  subparagraph  of  Article  151(1),  joint 
undertakings  or  any  other  structure  necessary  for  the  efficient  execution  of 
Community research, technological development and demonstration programmes set 
up  by  the  Communities  under  Article 171  of  the  EC  Treaty  that  have  legal 
personality  and  receive  contributions  charged  to  their  general  budget  under 
Article 185  of  Council  Regulation  (EC,  Euratom)  No 1605/20027  are  treated  as 
international bodies, provided that they do not exercise any economic activity within 
the meaning of Article 9(1) of this Directive. 

However,  the  exemption  provided  for  in  Article 151(1)(b)  shall  not  apply  to  the 
supply of goods and provision of services intended for the private use of members of 
the joint undertakings or of any other structure referred to in the first paragraph.". 

11) 

The following Article 168a is added: 

"Article 168a 

In the event of acquisition, construction, renovation or substantial transformation of 
immovable  property,  the  initial  exercise  of  the  right  of  deduction  arising  when  the 
tax becomes chargeable shall be limited to the proportion of the property's effective 
use for transactions giving rise to a right of deduction. 

By  way  of  derogation  from  Article 26,  the  changes  in  the  proportion  of  use  of 
immovable  property  referred  to  in  the  first  paragraph  shall  be  taken  into  account 
under the conditions provided for in Articles 187, 188, 190 and 192 for adjusting the 
initial exercise of the right of deduction. 

The changes referred to in the second paragraph shall be taken into account during 
the  period  defined  by  the  Member  States  under  Article 187(1)  for  immovable 
property acquired as capital goods.". 

12) 

In Article 221(2), the expression "Articles 380 to 390" is replaced by "Articles 380 to 
390b". 

13) 

The following points 17 and 18 are added to Article 287: 

"(17) Bulgaria: EUR 25 600; 

(18)  Romania: EUR 35 000". 

14) 

The following Articles 390a and 390b are inserted: 

7 

OJ L 248, 16.9.2002, p. 1. 

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"Article 390a 

Bulgaria may, under the conditions applying in that Member State on the date of its 
accession, continue to exempt the international transport of passengers, as referred to 
in point (10) of Part B of Annex X for as long as the same exemption is applied by 
any  of  the  Member  States  which  were  members  of  the  Community  on  1 January 
2007. 

Article 390b 

Romania may, under the conditions applying in that Member State on the date of its 
accession, continue to exempt the international transport of passengers, as referred to 
in point (10) of Part B of Annex X for as long as the same exemption is applied by 
any  of  the  Member  States  which  were  members  of  the  Community  on  1 January 
2007." 

15) 

In  Article 391,  the  expression  "Articles 380  to  390"  is  replaced  by  "Articles 380  to 
390b". 

16) 

In Annex X, the title is replaced by the following: 

"LIST  OF  TRANSACTIONS  COVERED  BY  THE  DEROGATIONS  REFERRED 
TO IN ARTICLES 370 AND 371 AND ARTICLES 375 TO 390b" 

Article 2 
Transposition 

1. 

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions  necessary  to  comply  with  this  Directive  by  1 July  2008.  They  shall 
forthwith  communicate  to  the  Commission  the  text  of  those  provisions  and  a  table 
showing the correlation between those provisions and this Directive. 

When  Member  States  adopt  those  provisions,  they  shall  contain  a  reference  to  this 
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official 
publication. Member States shall determine how such reference is to be made. 

2. 

Member States shall communicate to the Commission the text of the main provisions 
of national law which they adopt in the field covered by this Directive. 

This Directive shall enter into force on the twentieth day following that of its publication in 
the Official Journal of the European Union. 

Article 3 

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Article 4 

This Directive is addressed to the Member States. 

Done at Brussels,  

For the Council 
The President 

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