CELEX: 51997PC0120
Language: en
Date: 1997-03-21
Title: 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

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)
 ---pagebreak---  ---pagebreak---                            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
                                              £
 ---pagebreak--- 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
 ---pagebreak---                                            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
 ---pagebreak--- Whereas the Community provisions give Member States a great deal of discretion in
determining the VAT treatment to be applied to immovable goods, its transposition
have led to considerable variations in the national legislations applied in this field;
Whereas avoidance schemes have been set up, based on the use of surrender, including
by way of abandonment of a leasehold interest or assignment of a leasehold interest,
which result in the avoidance of the VAT where the ultimate acquirer of the property is
not entitled to a full deduction of VAT;
Whereas it is also necessary to extend the derogation to the surrender or assignment of
a leasehold interest to a taxable person having full right of deduction, as the surrender
or the assignment of a leasehold interest will often arise due to financial difficulties of
the lessee;
Whereas the measure envisaged is a derogation from Article 21(l)a of the Sixth VAT
Directive, whereby the person liable for the tax is the taxable person who carries out
the taxable transaction;
Whereas the derogation provides that, where a surrender or assignment of a leasehold
interest is a taxable supply of goods, the person acquiring the interest is liable for the
payment of the tax if that person is a taxable person or a non-taxable legal person;
Whereas this derogation shall ensure a better fiinctionning of the actual VAT regime
applied by Ireland on immovable goods;
Whereas, given the limited scope of the derogation, the special measure is
proportianate to the aim pursued;
Whereas the Commission adopted on 10 July 1996 a work programme based on a
step-by-step approach for progressing towards a new common system of VAT (COM
(96) 328 final, 22 July 1996);
Whereas the tax treatment of immovable goods is an important issue to be reviewed in
this programme;
Whereas the last package of proposals is to be put forward by mid-1999, the
authorisation is granted until 31 December 1999, in order to permit an evaluation of
the coherence of the derogation with the global approach of the new common VAT
system,
Whereas the derogation has no adverse impact on the European Community's own
ressources accruing from value added tax;
HAS ADOPTED THIS DECISION:
                                           6
 ---pagebreak---                                         Article 1
By way of derogation from Article 21(l)a of the Directive 77/388/CEE, Ireland is
hereby authorised to designate the person to whom the supply is made as the person
liable to pay the tax where the two following conditions are met :
         a surrender or assignment of a leasehold interest is treated as a supply of goods
         made by a lessee;
         the person acquiring the leasehold interest is a taxable person or a non -taxable
         legal person.
                                         Article 2
This authorisation is granted until 31 December 1999.
This Decision is addressed to Ireland.
Done at Brussels,
                                                                           For the Council,
                                                                             The President
                                             6
 ---pagebreak---                                                                   ISSN 0254-1475
                                                           COM(97) 120 final
                                              DOCUMENTS
EN                                                                       06 09
                                    Catalogue number : CB-CO-97-110-EN-C
                                                             ISBN 92-78-17200-6
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