The Directorate General of tax published end January 2006 1 a statement drawing the consequences of a judgment of the Court of justice of the European communities in October 2005 2

The Directorate General of tax published end January 2006 (1) a statement drawing the consequences of a judgment of the Court of justice of the European communities in October 2005 (2). According to this judgment, the French provisions limiting the deductibility of the VAT for allocation of grants of equipment did not respect Community law. Indeed, French law provided that a taxable person receiving a grant to finance property of equipment could not deduct the VAT relating to the purchase of this property if integrate endowments to the depreciation of the property in the price of its downstream operations funded (3). However, as firmly reminded the Court of justice, any limitation of the right to deduction of VAT has an impact on the level of the tax burden and must therefore be applied in a similar manner in all Member States. The conditions governing the right to deduct are expressly and restrictively listed by the 6th VAT directive and the Member States may not unilaterally depart from the text, also imperfect can they think of it (4).

Thus, with respect to the subject that perform that right opening operations for deduction ("total subject"), the rule is that the property acquired should be used for the purposes of the taxable activities. The origin of the funds that used to acquire the property of equipment or the method of calculating prices charged by the taxable person are not relevant for the calculation of the deductible VAT. With respect to the subject "mixed" both conducting of transactions exempt operations , deductible VAT and deduction and more is to be calculated according to a proportional deduction provided for by the sixth directive. No provision of this text to decrease, prior to the application of this proportion, calculation of the deductible VAT Base. Accordingly, the Court held that by introducing a special rule limiting the deductibility of the VAT, the France has breached its obligations under Community law.

Following this judgment, the Directorate General of taxes, by its statement of 27 January, amended the provisions in question and removed, for the total subject to mixed taxable persons, the condition of impact in the downstream of the endowments award to depreciation. The deduction of VAT relating to the investment financed in whole or in part by a grant of equipment is therefore now permitted as these expenses are used for the purposes of a transaction pensionable deduction.

In its judgment of 6 October 2005, the Court of justice also vigorously rejected the argument of the French Government according to which article 2 of the 1st directive VAT could be based limitations of the right to deduction (5). The Court indeed emphasized that this provision merely set out the principle of the right to deduction and cannot be used as the basis of a limitation of the right to deduction not provided for by the provisions of the sixth directive. The administration was therefore brought to amend two other provisions of French law that were not the object of the proceedings which gave rise to the judgment of the Court, but which are, in light of this judgment, inconsistent with Community law. Thus, under the terms of the statement of January 27, 2006, public services delegated can now deduct the VAT relating to investment expenditures without the need to pass the cost of the investment in the tariffs to their users. Similarly, is no longer applicable rule that made the deduction of VAT on investments in leases granted by local communities to practice, by these communities, a rental of a certain level.

Another fundamental consequence of the compliance with Community law: the subject may request the refund of the VAT which they have paid too (6). Thus, those, in the past, equipment grants and public services delegated who could not deduct the VAT paid on the acquisition of the property of equipment can request the refund of overpaid VAT. Attention however: their claims cannot be made until the end of the second year following the payment of tax, or up to December 31, 2007 for the VAT paid in 2005.