Is it possible to deduct VAT on induced investments?
The Court of Justice of the EU (CJEU) in the recent Mitteldeutsche Harstein-Industrie AG case (C-528/19) dealt with whether it is permissible to deduct input VAT on construction work carried out on a municipal road for the benefit of a municipality, and whether building a municipal road constitutes a supply of goods for consideration.
A German company wanted to open a limestone quarry whose operation was permitted by the local government authority on the condition that a public road belonging to the municipality would be built to the quarry. The company agreed to cover all costs of building the road. The municipality promised that the company would be allowed to use the road for heavy trucks accessing the quarry, without any limitations.
The court first dealt with the question whether the company was entitled to deduct VAT in respect of the work carried out to build the road for the benefit of the municipality. The CJEU pointed out that without building the municipal road, it would have been impossible to operate the limestone quarry, from both a practical and a legal point of view. The construction work on the municipal road was therefore essential for the company to carry out its economic activity, i.e. to operate the limestone quarry. The fact that the road was also available to the public free of charge, was irrelevant, as the road was built primarily for the purposes of the quarry operator (access of heavy trucks), not for the purposes of the public. The CJEU thus concluded that the company was entitled to deduct VAT on the work carried out to construct the municipal road, to the extent that the work had been essential for the company’s economic activity.
In its answer to further questions referred to it, the CJEU stated that the authorisation to operate a quarry granted unilaterally by the government authority cannot be deemed a consideration received by the company for carrying out the construction work on the municipal road. The CJEU pointed out that a unilateral act by a public authority cannot establish a legal relationship entailing reciprocal performance. Furthermore, the work on the construction of the road cannot be considered a supply of goods to the municipality for consideration, even though the municipality benefited from the construction, as the road was built primarily for the purposes of the quarry operator.