The Court of Justice of the European Union (CJEU) recently dealt with the tax treatment of utilities provided in the context of letting of immovable property. The ruling of the CJEU followed a referral made by the Polish Supreme Administrative Court that was considering a legal dispute brought by the Polish Minister of Finance against a public body responsible for letting of State immovable property.
As part of its competence, the Polish municipal body rented immovable property and resold utilities, including electricity, water, heating and disposal of refuse. Tenants were charged in advance for these utilities in accordance with pre-established amounts in the rental agreement concluded with the public body. These payments were then reconciled at the end of the year to reflect the tenants’ actual consumption. Essentially, the public body used to pass on to the tenants the costs it incurred in purchasing those services from third-party suppliers.
The Polish tax authorities considered that the method of calculation of the VAT adopted by the Polish public body was incorrect and noted that the various utilities were to be taxed under the main service and one single rate applied. The public body, on the other hand, did not agree that the landlord was supplying the tenant with a single rental service, even though the tenants did not conclude a separate agreement with the utility suppliers.
The Luxembourg Court was asked to rule on whether utilities should be included in the taxable base of the rental service or whether they constitute supplies separate from the rental service. The distinction of billing separately for utilities or through inclusion in the rent as a single supply has important practical consequences, particularly as regards the VAT rate to be applied.
In its preliminary ruling, the CJEU found that the provision of electricity, heating and water and refuse collection provided by a third-party supplier for the tenant must be regarded as being supplied by the landlord to the tenant, where the landlord is only passing on those costs to the tenant.
Services provided by a landlord to a tenant may be separate and distinct from the supply of property, or ancillary to the supply of letting
However, depending upon the terms of the tenancy agreement, the provision of these services may be either assessed separately for VAT purposes, or follow the VAT treatment of the rent. This assessment is left to the national court to determine.
In principle, the letting of immovable property and the provision of utilities as well as refuse collection accompanying that letting must, in principle, be regarded as distinct and independent from the lease of the immovable property for VAT purposes, unless they are so closely linked to the lease of immovable property that they objectively form a single, indivisible supply.
Whether there is a single supply or multiple supplies of various services in the context of rent of immovable property can often be a complex matter to determine. By way of a guideline, individual meters and billing according to the amount used indicates that the provision of utilities constitutes a separate supply from the lease of immovable property. If the utilities and the rent are itemised separately on the invoice, this also suggests that the landlord does not provide a single supply.
The court drew on one of its previous rulings where it had considered that where the service of cleaning of the common parts of a property is separately invoiced from the rent, the service could be considered as separate and distinct from the rental of property.
Where the rental agreement permitted termination of the lease in the event of default in payment of the services fees under the lease, this contributed to the assessment of the supply of services as being a single one.
Accordingly, depending on the specific circumstances and the particular terms of a rental agreement, services provided by a landlord to a tenant may be separate and distinct from the supply of property, or ancillary to the supply of letting. The starting point for most services is that they should be regarded as separate from the lease.
jgrech@demarcoassociates.com
Josette Grech is legal adviser on EU law at Guido de Marco & Associates.