On 16th September 2021, the Fourth Chamber of the Court of Justice of the European Union (“CJEU”) rendered its judgment on the value added tax (“VAT”) treatment of the services provided by the Bulgarian National Television (“BNT”).
BNT, as national public provider of audiovisual media services, is responsible for the provision of media services to all Bulgarian citizens. BNT does not receive any remuneration from its viewers. Its activity is financed by targeted state subsidy, donations, and other grant transactions, as well as by self-generated income. The national public provider made a partial tax deduction with respect to all purchases until 2015. Thereafter, BNT begins to divide purchases according to its activity - as a commercial activity and as a public function activity. Depending on the latter, BNT made a full tax deduction with respect to the purchases relating to its activities of a ‘commercial’ nature. The public services task activity is defined as exempt transaction and did not fall within the scope of VAT.
The Bulgarian National Revenue Agency (“NRA”) refused to recognize a right to a full deduction in respect of the purchases undertaken by BNT. The tax authorities accepted that the commercial activity is taxable for VAT purposes. On the other hand, the public services task activity is VAT-exempt supply. The tax authorities maintain that BNT could not make a full input tax deduction because they cannot determine whether the purchases are made in relation to the VAT taxable supplies, or the VAT exempt supplies. According to the NRA, in order to determine the right of full deduction, it is important to determine the type of financing– concretely to be formed from income from remunerated transactions.
The current case has been initiated by request for a preliminary ruling which contains the following questions:
1) Is the supply of a service an activity of a national public television provider for the provision of audio-visual media services, which is financed by the state in the form of a subsidy and for which viewers do not pay fees?
2) If the activity of BNT is a supply of a service, is the supply of this service VAT-exempt?
3) Is the use of a full tax credit for purchases allowed depending on the way of financing the activity of BNT?
4) What is the scope of the right to input tax deduction in respect of those purchases and which criteria must be applied for the determination thereof?
The CJEU accepts that BNT's activity of providing audio-visual media services to viewers, financed by a state subsidy and for which no fees are paid by viewers, does not constitute a supply of a service for VAT purposes.
The arguments of the CJEU are that the provider, i.e. BNT and the viewers are not linked by any contractual relationship or transaction in which a price was stipulated. The access to the services is free and any potential viewer can use it. In addition, the amount of the subsidy and its the provision do not relate to the viewers and are not linked to them in any way.
Despite the answer of the first question, the CJEU rules on the VAT deduction. The common system of VAT ensures complete neutrality of taxation of all economic activities, whatever the purpose or results of those activities, provided that they are themselves subject to VAT. [1]
Referring to several of its judgments, the CJEU agreed that where goods or services acquired by a taxable person are used for purposes of transactions that are exempt or do not fall within the scope of VAT, no output tax can be collected or input tax deducted. The way in which such purchases are financed, whether by means of revenue derived from economic activities or subsidies received from the State budget, is irrelevant for the purposes of determining the right of deduction. [2]
Also CJEU states that from the provisions of Articles 173 to 175 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (“VAT Directive”) follow that the calculation of a VAT deductible proportion is, in principle, reserved solely to goods and services used by a taxable person to carry out both in relation to economic transactions which give rise to a right to deduct and those which do not.
Another important conclusion made by the CJEU is that this activity does not fall within the scope of the VAT Directive due to its non-economic nature, which is due to the impossibility of deducting VAT on expenditures incurred.
In view of the above, the determination of the methods and criteria for apportioning input VAT between economic and non-economic activities lies in the discretion of the Member States.
By the decision in Case C-21/20, the CJEU answered fundamental questions which arise in situations where economic operators carry out activities of a similar dual nature - when such an activity is of an economic nature for VAT purposes and the possibility of deducting VAT.
[1] Judgment of 10 November 2016, Baštová, C‑432/15;
Judgment of 18 March 2021, A. (Exercise of the right of deduction), C‑895/19.
[2] Judgment of 5 July 2018, Marle Participations, C‑320/17;
Judgment of 3 July 2019, The Chancellor, Masters and Scholars of the University of Cambridge, C‑316/18.