Judgment of the Supreme Court of October 9th 2015. Unusual financial transactions that are not included in the proportion of VAT


Through this judgment it is clarified the concept of ancillary operations set out in article 174.2. b) of Directive 2006/112/EC in relation to the incidental financial transactions that must be excluded from the rule of proportion. And it does so recalling, firstly, the wrong transposition of the European rule to the Spanish legislation, since the article 104.Three.4º of the VAT Act refers to real estate or financial operations that do not constitute regular business or professional activity of the taxable person.

The case refers to the sale of shares that a financial institution has in its portfolio of another entity, which are transferred to a financial institution in Andorra within the national regulatory framework.

The financial institution requested, through the relevant VAT return, the refund of the tax in accordance with the application of a pro-rata basis of 14%. However, at a later time, the entity initiated a procedure of rectification of the VAT return and requested a higher refund, subject to a pro-rata of 19%, understanding that the sale of shares granted the right to the deduction in so far as the recipient was established outside the EU VAT territory (art. 94.One.3º) and, therefore, the profit from the sale should also be included in the numerator of the pro-rata.

Once analyzed the new request, the tax administration understood that, while the operation of sale of shares has a financial nature, it was an unusual operation which should not form part of the numerator nor of the denominator of the proportion, therefore, rather than including it in the numerator, proceeded to exclude it from the denominator, resulting in a pro-rata of 15%.

The first argument of the appeal submitted by the entity before the Supreme Court should be based in determining whether the profit gained from the sale of shares should be excluded from the calculation of the pro-rata by application of article 104.Three.4º of the VAT Act for not being a regular activity of the company or if it should be included in the numerator and in the denominator.

For its part, the Supreme Court, in accordance with the statement made by the appellant, makes mention of the wrong transposition into the national legislation of the article 19.2 of the former Sixth Directive, which refers to ancillary operations and not to transactions which are not regular business activity. Thus, it is not the same definition an accessory operation than an unusual operation, having been already defined by the jurisprudence of the European Court of Justice and, by virtue of the direct application of the Directive, the Supreme Court determines the need to analyze if the operation in question deserves consideration of accessory to the main activity operation to determine if it should be included or not in the calculation of the pro-rata.

In this sense, the doctrine of the European Court of Justice has established:

–          ECJ of 11 July 1996 (Régie Dauphinoise): on the one hand, not must be taken into account the results or income but the use of the means and their quantification in proportion to the total of the taxable person. On the other hand, an activity that constitutes a direct, permanent and necessary extension of the taxable activity of the taxable person cannot be considered as accessory.

–          ECJ of 14 November 2000 (Floridienne and Berginvest): financial outcomes resulting from the mere ownership of property may not be included in the proportion since it does not constitute economic activity. It is included when they constitute the consideration of provision to a third party of a capital.

–          ECJ of 29 April 2004 (Desenvolvimiento Minero): an activity constitutes a direct, permanent and necessary extension of the taxable activity when the operations in question are in the context of business objectives or has a commercial purpose.

In any case, determines the Court that the definition of accessory operation is an indeterminate legal concept, and that should be analyzed in the context of each case, to which i) has to be checked if it is a transaction subject to VAT, ii) if it is a financial transaction subject to and exempt from VAT and if the ancillary is given respect from the main business and, iii) operations which constitute a direct, permanent and necessary extension of the economic activity of the taxable person does not have the status of accessory.

For the present case, the Court considers that the controversial operation has a financial nature, but it is an ancillary operation because it is not a direct extension, permanent and necessary of the financial activity of the taxable person (it is an operation carried out to comply with a regulatory framework of obligatory application for the taxable person within a deadline).

Attached is a copy in Spanish of the judgment of October 9th of 2015, with case number 889/2014.

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