Subject to VAT and exempt transactions. Deductibility of the VAT paid for expenses linked to an investment. Judgment of the ECJ “University of Cambridge”


In the present judgment (C-316/18), the University of Cambridge, a non-profit teaching center, performs both, transactions exempt from VAT (teaching) and transactions subject to VAT in the framework of research activities, publications, advice, etc.

To partially fund these activities, the donations received are deposited in a fund that is subsequently invested, which is managed by a third party that charges fees for said management services. The University requested to the Tax Administration the deduction of the VAT paid for these commissions, on the basis that the returns generated by the fund were used to finance the costs of all its activities. This request was denied by the Administration, since those expenses were directly attributable to the investment activity, not included in the scope of VAT.

Although the subsequent Courts accepted the University’s claim, the latter dismissed it, stating that the expenses related to the commissions can only be linked to the activities of the University if can be considered that the expenses corresponding to the management activity are allocated to the economic activities that were intended to be supported when creating said fund. In certain cases, expenses actually attributable directly to a non-taxable activity may, for VAT purposes, be considered linked to the taxable economic activity that is subsequently exercised. For that reason, it was asked to the ECJ whether Article 168 (a) of the Directive should be interpreted as meaning that a taxable person who exercises both, subject and exempt activities, can deduct, as general expenses, the ones related to an investment that generates income to cover the costs of all its activities.

The Court begins by recalling that VAT applies only to economic activities, and to qualify a transaction as performed for consideration there must be a transaction between the parties with an agreed price, so that there is a direct relationship between the supplied goods or service rendered and the consideration received. Second, in order to deduct the tax paid, the interested party must have the status of taxpayer and use the goods and services acquired for the needs of their own taxed transactions. Therefore, transactions that are not in the scope of VAT or exempt, do not general the right to deduct.

In this sense, to be a direct relationship between a transaction for which the VAT is borne and a transaction by which the VAT is charged, it is assumed that the expense must be part of the price of the transactions for which it is passed on, although the deduction is admissible even when there is no direct link, provided that the costs are part of the general expenses of the taxpayer and, as such, are part of the price.

However, in this case, firstly, the University of Cambridge does not act as a taxpayer when it receives donations for charity, since the donations are not consideration for any economic activity and, therefore, are not within the scope of the VAT. In addition, the Court considers that, in the case of the donation’s investment activity and related expenses, the same VAT treatment must be applied than the non-economic activity that constitutes its perception and its related costs. Therefore, this activity is only a direct extension of the non-economic investment activity, so the VAT of the associated expenses are not deductible either.

However, the Court points out that it is not the fact that it is a non-economic activity what excludes the right to deduct, if these expenses were included in the price of the transactions for which the VAT is charged, but this is something that does not happen in the case since the University is a non-profit teaching center and these expenses were generated in order to create resources to cover the costs of subsequent operations, so it cannot be understood that these expenses are constitutive elements of the price and that form part of the general expenses of the University.

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