Lease of real estate with equipment – unified service or separate benefits? (CJEU ruling of May 4, 2023 in case C-516/21)

The subject of the dispute and the position of the CJEU 

The case concerned a German company that leased a building intended for poultry farming together with permanently installed equipment and facilities specially adapted for this purpose. According to the provisions of the lease agreement, the lessee was obliged to pay a uniform rent (which corresponded to 20% of the lease of the aforementioned equipment and facilities).

Under German VAT regulations, the lease of the property was exempt from VAT. However, the German tax authority considered that the lease of the aforementioned equipment and facilities was not an ancillary service to the lease of the real estate itself, so that this part of the transaction should be subject to VAT. Consequently, the authority issued a dimensional decision to the company.

Following the company’s complaint against the aforementioned decision, the case went before the German Financial Court, which noted that in accordance with the provisions of the VAT Directive, member states may exempt the leasing and rental of real estate. On the other hand, the provisions of the VAT Directive indicate that the said exemption does not extend to the rental of permanently installed equipment and facilities. As a result, the national court became doubtful about the interpretation of the aforementioned provisions of the VAT Directive on the basis of the case at hand, and decided to submit a preliminary question to the CJEU.

The CJEU noted that the case concerns the lease of a livestock building and permanently installed equipment in the building specially adapted for breeding, and the lease agreement is between the same parties and provides for the payment of a uniform rent. At the same time, the CJEU pointed out that it is up to the national court to examine whether the said supplies constitute elements of a unified transaction for VAT purposes, as the German court seemed to suggest (which would consequently mean that VAT exemption could be applied to the entire transaction).

This is not the first CJEU judgment in a similar case 

Although the CJEU judgment in the case in question does not provide a clear answer to the question of the VAT qualification of the case in question as a unified supply or separate supplies, it is worth recalling that there have already been more precise CJEU rulings in similar cases.

In the judgment of December 19, 2018, in the Mailat case (C-17/18), the CJEU clearly indicated that a lease agreement concerning real estate used for commercial activities, together with all fixed assets and inventory necessary for the conduct of those activities, constitutes a single supply, in which the letting of the real estate is the main supply.

In this context, the reticence of the CJEU in expressing a firmer position in Case C-516/21 may be puzzling. At the same time, it seems that in the present case both the subject of the transaction (real estate with permanently installed equipment and facilities) and the method of calculation of remuneration (uniform rent) rather support the existence of a single benefit, which would be taxed under the rules applicable to the lease of real estate.

Consequences of the CJEU judgment for Polish taxpayers 

The issue raised in the judgment in question may have potentially significant consequences also in terms of Polish practice. For example, in the case of a contract of lease of residential premises for residential purposes together with equipment, a doubt may arise as to whether the exemption provided for the lease of such premises covers the entire transaction or only the part that relates to the lease of the premises themselves. It seems that the CJEU case law (in particular, the aforementioned judgment in Case C-17/18 Mailat) provides quite valuable guidance for assuming the existence of a composite benefit in this case.