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What constitutes an “economic activity”? A recurring EU issue with no simple solution

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Fernando Matesanz of Spanish VAT Services considers the implications of the CJEU’s ruling on “economic activities”, and the lack of a one-size-fits-all solution for taxpayers.

The CJEU issued an interesting judgment in March (case C-612/21, Gmina O.), in which it answered an important question. Namely, under what circumstances a public body could be considered a taxable person for VAT under a private law contract which imposed obligations on it.

The CJEU ruled that in the specific case, the public body would not be carrying out an economic activity and, therefore, should not be considered a taxable person for VAT. The conclusion was based on the cost structure of the transaction in question, as the public body's actions did not correspond to a private operator who would have tried to make a profit margin on the transaction.

It is important to note that the decision relates to this case and its specific circumstances. There are more than a few cases in which the CJEU, having regarded the unique circumstances, ultimately concluded that a given public body was acting as a taxable person for VAT purposes.

The reason why the CJEU's judgment has attracted attention is because of the clear reasoning behind its decision. This refers to the steps to be taken to determine that a given company or sole trader is acting as a taxable person for VAT purposes.

The analysis must be carried in two phases, as follows:

  • At first it must be concluded whether the supplier is carrying out a supply of goods or of services “for consideration” within the meaning of Article 2(1)(a) and (c) of the VAT Directive. For this, there must be a direct link between the supply of goods or services and the consideration received in exchange. Thus, the remuneration received by the supplier of the transactions must constitute the actual consideration for the goods or services supplied; and

  • If it is decided that a certain supply is made “for consideration”, a second question must be answered: whether said transaction is carried out during the course of an economic activity according to of Article 9(1) of the VAT Directive.

In this respect, an activity is considered “economic” when it is permanent and is carried out in return for remuneration. The CJEU has mentioned in many of its judgments that considering the difficulty of defining “economic activity” (there is no uniform definition at an EU level), all the circumstances in which it is applied must be observed.

Undoubtedly, the intention of obtaining a permanent income is a key aspect to consider when determining the existence of an economic activity.

In most cases, the analysis will likely be straightforward, since the intention to earn recurring income is common in business. However, the situation is complicated with occasional activities, which are very common, for example, in the education sector or in the field of conferences. In these cases, a given subject may not have initially been intended to earn income on a continuous basis, but such occasional activity may become more recurrent, and therefore doubts may arise. There is no clear and uniform definition of what is meant by occasional activity, so it is difficult to determine what is a "continuing basis" within the meaning of Article 9(1) of the VAT Directive.

This situation is clarified in many countries by the existence of turnover thresholds, below which one has no VAT obligations. However, this option does not exist in all member states today. Part of the problem may be solved in 2025 with the introduction of a common regime for small enterprises.

The recent CJEU case reminds us that not every provision of goods and services has to take place within the framework of an economic activity. For this, we must consider the circumstances of the case and especially the intention and prospects of the provider.

This controversy is not something that started with this CJEU case. It has always existed in the field of VAT and is continuously repeated due to the lack of a uniform position on the matter.

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