On September 7, 2023, the European Court of Justice (ECJ) issued the Advocate General’s Opinion in the case C-433/22 (HPA – Construções). This case revolves around the interpretation of the Value Added Tax (VAT) Directive and the application of reduced rates for labor-intensive services, specifically in relation to the renovation of private dwellings.
The VAT Directive, also known as Directive 2006/112/EC, states that Member States can apply a standard VAT rate to the supply of goods and services. Additionally, Member States have the option to apply one or two reduced rates, which are limited to specific categories of goods and services listed in Annex III of the Directive. Annex IV of the Directive contains a list of services, including the renovation and repair of private dwellings, that can be subject to a reduced rate of VAT.
In this case, HPA – Construções, SA, a trading company specializing in construction and commercial services, performed renovation works on buildings in Lisbon in 2007. HPA applied a reduced VAT rate of 5% to these services, invoiced the commercial companies who owned the properties, and paid the VAT accordingly. However, during a tax audit in 2011, the Tax Audit Offices of the Lisbon Treasury Department determined that the standard VAT rate of 21% should have been applied retrospectively. The tax authorities argued that HPA failed to prove that the renovated properties were actually used for residential purposes.
HPA challenged the tax assessment before the Administrative and Financial Court in Sintra, Portugal. The court ruled in favor of HPA, stating that any real estate with a permit for residential use should be considered a private dwelling, regardless of whether it is currently inhabited. The Tax and Customs Administration appealed this decision to the referring court, leading to the current case before the ECJ.
The key question before the ECJ is whether Annex IV No. 2 of the VAT Directive allows national legislation to restrict the application of the reduced VAT rate to renovation works carried out on private dwellings that are occupied at the time of the works. In the Advocate General’s Opinion, Annex IV No. 2 is interpreted as requiring the reduced VAT rate to be applied only to services related to the renovation and repair of private dwellings that are being used as private residences at the time of the works. However, it is clarified that the property can still be considered a private residence if it is temporarily vacant and rented out to a third party.
This interpretation emphasizes the requirement for the property to be used as a private residence, but it does not necessitate the actual presence of occupants during the renovation works. The Advocate General’s Opinion aims to strike a balance between the objective of encouraging the renovation of private dwellings and the need to ensure the correct application of VAT rates.
It is important to note that the Advocate General’s Opinion is not binding, and the ECJ will make its final judgment in due course. The outcome of this case will have implications for the application of reduced VAT rates to renovation works on private dwellings throughout the European Union.
In conclusion, the Advocate General’s Opinion in the case C-433/22 (HPA – Construções) provides an interpretation of the VAT Directive regarding the application of reduced VAT rates to the renovation and repair of private dwellings. The Opinion emphasizes the requirement for the property to be used as a private residence, but it does not necessitate the actual presence of occupants during the works. The final judgment of the ECJ will determine the legal implications of this case and its impact on the application of reduced VAT rates in the European Union.
