Impact of tax duty depending on possibility to infringe competition

In the cited matter, the ECJ assessed a preliminary query raised by the High Court of Justice, Chancery Division (England & Wales) on whether public-law entities (municipalities) must pay the value added tax (“VAT”) in connection with operation of closed car parks. In the case, several local authorities in the United Kingdom filed actions at local English courts against the resolutions of VAT administrators by which the refund of taxes paid on income generated from leased car parks was denied to them. The local authorities came to a conclusion on the basis of the interpretation of the relevant provisions of the Sixth Directive provided by the ECJ in the judgement of Fazenda Pública that such income is not subject to VAT. In this case, the point was not to decide whether operation of a car park constitutes “performance of public administration” but rather to determine whether it is subject to VAT on the basis of Article 4, para 5 of the second subparagraph of the Sixth Directive, which sets forth that public administrative authorities are considered to be tax payers if the fact that they were not subject to VAT would significantly infringe on the competition. The proceedings concerned the interpretation of the term “significant infringement of competition”.

The ECJ deduced that the competition need not be significantly infringed. At first the court noted that it is necessary to narrowly interpret an exception from the tax duty set forth for public administrative authorities (points 60 and 61) and then stated that a too-narrow perception of the term “significant infringement of the competition” could discourage potential competitors from entry to the relevant market. Therefore, it is necessary to understand potential competition as competition, but then the “purely theoretical possibility that a private entity enters the relevant market that would not be supported by any market analysis could not be deemed as the existence of potential competition. If it is to be so, such possibility must be realistic and not purely hypothetical” (point 64). In the final part of the judgment, the ECJ defines the term “significant” (even if only potential) infringement of competition to mean “greater than negligible”.

Application to the Czech Republic 

The current wording of the VAT Act does not fully comply with the ECJ’s conclusions since Czech law binds taxation for public-law entities to the resolution of the relevant authority (in our case the Antimonopoly Office - see Section 5, subsection 3 of Act No. 235/2004, Coll.). The ECJ’s resolution, however, indicates that public administrative authorities are obliged to pay VAT independently of the resolution of any Authorities if their activities that would otherwise be “exercise of public administration” could potentially and significantly infringe the competition.