ECJ case - The Hotel's Eligibility for a Reduced VAT Rate: Valentina Heights Case (C-733/22)

The Valentina Heights Case refers to a case concerning the application of a reduced VAT rate by a Bulgarian company on the provision of holiday apartments in the popular Bulgarian skiing resort, Bansko. The dispute arose when the Tax Authority, during a tax audit, determined that the company did not have the proper certificates needed for subjecting the supply to the reduced VAT rate.

The right to apply a reduced VAT rate on such services derives from point 12 of Annex III of the EU VAT Directive, and as suc,h was implemented into the Bulgarian national legislation. However, due to the specifics of the case, the interpretations of the key stakeholders on the factual situation and application of regulations, such as the Tax Authority, competent national courts, and the Valentina Height,s varied.

Background of the Case 

Valentina Heights is a Bulgarian based company that operates in the hospitality industry providing tourism, catering, hotel and tour operating services. The company registered for VAT in Bulgaria in December 2016, and was later subject to tax audit for the period December 2016 - February 2020.

During the tax audit, the Tax Authority determined that Valentina Heights leased a holiday apartment complex in Bansko, which belonged to the individual owners. Valentina Heights had a contractual approval to further rent out the complex to the third parties, that is tourists visiting the ski resort.

The income generated from the rent of apartments was reported through an electronic cash register and reported to the Tax Authority, where the company applied a reduced VAT rate of 9% on transactions relating to provision of accommodation.

To apply a reduced VAT rate, Valentina Heights needed to obtain a certificate of categorisation of the holiday complex. In 2013 the Valentina Heights complex was categorized as a guest house with a capacity of 9 bedrooms and 19 beds. In 2016, the complex was categorized in the three star category, with a capacity of 23 bedrooms and 46 beds.

However, in March 2019, the mayor's office withdrew the categorisation of the guest house. In September of the same year, Valentina Heights submitted an application before the Ministry of Tourism to obtain a two star categorisation for a snack bar belonging to the holiday complex. 

In addition to this, the Valentina Heights submitted supplementing documents in 2020, referring to the previously obtained categorisation certificates. In September 2020, the Ministry of Tourism issued the certificates for the holiday complex and snack-bar valid until January 2021.

The procedure of obtaining new certifications duration and the fact that the mayor's office withdrew previously granted category certificates led to the adjustments by the Tax Authority during the tax audit of the declared VAT. The adjustments refer to the period from March 2019 when the Valentina Heights did not have the proper certificates, due to the fact that it was withdrawn. 

The Tax Authority concluded that, since the holiday complex did not  have the category certificate, the 20% standard VAT rate had to be applied on the services provided by the Valentina Heights.

However the decision was overruled by the Administrative Court, who stated that although the Valentina Heights did not have the certificate for periods in question, it was not its fault, since it was the Ministry of Tourism that did not issue the certificate in reasonable time. Moreover, the Court concluded that Valentina Heights had the right to use the special scheme for the taxation of tourist services on the basis of the nature of the activity carried on rather than on the basis of registration under a special law.

The Tax Authority appealed against this decision before a Supreme Administrative Court, underlining that the  provision of accommodation services that do not have a categorisation certificate or a provisional certificate should not benefit from a reduced rate of tax, as they do not meet the criteria set in the VAT Law.

Uncertain how to interpret the EU VAT Directive provisions in relation to the ECJ case-law and the Bulgarian law that imposes categorisation requirements on accommodation that may be seemed as limiting of application of the reduced rate, as well as whether the reduced rate of VAT for such accommodation should be applied on the basis of the nature of the activity carried on rather than on the basis of the categorisation required under the special law, the Supreme Administrative Court submitted a request for a preliminary ruling to the ECJ.

Main Questions from Request For Ruling

The Supreme Administrative Court referred two questions to the ECJ for a preliminary ruling concerning the interpretation of the EU VAT Directive, specifically Article 98(2) and point 12 of Annex III.

The first question raises the issue of whether the reduced VAT rate for accommodation services can be applied even if the accommodations do not have official categorization certificates requested by the national VAT laws.

Should the ECJs answer to the first question be negative, the second referred question seeks clarification of whether the reduced VAT rate can still apply selectively on certain aspects of the accommodation supply, provided the facilities are either categorized or have at least started the categorization process.

In essence, the referring questions revolves around whether the application of reduced VAT rate is dependent upon the full compliance with the national categorization standards, or whether the partial compliance, i.e., initiation of the categorization process, can justify the application of the reduced VAT rate.

Applicable EU VAT Directive Article

Article 96 defining the application of standard VAT rate on supplies of goods and services and the right of EU Member States to define the rate, 98(1) and (2) limiting EU Member States to apply one or two reduced VAT rates only to supplies listed in Annex III, and 135 that excludes the transaction relating to the provision of hotel, camping and similar accommodation from exemptions granted to the leasing or letting of immovable property are the most relevant article regarding this case. 

Annex III contains the list of goods and services to which the reduced VAT rates stated in Article 98 may be applied, and in point 12 accommodation provided in hotels and similar facilities, including the provision of holiday accommodation and the letting of places on camping or caravan sites are listed.

Bulgarian National VAT Rules 

Regarding the Bulgarian national applicable legislation, there are three relevant laws. The first one is the Law on VAT, more particularly Article 66 which defines that the standard VAT rate of 20% is applied on all taxable supplies except those subject to zero rate. Furthermore, Article 66 states that a reduced VAT rate of 9% applies to the accommodation provided in hotels and similar facilities, including holiday accommodation and camping and caravan sites.

The term accommodation is further defined by paragraph 1, point 45, of the Additional Provisions of the Law on VAT, stating that accommodation means basic tourist services within the meaning of point 69 of the Additional Provisions of the Law on Tourism.

Regarding the Regulation implementing the Law on VAT, Article 40 states that to provide accommodation services subject to reduced VAT rate, taxable persons must have a copy of the register of tourist arrivals, a categorization certificate and an invoice for the supply.

In addition to the VAT related laws and articles, Articles 111, 113,114, and 133 of the Law on Tourism which define who can carry out hotel and catering services in tourism facilities, and categorization requirements, were also considered in the decision-making process by the ECJ.

Importance of the Case for Taxable Persons

This case is relevant due to the fact that it helps with the interpretation of the concept of phrase accommodation in hotels and similar establishments, or facilities. Depending on the national legislature and the ECJ case-law, this case serves as the guidance on how other EU countries may define requirements for application of the reduced VAT rates for such services.

Moreover the case and ECJ ruling may be relevant for national Tax Authorities and Courts for determining whether certain types of accommodation are subject to the reduced VAT rate, or they can be treated as leasing or letting of immovable properties that are exempt from VAT. Therefore, taxable persons can use the explanations and ECJ reasoning from this case to determine which VAT rates and under what conditions they must apply to provision of accommodation services in hotels and similar facilities.

Analysis of the Court Findings

The ECJ pointed out that the wording from point 12 of the Annex III and Article 135(2) of the EU VAT Directive on the definition of accommodation provided in hotels and similar facilities are the same. 

More precisely, Article 135(2) gives EU Member States the right to define the concept of accommodation, which in the case of Bulgaria is done through a Law on Tourism. Furthermore, under the Law on Tourism accommodation facilities must have a categorization certificate of provisional categorization certificate to be considered accommodation.

The ECJ also reaffirmed the clarification from case-law that the EU countries have the right to define the types of accommodation services that are subject to reduced VAT rates, thus, deviating from the general exemption for leasing or letting of immovable property.

The ECJ added that the Tax Authority during the tax audit, and as stated in the notice and adjustment issued to the Valentina Heights recognized the provided services during the period which it operated without a categorization certificate as accommodation operations within the hotel sector subject to 20% VAT rate, instead of 9% reduced VAT rate. If the classification was any different those services would fall under the VAT exemption provided in the Article 135(1)(l) of the VAT Directive.

This conclusion made by the ECJ highlights that the absence of categorization was not relevant for determining the true nature of services provided by Valentina Heights, but it did affect the VAT treatment.

Regarding the right of EU countries to apply reduced VAT rates as an exemption to the general rule of applying the standard VAT rate, the ECJ pointed out that two conditions must be met. The first condition is to ensure that the reduced rate is applied  to clearly defined and specificity aspects of the category of supply. Second, EU countries must respect the principle of fiscal neutrality, meaning to ensure that similar services are not treated unequally in a way to distort the competition.

Following these criteria, the ECJ determined that under the Bulgarian national legislation all accommodation facilities must be categorized, or they cannot lawfully carry out activities. Moreover, the non-categorized accommodations would be accommodation that does not comply with national legislation, and could lead to imposition of administrative penalties. However, it would not in any case be considered as another type of supply within the point 12 of Annex III.

Since the law requires the categorization as a condition to perform activity, non-categorized accommodation would not be subject to a standard VAT rate. As a consequence of this reasoning and wording, the categorized accommodation service provision would not be considered as identifiable separate from other services in that category.

Finally, the ECJ highlighted that when assessing the application of VAT rates, operational stability of Valentina Heights, which continued its accommodation services both with and without the valid categorization certificate should be considered. More specifically, although lacking the necessary certificate for almost a year, the company regularly recorded and reported income to the Tax Authority,  indicating transparency and regulatory oversight. 

The Valentina Heights was not operating illegally or entirely outside the categorization framework, but it operated during the period when the certificate expired, while its application was pending. The reasons for a two year long delay in issuing a new certificate may have been found in administrative inaction or incomplete documentation.

Nevertheless, even if the absence of categorization beaches national tourism laws, VAT rules must respect the principle of fiscal neutrality. Under the principle, the temporary lack of categorization does not automatically justify applying the higher VAT rate, as such differentiation would violate the neutrality required in VAT taxation. 

Courts Final Decision

The ECJ concluded that Article 98(2) of the VAT Directive, in conjunction with point 12 of Annex III, prohibits national legislation of EU countries to make the application of reduced VAT rates for hotel accommodation conditioned by the possession of a categorization certificate. 

For such a requirement to be in line with the EU laws it must restrict the reduced rate to clearly defined and specific aspects of accommodation services. 

Conclusion

The ruling and ECJ interpretation underlines that EU Member States cannot impose broad administrative conditions that arbitrarily affect the application of reduced VAT rates without targeting a specific aspect of services provided. Following the letter of the ruling it is clear that Valentina Heights was right to apply a 9% reduced VAT rate during a period in which it did not have necessary certificates.

The Valentina Heights case emphasizes the importance of balancing the national VAT regulations with EU principles. Additionally, the case and decision ensures that temporary administrative delays do not unjustly disadvantage businesses or distort competition by affecting the VAT treatment of services provided.

Source: Case C‑733/22 - Regional Directorate of the National Revenue Agency v. Valentina Heights, EU VAT Directive