When Services Meet Goods: VAT Lessons from ECJ Case C‑410/17

What started as a request for a preliminary decision submitted by A Oy, a Finnish company that provides a wide range of environmental services across Finland and Sweden in the industrial, construction, and real estate sectors, to the Finnish Tax Authority, escalated into a case before the Court of Justice of the European Union (ECJ). 

At the heart of Case C‑410/17 are demolition and purchasing-dismantling contracts, where a company both provided demolition services and acquired scrap metal and other materials, raising complex questions about how VAT applies when services and goods are intertwined in a single contractual arrangement. However, this case also brings many more unique circumstances that the ECJ had to factor in when deciding.

Background of the Case 

The company's business operations span across industrial maintenance, real estate services, demolition, recycling, and waste processing.  In addition to demolishing structures, such as old factory buildings, the company also acts as the main contractor, managing the site and overseeing all work. Additionally, the company is responsible for handling, processing, and disposing of all materials and waste resulting from the demolition in accordance with environmental and industry standards.

Notably, some demolition materials and waste, including scrap metal, are subject to Finnish VAT Law, under which the VAT liability shifts to the buyer. Additionally, part of the waste consists of items that the company can resell to other companies that buy recyclable scrap. Before pricing demolition services, the company estimates how much of this material will be recovered and what it can likely earn from selling it.

To be more competitive, the company incorporates the estimated resale value into the demolition service quote. Nevertheless, the estimated value is not discussed with the client nor specified to them, and they receive a single all-inclusive price covering the entire demolition service.

The company also purchases old machinery and equipment from its clients under dismantling-purchase contracts, including buildings, installations, machines, and other movable items. It is responsible for dismantling and removing them from the client’s premises, and for disposing of the resulting waste in accordance with the contract terms. 

Since these services create significant costs, the company estimates them in advance and incorporates them into the price it offers, effectively reducing the purchase price it is willing to pay. Similar to the demolition contracts, these costs are not discussed with the client and are not identified in the contract.

Considering the specifics of services and how estimated recovered materials and costs are incorporated into the price, the company sought a preliminary ruling from the Finnish Tax Authority to clarify how VAT should be calculated both for demolition services supplied under the demolition contract and for the purchase of scrap metal and metal waste under the dismantling-purchase contract.

In its 2015 preliminary decision, the Tax Authority concluded that the company was required to account for VAT on the demolition services it provided and, through the reverse charge mechanism, also on the scrap metal it acquired from the client. Moreover, the Tax Authority reached the same conclusion regarding the dismantling-purchase contracts.

However, in neither case did the Tax Authority address how the consideration or pricing was determined, leaving the structure of the financial exchange outside its scope. The company challenged the decision before the Administrative Court in Helsinki, which, in December 2015, rejected the appeal and concluded that, under both the demolition contract and the dismantling-purchase contract, the arrangements constituted a barter transaction. 

The company further appealed to the Supreme Administrative Court of Finland (the Court), which decided to pause the proceedings and refer two questions to the ECJ.

Main Questions from Request For Ruling

Given the complex arrangement of both contracts and services provided by the company, the Supreme Administrative Court referred two detailed questions to the ECJ. 

In its first question, the Court asked whether the previously mentioned demolition contract should be treated as a single supply of services or as two distinct transactions: the provision of demolition services and the purchase of scrap metal from the client. The Court also questioned whether it matters that the company factors potential scrap-sale revenue into its pricing, where neither the quantity nor the value of the recoverable scrap is specified in the contract or communicated to the client, since these become clear only when the scrap is later sold.

The second question concerned the dismantling-purchase contracts, where the Court sought clarification whether such agreements should be regarded as a single transaction involving only the sale of goods to the demolition company, or whether they actually comprise two separate taxable events: the sale of goods and a supply of demolition services back to the seller. Similar to the first question, the Court also requested clarification on the relevance of the company’s internal calculation of dismantling and disposal costs.

Applicable EU VAT Directive Article

Apart from Articles 2(1)(e) and (c), 14(1), and 24(1), which are among the most frequently interpreted articles of the EU VAT Directive, for the needs of thi case ECJ also focused on Articles 73 and 199(1), which explain how the taxable amount must be determined and provide EU countries with an option of applying the reverse charge mechanism in specific sectors, respectively. 

Article 199(1) is significant for this case, as under point (a) it includes construction-related services such as demolition, and under point (d) it extends to the supply of used materials, scrap, waste, and recyclable materials listed in Annex VI. Annex VI to the EU VAT Directive confirms that ferrous and non-ferrous scrap, used materials, semi-finished metal products, and a wide range of recyclable waste fall under the categories eligible for reverse charge treatment.

Finland National VAT Rules

Regarding Finland's national VAT rules, the ECJ noted that the VAT Law defines that the seller of goods or services is the person liable for VAT, unless a specific exception applies, such as the application of the reverse charge mechanism for buyers of scrap metal and waste, provided the buyer is registered for VAT, as defined in Article 8d. The ECJ added that the VAT Law transposes a provision from the EU VAT Directive into national legislation.

Importance of the Case for Taxable Persons

The case showcases how the lines between services and goods can blur when demolition meets taxation. In this case, the ECJ clarifies how VAT applies when a single contract involves both the supply of services and the acquisition or resale of goods, and addresses matters such as the dual nature and economic reality of the transaction, valuation and consideration, and reverse charge mechanism, which gives taxable persons a clear guidance to determine when and how VAT applies to these contracts.

Analysis of the Court Findings

The ECJ first noted that, in the present case, it is undisputed that the company performs demolition works in return for payment within an EU country, which qualifies as the supply of services for consideration under Article 2(1)(c) of the VAT Directive. 

Furthemore, the ECJ underlined that, under the established case law, consideration for a supply of services can indeed include a supply of goods, which then forms part of the taxable amount, provided there is a direct link between the service and the goods and the value of the goods can be expressed in monetary terms. The same principle applies when a supply of goods is exchanged for a supply of services, provided these conditions are met.

Additionally, case law establishes that barter contracts, in which consideration is provided in kind, are economically and commercially equivalent to monetary transactions. Since the company, in addition to receiving monetary payment for its services, also acquires recyclable scrap metal under the demolition contract, which it can resell, the acquisition constitutes a supply of goods.

When addressing the issue of whether the supply of goods is made or considered, following the established case law, in the present case, the supply of recyclable scrap metal qualifies as being made for consideration if the company assigns it a value and factors that value into the price it quotes for the demolition services. Whether this is the case depends on the Court's final determination.

Regarding the absence of any agreement in the demolition contract on the quantity or value of the scrap metal, ECJ stated that this fact does not prevent scrap metal from still constituting consideration. Moreover, under the agreed terms, the value of the recyclable scrap metal can still be established, with the value corresponding to the reduction in the demolition service price, as the company expects to obtain revenue from selling the scrap metal.

Furthermore, the ECJ held that the nature of the transactions is not affected by the lack of a precise value for the recyclable scrap metal received, and that both parties are engaged in reciprocal exchanges under a single contract. Since the supply of services and the obtaining of scrap metal, which counts as consideration, are directly linked and form part of the same contractual exchange, there is a clear and direct connection between the demolition work carried out and the transfer of the scrap metal.

However, the ECJ also noted that scrap metal received by the company can be treated as a taxable supply only if a taxable person provides it for VAT purposes. If the set condition is met, the taxable amount for the demolition service includes both the amount paid by the customer and the value the company assigns to the scrap metal, which appears as a discount on the service price.

Regarding the second question, the ECJ interpreted it as asking whether the combination of buying goods and providing demolition and disposal services constitutes a single economic transaction or two distinct supplies for VAT purposes. While it is apparent that the contract involves the supply of service for consideration, the issue of whether the supply of goods is also made in exchange for services remains.

The ECJ stated that it is for the Court to determine whether the demolition services constitute part of the counter-performance for the goods supplied, and thus whether, together, both elements constitute the consideration for VAT purposes.

By applying the same logic as for the first question, the ECJ stated that neither the existence of an agreed dismantling and disposal cost nor the seller’s lack of knowledge about the exact amount of those costs undermines the finding that the demolition work constitutes consideration. Even if the actual values are not explicitly communicated or detailed, the VAT treatment remains unchanged. The critical element is that the value of the dismantling and waste-disposal services can be determined. 

The ECJ added that the price reduction reflects the subjective value the company assigns to demolition services, and that both parties exchange reciprocal supplies under the same contract. More specifically, the seller supplies goods for dismantling, while the company provides dismantling and disposal services. Consequently, the mutual obligations and rights are directly linked.

Following this interpretation, the ECJ concluded that the VAT taxable base for the supply of goods to be dismantled consists of two amounts, the purchase price and the value of the reduction, which together represent the full consideration exchanged between the parties.

Courts Final Decision

Regarding the demolition contract, the ECJ concluded that the arrangement constitutes two distinct supplies for VAT purposes. The first one is the demolition service provided to the client, and the second one is the supply of goods, scrap metal, if the company assigns a value to the scrap metal, and factors that value into the price quoted for the demolition services. Whether the supply of scrap metal is taxable or not depends on whether the company qualifies as a taxable person under the VAT system.

Concerning the purchase contract for dismantling and disposing of the resulting waste within a specified period, the contract encompasses a supply of goods for consideration subject to VAT if the company qualifies as a taxable person. Additionally, since the company must perform demolition or dismantling and waste disposal to meet the seller’s specific needs, the contract also constitutes a supply of services for consideration. However, whether all the conditions are met in this case is for the Court to determine.

Conclusion

Ultimately, the ruling provides a clear and practical interpretation of VAT implications on contracts that intertwine goods and services. Notably, the ECJ's conclusions underline that the absence of explicit agreements on the value or quantity of the materials does not preclude the recognition of consideration, and that VAT treatment should reflect the economic reality of the transaction. Moreover, with its ruling, the ECJ reminds that the substance of a transaction, rather than its formal contract terms, governs VAT obligations.

Source: Case C‑410/17 - A Oy v Taxpayer Legal Enforcement Unit, EU VAT Directive