© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
H4a. Leases of land
GENERAL
Services or goods
- Distinguishing operating lease and finance lease: substantially all risks and rewards pass
“[28] It is clear from the Court's case-law that an operating lease must be distinguished from a finance lease, the nature of the latter being that substantially all the risks and rewards of legal ownership are transferred to the lessee. The fact that a transfer of ownership is provided for on the expiry of the contract or the fact that the present value of the lease payments is practically identical to the market value of the property constitute, separately or together, criteria which permit a determination of whether a contract can be categorised as a finance lease (see, to that effect, judgment in Eon Aset Menidjmunt, C 118/11, EU:C:2012:97, paragraph 38).” (NLB Leasing C-209/14)
THE EXEMPTIONS
- Long lease of immoveable property: supply of goods if value of lease payments practically identical to market value
“[30] Accordingly, where a financial leasing agreement relating to immovable property provides either that ownership of that property is to be transferred to the lessee on the expiry of that agreement or that all the essential powers attaching to ownership of that property are to be enjoyed by the lessee and, in particular, substantially all the rewards and risks incidental to legal ownership of that property are transferred to the lessee and the present value of the amount of the lease payments is practically identical to the market value of the property, the transaction resulting from that agreement must be treated as an acquisition of capital goods.” (NLB Leasing C-209/14)
The exemptions in EU law
- Leasing or letting of immovable property
"(l) the leasing or letting of immovable property." (Article 135(1))
- Mandatory carve outs from leasing or letting (hotels, parking, installed equipment)
"The following shall be excluded from the exemption provided for in point (l) of paragraph 1:
(a) the provision of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use as camping sites;
(b) the letting of premises and sites for the parking of vehicles;
(c) the letting of permanently installed equipment and machinery;
(d) the hire of safes." (Article 135(2))
- Discretionary carve outs from leasing or letting of immovable property
"Member States may apply further exclusions to the scope of the exemption referred to in point (l) of paragraph 1." (Article 135(2))
- Discretionary carve out cannot be used to tax the surrender of a lease where it was exempt to grant the lease
"[12] Article 13B allows Member States to exclude certain types of letting from the scope of the exemption and hence to subject them to tax. However, it cannot be construed as allowing them to tax a transaction terminating a lease where the grant of that lease was compulsorily exempt. The relations created by a lease cannot be broken up in this way." (Lubbock Fine C-63/92)
MEANING OF LEASE
- Right to occupy property and exclude others for an agreed period in return for rent
"[40] In addition, in the absence of a definition of those notions in the VAT Directive, the Court defined the ‘letting of immovable property’, for the purposes of Article 135(1)(l) of that directive, as an arrangement whereby the lessor assigns to the lessee, in return for rent and for an agreed period, the right to occupy its property and to exclude any other person from it (see, inter alia, judgment of 19 December 2018, Mailat, C‑17/18, EU:C:2018:1038, paragraph 36 and the case-law cited)." (WEG C-449/19)
Payment linked to the passage of time
- Payment linked to occupation, but other factors may be taken into account
“[23] Furthermore, while a payment to the landlord which is strictly linked to the period of occupation of the property by the tenant appears best to reflect the passive nature of a letting transaction, it is not to be inferred from that that a payment which takes into account other factors has the effect of precluding a 'letting of immovable property' within the meaning of art 13B(b) of the Sixth Directive, particularly where the other factors taken into account are plainly accessory in light of the part of the payment linked to the passage of time or pay for no service other than the simple making available of the property.
[…]
[27] It is also a matter for that court to establish whether the contracts, as performed, have as their essential object the making available, in a passive manner, of premises or parts of buildings in exchange for a payment linked to the passage of time, or whether they give rise to the provision of a service capable of being categorised in a different way.” (Temco Europe SA, C-284/03)
Passivity
- Relatively passive activity: distinguish provision of services from simply making property available
"[41] The Court has also specified that the exemption provided for in Article 135(1)(l) of the VAT Directive is due to the fact that the letting of immovable property, whilst being an economic activity, is normally a relatively passive activity, not generating any significant added value. Such an activity is thus to be distinguished from other activities which are either industrial and commercial in nature, or have as their subject matter something which is best understood as the provision of a service rather than simply making property available, such as the right to use a golf course, the right to use a bridge in consideration of payment of a toll or the right to install cigarette machines in commercial premises (judgment of 2 July 2020, Veronsaajien oikeudenvalvontayksikkö (Computing centre services), C‑215/19, EU:C:2020:518, paragraph 41 and the case-law cited)." (WEG C-449/19)
- Supply of heat not passive
"[42] In the main proceedings, as is apparent from the request for a preliminary ruling, the activity at issue consists in the supply of heat generated by the operation, by WEG Tevesstraße, of a cogeneration power unit. By supplying that heat, that association simply sells tangible property which is the result of the exploitation of another tangible property, albeit the latter is immovable, without however conferring on the purchasers of the heat, that is to say the property owners belonging to that association, the right to occupy an immovable property, in the present case the cogeneration power unit, and to exclude any other person from enjoyment of such a right, within the meaning of the case-law referred to in paragraph 40 above." (WEG C-449/19)
SCOPE OF EXEMPTION
Transactions related to leases
- Payment to surrender lease is exempt where lease itself was exempt
"[28] However, the Court must make clear that that judgment [in Lubbock Fine] was given in respect of a tenant who returned the immovable property leased to the landlord and who, consequently, for the purposes of taxation, assigned his right to occupy the property back to the landlord by surrendering it. That is why the Court ruled, in paragraphs 9 and 12 of the judgment, that the tenant's surrender of the supply of services made by the landlord, which involved a change in the contractual relationship, has to be exempt where the supply itself is exempt." (Cantor Fitzgerald C-108/99)
"[9] Where a given transaction, such as the letting of immovable property, which would be taxed on the basis of the rents paid, falls within the scope of an exemption provided for by the Sixth Directive, a change in the contractual relationship, such as termination of the lease for consideration, must also be regarded as falling within the scope of that exemption." (Lubbock Fine C-63/92)
- Paying person to accept assignment of lease is supply by the recipient of the assignment, but not exempt
"[21] The letting of immovable property for the purposes of Article 13B(b) of the Sixth Directive essentially involves the landlord of property assigning to the tenant, in return for rent and for an agreed period, the right to occupy his property and to exclude other persons from it (see, to that effect, Case C-358/97 Commission v Ireland [2000] ECR I-6301, paragraphs 52 to 57, Case C-359/97 Commission v United Kingdom [2000] ECR I-6355, paragraphs 64 to 69; and Case C-326/99 Goed Wonen [2001] ECR I-6831, paragraph 55).
[22] The supply at issue in the main proceedings does not meet those conditions.
[23] On the contrary, it was the new tenant, CFI, which, by agreeing to take on the rights and obligations arising under the existing lease, supplied a service to the former tenant, Wako. Wako did not make a supply of services to CFI but paid consideration in cash for the service supplied by CFI, consideration which, as such, is not liable to VAT. The landlord was the only person to effect a supply of services to CFI within the meaning of Article 2(1) of the Sixth Directive, which was exempt under Article 13B(b) thereof, namely the right to occupy its property in consideration for the payment of rent." (Cantor Fitzgerald C-108/99)
Service charges
- Not exempt where supplier is not also supplier of land
"[228] We also find that as the supplier of the Maintenance Services is not also the supplier of the land, the supply of Maintenance Services is not ancillary to a supply of land and cannot take on the character of an exempt supply of land. In reaching this conclusion we have also borne in mind that VAT exemptions are to be construed strictly." (Places for People Homes Limited v. HMRC [2025] UKFTT 1417 (TC), Judge Aleksander)