The Court denies the right to deduct

Abstract

Up to 31 December 1994 Mr Malburg held a 60% share in the German partnership Malburg & partner. This partnership was dissolved, with a portion of the client base being transferred to each of the partners. Mr Malburg founded a new partnership on 31 December 1994 in which he held a 95% share. According to the undisputed findings of fact, Mr Malburg made the client base he had acquired following the dissolution of the former partnership available free of charge to the new partnership for use in its business. The transfer of the client base at the moment of dissolution of the old partnership was subject to VAT. As a consequence the old partnership sent an invoice to Mr Malburg upon this transfer which included the respective VAT. In his VAT return Mr Malburg deducted the VAT which had been invoiced to him in respect of the acquisition of the client base. The German Finanzamt refused the deduction. Being doubtful about the interpretation of the VAT Directive in this respect, the German Bundesfinanzhof requested a preliminary ruling from the ECJ. The core question was whether a partner in a partnership of tax advisers is entitled to deduct the input VAT paid on the acquisition of a portion of its client base from another partnership of tax advisers, which he makes available directly and free of charge to a newly founded partnership of tax advisers for the use of its business. The client base did not become part of the capital assets of that newly founded partnership. The referring court sought more specifically to ascertain whether the reasoning underlying the Polski Trawertyn case applied by analogy to the referred case. The Court commenced by emphasising the uniqueness of the Polski Trawertyn case and also repeated its settled case law according to which economic activities give rise to deduction of VAT. However, the entitlement to deduct VAT generally presupposes a direct and immediate link between a particular input transaction and a particular output transaction or transactions. The direct and immediate link is also vital when determining the extent of the deduction entitlement. The Court pointed out that in the Polski Trawertyn case the output transaction