6.3.2.1 No recovery of VAT on costs for non-economic activities

A taxable person cannot deduct VAT on costs that he incurs for non-economic activities. Non-economic activities are activities that are not considered to be performed by a taxable person acting as such. These activities are, therefore, outside the scope of the EU VAT Directive. Examples, from CJEU case law, of non-economic activities are: the ‘passive’ holding of shares (which is considered an activity performed as a shareholder, not a business activity),1 promoting the general interest2 and certain activities performed by government authorities in which they engage as public authorities.3 Also, as explained in Chapter 3, supplies, even if made for consideration, by a person not acting in its capacity of a taxable person are also considered non-economic activities. The same applies to activities subject to a total prohibition on importation and marketing in the EU: these are considered to be outside the scope of VAT.4 The VAT incurred on costs relating to these activities is not deductible.

In the provisions regarding taxation of private consumption of business goods and services, the description of the taxable event includes transactions by a taxable person “for purposes other than those of his business”.5 These transactions do not include non-economic activities. If that would be the case, then the very definition of ‘taxable transactions’ under the EU VAT Directive (“the supply of goods or services effected for consideration (…) by a taxable person acting as such”) would be rendered meaningless.6

The “purposes other than those of his business” are to be interpreted as meaning “for the purpose of private consumption by a private individual”. This view is supported by the CJEU where it held that it follows from the structure of the EU VAT Directive that the provisions [re. taxation of private use, JB] is designed to prevent non-taxation of (…) use for private purposes.7

Strangely, the CJEU seems to hold that certain non-economic activities can also qualify as ‘business transactions’ (as opposed to transactions ‘for purposes other than those of his business’).8 In my view, the Union concept of “business activities” (or any other concept) from the EU VAT directive cannot be applied to activities that are outside the scope of that VAT Directive.