The Development of Social Housing in the European Union: when general interest meets Community interest.

Chapter I

EUROPEAN COMMUNITY FRAMEWORK FOR SOCIAL HOUSING:

artand limits of the exemption to the rules

Introduction

A European Community framework for social housing actually exists today. It came into being progressively, by default and by derogation from the general provisions of the Treaty and the derived law. Yet neither the Treaty establishing the European Community (CE), nor the Treaty on the European Union nor the draft Constitutional Treaty adopted by the heads of State and Government of the Member States and not yet ratified vest the European Union with specific powers in the field of housing policy and, a fortiori in that of social housing.

As a consequence and in compliance with the principle of subsidiarity defined in article 5 of the Treaty, the Community can intervene in social housing “only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community”[1].As an illustration of this principle, the European Union ensures the cofinancing of the modernization of social housing in the new Member States granted on the basis of its 2007-2013 cohesion policy, taking into account the extent of the task and its active contribution to a real convergence between the Regions of the new Member States and those of the old ones.

Apart from the logic of cofinancing, it is legitimate to wonder why a Union between independent States, the legal form of which is based on an international Treaty, can actually intervene in a public policy domain that is not subject to its exclusive powers. A public policy domain even which is deeply ingrained in the history of the States which form the Union and developed before the signature of the Treaty or their adhesion[2].

It is useful to ask that question in the context of the legal order of the Community which defines the nature of the relation between Community law and the internal legal order of the Member States. The legal order of the Community establishes the principle of primacy of Community law over the internal legislations of the Member States, and thus the potential capacity of the Union to impact the legislation of the Member States related to social housing by progressively building up its own framework.

The detailed analysis of the components of the Community framework, which is the object of this first chapter, will allow clarification, in particular, of the context and the modalities by which the European Union attempted - or was constrained to define - to classify or to circumscribe the concept of social housing, its objectives, forms of organization, financing and regulation.

The definitions of social housing adopted by the institutions of the Community, namely by the Council, the European Parliament but also the European Commission are revealing the present sector approach. They either result from law derived from the Treaty, i.e. directives, Community regulations or decisions, or from so-called soft law, i.e. communications and additional interpretative communications which are binding only for the European Commission. The jurisprudence of the Court of Justice of the European Communities (CJEC) also offers superior clarity in this context.

This analysis of the Community framework for social housing will also be very useful for the continuation of our action consisting in precisely specifying the conditions of social housing development in Europe. It will enable us to formulate a European definition of social housing, or at the very least attempt to find a common definition dictated by a twofold requirement: to integrate the legal reference system of the European Union and to be open enough to embrace a priori the diversity of all social housing concepts in the 27 Member States which form the Union.

1: Social housing in derived Community law

The social housing approach in Community law is neither uniform nor coherent. Each component of Community law looks at it in its specific form, based on its own legal foundations, in view of its own problems and with its own vocabulary, without requiring a global coherence, as there is no horizontal approach to social housing by the departments of the European Commission.

As an example, the definition of the perimeter of social housing established with reference to the rules of competition and control of the manifest error in qualifying social housing as a service of general interest does not at all consider, and is even in contradiction with, the European definition of social housing adopted by the European Council in the Sixth VAT Directive.

Another example which illustrate the sectoral approach: Whereas the administration of DG Internal Market and Services preaches the achievement of the internal mortgage market in order to promote the offer of building loans, the services of the Economic and Financial Affairs Directorate General (DG ECFIN) sends out recommendations to the Member States and banks to reduce their offer of building loans in order to let the air out of the real estate bubble, which is the source of destabilization of the Eurozone. In his report on the Lisbon Strategy, Wim Kok recommended the following:“reducing restrictions on refinancing mortgage debt and offering improved possibilities to finance a larger proportion of the purchase price of property via more generous and cheaper mortgage loans could extend home ownership and also boost consumption. Transaction costs on housing are too high in most Member States. More flexible housing markets would encourage labour mobility and the development and efficiency of the financial services sector, empower home-buyers and support more consumer spending”[3].

Each Directorate General of the European Commission addresses the issue of housing and social housing according to its own logic without any coordination with the Commission’s General Secretariat. It would be useful, therefore, to pass the different components of Community law in review which make it possible to address the social housing issue before trying to extract possible elements of convergence and divergence of these sectoral approaches. The comparative analysis of the social housing approach of each and every Directorate General of the European Commission is presented in the opposite table and perfectly illustrates such eclecticism.

Table N° 1:The approach to social housing by the services of the European Commission

DG Employment – Social Affairs /
  • Recognition of the specificity of the missions and the forms of organization
  • Stake of modernization to cope with the development of the needs
  • Clarification of the applicable Community framework
  • Definition of social housing
  • Role in the European strategy for social inclusion and the Lisbon strategy
  • Housing aspects in connection with the implementation of the non-discrimination directive
  • Link between housing, employment, labour mobility (guidelines on employment)
  • European statistics in matters of housing (mandate of the Council)
  • Exclusion of housing and homelessness

DG Regional policy /
  • Contribution of social housing to the cohesion policy
  • Eligibilityof the ERDF for the modernization of social housing, the renewal of neighbourhoods in difficulties and the energy performance.

DG Competition
Unit conception of policies /
  • Legal certainty for State Aid for social housing as a service of general interest (compensations)
  • Applicable framework for State Aid granted to social housing enterprises
  • Conditions for calculating and controlling the right compensation
  • Definition of social housing as a service of general interest
  • Transparency of the conditions of mandating social housing enterprises

DG Concurrence
Unit application of the rules /
  • Filing complaints(Sweden, France) and notifications of State Aid granted to social housing by the Member States (Netherlands, Czech Republic)
  • Application of the legal framework in relation to State Aid
  • Definition of social housing (control of the manifest error)
  • Control of the compatibility of exclusive or specific rights
  • Control of the application of the transparency directive

DG Internal Market /
  • Control of the requirements for approval and accreditation
  • Control of barriers to the freedom of establishment and the freedom to provide services
  • Definition and control of the conditions of awarding public contracts
  • Rules which apply to PPP and institutional PPP
  • Rules which apply to the relationship between public authorities and social housing enterprises (contracts, concessions, in-house…)
  • Internal Market of building loans

DG Economy-Finance /
  • Impact of the real estate bubble on the Eurozone
  • Recommendation to abolish tax advantages for homeownership creation and to moderate the distribution of building loans

DG Energy /
  • Contribution of social housing to reducing the emission of greenhouse gases and developing renewable energies
  • Funding of pilot-projects and the proliferation of innovative practices

DG Enterprises /
  • Standardization of products and services

DG Environment /
  • Urban environment, construction

DG Taxation and Customs Union /
  • Framework that applies to reduced VAT rates for social housing
  • Definition of social housing

DG Development /
  • Eligibility of social housing for the European Development Fund

General Secretariat /
  • Horizontal approach for SGI
  • Common principles applicable to SGI
  • Evaluation of SGI

Sources: Union sociale pour l’habitat, Representation to the European Union, 2006

The approach in Community Tax Law in connection with a common VAT system

The issue of a Community definition of social housing first arose in the Council in the 1970s in relation to the fiscal harmonization and, in particular, the implementation of a common VATsystem for all Member States. The intended objective consisted namely of defining a unique reduced VATrate to be compulsory for a defined list of goods and services called “first necessity” items, or for “social objectives”.

More than thirty years later, this ambitious project is far from being realized. Following a unanimous decision of the Council, the provisional system still applies today and is actually limited to the definition of the spread of reduced VAT rates and their optional application to a closed list of goods and services among social housing[4].

In practice, the VAT rates which apply to social housing in the Member States vary from 0 percent in the United Kingdom to 25 percent in Sweden,whereas Malta has a special regulation exempting social housing from VAT.The common definition of social housing which was adopted unanimously by the Council and is the basis for the Heads of State and Government to introduce a reduced VAT rate is the following: “the supply, construction, renovation and alteration of housing provided as part of social policy”.

This is a global definition of social housing and, as it was adopted unanimously, it embraces the diversity of the national definitions. It focuses on the finality of public policy in itself, in this case social policy, which leads the Member States to provide social housing, or to have it provided as goods of first necessity and with a social objective.

Thus, it illustrates the social roots as well as the principles of intervention of the public power in the supply of dwellings and the regulation of the market forces. The European Commission is very clearregarding the scope of its application. In its report to the Council and the Parliament dated November 11th, 1997 (COM 97559), it limits the privilege of a reduced VAT rate explicitly “to social housingonly”, as certain Member States wanted to extend it to construction servicesalso.

This issue of the scope of application of the definition of social housing is the very core of recent negotiations in the Council on the repeal of the provisional rules regarding reduced VAT rates for labour-intensive services. Poland, the Czech Republic and Slovakia had actually blocked the accord in the Council by requesting acceptance of the extension of reduced VAT rates to the entire house building sectorto be a condition. The new Member States are still benefiting from derogation in this sense until December 31st, 2007.

In Poland, the scope of application of the definition of social housing fixed by habitable surface ceilings entered into force on January 1st, 2007 (120 square meters in detached houses and 200square meters in multi-storey buildings).

In the Czech Republic, the limitation of reduced VAT rates to social housing as defined by the directive has given rise to a debate. The plan to define the scope of application of social housing on the basis of limited habitable surfaces (90 square meters in multi-storey buildings and 150 square meters in detached housing) was discussed, in the government itself, by the prime minister who wished to apply the spirit of Community law and the finance minister who had the intention to extend the derogation even after 2008,qualifying all dwellings as social housing in the sense of Annex H. The prospect of passing from a VAT of 5 percent to 19 percent for the construction of homes was likely to affect building activities and their financial affordability. The Czech government finally took the decision to define the basic parameters for the definition of social housing as the construction of at most 120 square meters for dwellings and 350square meters for multi-storey buildings. The average habitable surface area of newly built dwellings in the Czech Republic is presently 105 square meters and 152 square meters , for houses. According to the Czech Minster of Finances, this new definition of “social housing” constitutes a compromise between the plans presented in early 2006 by the old government and those of the Minister of Finances who considers any newly built flat or house to be “social housing”.

These definition criteria for social housing admitted in the context of the Sixth VAT Directive contradict those established in the name of the rules of competition and the control of State Aid. To quote the opinion of the department in charge of the competition in the European Commission, “the solution forwarded by the Dutch authorities which comprises limiting the maximum value of dwellings likely to be considered as “social housing” does not solve this problem (of a manifest abuse of the definition of social housing as a service of general interest)”.

The social housing approach of the DG Competition works with reference to the provisions of the Treaty which are relevant for competition and confer it the monopoly of control and legislation to be developed, namely in view of a manifest abuse of the classification of a service of general interest by the Member States. The social housing approach of the DG Taxation and Customs Union in charge of tax issues works within the framework of legislative decisions taken unanimously by the 27 Heads of State and Government. The one explains the other …

The following table shows the great spread of VAT rates applied to social housing as defined in Annex H of the Sixth VAT Directive between countries which apply their normal VAT rates (Austria, Cyprus, Denmark, Estonia, Finland, Germany, Hungary, Latvia, Netherlands, Slovakia, Sweden) and the other Member States which apply reduced rates (Belgium, Czech Republic, France, Greece, Italy, Lithuania, Luxemburg, Malta, Poland, Portugal, Slovenia, Spain, United Kingdom.

VAT rates applied to social housing (category 9 Annex H Directive 77/388/CEE) as per September 1st, 2006
Old Member States / New Member States
Cyprus / 15%
Austria / 20% / Czech Republic / 5% (1)
Finland / 22% / Estonia / 18%
Germany / 16% / Hungary / 20%
Greece / 9% / Latvia / 18%
France / 5.5% / Lithuania / 9%
Ireland / 13.5% / Malta / EX
Italy / 4% / Poland / 7%
Luxemburg / 3% / Slovakia / 19%
Netherlands / 19% / Slovenia / 8.5%
Portugal / 5%
Spain / 4%
Sweden / 25%
United Kingdom / 0 – 5%
EX = exonerated / (1) flats in social housing
Sources: European Commission, Taxation and Customs Union, Doc 1826/2006

This differentiated treatment of social housing from the point of view of the applied VAT rates provides an initial clarification of the concepts of social housing in the Member States and of the nature of their sectoral approach.

An example: among the old Member States, the application of normal VAT rates is clearly linked with a universal concept of social housing, often classified as non-profit housing and not explicitly as social housing, in a logic of continuity with a strongly regulated housing market such as in Sweden, Denmark, Germany until 2002, Austria and the Netherlands.

The Member States which have more targeted social housing concepts clearly separated and segmented from the rest of their non regulated housing market tend to apply reduced VAT rates for social housing as a specific and distinctly identified sector, for instance Italy, Spain, France, Belgium, Luxemburg, the United Kingdom and Ireland.

However,this distinction is less clear for the new Member States, where the application of reduced VAT rates essentially strives to boost the construction of new dwellings and to make them affordable. In the new Member States, the rental dwelling stock of the communist period has been privatized largely by the sale of social dwellings to their tenants at reduced prices and without any specific counterpart in the form of social obligations in the event of their repeated sale or letting.

Therefore,this Community definition of social housing adopted unanimously by the Council grants the Member States a wide range of freedom to limit the scope of application, as illustrated by the Polish and Czech examples based on the surface limit for flats.

We must keep in mind four main defining elements of this fiscal approach to social housing:

  1. Social housing belongs to a specific category of goods and services referred to as “first necessity” and with a “social objective” in Community VAT law;
  2. Social housing is defined as being “an act provided as part of a social policy”. It is clearly distinct due to its explicit link with a public policy, in this case social policy, and throughthe act of providing, which refers to the physical planning of a housing supply in addition to that created spontaneously by the market and at conditions which result from the interaction of offer and demand;
  3. Social housing is defined in line with the analysis of the Commission in charge of monitoring the application of the VAT directive as regards its social roots and the regulation of the market forces;
  4. Social housing is thus defined by a legislative act adopted unanimously by the Council enabling integration of the entirety of social housing concepts of all Member States as opposed to the restrictive definition of social housing as a service of general interest, which contradicts the universal concepts of certain Member States, namely those of the Netherlands and of Sweden.

Social housing in Community competition law