ECJ C-734/19 (ITH Comercial Timişoara) – Judgment – Input VAT recovery for goods/services no longer used beyond taxpayer’s control

On November 12, 2020, the ECJ issued his decision in the ECJ case C-734/19 (ITH Comercial Timişoara) related to Input VAT recovery for goods/services no longer used beyond taxpayer’s control.

Context: Request for a preliminary ruling – Common system of value added tax (VAT) – Directive 2006/112/EC – Deduction of input tax – Abandonment of the activity initially intended – Adjustment of deductions of input VAT – Real estate activity

Articles in the EU VAT Directive 2006/112/EU

Article 167 and 168

Article 167 (Origin and scope of right of deduction)
A right of deduction shall arise at the time the deductible tax becomes chargeable

Article 168
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;
(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18(a) and Article 27;
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
(d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22;
(e) the VAT due or paid in respect of the importation of goods into that Member State.

Summary of the case

A Romanian referral asking whether, inter alia, Articles 167 and 168 of the VAT Directive and the principles of legal certainty, the protection of legitimate expectations, non-discrimination and tax neutrality permit or preclude the right of a taxable person to deduct VAT in relation to certain investment expenditure which the taxable person incurs with the intention of allocating it for the purpose of carrying out of a taxable transaction – should the right to deduction be forfeited in the event that the planned investment is subsequently abandoned?

In its decision in Case C-734/19 (ITH Comercial Timişoara) released on 12 November 2020 (see: PwC), the CJEU has underlined the need that an agreement is in place (although not necessarily in writing), according to which the agent intervenes, on behalf of the principal, in the sale of goods or the provision of services. In that case, given no such an agreement existed, the CJEU held that the special VAT regime for agents without representation did not apply (see, in particular, paragraphs 52 and 53 of the judgment mentioned above).

Detailed Facts

The factual situation which gave rise to the main proceedings is the applicant’s failure to complete two building projects which it had begun in 2006 and 2007 in accordance with the agreements which it had entered into with a company that manufactures lifts and escalators (‘the lift company’).
In 2006, the applicant purchased a plot of land on which it intended to build a factory for making lifts and ancillary products. Subsequently, the building was to have been let to the lift company for a period of ten years (‘the Dragomirești Vale project’).
By means of a sale and purchase agreement concluded in December 2007, the applicant purchased from the lift company real estate consisting in a plot of land and the building in which the lift company was carrying on its business. The purpose of the transaction was to enable the applicant to build an office block and shopping centre on the plot of land (‘the Calea Giulești project’) and to enable the lift company to reduce its own costs by moving into the premises that were to have been built as part of the Dragomirești Vale project.
Between 2008 and 2010, in connection with the Dragomirești Vale project, the applicant incurred expenditure in connection with various preparatory steps, such as applying for a building permit and concluding various technical consultancy agreements for the purpose of securing that permit, project planning, the construction of a number of preliminary buildings and the supply of site management services. That expenditure amounted to a total of RON 942 471, on which VAT of RON 226 193 was charged, in relation to which the applicant exercised its right of deduction.
In connection with the Calea Giulești project, the applicant incurred expenditure in obtaining the permit required for the demolition of the existing buildings on the land where the lift company was carrying on its business and in applying for a building permit. That expenditure amounted to a total of RON 71 268, on which VAT of RON 13 541, was charged, in relation to which the applicant exercised its right of deduction.
In 2008, against the background of the economic crisis and the protraction of discussions with the public authorities involved in the grant of the necessary permits, the applicant suspended the Calea Giulești project.
Against the same background, the lift company found itself forced to lease premises at a rent lower than the rent it had agreed with the applicant for the lease of the lift manufacturing factory that was to have been built. In those circumstances, the applicant also suspended the Dragomirești Vale project and leased a building which it then sublet to the lift company for a period of seven years at a rent lower than the rent originally agreed upon. In an addendum to the 2007 sale and purchase agreement, the lift company certified that the applicant had fulfilled completely and in due time its obligations relating to the move.
On 26 May 2016, the applicant decided to cancel the investments associated with the Calea Giulești project and to enter them in its financial statements for 2015. The applicant nevertheless obtained the permit authorising the demolition of the existing buildings on the land that had previously belonged to the lift company and planning consent for the preparation of the documentation relating to the permits for the completion of the project.
In 2009 and 2013, the tax authorities carried out tax inspections in relation to the applicant’s activities during the period 27 March 2006 to 30 June 2012, including its investment expenditure for the two building projects, checking whether it complied with VAT law. In the tax inspection reports the authorities recorded that the applicant had deducted and collected VAT during the period covered by the inspection in accordance with VAT law. In addition, one of the tax inspection reports expressly mentioned that the applicant’s financial position had prevented it from completing the two projects.
In 2016, in connection with another tax inspection, the tax authorities examined the period from 1 July 2012 to 30 June 2016. In the tax inspection report they stated that the applicant had incorrectly deducted VAT amounting to RON 13 541 relating to the investment expenditure for the Calea Giulești project and that it must collect from the lift company VAT of RON 226 193 in connection with the investment expenditure incurred for the Dragomirești Vale project, which the applicant should have re-invoiced to the lift company.
In the tax assessment notice that was issued on the basis of that tax inspection report, the applicant was required to pay additional VAT of RON 239 734. The applicant challenged the tax inspection report and the tax assessment notice, first in administrative proceedings and subsequently in the judicial proceedings which led to the present case, seeking reimbursement of the sum thus paid together with interest.

AG Opinion

None

Decision

1) Articles 167, 168, 184 and 185 of Council Directive 2006/112 / EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the right to deduct input value added tax (VAT) on goods, in this case on real estate, and services acquired with a view to carrying out taxed transactions is maintained when the investment projects initially planned have been abandoned in due to circumstances beyond the control of the taxable person and that there is no need to adjust this VAT if the taxable person still intends to use the said goods for the purposes of a taxed activity .

2) Directive 2006/112, in particular Article 28 thereof, must be interpreted as meaning that, in the absence of an agency contract without representation, the commission agent mechanism is not applicable when a taxable person carries out a construction in accordance with the needs and requirements of another person expected to hire said construction.

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