Flashback on ECJ Cases C-107/13 (FIRIN) – No right to deduct the VAT on prepayment if supply did not happen

On March 13, 2014, the ECJ issued its decision in the case C-107/13 (FIRIN).

Context: Common system of value added tax – Deduction of input tax paid – Payments made on account – Refusal to allow the deduction – Fraud – Adjustment of the deduction in the case where the taxable transaction is not carried out – Conditions

Article in the EU VAT Directive

Articles 65, 90(1), 168(a), 185(1) and 193 of Council Directive 2006/112/EC

Article 65
Where a payment is to be made on account before the goods or services are supplied, VAT shall become chargeable on receipt of the payment and on the amount received.

Article 90(1) (Taxable amount)

1. In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.

Article 168(a) (Rigjt to deduct VAT)

1. In the case of immovable property forming part of the business assets of a taxable person and used both for purposes of the taxable person’s business and for his private use or that of his staff, or, more generally, for purposes other than those of his business, VAT on expenditure related to this property shall be deductible in accordance with the principles set out in Articles 167, 168, 169 and 173 only up to the proportion of the property’s use for purposes of the taxable person’s business.
By way of derogation from Article 26, changes in the proportion of use of immovable property referred to in the first subparagraph shall be taken into account in accordance with the principles provided for in Articles 184 to 192 as applied in the respective Member State.
2. Member States may also apply paragraph 1 in relation to VAT on expenditure related to other goods forming part of the business assets as they specify.

Article 185(1) (Right to deduct VAT – Adjustments)

1. Adjustment shall, in particular, be made where, after the VAT return is made, some change occurs in the factors used to determine the amount to be deducted, for example where purchases are cancelled or price reductions are obtained.

Article 193 (Liability to pay VAT)

VAT shall be payable by any taxable person carrying out a taxable supply of goods or services, except where it is payable by another person in the cases referred to in Articles 194 to 199b and Article 202.


  • FIRIN, which succeeded to the rights of ‘Hlebozavod Korn’, is a company incorporated under Bulgarian law whose objects are the production and marketing of bread and pastries. York Skay EOOD (‘York Skay’) holds 99% of its share capital and the remainder is held by Mr Yorkishev.
  • At the end of 2010, FIRIN placed an order for 10 000 tonnes of wheat with Agra Plani EOOD (‘Agra Plani’), a company wholly owned by Mr Yorkishev. In respect of that transaction, which was payable in advance, Agra Plani issued, on 29 November 2010, an invoice for 3 600 000 Bulgarian leva (BGN), referring to VAT payable in the amount of BGN 600 000.
  • Following an audit, the Bulgarian tax authority challenged the deduction of that sum of BGN 600 000 that FIRIN had made in its VAT returns for the period from November to December 2010.
  • The tax authority substantiated that challenge by claiming that the supply had not been made and that the invoice of 29 November 2010 was part of a fraudulent scheme revealed by the audit. As it was not registered with the National Office for Grain, Agra Plani was not authorised to trade in grain under national law, a fact of which FIRIN could not have been unaware. Furthermore, the total amount of the payments made, from 30 November 2010, by FIRIN to Agra Plani, amounting to BGN 4 170 000, a sum greater than the amount payable according to the invoice, was transferred on that date to York Skay’s account. On that same date also, the sum of BGN 3 600 000 was paid into FIRIN’s bank account by York Skay.
  • In the absence of reliable justification, the tax authority did not accept the explanations provided as to the nature of those transfers, the first of which, according to FIRIN, stemmed from a loan from Agra Plani to York Stay, and the second from an additional contribution to FIRIN’s capital.
  • A tax adjustment notice was issued on 26 September 2011 as a consequence of that audit. FIRIN lodged an administrative objection to that notice with the Direktor. By decision of 16 January 2012, the Direktor confirmed that notice.
  • FIRIN thereupon brought an action against the Direktor’s confirmatory decision before the Administrativen sad Veliko Tarnovo (Administrative Court, Veliko Tarnovo), claiming that it satisfied all of the conditions for entitlement to deduct the sum of BGN 600 000 and that the grounds for refusal of that deduction referred to circumstances, including the fictitious nature of the transaction, that are relevant, not for the purposes of refusing the right of deduction, but for the triggering of FIRIN’s liability for its supplier’s unpaid VAT.
  • Against that background, the referring court is unsure whether a right to deduct VAT can be accepted in a situation where, for various reasons, the supply envisaged could not be made and whether a subsequent adjustment remains possible. It also expresses uncertainty as to whether the national system of joint and several liability for VAT is compatible with European Union law.


In cases such as that in the main proceedings, in which value added tax connected with a payment made in advance for a future clearly defined taxable supply of goods is immediately and effectively deducted, are the provisions of Article 168(a), in conjunction with Article 65, Article 90(1) and Article 185(1), of Council Directive 2006/112/EC  of 28 November 2006 on the common system of value added tax to be consistently interpreted as meaning that, in light of a failure, for objective and/or subjective reasons, to render the principal counter-performance in accordance with the terms and conditions of supply, the right to deduct input tax at the date on which it is exercised must be refused?
Does it follow from such a consistent interpretation, having regard to the principle of the neutrality of value added tax, that in this situation the supplier’s objective possibility of adjusting the value added tax charged and/or the basis of assessment of the tax on the invoice in the manner provided for under national law is (or is not) significant; and how might such an adjustment affect the refusal to allow the original deduction of input tax?
In the light also of recital 44 in the preamble to Directive 2006/112, is Article 205, in conjunction with Article 168(a) and Article 193, to be interpreted as meaning that the Member States are permitted to refuse to allow the recipient of a supply to deduct input tax by applying only such criteria as they themselves have laid down in their national legislation, according to which a liability to tax is imposed on a person other than the taxable person where in such a case the ultimate tax outcome would differ from the outcome if the rules established by the Member State had been strictly observed?
If the answer to the third question should be in the affirmative: are national legal provisions such as those in the main proceedings permissible in the context of the application of Article 205 of Directive 2006/112 and compatible with the principles of effectiveness and proportionality if they introduce joint and several liability for the payment of value added tax by reference to suppositions that are not based on objective facts that can be directly established but on expressed precepts of civil law, disputes in respect of which are conclusively settled on other legal grounds?

AG Opinion

(1)      It is a condition for the creation of a tax claim under Article 65 of the VAT Directive that it is expected that in the normal course of events the taxable supply will in fact be made.

(2)      In accordance with Article 185(1) of the VAT Directive, a deduction of input tax claimed on the basis of a payment on account within the meaning of Article 65 of the VAT Directive is to be adjusted if the taxable supply is ultimately not made. The adjustment to the right to deduct input tax does not depend on either the adjustment of the corresponding tax liability or repayment of the payment on account.


Articles 65, 90(1), 168(a), 185(1) and 193 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as requiring that the deduction of value added tax made by the recipient of an invoice drawn up with a view to a payment being made on account in relation to the supply of goods be adjusted where, in circumstances such as those in the main proceedings, that supply is ultimately not made, even if the supplier remains liable for that tax and has not refunded the payment made on account.


It is necessary to review the deduction of VAT by the recipient of an invoice drawn up for the purpose of advance payment for the supply of goods where, in circumstances such as those at issue in the main proceedings, that supply does not ultimately take place, even though the supplier still have to pay that tax and have not refunded the prepayment.

Interesting paragraph in the decision

50      The adjustment mechanism provided for in those articles is an integral part of the VAT deduction scheme established by Directive 2006/112. It is intended to enhance the precision of deductions so as to ensure the neutrality of VAT, with the result that transactions effected at an earlier stage continue to give rise to the right to deduct only in so far as they are used to make supplies subject to VAT. That mechanism thus aims to establish a close and direct relationship between the right to deduct input VAT paid and the use of the goods or services concerned for taxable output transactions (TETS Haskovo, paragraphs 30 and 31).


Similar ECJ cases











  • VAT
* click here if you have interesting news to share *