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Flashback on ECJ Cases – C-507/16 (Entertainment Bulgaria System) – Deductibility of input VAT due or paid

On November 15, 2017, the ECJ issued its decision in the case C-507/16 (Entertainment Bulgaria System).

Context: Reference for a preliminary ruling — Taxation — Directive 2006/112/EC — Article 168(a), Article 169(a), Article 214(1)(d) and (e), and Articles 289 and 290 — Deductibility of input value added tax (VAT) due or paid — Output transactions carried out in other Member States — Tax exemption scheme in the Member State in which the right to deduct is exercised


Article in the EU VAT Directive

Artciles 168(a), 169(a), 214(1)(d) and (e) of the EU VAT Directive 2006/112/EC

Article 168 (Right to deduct VAT)
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;

Article 169 (Right to deduct VAT)
In addition to the deduction referred to in Article 168, the taxable person shall be entitled to deduct the VAT referred to therein in so far as the goods and services are used for the purposes of the following:
(a) transactions relating to the activities referred to in the second subparagraph of Article 9(1), carried out outside the Member State in which that tax is due or paid, in respect of which VAT would be deductible if they had been carried out within that Member State;

Article 214 (Identification of taxable persons)
1. Member States shall take the measures necessary to ensure that the following persons are identified by means of an individual number:
(d) every taxable person who within their respective territory receives services for which he is liable to pay VAT pursuant to Article 196;
(e) every taxable person, established within their respective territory, who supplies services within the territory of another Member State for which VAT is payable solely by the recipient pursuant to Article 196.


Facts

  • It is apparent from the decision to refer that EBS is a company established in Bulgaria that provides internet services, such as website design, multimedia development and graphic design.
  • From 21 December 2010, EBS was identified for VAT purposes pursuant to Article 97a(2) of the ZDDS, which provides for the registration of taxable persons established in Bulgaria who supply services provided in the territory of another Member State.
  • According to the decision to refer, EBS received services supplied by taxable persons established in the territory of Member States other than the Republic of Bulgaria, which it used to provide services in other Member States and in Switzerland.
  • EBS proceeded to deduct the input VAT relating to the services received, in the context of the reverse charge regime.
  • During a tax inspection, the Natsionalnata agentsia za prihodite (National Revenue Agency, Bulgaria) established that on 30 November 2013 EBS had reached the turnover threshold beyond which undertakings no longer benefit from VAT exemption in that Member State and must, under national law, register for VAT in accordance with Article 96(1) of the ZDDS.
  • By a tax assessment notice of 16 September 2015, the National Revenue Agency, first, found that EBS had improperly exercised its right to deduct the input VAT relating to the services received, on the ground that Article 70(4) of the ZDDS forbids the exercise of that right for those taxable persons identified pursuant to Article 97a of the ZDDS and, second, imposed an additional assessment to VAT and default interest on EBS (the ‘tax assessment notice’).
  • By decision of 30 November 2015, the Director of the ‘Appeals and Tax and Social Security’ Directorate of Sofia granted in part a rectification request in respect of the tax assessment notice, finding that EBS could not be prohibited from deducting input VAT due or paid until it had been identified for VAT purposes pursuant to Article 96(1) of ZDDS, but only until the date on which the conditions for lodging a request for registration pursuant to that provision were fulfilled.
  • Being obliged to pay the amount of BGN 2 094 196 (around EUR 1 070 741) in VAT, together with default interest, EBS lodged a request for annulment of the revised tax assessment notice before the Administrativen sad Sofia-grad (Administrative Court of the City of Sofia, Bulgaria).
  • That court is considering the question whether Article 70(4) of the ZDDS is compatible with Directive 2006/112.
  • That court notes that, if the taxable persons identified for VAT pursuant to Article 97a of the ZDDS, as referred to in Article 70(4) of the ZDDS, cannot indicate VAT in invoices issued by them for goods or services supplied in Bulgaria, they should, however, be able to invoice that tax for goods and services supplied outside of the territory of that Member State. The court points out that those taxable persons may, as a result, deduct input VAT due or paid for services provided to them by taxable persons established in the territory of other Member States.

Questions

1.    Is Article 214 of Directive 2006/112 to be interpreted as meaning that, in connection with the right to deduct input tax, different weight is to be attached to the cases of registration for the purposes of value added tax, or does Article 214 of that directive preclude the Member States from attaching differing weight to the cases of registration, as is the position under Articles 97а and 70(4) of the ZDDS?

2.    Are Articles 168(а) and 169(а) of Directive 2006/112 to be interpreted as meaning that a taxable person who has been registered pursuant to Article 214(1)(e) of that directive is not entitled to deduct input tax declared by him in respect of supplies to him of services carried out by taxable persons from other Member States if he uses those supplies in order to provide services in other Member States and the other substantive and procedural conditions for the exercise of the right to deduct are satisfied?

3.    Are Articles 168(а) and 169(а) of Directive 2006/112 to be interpreted as precluding national legislation, such as Article 70(4) of the ZDDS, under which a taxable person who has been registered for purposes of value added tax pursuant to Article 214(1)(d) or (e) of that directive, and not pursuant to Article 214(1)(a) thereof, has under no circumstances a right to deduct input tax?


AG Opinion

None


Decision

Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2009/162/EU of 22 December 2009, must be interpreted as meaning that it does preclude Member State legislation that prevents a taxable person, established in the territory of that Member State, deducting input value added tax due or paid in that Member State in respect of services provided by taxable persons established in other Member States and used to provide services in Member States other than the Member State in which that taxable person is established, on the ground that that taxable person is identified for value added tax purposes by virtue of one of the two cases referred to in Article 214(1)(d) and (e) of Directive 2006/112, as amended by Directive 2009/162. However, Article 168(a) and Article 169(a) of Directive 2006/112, as amended by Directive 2009/162, must be interpreted as meaning that they do not preclude legislation of a Member State that prevents a taxable person, established in the territory of that Member State and eligible there for a tax exemption scheme, exercising its right to deduct input value added tax due or paid in that Member State for services provided by taxable persons established in other Member States and used to provide services in Member States other than the Member State in which that taxable person is established.


Summary

Deductibility of VAT payable or paid in advance – Transactions performed in a later stage in other Member States – Small business scheme of the Member State in which the right to deduct is exercised

Entertainment Bulgaria System (EBS) is a Bulgarian company that provides Internet services such as web design, multimedia production or graphic design. EBS has been identified for VAT purposes because taxable persons established in Bulgaria who supply services having their place of performance in the territory of another Member State are subject to registration. EBS purchased services provided by taxable persons established in the territory of a Member State other than Bulgaria and used those services to provide services in other Member States and Switzerland. EBS paid and deducted the VAT relating to the supplies of services thus purchased at an earlier stage under the reverse charge mechanism.

The question is whether EMS may deduct input tax in Bulgaria.

According to the ECJ, the VAT Directive contains legislation of a Member State which prevents a taxable person established in the territory of that Member State from deducting input tax due or paid in that Member State on services supplied by taxable persons established in other Member States and which are used to provide services in Member States other than the Member State where that taxable person is established, because he has been identified for VAT purposes pursuant to one of the two cases referred to in Article 214(1)(d) and (e) of the VAT Directive.

However, Article 168(a) and Article 169(a) of the VAT Directive do not preclude legislation of a Member State that prevents a taxable person established on the territory of that Member State who qualifies for a tax exemption scheme there from deducting input tax. which is due or paid in that Member State on services supplied by taxable persons established in other Member States and which are used to provide services in Member States other than the Member State in which that taxable person is established.


Source:


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