On November 11, 2021, the ECJ issued its decision in the case C-281/20 (Ferimet, S. L.).
Context: Is a member state allowed to refuse input VAT deduction where, under the reverse charge procedure, the self invoice issued by that person for the goods he or she has purchased states a fictitious supplier, although it is not disputed that the person did make the purchase and used the purchases for activities that allow to recover input VAT?
Article in the EU VAT Directive
Article 168 and related provisions of Council Directive 2006/112/EC
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.
In 2008 the company Ferimet acquired recovered materials (scrap) from the company Reciclatges de terra alta. It declared this purchase under the reverse charge mechanism and issued the corresponding invoices drawn up by itself. The tax inspectorate found that there was a sham act, because while it could not be denied that the supply of the materials had taken place, the actual supplier was knowingly disguised. For that reason, the tax inspectorate concluded that Ferimet had wrongly deducted the VAT and imposed a financial penalty on it. The regional judge in economic and administrative matters has confirmed this decision. Ferimet has challenged this administrative decision, arguing that the VAT deduction cannot be refused if it is established that the transaction actually took place and if the reverse charge mechanism not only guarantees the collection of the VAT and its control, but also the absence of any tax advantage for the taxpayer. Ferimet’s appeal was dismissed, on which Ferimet appealed in cassation.
In certain cases, as referred to in Article 84 of the VAT Act, the person who has to declare and pay the VAT is the recipient of the invoice and not the originator of the invoice. One of the cases in which this diversion takes place is regulated in Article 84 (1.2) c) of the VAT Act, and concerns entrepreneurs whose economic activity consists of the purchase and sale of recovered materials (scrap). The dispute at issue concerns the question whether the applicant can deduct the VAT which it has charged to itself and which it owes itself on the basis of an invoice drawn up by itself under the reverse charge mechanism, if (i) the transaction was actually carried out (this is not disputed), but ii) there is deception as to the actual supplier of the purchased goods.
Must Article 168 and related provisions of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, 1 the principle of tax neutrality arising from that directive, and the associated case-law of the Court of Justice be interpreted as not allowing a trader to deduct input VAT where, under the reverse charging of VAT, known in EU law as the reverse charge procedure, the documentary evidence (invoice) issued by that trader for the goods he or she has purchased states a fictitious supplier, although it is not disputed that the trader in question did actually make the purchase and used the purchased materials in the course of his or her trade or business?
In the event that a practice such as that described above ― of which the interested party must have been aware ― can be characterised as abusive or fraudulent for the purposes of refusing the deduction of input VAT, is it necessary, in order for the deduction to be refused, to prove in full the existence of a tax advantage that is incompatible with the guiding objectives of ‘VAT regulation?’
Lastly, if such proof is required, must the tax advantage which would be grounds for refusing the deduction and which must be identified in the specific case in question relate exclusively to the taxpayer (who purchased the goods), or could that advantage be one which relates to other parties involved in the transaction?
Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in conjunction with the principle of fiscal neutrality, must be interpreted as meaning that a taxable person must be refused the right to deduct value added tax (VAT) relating to the acquisition of goods supplied to that taxable person where he or she has knowingly mentioned a fictitious supplier on the invoice which that taxable person him- or herself has issued in respect of that transaction under the reverse charge procedure, if, taking into account the factual circumstances and the evidence provided by that taxable person, the information necessary to verify that the true supplier had the status of taxable person is lacking, or if it is established to the requisite legal standard that the taxable person has committed VAT fraud or knew or ought to have known that the transaction relied on as a basis for the right of deduction was connected with such a fraud.
Ferimet SL declares that in 2008 it acquired materials for reuse (scrap) from Reciclatges de Terra Alta. Since, in its view, that purchase is subject to the VAT reverse charge mechanism, Ferimet draws up the corresponding invoice. The Spanish Tax Authorities subsequently establish that the materials have been delivered, but not by RTA. It therefore takes the view that Ferimet is not entitled to deduct input tax. The Spanish court is asking questions for a preliminary ruling in this case.
The EU Court of Justice has ruled that Ferimet is not entitled to deduct input tax. It is important here that a fictitious supplier is deliberately mentioned on the self-issued invoice in the context of the application of the reverse charge mechanism. It is also important that information is missing to determine whether the supplier is liable for tax, or that it is sufficiently clear that fraud has been committed.