Flashback on ECJ Cases – C-414/07 (Magoora) – Deduction of VAT on the purchase of fuel for certain vehicles irrespective of their purpose of use

On December 22, 2008, the ECJ issued its decision in the case C-414/07 (Magoora).

Context: Sixth VAT Directive – Article 17(2) and (6) – National legislation – Deduction of VAT on the purchase of fuel for certain vehicles irrespective of the purpose for which they are used – Effective restriction on deductions – Exclusions laid down by national law when the directive entered into force

Article in the EU VAT Directive

Articles 17(2) and 17(6) of the Sixth VAT Directive (Articles 168 and 176 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;

(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18(a) and Article 27;

(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.

Article 176

The Council, acting unanimously on a proposal from the Commission, shall determine the expenditure in respect of which VAT shall not be deductible. VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

Pending the entry into force of the provisions referred to in the first paragraph, Member States may retain all the exclusions provided for under their national laws at 1 January 1979 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession.

Facts

The dispute pending before the Wojewódzki Sąd Administracyjny w Krakowie (Regional Administrative Court, Cracow) concerns the possibility for Magoora to deduct the input tax on the purchase of fuel for a vehicle used for the activities of that company under a leasing contract.
On 25 March 2005, Magoora entered into a contract for the operational leasing of a car, registered at the Urząd Skarbowy (Tax Office) on 13 June 2005. The referring court does not provide any information about the make and technical characteristics of that car.
It is clear from the order for reference that the restrictions on the deduction of input tax on purchases of fuel according to a mathematical formula in the Law on VAT, in the version in force on the day on which the leasing contract was concluded, namely 25 March 2005, were not applied to Magoora. However, following the adoption of the new wording of Article 86(3) of the Law on VAT, in the version in force since 22 August 2005, the restrictions on the deduction of input VAT on those purchases were applied to that company, since the authorised weight of the vehicle at issue in the main proceedings did not exceed 3.5 tonnes.
On 30 August 2005, Magoora submitted to the Naczelnik Urzędu Skarbowego Kraków-Prądnik (Head of the Cracow-Prądnik Tax Office) an application for an interpretation of the provisions of the Law on VAT as regards the scope and restrictions on the right to deduct input tax on the purchase of fuel for the vehicle used under a leasing contract. Magoora takes the view, in that regard, that it should retain the right to deduct input tax on purchases of fuel for that vehicle on the basis of Article 17(6) of the Sixth Directive.
By decision of 3 November 2005, the Naczelnik Urzędu Skarbowego Kraków-Prądnik declared Magoora’s submissions unfounded, taking the view that Article 17(6) of the Sixth Directive could not constitute a source of national law in Poland.
On 15 February 2006, the Dyrektor Izby Skarbowej w Krakowie dismissed Magoora’s appeal and upheld that decision on the ground that the Republic of Poland was entitled to retain restrictions on the deduction of VAT which existed in that Member State on the date on which the Sixth Directive entered into force. Furthermore, he held that the provisions in force from 22 August 2005 merely redefined the categories of vehicles for which the deduction of VAT on purchases of fuel was not permitted.

Questions

Does Article 17(2) and (6) of the Sixth Directive ¹ preclude the Republic of Poland from repealing completely, as of 1 May 2004, national provisions in force up to that date concerning restrictions on the deduction of input tax on purchases of fuel for vehicles used for a taxable activity and also introducing in their place restrictions on the deduction of input tax on purchases of fuel for vehicles used for a taxable activity but which are defined in national law on the basis of different criteria to those used prior to 1 May 2004, and from subsequently amending those criteria again with effect from 22 August 2005?

If the answer to Question 1 is in the affirmative: does Article 17(6) of the Sixth Directive preclude the Republic of Poland from amending the above criteria so as de facto to restrict the scope of deductions of input tax in comparison with the national provisions in force on 30 April 2004 or with the national provisions in force before the amendment made on 22 August 2005? If it should be found that this action by the Republic of Poland constitutes a breach of Article 17(6) of the Sixth Directive, would it be necessary to find that a taxable person would be entitled to make deductions but only in so far as the amendments to the national provisions went beyond the scope of the restrictions on deducting input tax provided for in the national provisions in force on 30 April 2004 and repealed on that same date?

Does Article 17(6) of the Sixth Directive preclude the Republic of Poland, invoking the possibility, provided for in that provision, for Member States to restrict the deduction of input tax attaching to expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment, from restricting the deduction of input tax in comparison with the position in law as it stood on 30 April 2004 so as to exclude the deduction of input tax on the purchase of fuel for passenger cars or other motor vehicles with a maximum authorised mass not exceeding 3.5 tonnes, with the exception of vehicles referred to in Article 86(4) of the Ustawa o podatku od towarów i usług (Polish Law on the tax on goods and services) of 11 March 2004, in the version in force since 22 August 2005?

AG Opinion

None

Decision

The second subparagraph of Article 17(6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment precludes a Member State from repealing in their entirety, when that directive is transposed into national law, national provisions concerning restrictions on the right to deduct input tax on purchases of fuel for vehicles used for a taxable activity, by replacing, on the date on which that directive entered into force on its territory, those provisions by provisions laying down new criteria in that regard, if – which it is for the national court to determine – the latter provisions have the effect of extending the scope of those restrictions. It precludes, in any event, a Member State from subsequently amending its legislation which entered into force on that date, so as to extend the scope of those restrictions as compared with the situation existing prior to that date.

Summary

When transposing that Directive into national law, a Member State shall not be allowed to repeal in its entirety national provisions restricting the right to deduct input tax paid on the purchase of fuel for vehicles used for a taxed activity, by to replace those provisions in its territory at the time of the entry into force of that Directive with provisions laying down new criteria in that regard, where the latter provisions have extended the scope of those restrictions.

In any event, it is not permitted for a Member State to subsequently amend its legislation which has entered into force at that time in the sense that this extends the scope of those restrictions in relation to the situation existing before that time.

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