On September 15, 2022, the ECJ issued its decision in the case C-227/21 (HA.EN.)
Context: Request for a preliminary ruling – Tax law – Value added tax (VAT) – Directive 2006/112/EC – Right to deduct input VAT – Scope of the case-law on fraud – Existence of an abuse of rights – Refusal of the right to deduct input VAT because the recipient of the supply knew or should have known that the supplier would not be able to pay the VAT incurred to the tax authorities due to his or her financial situation – VAT burden where the price is set off against existing debts
Article in the EU VAT Directive
Article 168(a) of Council 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;
- By a credit agreement of 21 September 2007, ‘Medicinos bankas’ UAB (‘the bank’) granted a loan to ‘Sostinės būstai’ UAB (‘the borrower’) to carry out real estate development activities, and, for the purpose of securing due performance of the agreement, the borrower granted a contractual mortgage over a plot of land in the city of Vilnius together with a building under construction located on it.
- By an assignment of claim agreement of 27 November 2015, the applicant acquired from the bank for consideration all the financial claims arising from the credit agreement concluded by the latter with the borrower, together with all the rights established to secure the performance of obligations, including the aforementioned contractual mortgage. By entering into that arrangement, the applicant, inter alia, confirmed that it had become acquainted with the borrower’s economic and financial situation and legal status and was aware that the borrower was insolvent and subject to restructuring proceedings.
- By order of a bailiff of 23 May 2016, the auction of a part of the borrower’s immovable property was announced but no purchaser showed an interest in that immovable property.
- Following the auction’s failure to take place, the offer to take over that property of the borrower (‘the immovable property’) was made to the applicant, thereby meeting a part of the latter’s claims. The applicant exercised the right and took over the property.
- For this purpose, an instrument for the transfer of property to a person seeking enforcement was drawn up on 21 July 2016, whereby the bailiff transferred to the applicant the immovable property with a value of EUR 5 468 000.
- On 5 August 2016, the borrower drew up a VAT invoice, stating that the immovable property was being transferred for EUR 4 519 008.26 and VAT of
EUR 948 991.74. The applicant entered the VAT invoice in its accounts, deducted the input VAT and declared the VAT in the VAT declaration for November 2016.
- The borrower entered the VAT invoice in its accounts, declared the output VAT that was indicated in the VAT invoice in the VAT declaration for August 2016, but did not pay that output VAT into the State budget. On 1 October 2016, the borrower acquired the status of a company subject to insolvency proceedings.
- On 20 December 2016, the applicant submitted a request to the Valstybinė mokesčių inspekcija (State Tax Inspectorate; ‘the Inspectorate’ or ‘the tax
authority’) for refund of the overpaid amount of VAT that resulted from the declared deductible input VAT. After conducting a tax inspection in respect of the applicant, the Inspectorate found that the applicant – in that it entered into transactions for the acquisition of the immovable property and knew or should have known that the borrower would not pay VAT for such a transaction – acted dishonestly and abused rights, and therefore did not acquire the right to deduct VAT. For this reason, by decision of 12 July 2017, the applicant was refused the right to the VAT deduction of EUR 948 980, was charged interest of EUR 38 148.46 for late payment of VAT, and a VAT fine of EUR 284 694 was imposed upon it.
- The applicant brought a complaint against that decision of the Inspectorate before the Mokestinių ginčų komisija prie Lietuvos Respublikos Vyriausybės (Tax Disputes Commission under the Government of the Republic of Lithuania; ‘the Tax Disputes Commission’) which, by decision of 22 January 2018, set aside the parts of the decision of the Inspectorate in respect of the interest for late payment that was charged and the fine that was imposed, but, after stating that the applicant abused rights, upheld the decision of the tax authority not to recognise the right of that taxable person to deduct VAT.
- The applicant brought an action against the latter part of the decision of the Tax Disputes Commission before the Vilniaus apygardos administracinis teismas (Regional Administrative Court, Vilnius), which dismissed the action as unfounded by judgment of 14 November 2018.
- Partially upholding the applicant’s appeal, the Lietuvos vyriausiasis administracinis teismas (Supreme Administrative Court of Lithuania), by order of
13 May 2020, set aside the aforementioned judgment of the court of first instance and referred the case back to that court for fresh examination, stating, inter alia, that it was necessary for that court to assess the conditions for, and indications of, the presence of abuse of rights in the case in point.
- The Regional Administrative Court, Vilnius, after re-examining the tax dispute, found by judgment of 3 September 2020 that the applicant abused rights, and therefore the Inspectorate was justified in refusing to recognise its right to deduct input VAT. The applicant again appealed to the Supreme Administrative Court of Lithuania.
Is Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, in conjunction with the principle of fiscal neutrality, to be
interpreted as prohibiting or not prohibiting a practice of national authorities under which the right of a taxable person to deduct input VAT is denied where that person, when acquiring items of immovable property, knew (or should have known) that the supplier, due to his insolvency, would not pay (or would not be able to pay) the output VAT into the State budget?
(1) Article 168(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, in conjunction with the principle of fiscal neutrality, is to be interpreted as prohibiting a practice of national authorities under which the right of a taxable person to deduct input value added tax (VAT) is denied where that person, when acquiring items of immovable property, knew (or should have known) that the supplier, due to his or her insolvency, would not pay (or would not be able to pay) the output VAT into the State budget.
(2) However, it is for the referring court to decide whether the taxable person (recipient of the supply) in the present case is really charged with VAT collected from it by the supplier. This is not possible if the recipient of the supply has never made the funds available to the tax debtor for the payment of the VAT debt.
Article 168(a) of 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,
should be interpreted as:
it opposes a national practice consisting, in the context of the sale of immovable property between taxable persons, of refusing the buyer the right to deduct the value added tax (VAT) paid upstream simply because the latter knew or should have known that the seller was in financial difficulty, or even in a situation of insolvency, and that this circumstance could have the consequence that the latter would not pay or could not pay the VAT to the Treasury.
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