ECJ C-459/21 (The Navigator Company et Navigator Pulp Figueira) – Order – VAT deductibility can be less favorable than deduction of costs for direct tax

On December 9, 2022, the ECJ issued its Order in the case C-459/21 (The Navigator Company et Navigator Pulp Figueira).

Context: Reference for a preliminary ruling — Article 99 of the Rules of Procedure of the Court — Value added tax (VAT) — Directive 2006/112/EC — Article 176 — Exclusions from the right to deduct VAT — Less favorable regime compared to the mechanism of deductibility of costs provided for a direct tax governed by national law – Principle of equivalence – Inapplicability

Article in the EU VAT Directive

Articles 168(a) and 176 of the EU VAT Directive 2006/112/EC

Article 168 (Origin and scope of right of deduction)
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 176 (Restictions on the Right of Deduction)
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 companies Navigator and Added Value have submitted their monthly VAT returns and their individual corporate tax returns to the Portuguese tax and customs authorities. Both companies subsequently requested the tax authorities to annul their VAT returns. It argued that the VAT returns contain a defect related to Article 21 of the Portuguese VAT Code, which provides for the ‘exclusion from the right to deduct’ of VAT in certain cases. According to the companies, that article is contrary to the EU law principle of equivalence. Indeed, the companies argue that there are differences between the possibility of deducting expenses under corporate income tax (and autonomous taxation) and the possibility of deducting VAT, as regards expenditure on vehicles, expenses for representation and travel and subsistence expenses. . The tax authorities rejected the companies’ objection to the VAT returns. The companies have submitted an application for arbitration to the referring court. as regards expenditure on vehicles, expenditure on representation and travel and subsistence costs. The tax authorities rejected the companies’ objection to the VAT returns. The companies have submitted an application for arbitration to the referring court. as regards expenditure on vehicles, expenditure on representation and travel and subsistence costs. The tax authorities rejected the companies’ objection against the VAT returns. The companies have submitted an application for arbitration to the referring court.

Consideration:

The referring court asks the EU Court for further clarification on the EU law principle of equivalence. The court wants to know whether that principle precludes a national VAT scheme (such as Article 21 of the Portuguese VAT Code) which excludes completely or 50 percent the right to deduct expenses for vehicles, travel and accommodation expenses and representation expenses. , whereas such amounts are fully deductible as expenses under corporate tax or can actually be deducted for more than 50 percent as expenses under autonomous tax.

Preliminary questions:

Does the principle of equivalence preclude a national VAT regime such as that laid down in Article 21(1) of the Código do Imposto sobre o Valor Acrescentado (VAT Code; ‘the CIVA’), which is subject to the standstill provision and excludes wholly or 50 % of the right to deduct vehicle expenses, travel, subsistence and representation expenses, while such amounts are fully deductible for corporate tax purposes (subject to ex post verification and subject to certain conditions) as costs,whether more than 50 % can actually be deducted as costs under the autonomous tax?

Source Minbuza.nl

Questions

Does the principle of equivalence preclude national VAT legislation, such as that laid down in Article 21(1) of the Código do Imposto sobre o Valor Acrescentado (Value Added Tax Code) (‘CIVA’), maintained under the standstill clause, which excludes entirely or in the proportion of 50% the right to deduct VAT on motor vehicle expenses, travel and accommodation expenses and entertainment expenses, these being, in the context of corporation tax, fully deductible as expenses (without prejudice to ex post verification and subject to certain conditions), or, in the context of autonomous taxation, effectively deductible in a proportion greater than 50%?

AG Opinion

None

Decision

The principle of equivalence must be interpreted as meaning that it does not preclude national legislation, maintained by virtue of the second paragraph of Article 176 of Council Directive 2006/112/EC of 28 November 2006, relating to the common system of value added tax, and establishing a total or partial exclusion of the right to deduct VAT paid in respect of expenses relating to certain vehicles, travel and stays and expenses entertainment, even though such expenses benefit from an allegedly more favorable regime, as regards their deductibility, in the context of a direct tax governed by national law.

Summary

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