Briefing Document: Comprehensive Review of EU VAT Deduction Rules and Invoice Requirements Based on ECJ Case Law

Detailed Briefing Document: VAT Deduction and Invoice Requirements

Review of EU VAT Deduction Rules and Invoice Requirements based on ECJ Case Law

Purpose: This briefing document provides a review of the main themes and most important ideas arising from the provided excerpts of European Court of Justice (ECJ) documents concerning the right to deduct Value Added Tax (VAT) and the formal requirements for invoices under EU law.

Sources:

C-123/87 (Jeunehomme) and 330/87 (EGI SA) – Deduction can be refused in case of missing Invoicing requirements
C-491/18 (Mennica Wrocławska) – Incorrect description of the goods on the invoices
C-690/22 (Shortcut) – Order – Authorities can not restrict right to deduct VAT if invoices include a generic description of the services provided
C-516/14 (Barlis) – Vague description of the services and the dates may not lead to refusal of VAT deduction
C-518/14 (Senatex) – VAT deduction for non-compliant invoices
C-123/87 (Jeunehomme) and 330/87 (EGI SA) – Deduction can be refused in case of missing Invoicing requirements
C-610/19 (Vikingo Fővállalkozó Kft.) – Right to deduct VAT even if invoices cannot be considered credible

Executive Summary:

The provided sources, primarily ECJ judgments and orders, consistently uphold the fundamental principle of VAT neutrality, which ensures that taxable persons are relieved of the burden of VAT incurred in the course of their economic activities. The right to deduct input VAT is a cornerstone of this system. While holding a valid invoice is a formal condition for exercising this right under Article 178(a) of the VAT Directive (2006/112/CE), the ECJ emphasizes that formal defects in invoices should not, in principle, lead to the refusal of the right to deduct if the substantive conditions for deduction are met. National authorities must consider all available information to verify the reality of the transaction and the substantive conditions, and cannot impose additional formal requirements beyond those explicitly listed in Article 226 of the VAT Directive. Refusal of the right to deduct is generally only justified in cases of fraud or abuse, or where formal defects prevent the verification of substantive conditions.

Key Themes and Important Ideas:

Fundamental Principle of VAT Neutrality and the Right to Deduction:

The right of taxable persons to deduct input VAT is a fundamental principle of the common system of VAT and “in principle may not be limited” (Case C-491/18, para 30; C-518/14, para 37; C-516/14, para 37; C-690/22, para 28).
This deduction system aims to “relieve entirely the entrepreneur of the burden of the VAT due or paid in the course of all his economic activities” (Case C-491/18, para 31; C-518/14, para 37; C-516/14, para 39; C-690/22, para 29).
VAT neutrality guarantees that all economic activities are taxed neutrally, provided they are themselves subject to VAT (Case C-491/18, para 31; C-516/14, para 39; C-690/22, para 29).

Substantive vs. Formal Conditions for Deduction:

Substantive conditions for the right to deduction are laid out in Article 168(a) of the VAT Directive: the interested party must be a taxable person, and the goods or services must be used for the purposes of their taxed transactions, and supplied by another taxable person (Case C-491/18, para 32; C-516/14, para 40; C-690/22, para 47).
Formal conditions for exercising the right to deduction, according to Article 178(a) of the VAT Directive, include holding an invoice drawn up in accordance with the Directive, particularly Article 226 (Case C-491/18, para 33; C-516/14, para 41; C-518/14, para 6; C-690/22, para 31; C-154/20, para 6).

Invoice Requirements (Article 226 VAT Directive):

Article 226 of the VAT Directive lists the mandatory details that must appear on invoices for VAT purposes (Case C-491/18, para 5; C-516/14, para 8; C-154/20, para 8).
Article 226(6) specifically requires the invoice to include “the quantity and nature of the goods delivered or the extent and nature of the services rendered” (Case C-491/18, para 5; C-516/14, para 8; C-690/22, para 7; C-154/20, para 8).
The objective of the mandatory invoice details is to enable tax authorities to “control the payment of the tax due and, if necessary, the existence of the right to deduct VAT” (Case C-690/22, para 34; C-516/14, para 27).
National legislation or practices cannot impose additional formal requirements for invoices beyond those fixed by the VAT Directive (Case 123 and 330/87, Question 1 and 2; C-690/22, para 32).

Formal Defects vs. Right to Deduction:

The fundamental principle of VAT neutrality requires that the deduction of input VAT be granted if the substantive conditions are met, “even if certain formal conditions have been omitted by the taxable persons” (Case C-491/18, para 35; C-516/14, para 42; C-690/22, para 48).
Sanctioning non-compliance with formal conditions by refusing the right to deduction goes “beyond what is necessary” to ensure correct application of those conditions (Case C-491/18, para 36; C-518/14, para 41). Member States can impose other proportional penalties (Case C-491/18, para 36; C-518/14, para 41).
Tax authorities “cannot refuse the right to deduct VAT solely on the ground that an invoice does not satisfy the conditions required, in particular by Article 226(6) of the VAT Directive, if those authorities have all the data to verify that the substantive conditions for that right are satisfied” (Case C-491/18, para 38; C-516/14, para 43).
Authorities must not limit themselves to examining the invoice but “must also take into account the additional information provided by that taxable person” (Case C-491/18, para 39; C-516/14, para 44; C-690/22, para 52).
Refusal of the right to deduct due to formal defects is only permissible if the defect “has the effect of preventing certain proof that the substantive conditions” are fulfilled (Case C-491/18, para 37; C-690/22, para 54).

Specificity of Invoice Descriptions:

Article 226(6) requires the “extent and nature” of services, but does not require an “exhaustive” description of specific services (Case C-690/22, para 33; C-516/14, para 26).
The sufficiency of a description is assessed in light of the objective of enabling tax authorities to control the payment and deduction of VAT (Case C-690/22, para 34; C-516/14, para 27).
Generic descriptions like “legal services” may not be sufficiently detailed if they cover services not necessarily connected with economic activity (Case C-516/14, para 28, 38). However, terms like “services de développement d’applications” (application development services) may be sufficient if they relate to economic activity and don’t impede verification, even if general (Case C-690/22, para 36-39, 59).
National courts are responsible for verifying whether invoices fulfill the formal requirements, considering other documents presented by the taxable person (Case C-690/22, para 43-44; C-516/14, para 28, 35).

Fraud and Abuse:

The right to deduction can be refused if it is demonstrated, based on objective evidence, that it is invoked “fraudulently or abusively” (Case C-491/18, para 40; C-516/14, para 40; C-446/15, para 50; C-690/22, para 56).
This applies whether the fraud is committed by the taxable person or if they knew or should have known they were participating in a transaction connected with VAT fraud (Case C-446/15, para 51).
Combating fraud and abuse is a recognized objective of the VAT Directive (Case C-690/22, para 56; C-446/15, para 50).

Correction of Invoices:

The correction of an invoice, even regarding a mandatory detail like the VAT identification number, can have retroactive effect, meaning the right to deduct relates to the period in which the original invoice was issued, not the correction date (Case C-518/14, para 43).
National practices refusing the right to deduct if a correction occurs after a tax authority decision refusing deduction may be contrary to the Directive (Case C-518/14, para 44-45; C-154/20, para 45). The key is whether the substantive conditions were met and if the taxable person provided necessary information before the tax authority decision (Case C-154/20, para 45).

Irrelevance of Downstream/Upstream VAT Payment or Justification of Transaction Structure:

The question of whether VAT on prior or subsequent sales has been paid is “irrelevant to the right of the taxable person to deduct input VAT” (Case C-446/15, para 42).
National practice cannot impose an obligation on each member of a chain transaction to scrutinize other members or deny the right to deduct based on circumstances upstream of the invoice issuer over which the taxable person had no control (Case C-446/15, Question 2(i) and 3(i)).
Denying the right to deduct on the ground that the structure of a transaction (e.g., a chain) was not economically justified is not compatible with the VAT Directive if the substantive conditions for deduction are met and there is no fraud (Case C-446/15, Question 2(ii)).

Important Quotes:

“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: 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 168(a) of the VAT Directive, cited in Case C-491/18, para 3; C-516/14, para 5; C-518/14, para 5; C-446/15, para 5; C-154/20, para 5).
“In order to exercise the right of deduction, a taxable person must meet the following conditions: for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Articles 220 to 236 and Articles 238, 239 and 240;” (Article 178(a) of the VAT Directive, cited in Case C-491/18, para 4; C-518/14, para 6; C-154/20, para 6).
“Without prejudice to the particular provisions laid down in this Directive, only the following details are required for VAT purposes on invoices issued pursuant to Articles 220 and 221: … the quantity and nature of the goods supplied or the extent and nature of the services rendered;” (Article 226(6) of the VAT Directive, cited in Case C-491/18, para 5; C-516/14, para 8; C-690/22, para 7).
“the principle fundamental de neutralité de la TVA exige que la déduction de la taxe versée en amont soit accordée si les conditions de fond énoncées au point 32 de la présente ordonnance sont satisfaites, même si certaines conditions formelles ont été omises par les assujettis” (Case C-491/18, para 35) – Translation: the fundamental principle of VAT neutrality requires that the deduction of input tax be granted if the substantive conditions set out in point 32 of this order are satisfied, even if certain formal conditions have been omitted by the taxable persons.
“les autorités fiscales ne sauraient refuser le droit à déduction de la TVA au seul motif qu’une facture ne remplit pas les conditions requises notamment par l’article 226, point 6, de la directive TVA si ces autorités disposent de toutes les données afin de vérifier que les conditions de fond relatives à ce droit sont satisfaites” (Case C-491/18, para 38) – Translation: tax authorities cannot refuse the right to deduct VAT solely on the ground that an invoice does not satisfy the conditions required, in particular by Article 226(6) of the VAT Directive, if those authorities have all the data to verify that the substantive conditions for that right are satisfied.
“la déduction de la TVA peut être refusée si la violation des conditions formelles prévues par la directive TVA a pour effet d’empêcher d’apporter la preuve certaine que les conditions matérielles ont été satisfaites” (Case C-690/22, para 54) – Translation: the deduction of VAT may be refused if the violation of the formal conditions provided for by the VAT Directive has the effect of preventing certain proof that the material conditions have been satisfied.
“le droit à déduction peut être refusé s’il est démontré, au vu d’éléments objectifs, qu’il est invoqué frauduleusement ou abusivement” (Case C-491/18, para 40) – Translation: the right to deduction may be refused if it is demonstrated, on the basis of objective evidence, that it is invoked fraudulently or abusively.

Conclusion:

The ECJ’s consistent jurisprudence underscores the importance of the principle of VAT neutrality and the right to deduct input tax. While invoices are a formal requirement, their purpose is to facilitate tax control, not to impede the exercise of a fundamental right when the underlying economic transaction is real and subject to VAT. National tax authorities are required to consider all available evidence to verify the substantive conditions for deduction and cannot rely on minor formal defects in invoices to deny the right to deduct, unless those defects genuinely prevent verification of the substantive conditions or there is evidence of fraud or abuse. National laws and practices must be compatible with these principles and cannot impose additional formal burdens beyond those set out in the VAT Directive.