Case Overview: Amper Metal Kft. v. Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága
On November 25, 2021, the Court of Justice of the European Union (CJEU) delivered a significant judgment regarding the interpretation of value-added tax (VAT) regulations under Directive 2006/112/EC. The case stemmed from a dispute between Amper Metal Kft., a Hungarian electrical installations company, and the Appeals Directorate of the National Tax and Customs Authority of Hungary. The core issue revolved around Amper Metal’s right to deduct input VAT for advertising services that the tax authority deemed excessively expensive and non-beneficial.
Key Legal Context:
- Article 168(a) of the VAT Directive allows taxable persons to deduct VAT paid on goods and services used for taxable transactions.
- The Hungarian tax authority rejected Amper Metal’s VAT deduction claim, arguing that the advertising expenses did not link to income-generating activities and were disproportionate to any resulting benefit.
Judgment Highlights:
- Right to Deduct VAT: The CJEU ruled that a taxable person may deduct input VAT for advertising services if those services are subject to VAT and have a direct and immediate link with taxable transactions or the taxable person’s overall economic activity.
- Assessment of Value: The court emphasized that the right to deduct VAT should not be contingent upon the perceived economic efficiency or profitability of the expenditure. It clarified that whether the price of services is excessive compared to market value is not a valid basis for denying VAT deductions.
- Economic Activity Link: The court noted that even if the advertising services did not lead to an increase in turnover, this would not invalidate the right to deduct VAT, provided the services are used in the context of the taxable person’s business operations.
- Judgment Implications: The ruling reinforces the principle of VAT neutrality, ensuring that businesses are not penalized for the nature of their expenses as long as those expenses are related to their taxable activities.
Conclusion:
The CJEU’s judgment in this case clarifies the rights of taxable persons under EU VAT law, emphasizing that the deductibility of VAT should not depend on subjective assessments of cost-effectiveness or sales impact. This ruling is significant for businesses seeking to understand their entitlements under VAT regulations and reinforces the importance of maintaining a clear link between expenses incurred and taxable business activities.
A more extensive one …
I. Executive Summary
This briefing paper examines the fundamental principles of EU VAT deductibility, primarily through the lens of the Amper Metal Kft. (C-334/20) judgment by the Court of Justice of the European Union (CJEU). The case clarifies that a taxable person’s right to deduct input VAT cannot be denied merely because a national tax authority deems the price of services excessive or because those services fail to generate an increase in turnover. The core of EU VAT law, enshrined in the principle of fiscal neutrality, ensures that businesses are largely relieved of the VAT burden on their inputs, provided the expenditure is objectively linked to their taxable economic activity. While national authorities retain the power to assess the genuine business nature of an expense (e.g., distinguishing between business and entertainment), they cannot substitute their judgment for a business’s commercial decisions regarding price or profitability.
II. Core Principles of EU VAT Deductibility
Principle of VAT Neutrality:
- The fundamental goal of the common system of VAT is to “ensure complete neutrality of the tax burden of all economic activities, whatever their purpose or results, provided that those activities are themselves subject, in principle, to VAT.” (CURIA, para 17, 23; Study Guide, Point 1; VAT Deductibility: Price, Profit, and Economic Activity)
- This means traders should be “entirely relieved of the burden of the VAT payable or paid in the course of all his or her economic activities.” (CURIA, para 23; Study Guide, Point 1)
The Right to Deduct Input VAT (Article 168(a) VAT Directive):
- Core Principle: This right is “an integral part of the VAT scheme and in principle may not be limited. It is exercisable immediately in respect of all the taxes charged on input transactions.” (CURIA, para 23; Study Guide, Point 2)
- Condition for Deduction: Goods and services must be “used for the purposes of the taxed transactions of a taxable person.” (CURIA, Article 168(a); Study Guide, Point 2)
- “Direct and Immediate Link”: This is the crucial connection required. Input transactions must have a direct and immediate link to:
- A specific output transaction(s) giving rise to the right to deduct.
- Alternatively, the taxable person’s economic activity as a whole, as part of their general costs. (CURIA, para 31, 32; Study Guide, Point 2)
- Burden of Proof: National tax authorities and courts must assess “all the circumstances surrounding the transactions concerned and to take account only of the transactions that are objectively linked to the taxable person’s taxable activity.” (CURIA, para 34; Study Guide, Point 2)
Transactions Subject to VAT (“For Consideration” – Article 2(1)(c) VAT Directive):
- A supply of services is subject to VAT if made “for consideration” by a taxable person acting as such. (CURIA, Article 2(1)(c), para 26; Study Guide, Point 3)
- “For consideration” requires a legal relationship with “reciprocal performance,” where remuneration constitutes the “value actually given in return for the service supplied.” (CURIA, para 26; Study Guide, Point 3)
- A “direct link” means the services and consideration are “dependent on each other, that is to say, that one is made only on condition that the other is also made, and vice versa.” (CURIA, para 27; Study Guide, Point 3)
Taxable Amount (Article 73 VAT Directive):
- The “taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party.” (CURIA, Article 73, para 28; Study Guide, Point 4; VAT Deductibility: Price, Profit, and Economic Activity)
- It is the “consideration established between the parties and paid to the supplier, and not an objective value, such as the market value or a reference value determined by the tax authorities.” (CURIA, para 28; Study Guide, Point 4)
III. Limitations and Exceptions to Deduction
Non-Strictly Business Expenditure (Article 176 VAT Directive):
- VAT is “in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.” (CURIA, Article 176, para 30; Study Guide, Point 5)
- This is a key area where national authorities can assess the objective nature of the transaction to determine if it is genuinely business-related. (Study Guide, Point 5)
Prevention of Tax Evasion/Avoidance (Article 80 VAT Directive):
- Member States may adjust the taxable amount to the “open market value,” but only for transactions “involving family or other close personal ties, management, ownership, membership, financial or legal ties as defined by the Member State.” (CURIA, Article 80(1), para 29; Study Guide, Point 5; VAT Deductibility: Price, Profit, and Economic Activity)
- This is a “narrow exception” and was not applicable in the Amper Metal case as the transaction was between independent parties. (Study Guide, Point 5; VAT Deductibility: Price, Profit, and Economic Activity)
IV. The Amper Metal Kft. Case (C-334/20): Key Rulings and Implications
The Amper Metal case originated from a dispute where the Hungarian tax authority denied Amper Metal Kft. the right to deduct input VAT for advertising services. The authority deemed the services “excessively expensive and not beneficial,” arguing they were not linked to income-generating activities and did not meet “reasonable management” criteria under Hungarian law. (CURIA, para 14-15; VAT Deductibility: Price, Profit, and Economic Activity) Amper Metal argued that the right to deduct exists regardless of economic profitability. (CURIA, para 17; VAT Deductibility: Price, Profit, and Economic Activity)
The CJEU’s ruling addressed two main questions posed by the Hungarian court:
Irrelevance of Excessive Price:
- The CJEU ruled that the right to deduct input VAT “cannot be refused in respect of a transaction that falls within the scope of the VAT Directive on the ground that…the value of the service…is disproportionate…or…the service…is for a disproportionate sum, because the service (advertising) is expensive and the price is excessive in comparison with another service or services.” (CURIA, para 20, 40)
- The taxable amount is the “consideration established between the parties,” not an objective market value or a reference value determined by tax authorities. (CURIA, para 28, 37)
- Article 80 of the VAT Directive, which allows for adjustments to open market value in specific cases, was “irrelevant in so far as the dispute in the main proceedings concerns a transaction between independent parties.” (CURIA, para 37; Study Guide, Point 1 of Rulings)
Irrelevance of Lack of Turnover Increase/Profitability:
- The CJEU firmly established that the right to deduct “cannot be refused…on the ground that…the said service (advertising) has not generated any sales revenue for the recipient.” (CURIA, para 20, 40)
- The VAT Directive “make[s] the exercise of the right to deduct subject to a criterion relating to an increase in the taxable person’s turnover or, more generally, to a criterion of economic profitability of the input transaction.” (CURIA, para 30)
- The common system of VAT ensures neutrality “whatever their purpose or results, provided that they are themselves subject in principle to VAT.” (CURIA, para 23, 35; Study Guide, Point 2 of Rulings) The right to deduct, once it arises, is retained even if the expected economic activity does not materialize or lead to profit due to unforeseen circumstances. (CURIA, para 35)
Focus on Objective Business Link (Remaining National Authority Role):
- Despite the above, national courts and tax authorities “must objectively assess whether the expenditure is genuinely linked to the taxable person’s taxable activity.” (VAT Deductibility: Price, Profit, and Economic Activity)
- This includes determining if the services have a “direct and immediate link with one or more taxable output transactions or with the taxable person’s economic activity as a whole, under his or her general costs.” (CURIA, para 38, 40; Study Guide, Point 3 of Rulings)
- Crucially, they must assess, under Article 176 of the VAT Directive, whether the expenditure constitutes “entertainment expenditure which is not strictly business expenditure.” (CURIA, para 38; Study Guide, Point 4 of Rulings) For Amper Metal, this meant assessing “whether the affixing of advertising stickers to cars…was intended to promote the goods and services marketed by Amper Metal…or whether, in contrast, the expenditure incurred on that occasion proves to be entirely unrelated to Amper Metal’s economic activity.” (CURIA, para 39)
V. Conflict with Hungarian Law
The Hungarian Law on Corporation Tax (Law No LXXXI of 1996), specifically Point 4 of Annex 3, allowed for the increase of profit before tax by expenditures “not related to business or income-generating activities,” deeming payments “contrary to the requirements of reasonable management” if they exceeded a certain threshold (HUF 200,000) and could “clearly be concluded on the basis of the circumstances…that use of the service is contrary to the requirements of reasonable management.” (CURIA, para 10-11)
The CJEU’s ruling effectively clarifies that such national provisions, which allow tax authorities to deny VAT deductibility based on the perceived economic rationality, profitability, or excessive price of an expenditure between independent parties, conflict with the fundamental principles of EU VAT law, particularly VAT neutrality and the right to deduct. While Hungarian law sought to impose a “reasonable management” and “income-generating” requirement, the CJEU confirmed that the EU VAT Directive does not link deductibility to verifiable profitability or an increase in turnover.
VI. Conclusion
The Amper Metal Kft. judgment significantly reinforces the principle of VAT neutrality within the EU. It limits the ability of national tax authorities to second-guess the commercial decisions of businesses regarding the price paid for services or the actual profitability derived from them, when assessing VAT deductibility. The focus remains on whether the input transaction is objectively linked to the taxable person’s economic activity, either directly to output transactions or as a general business cost, and whether it falls under the “non-strictly business expenditure” exclusion of Article 176. For entities seeking to navigate the complexities of EU VAT law.
See also
- Join the Linkedin Group on ECJ/CJEU/General Court VAT Cases, click HERE
- VATupdate.com – Your FREE source of information on ECJ VAT Cases
