Briefing Document & Podcast C-691/17 (PORR Építési Kft.): VAT Reverse Charge, Deduction Rights and Reimbursement Principles

Briefing Document : VAT Reverse Charge, Deduction Rights, and Reimbursement Principles (PORR Építési Kft.)

Subject: Review of key themes, ideas, and facts from the CJEU judgment in PORR Építési Kft. v. Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága (C-691/17), along with supplementary materials, concerning VAT reverse charge, deduction rights, and reimbursement procedures.

I. Executive Summary

This briefing examines the significant CJEU ruling in PORR Építési Kft. (C-691/17), which clarifies the application of VAT deduction rights under the reverse charge mechanism, particularly when invoices are issued incorrectly. The judgment reinforces that a recipient of services who unduly pays VAT to a supplier, where the reverse charge should have applied, generally loses the right to deduct that VAT. However, it critically establishes that if recovering the unduly paid VAT from the supplier becomes “impossible or excessively difficult” (e.g., due to insolvency), the principle of effectiveness dictates that the recipient must be able to seek reimbursement directly from the tax authorities, especially when no tax evasion is suspected and the VAT has reached the Treasury. The ruling distinguishes between the right to deduct and the right to reimbursement, highlighting the limits of Member States’ procedural autonomy.

II. Core Concepts and Distinctions

A. Ordinary VAT Regime vs. Reverse Charge Mechanism

Ordinary VAT Regime: “the supplier of goods or services charges VAT to the customer and is responsible for collecting this VAT and remitting it to the tax authority.” (VAT Reverse Charge and Deduction Rights: Key Judgements, FAQ 1).
Reverse Charge Mechanism: “the recipient of the goods or services becomes directly liable for paying the VAT to the tax authority, rather than the supplier. This shifts the obligation to account for VAT from the supplier to the recipient.” (VAT Reverse Charge and Deduction Rights: Key Judgements, FAQ 1). Under this mechanism, “no VAT payment takes place between the supplier and the recipient of services, the recipient being liable, in respect of the transactions carried out, for the input VAT, while being able, in principle, to deduct that tax so that no amount is payable to the tax authorities” (PORR Építési Kft., para. 30).

B. Right to Deduct Input Tax

Principle: The right of a taxable person to deduct VAT paid on purchases from VAT collected on sales, ensuring they are not unduly burdened by the tax. It “forms an integral part of the VAT scheme and in principle may not be limited” (PORR Építési Kft., para. 31).
Requirements for Reverse Charge Deduction (Art. 178(f) of Directive 2006/112/EC): When the customer is liable for VAT, they “must comply with the formalities as laid down by each Member State” (PORR Építési Kft., para. 5). Critically, for the right to deduct under reverse charge, “a taxable person… is not obliged to hold an invoice drawn up in accordance with the formal requirements… and only has to fulfil the formalities laid down by the Member State concerned” (PORR Építési Kft., para. 33).
Key Condition for Deduction: The right to deduct “can be exercised only in respect of taxes actually due, that is to say, the taxes corresponding to a transaction subject to VAT or paid in so far as they were due” (PORR Építési Kft., para. 36).

C. Fundamental EU Law Principles

Fiscal Neutrality: “Ensures that the burden of VAT does not fall on taxable persons and that economic activities subject to VAT are taxed in a neutral way, meaning similar goods and services are treated similarly.” (VAT Reverse Charge and Deduction Rights: Key Judgements, FAQ 3). It aims to “free the taxable person completely of the burden of the VAT accruing or paid in all its economic activities” (PORR Építési Kft., para. 32).
Effectiveness (Principle of Effectiveness): “Requires that national procedural rules for enforcing rights derived from EU law do not make it virtually impossible or excessively difficult to exercise those rights.” (VAT Reverse Charge and Deduction Rights: Key Judgements, FAQ 3).
Procedural Autonomy of Member States: “In the absence of EU rules on applications for the repayment of taxes, the detailed procedural rules designed to ensure the protection of the rights which individuals acquire under EU law are a matter for the domestic legal order of each Member State… the conditions under which such applications may be made must observe the principles of equivalence and effectiveness” (PORR Építési Kft., para. 39).
Proportionality: While mentioned in the reference, the Court “did not find it necessary to interpret this principle for the given questions” (VAT Reverse Charge: Deduction and Reimbursement Principles, II.A.3).

III. Factual Background and Dispute (PORR Építési Kft.)

Parties: PORR Építési Kft. (‘PORR’) (recipient of services) vs. Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága (Hungarian Tax Authority).
Context: PORR was involved in motorway construction in 2010-2011.
Error: PORR received invoices from suppliers for construction work drawn up “under the ordinary tax regime and on which VAT was entered.” PORR “paid those invoices, deducted the amounts of VAT entered, then sought reimbursement of those amounts” (PORR Építési Kft., para. 18).
Tax Authority Finding: The tax authority determined that these transactions “should have been subject to the reverse charge VAT regime” and that the invoices were incorrect as they should not have included VAT or should have explicitly stated “Reverse charge” (PORR Építési Kft., para. 18).
Tax Authority’s Action: The authority “ordered PORR to pay… unpaid VAT, of… a tax penalty, of… a late-payment charge, as well as a fine for non-compliance” (PORR Építési Kft., para. 16). It also “refused PORR’s claim for VAT deduction” (VAT Reverse Charge: Deduction and Reimbursement Principles, I).
PORR’s Argument: PORR argued the tax authority erred in classification. Alternatively, even if the reverse charge applied, the authority “had still deprived it of the right to deduct VAT” and failed its obligation to ascertain “whether the issuers of the invoices at issue… had paid the VAT and whether they could still correct those invoices,” especially since self-correction was precluded due to the inspection (PORR Építési Kft., para. 21-22). PORR contended this led to double taxation.
Key Fact: There was “no evidence of tax evasion in the present case,” and the suppliers had “paid the VAT to the Treasury, so that the latter suffered no loss as a result of the fact that those invoices were wrongly issued under the ordinary tax system, instead of the reverse charge system” (PORR Építési Kft., para. 44).

IV. Court’s Reasoning and Judgment

A. Refusal of Deduction Right Upheld

Justification for Refusal: The CJEU concluded that PORR did not have the right to deduct the VAT because:

1. Formal Requirements: The invoices “did not satisfy the formal requirements provided for under the national legislation” (specifically, lacking the “Reverse charge” mention) (PORR Építési Kft., para. 34).
2. Substantive Requirement: A crucial substantive requirement of the reverse charge was not met: PORR, as the recipient, “should, as the recipient of the services, have paid the VAT directly to the tax authorities” instead of paying it to the suppliers (PORR Építési Kft., para. 34).
3. VAT Not Due: The VAT paid by PORR to its suppliers was “not due” in the context of the reverse charge mechanism. “The right to deduct can be exercised only in respect of taxes actually due” (PORR Építési Kft., para. 36).

Conclusion on Deduction: “Since PORR did not observe a substantive requirement of the reverse charge regime and the VAT which it paid to the suppliers of the services was not due, that company could not claim a right to deduct that VAT” (PORR Építési Kft., para. 37). The refusal was thus “in accordance with Directive 2006/112/EC” (VAT Reverse Charge: Deduction and Reimbursement Principles, IV.A).

B. Tax Authority’s Obligation to Examine Reimbursement/Correction (Distinction between Deduction and Reimbursement)

Primary Recovery Mechanism: Generally, a system where “the supplier of services which has paid the VAT to the tax authorities in error may seek to be reimbursed and… the recipient of those services may bring a civil law action against that supplier for recovery of the sums paid but not due observes the principles of neutrality and effectiveness” (PORR Építési Kft., para. 40).
Tax Authority’s Duty Before Refusing Deduction: The Court explicitly stated that the tax authority is “not required, before rejecting the claim for deduction of VAT, either to ascertain whether those issuers can correct those invoices on the basis of the national legislation or to order such correction” (PORR Építési Kft., para. 47). This examination is “not relevant for the purposes of ascertaining whether the rejection by the tax authority of the claim for deduction of VAT… complies with EU law” (PORR Építési Kft., para. 46).
Direct Reimbursement Mechanism (Exception based on Effectiveness): However, the principles of fiscal neutrality and effectiveness do require a direct recourse to the tax authorities for the recipient if:

1. Impossibility/Excessive Difficulty: “the reimbursement of the VAT by the supplier to the recipient of the services is impossible or excessively difficult, in particular in the case of the insolvency of that supplier of services” (PORR Építési Kft., para. 42).
2. VAT Paid to Treasury: Especially when “the VAT has actually been paid to the Treasury by the supplier of the services” and “there is no evidence of tax evasion” (PORR Építési Kft., para. 42, 44).

Nature of Direct Reimbursement: Such a direct application for reimbursement “would, however, be distinct from the claim for deduction of VAT, forming the subject matter of the main proceedings” (PORR Építési Kft., para. 45).

V. Practical Implications

Recipient Responsibility: Businesses acting as recipients under the reverse charge mechanism bear the primary responsibility for ensuring that invoices are correctly issued and that VAT is paid to the correct entity (i.e., directly to the tax authorities, not the supplier). Failure to adhere to these formal and substantive requirements will result in the refusal of the right to deduct the VAT.
Safeguard for Unduly Paid VAT: The ruling provides a crucial “last resort” mechanism for recipients. If, due to circumstances like supplier insolvency, they cannot recover unduly paid VAT from the supplier through standard civil actions, they can apply directly to the tax authorities for reimbursement. This ensures that the burden of VAT does not ultimately fall on the taxable person where no tax evasion is involved and the VAT has already reached the Treasury, upholding the principles of fiscal neutrality and effectiveness.
Tax Authority’s Role: Tax authorities are not obliged to investigate supplier correction or reimbursement before denying a deduction claim in such cases. Their obligation to facilitate direct reimbursement to the recipient only arises after it has been established that recovery from the supplier is impossible or excessively difficult.