1. Executive Summary:
This judgment addresses the question of whether a national tax authority can deny a purchaser the right to deduct input VAT when the purchaser knew (or should have known) that the vendor was insolvent and would likely not pay the output VAT to the public purse. The Court of Justice ruled that such a national practice is precluded by Article 168(a) of the VAT Directive (2006/112/EC) when read in conjunction with the principle of fiscal neutrality. The Court emphasized that the right to deduct input VAT is a fundamental principle and should not be limited unless there is objective evidence of fraud or abuse, which is not established simply because the purchaser knew of the vendor’s financial difficulties.
2. Background:
- The case originated from a dispute between UAB ‘HA.EN.’ (the purchaser) and the Valstybinė mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos (Lithuanian State Tax Inspectorate, the tax authority).
- HA.EN. acquired immovable property from UAB ‘Sostinės būstai’ (the vendor) through a compulsory sale procedure following an unsuccessful auction. HA.EN. was a creditor of the vendor and held a mortgage over the property.
- The vendor declared VAT on the sale but subsequently became insolvent and did not pay the VAT to the authorities.
- HA.EN. deducted the input VAT, but the tax authority denied this deduction, claiming HA.EN. knew (or should have known) the vendor’s insolvency and therefore acted in bad faith.
3. Key Issues and Arguments:
The core issue is whether the purchaser’s knowledge of the vendor’s financial difficulties justifies denying the input VAT deduction. The tax authority argued that HA.EN. should have known the vendor would not pay the VAT and therefore should not be entitled to deduct it. The referring court questioned whether such a practice was compatible with the VAT Directive and the principle of fiscal neutrality.
4. Court’s Reasoning and Decision:
The Court of Justice ruled against the national tax authority, stating that denying the input VAT deduction based solely on the purchaser’s knowledge of the vendor’s insolvency is contrary to EU law. The key points of the Court’s reasoning are:
- Fundamental Right to Deduction: The right to deduct input VAT is a fundamental principle of the VAT system, designed to ensure neutrality. The Court stated, “the right of taxable persons to deduct from the VAT which they are liable to pay the VAT due or paid on goods purchased and services received by them as inputs is a fundamental principle of the common system of VAT established by EU legislation.”
- Supplier’s Payment Irrelevant: Whether the supplier actually pays the VAT to the public purse is irrelevant to the purchaser’s right to deduct. “…the question whether or not the supplier of the goods has paid the VAT due on sale transactions to the public purse has no bearing on the right of the taxable person to deduct input VAT.”
- Burden on the Taxable Person: Making the deduction conditional on the supplier’s payment would unfairly burden the taxable person, which the VAT system aims to avoid. “Making the right to deduct VAT conditional upon the actual prior payment of that VAT by the supplier of goods would lead to the taxable person being subject to an economic burden which should not be his or hers and the avoidance of which is the specific aim of the rules governing deduction.”
- Fraud or Abuse Must Be Proven: While preventing tax evasion is important, denying the deduction requires establishing objective evidence of fraud or abuse. “It is therefore for the national courts and authorities to refuse the right of deduction if it is shown, in the light of objective evidence, that that right is being relied on for fraudulent or abusive ends.”
- Insolvency Alone is Insufficient: The mere knowledge of the vendor’s insolvency is not sufficient to prove fraud or abuse. The Court noted the existance of Article 199(1)(g) of the VAT Directive, which provides for a reverse charge mechanism which “shows that the EU legislature did not regard deduction of the VAT paid by the purchaser of immovable property in a compulsory sale procedure as contrary to the objectives of the VAT Directive.”
- No Tax Advantage Sought: In this case, HA.EN. was a creditor seeking to recover debt through a legal procedure, not solely to obtain a tax advantage. “…the fundamental reason for which a creditor, after an unsuccessful auction, has taken over immovable property over which he or she held such security may be not in order to obtain some tax advantage, but the creditor’s wish to recover all or part of his or her debt from a debtor in administration, by legal means available to the creditor, such as a compulsory sale procedure.”
- Fiscal Neutrality Violated: The national practice violated fiscal neutrality because it effectively made the purchaser bear the risk of the vendor’s insolvency. The Court stated “That practice effectively makes such purchasers bear the risk that the vendor’s insolvency entails for actual payment of the VAT into the public purse, a risk which is, however, in principle for the public purse to take on.”
5. Implications:
- This judgment clarifies the limits of national tax authorities’ power to deny input VAT deductions based on the vendor’s financial situation.
- Tax authorities must present concrete evidence of fraud or abuse beyond the purchaser’s awareness of the vendor’s insolvency.
- The judgment reinforces the principle of fiscal neutrality within the EU VAT system.
- Member States must not impose practices that effectively make purchasers bear the risk of a vendor’s insolvency regarding VAT payments.
- This case may impact similar disputes across the EU where national authorities have denied input VAT deductions based on the vendor’s financial difficulties.
6. Conclusion:
The Court’s decision upholds the fundamental principle of input VAT deduction and reinforces the need for objective evidence of fraud or abuse before denying this right. It clarifies that knowledge of a vendor’s insolvency, by itself, is insufficient grounds to deny the purchaser the right to deduct input VAT. The Court’s ruling promotes the neutrality of the VAT system and prevents unfair burdens on taxable persons.
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
- Podcasts & briefing documents: VAT concepts explained through ECJ/CJEU cases on Spotify
Latest Posts in "European Union"
- Ecofin report on EU VAT reforms
- Roadtrip through ECJ cases: Focus on Promotional activities/Discounts (Art. 79, 87, 90(1))
- Comments on ECJ case C-234/24 (Brose Prievidza): No VAT Exemption for Tooling Without Physical Movement
- Roadtrip through ECJ Cases – Focus on “Liability to pay VAT – Jointly and severally liability of the payment of VAT” (Art. 205)
- ECJ Customs – C-488/24 (Kigas) – AG Opinion – Traders must inform consumers about customs duties before contracts
