Even though in the past the CJEU ruled in several cases that the right to deduct is not restricted on the grounds of the neutrality of the VAT system, in its judgment of 4 October 2024 (C-475/23) the CJEU ruled that a taxable person is also entitled to deduct VAT on the purchase of goods which he supplies free of charge to a subcontractor.
Background of the CJEU decision
Voestalpine Giesserei Linz GmbH ("VGL"),a company established in Austria, with a tax number in Romania, is active in the production of moulded parts in Romania. In connection with the processing activity, the company purchased a crane, which was made available free of charge to an Austrian subcontractor, who, with the help of another Romanian subcontractor, actually carried out the production work. After purchasing the crane, VGL deducted VAT and allowed the Austrian and Romanian subcontractors to use the crane for the manufacturing work; after processing, VGL sold the products to its EU customers. The Romanian tax authority refused to allow the tax deduction on the purchase of the crane on the grounds that the Austrian company had not proved that the crane was purchased for the purpose of its economic activity.
CJEU judgment on the right to deduct VAT
The CJEU emphasised that the deduction system is intended to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his or her economic activities. The common system of VAT consequently ensures neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT (principle of VAT neutrality).
In its judgement, the CJEU noted that in order to enjoy a right of deduction, two conditions must be met:
- 1the person concerned must be a ‘taxable person’,
- the goods or services relied must be used by the taxable person for the purposes of its own taxed output transactions and, as inputs, those goods or services must be supplied by another taxable person.
- In relation to this second condition, the CJEU has previously ruled that, in order to exercise the right to deduct VAT, a direct and immediate link must exist between a particular input transaction and a particular output transaction, which means that the expenditure incurred in acquiring the goods is a component of the price of the output transactions giving rise to the right to deduct.
- Also note that in a previous judgement the CJEU ruled that a taxable person has a right to deduct even where there is no direct and immediate link between a particular input transaction and an output transaction, where the costs of the services in question are part of the taxpayer’s general costs and are, as such, components of the price of the goods or services which he supplies.
It is clear from the judicial practice that national courts and tax authorities are to examine all the circumstances in which the transactions concerned are carried out and to consider only those transactions which are objectively connected with the taxable activity of the taxable person.
Accordingly, it was examined whether the purchase of the product – in this case the crane – was indispensable for the taxpayer's economic activity. Furthermore, in order to fully exercise the right of deduction, it is necessary to determine whether the free transfer did not exceed what was necessary. If it exceeds this, i.e. if the subcontractor obtained additional benefits from the use of the goods supplied free of charge, in addition to the services provided to the taxable person, even though the taxable person's right to deduct may not be completely denied, but it cannot be exercised in full.
The VAT Directive requires all taxpayers to keep sufficiently detailed records to facilitate audits by the tax authority. According to the CJEU, failure to do so should not be an obstacle to the exercise of the right to deduct, but member states may nevertheless impose fines or penalties proportionate to the seriousness of the breach of the formal requirements for the right to deduct VAT.
The above judgment also supports the view that proper identification and interpretation of the circumstances and conditions is essential to ensure that taxpayers act correctly from a tax point of view, and it may be worth seeking expert advice on tax matters.
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