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Voidness of a transaction under civil law doesn’t deny the right to deduct VAT under EU law

Court of Justice of the European Union, C-114/22

Ruling: Article 167, Article 168(a), Article 178(a) and Article 273 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2010/45/EU of 13 July 2010, read in the light of the principles of fiscal neutrality and proportionality, must be interpreted as precluding national legislation under which a taxable person is deprived of the right to deduct input value added tax solely because a taxable economic transaction is regarded as fictitious and invalid under the provisions of national civil law, without it being necessary to establish that the criteria for classifying, under EU law, that transaction as fictitious are met or, where that transaction has actually been carried out, that it is the result of value added tax evasion or abuse of rights.

Explanation: The Supreme Administrative Court referred for a preliminary ruling by the Court of Justice on the right to deduct VAT by a taxpayer, whose transaction has been deemed as fictious by the tax authorities. Article 88 (3a)(4)(c) of the Act on VAT input tax may not be reduced whenever a transaction is void under the provisions of the Civil Code – fictionality is one of these circumstances. The referring Court had doubts, whether such a national legislation provision goes beyond the necessary to implement the aims of the VAT Directive as for preventing tax evasion, given the wording of the Directive and the principle of tax neutrality.

The Court of Justice ruled, that such national legislation is precluded by the provisions of the Directive. The EU law strongly protects the right to deduct VAT and only a situation of fraud or abuse of rights is a justification for denying that right. The CJEU on numerous previous occasions emphasized the importance of these rules for the common VAT system. Voidness under civil law may be taken into account whenever deduction is denied only if it had been proven, that the EU law criteria are also met for such measure.

Impact: The Court of Justice effectively declared the incompatibility of Article 88 (3a)(4)(c) of the Act on VAT with EU law. The tax authorities shouldn’t in the future question tax deductions on the grounds of fictionality of transactions. Possibly the abovementioned provision will be amended by parliament or repealed. However, deductions still may be questioned whenever relevant transactions are fraudulent or a deduction would constitute an abuse of rights. It is unclear how the verdict will affect the policy of the tax administration.