CJEU rules on adjustment of deductions claimed for capital assets

What is the situation as regards the modification/correction of VAT deductions claimed on capital assets if their use changes? And what if the assets have not yet been used but their intended use has changed? These were some of the issues the Court of Justice of the European Union (CJEU) dealt with in its latest judgement.

In Dutch case C-791/18 Stichting Schoonzicht, the applicant in the main proceedings had had an apartment complex comprising seven residential apartments built on their plot of land in 2013 and 2014. The completed project was delivered to them in July 2014. As the apartment complex was from the beginning intended for the provision of taxable supplies, the owner deducted, in full, input VAT charged to them for the construction of the complex in 2013. However, in August 2014, the applicant leased some of the apartments in a VAT-exempt regime, while the remaining apartments remained unoccupied. Under Dutch VAT legislation, the tax administrator requested a refund, in full, of the originally claimed VAT for the leased apartments.

The applicant objected to the tax administrator’s approach, arguing that Dutch legislation was contrary to the VAT Directive, namely Article 187, stipulating that in the case of capital assets, any adjustment shall be spread over five years including the year in which the goods were acquired or manufactured.

The CJEU did not accept the applicant’s arguments, stating that the article referred to does not cover situations where the entitlement to a VAT deduction is lower than originally reported, and this becomes apparent already when the assets were first used.

The CJEU held that Dutch legislation is not contrary to the directive. Under Dutch legislation, it is possible to request of a taxpayer to make a one-off adjustment/correction of the full amount of the deduction claimed if the change in the use of the immovable property, and, at the same time, the adjustment/correction of the deduction took place in the year of its first use.

Following the above, we recommend properly documenting the intended use of capital assets, and archiving the documentation over the entire time when a tax inspection may be possible. Especially in periods of economic downturn, original investment plans may change significantly.

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