Right to deduct where supplier has not paid output VAT
In case C-227/21 HA.EN. the Court of Justice of the European Union (CJEU) dealt with whether a supply recipient has the right to deduct VAT if they knew or should have known that the supplier was not going to pay output VAT because of financial difficulties.
A Lithuanian building company ran into problems and was unable to repay a loan, which was secured by a mortgage on immovable property. As a result of the insolvency, that immovable property was put up for auction. As no buyer showed interest in the property, the company agreed with creditor HA.EN. to transfer the property to them, whereby a part of HA.EN.'s claims would be extinguished.
The company in financial difficulties issued an invoice to HA.EN., indicating the tax base and VAT. Although the company declared output VAT on that invoice in their tax return, they never paid it. HA.EN. declared the received invoice in their tax return and exercised the related right to deduct VAT.
The Lithuanian tax authorities denied HA.EN. the right to deduct VAT on the grounds that they knew or should have known that their supplier would not pay output VAT because of their financial difficulties; HA.EN. thereby allegedly committed an abuse of rights.
The CJEU previously ruled that whether a supplier paid output VAT has no effect on the supply recipient’s right to deduct VAT. The right to deduct may only be denied if the taxable person has committed tax evasion or abuse of rights. To prove an abuse of rights, two conditions must be met:
- the transactions in question must result in the obtaining of a tax advantage contrary to the purpose of tax legislation, and
- obtaining that tax advantage must be the main purpose of the transactions.
The CJEU held that HA.EN. had not committed an abuse of rights. The CJEU argued namely that the VAT Directive grants a right to deduct for similar types of transactions, as it allows the reverse charge procedure to be applied. Furthermore, according to the CJEU, it is not possible to infer solely from the supplier's financial difficulties their unlawful intention not to pay VAT. The supplier was actually selling the immovable property (albeit in a forced sale) to pay their debts. Denying the right to deduct VAT would thus be contrary to the VAT Directive.
The Czech Republic has implemented into the VAT Act the obligation to apply the reverse charge mechanism to the sale of immovable property by a debtor in a forced sale under a court decision. However, the above CJEU’s judgement gives taxpayers further points to argue if denied the right to deduct VAT by a tax administrator.