CJEU on right to deduct VAT upon entering liquidation

UAB "Vittamed technologijos" is a company engaged in scientific and technical research. As part of a planned project, they worked on the development of a diagnostic and monitoring medical device. For development purposes, they acquired goods and services on which they deducted input VAT.

Following the completion of the development, the company launched the product on the market, but the project turned out to be loss-making over the following years. For this reason, the sole owner and shareholder of the company decided to discontinue its operations. The company then entered liquidation and applied with the tax administrator for the cancellation of their VAT registration. The tax administrator initiated a tax inspection and based on the established facts subsequently challenged the previously claimed VAT deduction on acquired inputs related to the project.

The CJEU first confirmed the previous case law, under which the right to deduct VAT shall be retained if:

• the intended economic activity does not give rise to specific outputs with the right to deduct VAT, or
• if, for reasons beyond its control, the taxable person does not use the acquired inputs to carry out outputs with the right to deduct VAT.

At the same time, however, the CJEU pointed out that for capital goods, a taxable person may be obliged to correct a previously claimed VAT deduction if they discontinue their activities before the related outputs with the right to deduct VAT have been carried out, and therefore no longer have – and will never have – any intention of using the capital goods to carry out taxable transactions. The court thus concluded that in the case at hand, the company shall not retain the right to deduct.

According to the CJEU, the situation could be different if, for instance, after entering liquidation, the company were to sell the assets owned to settle its previously incurred debts.