Preliminary question for CJEU: is minimum technical equipment overhead cost?

Within its economic activity, a Czech hospital provided mainly medical services which do not give rise to the right to deduct VAT. The hospital also provided other services giving rise to the right to deduct VAT (e.g., clinical studies of the effects of drugs, accommodation of patient escorts, extra services for hospitalised patients, doctors’ internships, administrative tasks, sterilisation of instruments for third parties, etc.). To be able to provide these services, hospitals must hold a licence for the provision of health services. The prerequisite for obtaining the licence is compliance with the minimum technical requirements laid down in the Ministry of Health’s Decree No. 92/2012 Coll. These technical requirements also include defibrillators, which the hospital purchased and on whose purchase they wanted to deduct VAT in a reduced amount: in the context of the above, the hospital considered them to be overhead costs.

Proof of direct link to economic activity

However, the Czech tax administrator disagreed with this interpretation and rejected the hospital's (reduced) entitlement to VAT deduction on the purchased defibrillators, as they did not see a sufficiently direct link between the purchase of the defibrillators and the taxable activity (with the right to deduct VAT). The hospital lodged a cassation complaint with the Supreme Administrative Court.

The SAC referred to the previous CJEU case law which stated that the right to deduct VAT may be granted even in the absence of a direct and immediate link between a particular input supply and the output supply giving rise to the right to deduct VAT, provided that the costs of the services in question are part of the general costs and contribute to the price of the goods or services. Such costs have a direct and immediate link to the overall economic activity.

On the other hand, as an argument in favour of the financial administration’s conclusions, the SAC stated that the aim of the ministry’s decree is clearly to guarantee the availability of health services (i.e. not all services provided by a healthcare facility) at a certain quality. The hospital confirmed that it did not purchase the defibrillators to provide services with entitlement to VAT deduction (e.g., clinical trials), but to use them for services without the entitlement to VAT deduction (i.e., regular medical services). The link between the purchase of the defibrillators and services with the right to deduct VAT was therefore unclear. 

The SAC thus referred to the CJEU the preliminary question whether the minimum technical and material equipment of healthcare facilities, a precondition for the provision of healthcare services, can be regarded as general (overhead) cost directly and immediately related to the overall economic activity of the hospital (thus giving rise to a reduced VAT deduction entitlement) and whether in this case there is a sufficient link between the costs incurred and the economic activity of the hospital.

Once the CJEU answers the preliminary questions, we will address the topic in a future issue of the Tax and Legal Update.