CJEU: VAT deduction on assets provided to suppliers free of charge

An Austrian company was registered for VAT in Romania because a part of its production and processing activities took place in Romanian territory. The company produced castings, which were subsequently processed in Romania. For this purpose, the company used the services of a Romanian subcontractor. The final products were then delivered to the Austrian company's customers in other EU member states. 
The Austrian company purchased a crane which it then made available free of charge to its Romanian subcontractor who processed the castings for the company. In its Romanian VAT return, the Austrian company claimed input VAT on the purchase of the crane.    

The tax authorities in Romania challenged the deduction on the grounds that the Austrian company neither proved that the acquisition of the crane was intended for its economic activity in Romania nor submitted a balance sheet for its permanent establishment in Romania. 

The CJEU, however, ruled that the VAT deduction could not be denied if it was proven that the crane was necessary for the Austrian company's economic activity, i.e., that it was used for the purposes of its business. At the same time, the CJEU emphasised that this approach was only possible if the cost of the crane was included in the price of the taxable supplies provided by the Austrian company to its customers. The CJEU further held that the failure to keep separate accounts for the Romanian permanent establishment was not in itself a ground for denying the right to deduct VAT. The Romanian tax authorities should have examined all evidence and verified whether the above substantive conditions for the right to deduct had been met. 

As it is quite common that taxpayers provide gratuitous supplies to their suppliers, the tax implications should always be assessed.