Court of Justice

In C-56/21, UAB Arvi ir ko, the Court was asked whether an aspect of Lithuanian VAT law on the option to tax was permitted under the Principal VAT Directive (PVD). The national law provided that a seller of land was allowed to opt to tax the sale only if the sale was to a taxable person registered for VAT. The taxpayer had built a gym which it purported to opt to tax. The buyer had applied to register for VAT but was only issued with its VAT registration number a month after the sale completed. The national tax authority said that the sale was exempt and that therefore the taxpayer could not recover its associated input tax.

The Court concluded that the rule in the Lithuanian law was permitted by the VAT Directive and not prohibited by the principles of fiscal neutrality (since it applied equally to all taxable persons), effectiveness and proportionality. The Court decided that the case law on the formal requirements for valid VAT invoices in the context of input tax recovery (which does not always insist on a VAT registration number) was not relevant as the case concerned the rules governing the right to opt to tax and not the right of deduction of the purchaser.

DLA Piper comment

The above case focuses on the question of whether having to be a taxable person identified for VAT purposes could be contrary to the principle of VAT neutrality and incompatible with the objectives of the PVD and the CJEU case law. The outcome of this ruling is not entirely surprising and in line with the AG's opinion. A recipient should be a taxable person identified for VAT purposes in order for a Member State to accept the supplier's choice to waive a VAT exemption. Compliance with this "formal" requirement is thus (appropriately) neither excessive nor a violation of the VAT neutrality principle.

In X, C-194/21, Company B sold 10 plots of building land to X (the taxpayer). The plan was to develop them for leisure purposes with a view to on-selling them. X and B entered into a contract for this purpose under which B would carry out all the development work on its own account and the net proceeds from the sale of the developed plots would be divided between the parties in equal shares.

B supplied the plots to X and invoiced VAT to X for that supply but X did not exercise his right of deduction. Due to economic circumstances, the planned development of the plots was not carried out and X resold two plots to B and charged VAT on the price. X did not however account to the tax authority for that tax.. The tax authority sent X an adjustment notice relating to the VAT on the price paid by B for the supply of the two plots which X paid but argued that the adjustment should be reduced by the amount of VAT it paid on the supply of the plots to it.

The Court noted that permitting the right to deduct VAT without any time limit would be contrary to the principle of legal certainty. The adjustment mechanism provided for by the VAT Directive is intended to make sure any VAT recovery accurately reflects the 1 circumstances (such as price reductions) but is not intended to apply where the taxpayer failed to exercise the right to deduct on time. Even in the absence of fraud, abuse of rights or detrimental impact on the tax revenue, a time limit for claiming input tax recovery could not be circumvented.

DLA Piper comment:

At first, it seems unfair to prevent a taxpayer from deducting when the services are used when the initial deduction was unintentionally denied. No evidence of fraud or abuse of the system, and no negative effects on the Treasury have been noticed due to the late exercise of the right to deduct VAT. However, Member States are free to set a statutory limitation for exercising the right to deduct VAT. We share the opinion of the CJEU that the deduction of VAT should reflect the 1 circumstances and therefore a limitation on the time of exercising a right to deduction seems reasonable.

In B (C-696/20), the taxpayer was a company established in the Netherlands and was registered for VAT in both the Netherlands and Poland. It acted as an intermediary in a chain of transactions purchasing goods from BOP, a company established in Poland and reselling those goods to its own customers located in other Member States. The goods were shipped directly from BOP in Poland to the ultimate customers. When it acquired the goods from BOP, the taxpayer used its Polish VAT number and, considering those supplies to be domestic supplies, Polish VAT at 23% was applied. The taxpayer then classified the supplies it made to its clients as intra-Community supplies and therefore exempt. The taxpayers’ customers declared the VAT applicable on the intra-Community acquisition.

The dispute between the taxpayer and the Polish tax authority centred on whether the first transaction should be treated as an intra-community transaction which in turn partly depended on whether transport should be attributed to the first or the second transaction. The Polish tax authorities argued that the transport of the good should have been linked to the initial supply by BOP. Resultantly, since the taxpayer used its Polish VAT registration number, it should have declared VAT on its reclassified intra-community acquisition in Poland, while the intra-community sale from BOP to taxpayer occurred in Poland was not qualified as exempt. This analysis created double taxation (with a combined VAT burden of 46%) for the taxpayer.

The Court found that the Polish tax authority’s application of the rules on the place of supply of intra-community acquisitions ran counter to the objectives of the provision in question (article 41 Principal VAT Directive) which are to ensure that a given intra-community acquisition is subject to tax and to prevent double taxation in respect of the same acquisition. As the supply from BOP to the taxpayer had not been treated as exempt, it was contrary to the principles of proportionality and fiscal neutrality to apply the Polish rule implementing article 41 in this case.

DLA Piper comment: This case demonstrates how businesses taking part in chain transactions within the EU should be mindful of the associated formalities and VAT obligations (e.g., the importance of obtaining a valid and correct VAT ID from your supplier). Although the transactions occurred before the implementation of the so-called quick fixes introduced by EU Directive 2018/1910 the key takeaway for transactions that occurred before such implementation is that, if the allocation of the transport (needed to assess which transaction qualifies as intra-Community) is wrongly assessed by parties, the principle of proportionality requires that the reclassified intra-Community sale would be qualified as exempt in order to avoid a double taxation scenario. Please also refer to our previous comments when the AG’s opinion was issued.