Court of Justice of the EU

In HvJ Weindel (C-621/19) Weindel Logistik Service (WLS), provided reconditioning services in relation to goods imported from Switzerland, Hong Kong and China into Slovakia for repackaging. WLS was identified as the importer of the goods liable to pay import VAT despite ownership of those goods remaining with its customer at all material times. After works had been completed, the goods were delivered to within the EU or exported. WLS invoiced its customer in relation only to its repackaging services and not in relation to the service of the importation of goods.

The ECJ was asked to determine whether under Articles 167 and 168(e) of Council Directive 2006/112, WLS could exercise a right to deduct the import VAT when it was not the owner of the goods, did not have the right to dispose of them as owner and still use the goods for the needs of its operations.

The Court referred to and reconfirmed its earlier decision in DSV Road (C-187/14) which held that persons who import goods without owning them are not in a position to benefit from the right to deduct VAT, except if they are able to establish that the cost of importation is incorporated in the price of the particular downstream operations or in the price of the goods or services provided by the taxable person in the course of his economic activities. The Court also referred to the non-binding VAT Committee guidelines established in the 94th meeting, of 19 October 2011 that a taxable person liable to pay import VAT is not entitled to deduct VAT when the following two conditions are met:

• when the taxable person does not obtain the right to dispose of the goods as an owner; and
• when the cost of the goods does not have a direct and immediate link with his economic activity.

DLA Piper comment: This decision is an important reminder that the importer paying the import VAT must be the owner at the time of import to recover the VAT. This accords with the policy in the UK and many other jurisdictions. given the context of Brexit when goods moving between the EU and the UK will now be treated as imports and exports. Businesses involved in the importation of goods must pay careful attention to ensure that they are able to demonstrate the right of deduction in relation to any import VAT that is incurred. Toll operators, customs agents, businesses involved supplies of imported equipment which are leased are therefore at risk of incorrectly claiming import VAT. Supply chains should be reviewed to ensure the person paying the import VAT is entitled to reclaim it.

In Sonaecom (C-42/19), the taxpayer had intended to acquire shares in a company and then to supply taxable services to it. In preparation for the purchase, the taxpayer incurred fees on consultancy services for market research and other services relating to the issue of corporate bonds. Sonaecom sought to recover the associated input tax on the services which the Portuguese tax authority refused on the ground that Sonaecom did not actually acquire the shares and instead made the capital raised available to its parent company by way of a loan (an exempt supply).

The Court has agreed with the Advocate-General that a mixed holding company (being one which supplies taxable services to its subsidiaries as well as carrying out the non-economic activity of holding shares) includes a company, such as Sonaecom, which prepares to acquire a company to which it intends to make taxable supplies. The right of a mixed holding company to recover input tax on its costs relating to a proposed acquisition arises at the time the services are performed and the right is retained even if those planned taxable supplies do not take place because of circumstances beyond the taxpayer’s control. Consequently, in the view of the Court, the VAT on Sonaecom’s costs of market research, which were part of the general costs of its economic activity as a whole, was recoverable in full. On the other hand, the input tax costs incurred by Sonaecom in organising finance for its planned investment were not recoverable since the finance was ultimately on-lent to the parent company in the group (an exempt supply) and the actual use of the services takes precedence of the initial planned use. The Court agreed with the Advocate General that the costs of obtaining the finance had a direct and immediate link with the exempt grant of the loan to the parent company and could not be recovered as general costs of the undertaking.

DLA Piper comment: The deduction of input VAT by holding companies is a complex and difficult rea which has been subject to many court decisions. This ECJ decision provides further support to the decision in Ryanair (C-249/17) that VAT may deductible in respect of aborted M&A costs where the intention was to make taxable supplies.

The decision also supports the principle that where VAT is incurred on costs, and before the costs are used, there is a change in intention, the attribution of that input tax must follow the change in intention. Here, the switch from issuing bonds to making an exempt loan, meant that the VAT on the financing services could not be reclaimed.