Court of Justice

In X-Beteiligungsgesellschaft mbH (C-324/20), the taxpayer provided brokerage services in connection with a land sale.  At the time the fee agreement was concluded between the taxpayer and its client, the service had already been performed. The fee agreement provided that the fee of EUR1 000 000 plus VAT was to be paid in five equal annual instalments and the first instalment was to be paid almost one year after the service was performed.

When each instalment was due, the taxpayer issued a VAT invoice for the instalment in question and accounted for the VAT on that instalment. However, the German Tax Authorities considered that the VAT on the entire fee should have been accounted for in the year in which the services were performed.

The ECJ  was asked whether the special rule for services giving rise to "successive statements of account or successive payments" was applicable in this case. According to Article 64 of the EU VAT Directive, the supply of services is deemed to be completed when the instalment periods expire. Article 64 provides an exemption for the sale of goods on deferred terms, but no exemption for a supply of services on deferred terms. Alternatively, the ECJ was asked whether Article 90 of the EU VAT Directive, which provides that the taxable amount for VAT may be reduced in the event of non-payment in part, is applicable to this case.

The ECJ noted that the special rule in Article 64 must be read in the light of the general VAT rule that the chargeable event for VAT occurs (ie VAT becomes chargeable) when the goods or services are supplied. According to the ECJ, Article 64 could not be applicable to the present case since that rule implicitly requires that the supply be completed between payment intervals and its application is based on the existence of a relationship between the nature of the services in question and the payment in instalments.

According to the ECJ, the chargeable event and the chargeability of VAT are not governed by the parties to the contract such that it does not matter that the taxable person may possibly pre-finance the VAT he is required to pay in circumstances such as these. 

Similarly, Article 90 could not apply to the present case since the non-payment of the consideration governed by that provision relates to cases where the recipient of a service fails to pay a debt which is due rather than to cases where the recipient pays in instalments in accordance with the contract.

DLA Piper comment:

Pursuant to Article 64 of the EU VAT Directive, supply of services involving “successive statements of account or successive payments” shall be regarded as being completed on expiry of the periods to which such statements of account or payments relate”. Such provision do not apply to services rendered on a one-off basis, but to services the very nature of which justifies payment by instalments, namely those rendered on a recurring or continuous basis over a given period.

The ECJ interpretation is confirmed by the objective and the systematic structure of the EU VAT Directive. In such context, Article 64 introduces a legal fiction for transactions involving payment through instalments, stating that the chargeable event and chargeability of VAT are linked to the expiry of the periods to which the payments relate, so as to determine precisely the moment at which the tax obligation arises without the need for any factual assessment. Therefore, the application of such rule is necessary only whether the time of service performance is not unequivocal and it may be subject to different evaluations.

Lastly, even though the VAT taxable persons may advance the VAT which they are required to pay to the State when they supply one-off services for which remuneration is payable in instalments, such procedure does not affect the foregoing, since, in the light of the principle of VAT neutrality, the obligation to pay the tax is not conditional on prior payment of the consideration judgment (see, ECJ C-274/10 Commission v Hungary).

In Wilo Salmson France SAS (C-80/20) in 2012 a company established for VAT purposes in France submitted a VAT refund application in Romania, according to EU Directive 2008/9/EU, for goods purchased in Romania and never delivered abroad. The invoice received in 2012 did not meet the Romanian statutory requirements and the VAT refund application was consequently refused lacking requirement to recover input VAT. The invoice was then cancelled by the Romanian Seller and reissued in 2015. A new VAT refund application was submitted in 2015 by the French company and, in order to assess whether the refund application was submitted in time, the Romanian Court, vested of the case, asked the ECJ when, in similar case, the right to recover VAT arose (ie at the time of supply or when a VAT invoice has been received) and whether the cancellation of an invoice could have any effect on the right to recover VAT.

The ECJ pointed out that the VAT refund by a taxable person not established in the Member State where VAT is charged should be made in accordance with EU Directive 2008/9/EU.

In order to be eligible for a refund under EU Directive 2008/9/EU, transactions must be those allowing the right to recover input VAT in the Member State of establishment and goods and services purchased must be used by the foreign VAT entity in the context of its own economic activity.

Moreover, the VAT refund on a supply of goods can be legitimately filed only if the VAT person is in possession of a valid invoice. In case invoice is affected by defects which deprive the tax authorities of the information necessary to carry on controls, the refund of VAT cannot be granted. Thus, the ECJ points out that unless a document is “vitiated” by shortcoming concerning essential information, it will be considered as a VAT invoice within the meaning of the VAT Directive.

Notwithstanding the above, the unilateral cancellation of a non-conforming invoice, and the re-issue of that invoice, following the decision of the Member State to reject the VAT refund application based on that invoice is not permitted if that decision has become final. Otherwise, the effect would be to circumvent the time-limit for submitting the refund application.

DLA Piper comment:

In accordance with the Advocate General Conclusion, the ECJ emphasized that even though the possession of a VAT invoice(s) is needed to recover input VAT, the quality of the information of the invoice(s) itself is crucial: it must always show all the essential elements set forth by the VAT law. Therefore. as long as each invoice shows the essential elements (ie the name of the supplier, the recipient of the supply, the goods or services supplied, the price and the VAT) the right to recover VAT cannot be denied under such standpoint.

However, even if the invoices show all the essential elements and the right to recover VAT therefore legitimately arises, it is not permissible to re-file a VAT refund application – on the basis of new invoices duly amended to clear previous shortcoming which led to the first rejection – if the first filing has been rejected and never appealed by the taxpayer before the competent Tax Court. Indeed, notwithstanding the above, the VAT refund application is subject to a specific time-limit which cannot be re-opened (30 September of the calendar year following the reference period, starting from the date of receipt of the invoice and not the date on which VAT became chargeable, see ECJ case C-533/16, VW AG).

The two joined cases E v Finanzamt N and Z v Finanzamt G (C-45/20 and C-46/20) concerned the refusal by the German tax authorities to allow input VAT recovery in relation to certain investment assets allocated to the business activity on the basis that the taxpayer had not timely filed to the tax authority his decision to use, totally or partially, said assets for business use (within the deadline for filing the annual VAT return).

In the first of the two cases, the taxpayer ran a scaffolding business and had commissioned a firm of architects to draw up building plans for a family house, one room of which was described in the plans as an ‘office’. 

In the second case, the taxpayer purchased a photovoltaic system whose electricity has been partially used for his own consumption and partially resold to an energy supplier. 

In both cases, German tax authority challenged the recoverability of input VAT lacking the taxpayer’s evidence concerning his communication (within the deadline set forth by the domestic law) to include investment assets (office or photovoltaic system) into the relevant business activity.

The ECJ noted that the distinction between the substantive and formal conditions governing the right of VAT recoverability is important since according to the principle of neutrality the VAT recoverability should be allowed whether the substantive requirements are satisfied, even though the taxable person has failed to comply with some of the formal requirements. However, according to the ECJ the taxpayers failure to comply with the deadline by which they should have communicated to the tax authorities their decision to allocate the purchased investment asset to business use “is not such as to prevent them from producing conclusive evidence that they had taken such a decision at the time of acquiring the capital goods at issue.”

According to the ECJ, the VAT Directive did not preclude Member States to introduce rules requiring the taxpayer to show, before the deadline for filing its annual VAT return, evidence of its decision to allocate the purchased investment asset to business use “unless the specific legal arrangements under which that option may be exercised show that it does not comply with the principle of proportionality.”

DLA Piper comment:

Pursuant to Article 168 of the EU VAT Directive, the right to recover VAT is subject to compliance with the substantive and formal conditions. In such respect, according to the ECJ, in order to assess whether a taxable person acted in that capacity when acquiring goods, it may be sufficient the presence of an unequivocal and express decision / declaration of the taxable person intention to use such investment assets for economic purposes at the time of their acquisition, such as the annual VAT return.

However, the absence of such decision does not preclude the taxable person intention from being implicitly revealed (ie factors that may implicitly reveal the taxpayer intention to allocate the purchased investment assets to business use include the nature of the goods, the status of the taxable person acting as such and the period of time elapsing between the acquisition of the goods and their use for the purposes of the taxable person's economic activities). Therefore, in light of the above principle, even though the adoption of an allocation decision is an essential condition for the exercise of the right of VAT recoverability, its communication to the Tax Authorities should be regarded as a formal condition.

Notwithstanding the above, in the light of the ECJ case law (see, ECJ case C-81/17 Zabrus Siret), the exercise of VAT recoverability without a time limit would be contrary to the principle of legal certainty. Therefore, where such a time limit period set out by the Member States is consistent with the principles of equivalence, effectiveness and proportionality governing the functioning of VAT, it would not conflict with the taxpayer right to recover VAT.