Spain Found To Have Breached EU VAT Laws

by Ulrika Lomas, for LawAndTax-News.com, Brussels

14 October 2005

It emerged last week that Spain has found itself in hot water over its policy regarding the amount of VAT due on purchases assisted by government subsidies.

The European Commission brought the action before the European Court of Justice against Spain in 2003, maintaining that part of the Spanish law on value added tax was contrary to the Sixth Directive, which provides for a right to deduct VAT in respect of input tax on the goods and services used by taxable persons for the purposes of their taxed transactions.

In a judgement issued last week, the Court pointed out that any limitation of the right to deduct VAT affects the level of the tax burden and must be applied in a similar manner in all the Member States. Consequently, derogations are permitted only in the cases expressly provided for in the Sixth Directive.

Secondly, it observed that, according to the Sixth Directive, the application of the deductible proportion in respect of taxable persons who receive subsidies which do not form part of the price of the good or service provided and which do not form part of the taxable amount for VAT purposes is only provided for in the case of mixed taxable persons, that is, taxable persons who carry out, at the same time, transactions in respect of which VAT is deductible and transactions in respect of which VAT is not deductible.

It therefore stated that Spain has failed to fulfil its obligations by providing that the proportion is applicable to fully taxable persons who carry out only transactions in respect of which VAT is deductible.

Finally, the Court found that the special rule which limits the right to deduct VAT on the purchase of goods and services which are subsidised introduces a mechanism for limiting the right to deduct which is not authorised by the Sixth Directive.

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