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ECJ Rules Against Portugal In Input VAT Credit Dispute

by Ulrika Lomas,, Brussels

06 March 2018

The European Court of Justice has provided a ruling against the Portuguese tax and customs authority in favor of a taxpayer who challenged the authority's decision that it should be retroactively precluded from deducting tax incurred on inputs in relation to a supply of leasing and letting transactions. The tax and customs authority required the taxpayer, Imofloresmira, to make adjustments to VAT deductions on the ground that the properties at issue had been unoccupied for over two years and were therefore regarded as no longer being used for the purposes of its own taxed transactions, even though, during that period, the company always had the intention of letting those properties and undertook the necessary steps to that end.

The Court noted that the VAT Directive provides for the right to deduct input taxes incurred on goods or services used to make taxed transactions. The deduction of input taxes is linked to the collection of output taxes; where goods or services acquired by a taxable person are used for the purposes of transactions that are exempt or do not fall within the scope of VAT, no output tax can be collected or input tax deducted.

The case concerned the taxation of leasing and letting transactions, which member states may elect to tax under a derogation from the general rule provided in Article 135(1)(l) of the VAT Directive, that such transactions should generally be exempt.

In Portugal, such transactions may be taxable and therefore taxpayers can generally claim input tax credits. When the leases relating to the properties at issue in the main proceedings were concluded, Imofloresmira, a VAT-registered entity, opted for the taxation of the letting of those properties.

The ECJ said that, under Article 167 of the VAT Directive, a right of deduction arises at the time the deductible tax becomes chargeable. Consequently, only the capacity in which a person is acting at that time can determine the existence of the right to deduct. It said: "It follows that, once the tax authority has accepted, on the basis of information provided by a business, that it should be accorded the status of a taxable person, that status cannot, in principle, subsequently be withdrawn retroactively on account of the fact that certain events have or have not occurred."

"It should be remembered that, according to settled case-law, the right to deduct provided for in Article 167 to 172 of the VAT Directive is an integral part of the VAT scheme and, in principle, may not be limited. It is exercisable immediately in respect of all the taxes charged on transactions relating to inputs."

"The deduction arrangement is intended to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT therefore ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT."

"It is important to recall also that it is the acquisition of goods or services by a taxable person acting as such that gives rise to the application of the VAT system and therefore of the deduction mechanism. The use to which the goods or services are put, or intended to be put, merely determines the extent of the initial deduction to which the taxable person is entitled under Article 168 of the VAT Directive and the extent of any adjustments in the course of the following periods."

"It follows therefore that the entitlement to a reduction is retained in principle, even if subsequently, by reason of circumstances beyond its control, the taxable person does not make use of those goods and services which gave rise to a deduction in the context of taxed transactions."

It concluded, therefore, that "the principle of fiscal neutrality precludes national legislation which, by making the final acceptance of the VAT deductions dependent on the results of the taxable person's economic activity, creates, as regards the tax treatment of identical investment activities, unjustified differences between undertakings with the same profile and carrying on the same activity."

The Court said that conclusion cannot be called into question by the argument of the Portuguese Government that, due to the termination of the leases concluded previously, "some change occurs in the factors used to determine the amount to be deducted," so that it would be necessary to carry out a proportional adjustment of the tax deducted.

The ECJ said that the right to deduct may only be challenged in instances of demonstrable fraud.

The ruling in Imofloresmira v. Portuguese tax and customs authority (Case C-672/16) was released February 28, 2018.

TAGS: compliance | tax | investment | business | value added tax (VAT) | Portugal | interest | VAT legislation | law | tax credits | tax authority | legislation | trade | European Union (EU) | services | VAT case law | VAT refunds | VAT compliance matters | Europe | Other

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