On 3 June 2022, following a preliminary ruling requested by the Hungarian Supreme Court (Kúria), the European Court of Justice (“ECJ”) decided on case C-188/21 concerning the proportionality of a national measure denying a taxable person’s right to input VAT deduction.
More specifically, the main issue related to the interpretation of Articles 63, 167 and 168, 178 to 180, 182 and 273 of the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended (“VAT Directive”), as well as of the principle of VAT neutrality.
Background
In the matter at hand, based on a national measure aimed at fighting against the underground economy, the Hungarian tax authorities deleted the tax identification number of a Hungarian VAT taxable person, which was failing to file and publish its annual accounts. Following the filing of its annual accounts, the taxable person’s tax identification number was subsequently reinstated.
However – and although no fraud or damage to the state budget had been alleged or established – the taxable person was denied the right to deduct input VAT incurred before the deletion of its tax identification number.
ECJ decision
Prior to reaching its conclusion (detailed below), the ECJ reminded firstly that the principle of VAT neutrality is a fundamental right which, in principle, cannot be limited and secondly that this fundamental principle requires deduction of input VAT to be allowed if the material conditions are satisfied, even if the taxable person has failed to comply with some formal conditions.
The ECJ emphasised also that a taxable person may be allowed to deduct input VAT even if it has not exercised its right during the period in which it arose, i.e. during the period where VAT became payable.
Furthermore, the ECJ recalled that, while the Hungarian government rightly pointed out that, in accordance with Article 273 of the VAT Directive, Member States may adopt measures to ensure the correct collection of the tax and to prevent fraud, such as penalties for failure to comply with the formal conditions relating to the exercise of the right to deduct VAT, such measures must not, however, pursuant to the principle of proportionality, go beyond what is necessary to achieve such objectives and must not jeopardise the neutrality of VAT.
Based on this reasoning, the ECJ ruled with respect to the case at hand that: “the principles of VAT neutrality and proportionality must be interpreted as precluding a national measure under which a taxable person for VAT purposes whose tax identification number was cancelled on the ground that it had failed to file and publish its annual accounts, and subsequently reinstated, following the rectification of that omission, is deprived of its right to deduct input VAT paid during the period preceding such deletion, even though the substantive requirements for entitlement to such deduction are satisfied and that taxable person has not acted fraudulently or improperly in order to be able to exercise that right.”
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