Key takeaways
On 14 February 2025, the Court of Justice of the European Union (“ECJ”) handed down a reasoned order in case C-270/24, Granulines Invest Kft, regarding the right to deduct input value added tax (“VAT”) for invoice incorrectness pertaining to the supply of goods.
Facts of the case
The applicant is a Hungary-based VAT taxable person, which operates in the waste trade during the relevant period (the “Applicant”).
The applicant ordered an industrial shredder from a Germany-based manufacturer and paid a deposit to the manufacturer (the “First Sale”). Shortly after the First Sale, the applicant found out about a local incentive program whereby interest-free financings could be granted for the purposes of investing into machinery (the “Incentive”). However, as this program did not apply to the direct purchase of a machine from a supplier based abroad, the Applicant decided to cancel the First Sale and identified a reseller established in Hungary (the “Reseller”) from whom it acquired the said shredder so as to benefit from the Incentive (the “Second Sale”). Subsequently, the Applicant invoked a full deduction right on the input VAT incurred with respect to the invoice received by the Reseller by reason of the Second Sale.
Following an audit, the tax inspector considered that the invoice issued by the Reseller was fraudulent, given that the machinery in question had been delivered to the Applicant at a later stage (as opposed to the delivery date outlined in the invoice) and for an inflated resale price. The tax authorities were also of the view that the machinery was directly purchased from the manufacturer located in Germany without the intervention of the Reseller and considered that the Applicant committed tax fraud as the Second Sale should be regarded as an artificial transaction from a VAT perspective given all the facts at hand.
Outcome of the ECJ’s ruling
The ECJ reminds that the right to deduct VAT applies irrespective of the purpose and result of the economic activity in question. In addition, taxpayers are generally free to choose the organisational structures or transactional arrangements they consider most appropriate for their economic activities and to limit their tax burdens. The principle of prohibition of abusive practices (applicable in VAT matters), prohibits only purely artificial arrangements carried out for the sole purpose of obtaining a tax advantage, which would be contrary to the objectives of the VAT Directive.
In the particular case at hand, it does not appear from the case brought before the ECJ that the transaction carried-out between the Applicant and the Reseller had as its sole or, at the very least, essential purpose the obtaining of a tax advantage, since the local authorities recognised that one of the main purposes of entering into the Second Sale was to enable the Applicant to benefit from the Incentive.
In addition, the ECJ ruled that the excessive price of a supply of goods, even if established, cannot justify by itself the denial of the VAT deduction right to the disadvantage of a taxable person.
Furthermore, the ECJ ruled that the mere omission for a reseller to pay the duly reported VAT cannot, regardless of the intentional or unintentional nature of such an omission, constitute VAT fraud leading to the denial of the deduction of input VAT in the hands of the purchaser. In order to justify such a denial, the tax authorities must establish to the required legal standard that the purchaser actively participated in VAT fraud or knew or should have known that the issuer of the invoice had committed such fraud.
Lastly, the fact that an invoice for a supply of goods, for which it is established that it has actually taken place, outlines a false delivery date - even if this mention is intentional - does not in itself constitute proof of the existence of VAT fraud.
In conclusion and in order to be in a position to deny the right to deduct VAT, the tax authorities must establish to the requisite legal standard that the taxable person has actively participated in VAT fraud, which cannot be solely assessed on the basis of the formal incorrectness of an issued invoice, but on the economic result of the transaction considered in its whole.
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