On 7 March 2024, the Court of Justice of the European Union (“ECJ”) handed down a judgment regarding the right to deduct input value added tax (“VAT”) for a company which was deemed “non-operational” by the national tax authority.
In the case at hand, a company carried out an economic activity of producing and marketing wine in the Campania region. For the year 2008, the local VAT authority considered that the company was non-operational since its output transactions subject to VAT were below the threshold under which, for the purposes of Italian law, companies were presumed to be non-operational. Italian law provided that in such circumstances the right to deduct input TVA and obtain a refund of such input VAT should be denied.
The questions referred
The national court first asked whether it is compatible with Article 9 (1) of the Directive of 28 November 2006 on the common system of value added tax (the “VAT Directive”) that the right to deduct input VAT paid may be denied to a company that carries out transactions subject to VAT while not reaching the income threshold provided for by the Italian legislation at issue, where that company does not demonstrate that objective circumstances rendered it impossible to achieve income higher than that threshold.
By its second question, the national court asked, in essence, whether Article 167 of the VAT Directive and the principles of VAT neutrality and of proportionality must be interpreted as precluding national legislation under which the taxable person is denied the right to deduct input VAT on account of the transactions subject to output VAT carried out by that taxable person being considered insufficient.
The ECJ judgment
The ECJ answered the first question by stating that the status of a taxable person is not subject to satisfying a particular threshold of transactions and should only be determined according to whether that person actually carries out an economic activity. The ECJ therefore considered the national legislation at issue to be incompatible with article 9 (1) of the VAT Directive.
With regard to the second question, the ECJ reaffirmed that the right to deduct input VAT is a fundamental principle of the common system of VAT. That right to deduct is subject to meeting two conditions: (i) the person must be a taxable person within the meaning of the Directive and (ii) there must be a direct and immediate link between a taxable person’s input transactions and output transactions. The ECJ recalled that the immediate and direct link requirement is met where the cost of goods and services are part of the taxable person’s general costs and as such components of the price of output transactions.
The ECJ concluded that no provision of the VAT Directive makes the right of deduction conditional upon the taxable person reaching a certain threshold amount of output transactions subject to VAT and that the right of deduction is ensured irrespective of the results of the economic activities in question. According to the ECJ, the objective of preventing fraud and abuse did not justify the application of a presumption based on a certain income threshold which was unconnected to identifying fraud or abuse. Fraud and abuse must be established according to the facts in the case, in accordance with the requisite legal requirements and cannot rest on assumptions or presumptions.
The ECJ concluded that the VAT Directive and the principles of VAT neutrality and of proportionality prohibit national legislation which denies a taxpayer person’s right to deduct on the basis that the taxpayer carried out an insufficient amount of transactions subject to output VAT.
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