On 3 October 2022, following a preliminary ruling requested by the Lithuanian Supreme Court (Lietuvos vyriausiasis administracinis teismas), the European Court of Justice (“ECJ”) decided on case C-293/21 concerning the obligation to adjust deductions of VAT if a taxable person is placed in liquidation and removed from the register of VAT payers.
More specifically, the main issue related to the interpretation of Articles 180 to 187 of the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended (the "VAT Directive").
Background
A Lithuanian company (the "Company") acquired goods and services on which VAT was chargeable in order to produce capital goods and sought to use such capital goods as part of its future taxable activity. However, as a result of losses incurred and considering the absence of orders and potential income, it was decided to discontinue the Company’s activity. As a result, the Company’s sole shareholder resolved to place the Company in liquidation.
Pursuant to a tax audit from the Lithuanian VAT authorities, the Company had been ordered to repay the input VAT deducted on the goods and services acquired, since, according to the tax authorities, the Company had an obligation to adjust the deduction of input VAT.
Questions referred to the ECJ
The Lithuanian Supreme Court hence asked the following questions to the ECJ:
- Are Articles 184 to 187 of the VAT Directive to be interpreted as meaning that a taxable person is (or is not) obliged to adjust deductions of VAT charged on the acquisition of goods and services for the purposes of producing capital goods in the case where those goods are no longer intended to be used in the course of taxable economic activities because the shareholder of the taxable person decides to place it in liquidation and that taxable person submits a request that it be removed from the register of VAT payers ?
- Is the answer to that question affected by the fact that the decision to liquidate the Company was taken because of growing losses, absence of orders and the shareholder’s doubts as to the Company’s profitability?
ECJ decision
When considering the questions referred to it, the ECJ recalled that the right of taxable persons to deduct the VAT due or already paid on goods purchased and services received as inputs from the VAT which they are liable to pay, is a fundamental principle of the common system of VAT established by EU legislation and that said fundamental principle may not, in principle, be limited.
The ECJ also emphasised that the right of deduction, once it has arisen, is retained even if, subsequently, the intended economic activity was not carried out and, therefore, did not give rise to taxable transactions.
However, the ECJ stated that, even though the right of deduction must be retained even where an activity is brought to an end before it gives rise to any taxable transactions, it must be combined with the rules of the VAT Directive regarding the adjustment of deductions. Indeed, these rules aim at establishing a close and direct link between the right to deduct the input VAT paid and the use of the goods or services concerned for taxed output transactions.
The ECJ thus reached the conclusion that if the taxable person no longer plans to use the goods or services concerned in order to carry out taxed output transactions, the close and direct link which must exist between the right to deduct the input VAT paid and the carrying out of the planned taxed transactions is broken, and it must result in the application of the adjustment mechanism provided for in Articles 184 to 187 of the VAT Directive.
Based on this reasoning, the ECJ ruled that a taxable person is indeed “under an obligation to adjust deductions of input VAT relating to the acquisition of goods or services intended to produce capital goods in the case where, as a result of the decision of the owner or sole shareholder of that taxable person to place it in liquidation and of the taxable person’s request to be removed, and it being removed, from the register of VAT payers, the capital goods produced have not been used – and will never be used – in the course of taxable economic activities. The reasons for the decision to place that taxable person in liquidation (…) have no bearing on the taxable person’s obligation to adjust the deductions of VAT concerned, in so far that taxable person no longer has – and will never have – any intention of using the capital goods for the purposes of taxable transactions.”
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