On 9 December 2021, the European Court of Justice (“ECJ”) decided on case C‑154/20 concerning the material requirements for the deduction of input VAT. In the current case, the main question was to rule on the ways to demonstrate and prove that the supplier of the service is a taxable person within the meaning of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (“VAT Directive”).
The Supreme Administrative Court of the Czech Republic requested a preliminary ruling concerning the right to deduct VAT in cases of alleged tax evasion or abuse.
More specifically, the Supreme Administrative Court of the Czech Republic submitted the following questions to the ECJ for a preliminary ruling:
- Is it compatible with the VAT Directive for the right to deduct input VAT to be conditional on the taxable person fulfilling the obligation to prove that the taxable supply received was made by another specific taxable person?
- If the first question is answered in the affirmative and the taxable person fails to fulfil that evidentiary obligation, can the right to deduct input tax be refused without it being established that that taxable person knew or could have known that, by acquiring the goods or services in question, he [or she] was participating in tax fraud?
The ECJ ruled that the VAT Directive “must be interpreted as meaning that deduction of input VAT must be refused (without the tax administration having to prove that the taxable person committed VAT evasion or knew or ought to have known of evasion) if the taxable person fails to prove that the true provider of the services in question was a ‘taxable person”. However, this only applies if the information needed to verify whether the true supplier or provider of services was a taxable person is missing, based on the supporting information and/or evidences provided by the taxable person.
In this context, the ECJ provided further explanations:
- The fundamental principle of VAT neutrality 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 of the formal conditions.
- The position may be different if non-compliance with formal requirements effectively prevents the production of conclusive evidence that the substantive requirements have been satisfied.
Thus, although in the context of fighting VAT fraud, a taxable person wishing to exercise the right to deduct VAT cannot, as a general rule, be required to check that the supplier of the goods or services concerned has ‘taxable person’ status, the position is different if establishing that status is necessary for the purpose of verifying that the material condition governing the right of deduction is satisfied. In the latter situation, it is for the taxable person to establish, based on objective evidence, that the supplier has the status of taxable person, unless the tax authorities have the information necessary to check that that material condition governing the right to deduct VAT is satisfied. In that regard, it follows from the wording of Article 9(1) of the VAT Directive that the concept of ‘taxable person’ is defined widely, based on factual circumstances, and therefore that the supplier’s status as a taxable person may be apparent from the circumstances of the case.
In this decision the ECJ considered, consistent with previous case law, that it would be in opposition with the principle of fiscal neutrality to deny a taxable person the right to deduct VAT based on the fact that the true supplier of goods or services has not been identified, and that the taxpayer failed to prove that said supplier was a taxable person, provided that “it clearly follows from the factual circumstances that that supplier necessarily had that status”. In a nutshell, to exercise that right, the taxable person cannot in every case be required to prove, where the true supplier of the goods or services concerned has not been identified, that that supplier has the status of taxable person.