On 8 May 2019, the ECJ published a judgment (C-566/17 Związek Gmin Zagłębia Miedziowego w Polkowicach v Szef Krajowej Administracji Skarbowej) clarifying the extent of the right to deduct input Value Added Tax (“VAT”) incurred on supplies used indissociably for the purpose of economic and non-economic activities. In the case at hand, Polish case law allowed taxable persons, in this instance a local government entity, to fully deduct input VAT in respect of supplies used indissociably both for the purpose of the local government entity’s economic and non-economic activities. Polish law at the time did not provide for any rules setting out the methods to apportion input VAT in case of a taxable person engaging in activities falling within the scope of VAT and activities outside the scope of VAT. Following a request for a tax ruling, the Polish tax authority refused to confirm the full deductibility of the input VAT. The local government entity argued that the absence of national laws setting out the apportioning methods for deducting input VAT meant it had the right to deduct in full input VAT incurred on supplies although it performed taxable and exempt activities. Further, according to the local government entity, to hold contrary would run counter to the principle of legality enshrined in the constitutional order of many Member States, including Poland.
First of all, regarding the right to deduct input VAT, the ECJ held that article 168 of the Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the “VAT Directive”) clearly provides that the right to deduct arises only in so far as the goods and services are used for the purpose of taxable transactions. Indeed, the right to deduct input VAT on goods and services applies only when and to the extent that the goods and services are subsequently used for taxable transactions. Thus, the ECJ held that recognising a right to a full deduction in the case at hand, where the goods and services had been used for both economic and non-economic transactions, would be contrary to the basic principles of the EU VAT system.
Second, the ECJ held that the principle of fiscal legality may be considered as a general principle of EU law requiring that the essential elements of the tax be defined in law. In other words, the taxpayer should be able to, based on the law, calculate the amount of tax and determine when it will be due. The ECJ took the view that Article 168 of the VAT Directive, as implemented into domestic law in the case at hand, defined with sufficient certainty the essential elements of the right to deduct input VAT (i.e. when the right may arise and its scope). As a result, the obligation on the taxpayer to apportion his input VAT incurred on supplies between his economic and non-economic activities is not, even in the absence of national laws precisely determining the technicalities relating to said apportionment, contrary to the principle of legality.