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Method or madness? Interpreting case law on VAT

Rulings by the Court of Justice of the EU directly affect how businesses operate, but determining their scope and meaning isn’t easy.

For most businesses operating within the EU that are confronted with VAT issues, the case law of the Court of Justice of the EU (CJEU) is of great importance.

The EU VAT Directive (2006/112/EU) harmonized VAT laws across Member States, which must follow the provisions and principles of the EU VAT system.

“To invest and operate with certainty, businesses must have a clear understanding of their rights and obligations.“


But determining whether the rules are actually followed may not be easy, not least because of the difficulties of interpreting CJEU case law.

In this article, we will look at how to interpret CJEU cases and how to consider their likely impact on other businesses.

The role of CJEU case law

EU law stipulates a number of rights for businesses that may be relied upon by them directly before the tax authorities and courts of a Member State.

The CJEU is the highest authority to determine the scope of those rights through its interpretation of the VAT Directive.

Because the court’s statements have such an impact, they are watched closely by those dealing with VAT.

Right to deduct input tax: a review of cases

Let’s consider an example of how the court’s rulings can affect everyday business transactions.

Business X is expanding and restructuring its European group of companies, which involves acquiring a subsidiary that is integrated into the business.

In connection with the acquisition of shares in the subsidiary, VAT is incurred on the services provided by lawyers, tax consultants and others.

Can the VAT be deducted as input tax?

The answer requires an understanding of the legal situation, as determined by CJEU case law.

Not always easy to interpret

Recently, in the Larentia + Minerva case, the court confirmed that an acquirer of shares can deduct VAT, but only with certain conditions.1

Herein lie a lot of the difficulties for businesses: the case law is not always easy to interpret.

This is especially true when the fact pattern is different from the one in the earlier case, because it may not be clear whether the ruling applies.

The Skandia America Corp. case, which dealt with transactions between a head office and a branch where the branch is a member of a VAT group, has received a lot of attention recently.2

The Court ruled that supplies were made between the head office and the branch/VAT group.

Earlier case law had made it clear that a branch and a head office should normally be considered the same entity for VAT purposes, so this ruling was profound news.

How far does it apply?

One issue being discussed is what importance we should give the fact pattern of the Skandia case, and the context in which it was decided, when considering whether supplies are made in other situations.3

At the heart of the discussion is this question: how far-reaching is a CJEU ruling?

It’s not easy to answer. We can find cases in which the Court formulates a statement and later follows it consistently.

The case law on the deduction of input VAT in a start-up phase of a business constitutes a good example of this practice.

How far does it reach?

The Court has consistently held that a right to deduct exists if the intended business would entail a right to deduct.4

But we can also find cases in which the CJEU limits the reach of a ruling to the specific facts of the case.

In Investrand, another case concerning the right to deduct input VAT, the Court considered costs related to advisory services obtained during arbitration proceedings to establish the amount of a claim.5

The problem was that the claim arose before its holder became liable to VAT, and the question was whether Investrand could deduct the VAT once it was a taxable person.

The Court held that it could not and stated that when the “exclusive reason” for an acquisition is found in noneconomic activities, there is no right to deduct input VAT.

On this basis, one may be tempted to conclude that if the exclusive reason for an acquisition is found in economic activities, the right to deduct exists. But later case law shows otherwise.

Different circumstances

In Wolfram Becker, the Court dealt with VAT incurred on the acquisition of lawyers’ services in connection with a claim that the managing directors of a company had acted criminally when the company won a bid for a contract.6

It was argued that the exclusive reason for the acquisition of services was found in economic activities, because the sole motive of the director and manager was to benefit the company and increase its sales by winning the contract.

The Court discussed the Investrand ruling at length, outlined the specific circumstances of that case and noted it had never ruled out the possibility that the conclusion could be different if the circumstances were different.

The Court concluded that the exclusive reason “can also be taken into account” when determining whether there is a right to deduct, thus significantly downplaying the importance of the exclusive reason for an acquisition.

Also …

Other cases on the right to deduct VAT include BLP, SKF and Sveda.7

In the first case, the Court ruled that the ultimate purpose of an acquisition is irrelevant when determining the right to deduct input VAT.

In SKF, and even more clearly in the recently decided Sveda, the Court conferred decisive importance to the ultimate purpose of the acquisition when determining whether there is a right to deduct VAT.

Making sense of it all

Is it possible to make any sense of this?

Is the case law completely arbitrary, or is there a method to it?8

It seems to me that, generally, the context of the case and the overall purpose of the common VAT system are suitable benchmarks for determining the reach of a judgment.

In Wolfram Becker, the court obviously viewed the costs of a lawyer in a criminal proceeding as a nonbusiness cost. Under a tax on consumption, all private expenditure should be taxed.

In contrast, in both SKF and Sveda, the overall purposes of the common VAT system could be achieved only by allowing deduction.

Only then could the VAT continue to be a tax on consumption that is neutral for taxable persons.

Similarly, the context in cases such as BLP and Investrand were obviously of great importance.

But the story of Investrand and Wolfram Becker also teach us another lesson — we should not place too much importance on how the Court has worded its judgment.

Rather, we should look at it in a broader sense and consider what the Court sought to achieve.

The precise wording of a judgment is seldom of crucial importance for a future ruling.

Conclusions

In this article, I have discussed key rulings from the CJEU and proposed a method for interpreting the ins and outs of case law in other situations.

This is not merely an academic exercise. CJEU case law directly and immediately affects businesses operating in the EU.

To invest and operate with certainty, businesses must have a clear understanding of their rights and obligations.

By sharing these experiences, and discussing how to read case law, we hope to achieve a little more clarity for all.

Endnotes

[1] Joined cases C-108/14 and C-109/14, Larentia + Minerva, ECLI:EU:C:2015:496.

[2] Case C-7/13, Skandia America (USA), ECLI:EU:C:2014:2225.

[3] The European Commission has discussed the case extensively in Working Paper No. 845. “Issues arising from the recent judgments of the Court of Justice of the European Union, taxud.c.1(2015)747072, Brussels 17 February 2015. The author is a member of the VAT Expert Group (VEG), which advises the Commission on VAT issues. The VEG is also involved in commenting on the implications of the Skandia case.

[4] Case C-268/83, Rompelman, ECLI:EU:C:1985:74, has been consistently followed. See, for example, Case C-400/98, Breitsohl, ECLI:EU:C:2000:304.

[5] Case C-435/05, Investrand, ECLI:EU:C:2007:87.

[6] Case C-104/12, Wolfram Becker, ECLI:EU:C:2013:99.

[7] Case C-4/94, BLP Group, ECLI:EU:C:1995:107; Case C-29/08, SKF, ECLI:EU:C:2009:665; and Case C-126/14, Sveda, ECLI:EU:C:2015:254.

[8] One may note in passing that even if an explicit, and a bit rude, commentator would call the case law mad, there could still be method in it, as Polonius said in Hamlet.


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Oskar Hencow

 

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