European Court of Justice Rules on Right to Immediately Deduct Input VAT on an Intra-Community Acquisition

European Court of Justice Rules on Right to Immediately Deduct Input VAT on an Intra-Community Acquisition

By Erik Zietse

In today's global economy, the number of international transactions increases every year. Unfortunately, so do the number of court proceedings relating to these cross-border transactions. For example, the VAT implications and VAT consequences of intra-community transactions seem to be an inexhaustible source of court proceedings. Recently, the ECJ provided an important judgment in this respect.

On April 22, the ECJ issued its judgment in joined cases C-536/08 and C-539/08. In these cases, the Dutch Supreme Court asked for a preliminary ruling on a question related to the deduction of input VAT in intracommunity transactions. The Supreme Court asked the ECJ to rule on the following question:

"Must Article 17(2) and (3) and Article 28b(A)(2) of the Sixth Directive be interpreted as meaning that, if the place of an intra-community acquisition is deemed, on the basis of the first subparagraph of the latter provision, to be within the territory of the Member State which issued the VAT identification number under which the person acquiring made the acquisition, the aforementioned person acquiring the goods has the right immediately to deduct the VAT thus due in that Member State?"

Although upon first glance this appears to be a very technical question, this question may be of relevance to a lot of companies, as illustrated by the facts in case C-539/08. In that case, a Dutch company purchased goods of companies located in other Member States (i.e., Germany and Italy) and sold the products to companies located in Cyprus, but VAT registered in Greece. The goods were transferred directly from Germany and Italy to Spain.

The suppliers did not include any VAT on the invoices. They did, however, refer to the VAT number of the Dutch company. The Dutch company, in turn, did not include any VAT in the invoices to its Cypriot customers, but made reference to the Greek VAT number of the customers.

In its VAT return, the Dutch company mentioned the VAT due in respect of the intra-community acquisitions and deducted that VAT. It also made reference to the intra-community supplies to the Cypriot customers under the Greek VAT identification number. However, the customers did not fill out any intra-community acquisition declarations either in Cyprus, Greece or Spain.

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The Dutch Tax inspector took the view that the Dutch company made intra-community acquisitions and was not entitled to deduct the VAT. This was disputed and eventually resulted in the prejudicial questions raised by the Supreme Court.

The ECJ first considered that the right to deduct input VAT is a fundamental tenet of the VAT legislation which, in principle, may not be limited, and should be exercised immediately. Any limitation on the right to deduct VAT has a direct impact on the tax burden and must therefore be applied in a similar manner in all Member States.

However, in this situation, where the goods are taxed as intra-community acquisitions and, based on the applicable legislation the acquisitions are deemed to have been made in the Member State that issued the identification number, and do not actually enter that Member State, those transactions cannot be regarded as giving rise to a right to deduct under the Sixth Directive.

Therefore, the ECJ concluded that where a taxable person has failed to establish that the intra-community acquisition has been subject to VAT in the Member State of arrival of the dispatch or transport, the taxable person is, in principle, subject to the tax in the Member State that issued the identification number, and does not have the right immediately to deduct the input VAT charged on the intra-community acquisition.

This judgment by the ECJ once more highlights the importance of implementing thorough VAT compliance regimes and procedures for all companies dealing with cross-border transactions. Failure to comply with the requirements can have serious consequences and can result in a significant financial impact.