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EU Court: VAT also deductible based on an invoice issued to another person’s name

One should always pay attention to the decisions of the EU Court of Justice. Recently, for instance, the European Court of Justice made a decision in two joined Hungarian cases providing a clearly defined framework for the former standpoint and practice of the Hungarian tax authority in respect of the exercising of the right of VAT deduction. The court in Luxembourg also made decisions in other disputes, which elevate the partnership between taxpayers and tax authorities to a higher professional level – provided, of course, that the tax authority is also open, prepared and willing to act as a partner.

An example could be the decision made in the case of Polski Trawertyn, a Polish company. In respect of the right to deduct VAT, this decision declares proper, compliant behaviour and the fulfilment of the conditions of VAT deduction to be more important than the formal correctness of the accounting documents and invoices and their compliance with the relevant national regulations. This decision shows that the right of tax deduction should be applied in compliance with laws and should indeed be applied boldly: this is, by all means, a reassuring development for many Hungarian enterprises.

The dispute emerged from Polski Trawertyn wishing to exercise its right of VAT deduction based on invoices issued before the foundation of the company (e.g. on the acquisition of an opencast stone quarry). The Polish tax authority declared the VAT deduction illegitimate during an audit performed at the already operating company primarily for the reason that these invoices were issued to the names of the members and not to the name of the company. According to the arguments of the Polish enterprise, the right of VAT deduction was not lost due to the reversed order of the foundation of Polski Trawertyn and commencement of the investments qualifying as part of the Polish company’s economic activity and the right of tax deduction may not be denied for this reason (i.e. for the later founders of the company already starting investments before the foundation).

According to the Polish regulations, Polski Trawertyn was not entitled to deduct VAT on the investment costs incurred before incorporation. Still, the European Court of Justice found that the economic activity may consist of a number of successive actions and for this reason, the preparatory actions qualify as economic activities also. Also, the expenses incurred in the interest of the enterprise always qualify as economic activities, therefore, anyone who performs an investment closely relating to and necessary for (even future) utilization has to be regarded as a taxable person. Accordingly, Polski Trawertyn is entitled to deduct VAT in this regard (and in theory).

However, the favourable but theoretical ruling in this matter is only a partial success. There is also the matter of the “formal non-compliance” of the invoices as they were not issued to the name of the company but to the names of the founders. According to the decision, if the facts of the case may also be determined by means other than the invoices and the requirement of having invoices infringes the right of the taxable person to deduct VAT, the deduction of the tax may not be denied on the grounds that the accounting document does not comply with the relevant national regulations. Although the existence of an invoice is a requirement under EU regulations, EU law does not prescribe that the invoice must be issued to the name of the company actually deducting the tax.

The judges declared that the right of Polski Trawertyn to deduct VAT cannot be tied to a requirement, which is not specifically prescribed by EU regulations and that the national tax authority may not prescribe further conditions as a result of which the theoretically existing right of tax deduction is lost for formal reasons. According to the decision of the court, Polski Trawertyn’s tax deduction right is stronger than the “formal non-compliance” of the invoices.

We have to point out that – as every decision – the decision made in the case of Polski Trawertyn was based on the inspection and understanding of the facts of the specific case and its generality is restricted. Nevertheless, the decision made in the case C-280/10 opens stunning perspectives for companies: the right of VAT deduction may not be restricted by national requirements regarding the form of invoices that are stricter than the requirements of EU regulations. Instead of the past practice of “form over content”, the tax authorities will have to inspect and judge based on specific facts. This is indeed a difficult task but in the long run this is the only way to serve the interests of both enterprises acting in good faith in compliance with laws and tax authorities. The audits performed on a lawnmower principle basis with the aim of meeting tight budget targets do not serve this goal – which is now also laid down in a court decision.

Taxable persons are also entitled to VAT deduction if the invoices forming the basis of this right do not meet the formal requirements of the national tax authorities – declares the recent decision of the European Court of Justice opening up major perspectives for Hungarian enterprises also.

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