Commercial motive not sufficient for deduction of input tax
Our pick of this week's cases
In Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ — Sofia v Iberdrola Inmobiliaria Real Estate Investments EOOD (Case C-132/16) (6 April 2017), the advocate general considered that the ‘direct and immediate link’ required between input tax and taxable supplies had not been established so that input tax could not be deducted.
Iberdrola owned land on which it intended to build a holiday village. The village was to be leased on a taxable basis. In order to connect it to the existing municipal waste water pump station, the latter had to be extensively renovated. Iberdrola agreed with the municipality that it would undertake the repair at its own expense. The pump station was repaired and the village built and connected to it. Iberdrola’s deduction of the input tax incurred on the repair was refused by the Bulgarian authorities.
The question for the CJEU was whether the Principal VAT Directive requires a right to deduct input tax where the input tax (on the renovation of the pump) has a link with taxable supplies (the leasing of the village), but it is supplied free of charge to a third party (the municipality).
The AG first observed that the way the relevant transactions had been accounted for by Iberdrola was irrelevant. She added that a mere causal link between inputs and economic outputs was not sufficient for the deduction of input tax under Art 168; the goods and services had to be used for the purpose of taxable supplies and a direct and immediate link was required between the use and the economic activity of the taxable person.
The AG concluded that the fact that the renovation of the pump had been a condition of the construction of the village was irrelevant. Likewise, Iberdrola’s motive in incurring the cost of repair was not material. The only issue was who used the services supplied by Iberdrola and this was the municipality, which maintained and operated the pump. The AG therefore distinguished this case from Sveda (Case C-126/14), in which the taxpayer had used the renovated infrastructure.
Why it matters: AG Kokott observed that the CJEU had been called on to consider ‘fundamental questions’. She added that its decision in Sveda had created some uncertainty and that this case was an opportunity to clarify the statements it had made in Sveda. It remains to be seen whether the CJEU will follow this opinion.
Commercial motive not sufficient for deduction of input tax
Our pick of this week's cases
In Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ — Sofia v Iberdrola Inmobiliaria Real Estate Investments EOOD (Case C-132/16) (6 April 2017), the advocate general considered that the ‘direct and immediate link’ required between input tax and taxable supplies had not been established so that input tax could not be deducted.
Iberdrola owned land on which it intended to build a holiday village. The village was to be leased on a taxable basis. In order to connect it to the existing municipal waste water pump station, the latter had to be extensively renovated. Iberdrola agreed with the municipality that it would undertake the repair at its own expense. The pump station was repaired and the village built and connected to it. Iberdrola’s deduction of the input tax incurred on the repair was refused by the Bulgarian authorities.
The question for the CJEU was whether the Principal VAT Directive requires a right to deduct input tax where the input tax (on the renovation of the pump) has a link with taxable supplies (the leasing of the village), but it is supplied free of charge to a third party (the municipality).
The AG first observed that the way the relevant transactions had been accounted for by Iberdrola was irrelevant. She added that a mere causal link between inputs and economic outputs was not sufficient for the deduction of input tax under Art 168; the goods and services had to be used for the purpose of taxable supplies and a direct and immediate link was required between the use and the economic activity of the taxable person.
The AG concluded that the fact that the renovation of the pump had been a condition of the construction of the village was irrelevant. Likewise, Iberdrola’s motive in incurring the cost of repair was not material. The only issue was who used the services supplied by Iberdrola and this was the municipality, which maintained and operated the pump. The AG therefore distinguished this case from Sveda (Case C-126/14), in which the taxpayer had used the renovated infrastructure.
Why it matters: AG Kokott observed that the CJEU had been called on to consider ‘fundamental questions’. She added that its decision in Sveda had created some uncertainty and that this case was an opportunity to clarify the statements it had made in Sveda. It remains to be seen whether the CJEU will follow this opinion.
