Is there an obligation to adjust VAT on capital goods in the event of a liquidation?

The European Court of Justice ruled on 6 October 2022 in the case Vittamed technologijos UAB (C-293/21). The conclusion of this case is that an obligation to reimburse VAT may arise for investment goods that have never been used for taxable transactions.

The Court seems to suggest that the circumstances in which the liquidation is handled may have an impact on the company's deductible VAT position.

Vittamed technologijos UAB (Vittamed) is a Lithuanian company engaged in scientific research and its practical application. Vittamed has not produced any taxable supplies since 1 March 2012.

In 2012 and 2013, Vittamed acquired goods and services in the context of an international project funded by the European Union. The objective was to develop a prototype of a medical diagnostic and monitoring device and the subsequent marketing of that device. Vittamed used goods and services to create intangible (licenses) and tangible (device prototypes) investment goods. It intended to use those capital goods for its future taxable activity.

After the completion of the project, Vittamed experienced financial difficulty and decided to go into liquidation.

The Lithuanian Tax Authorities were of the opinion that the VAT deduction should be adjusted and imposed a VAT assessment.

Vittamed challenged that decision on the grounds that, according to the case-law of the Court, where costs are incurred in the preparation of an economic activity, the deduction of input VAT may be granted. Even though the economic activity is not successfully pursued, and the taxable transactions ultimately do not take place.

Preliminary questions

The Lithuanian court has doubts as to the application of the VAT adjustment rules (Articles 184 to 187 of the VAT Directive) and referred the following questions to the EU Court of Justice for a preliminary ruling.

• Is a taxable person obligated to adjust the VAT deduction on goods and services
  acquired for the purposes of producing capital goods, where those goods are no
  longer intended to be used as part of taxable economic activities in a context
  where the shareholder decides to proceed with liquidation?
• Does the reason behind the decision to go into liquidation matter (in the case at
  hand, this was due to increasing losses, the lack of customer orders and the
  shareholder's doubts regarding the profitability of the planned proposed
  economic activity)?


The VAT rules provide that VAT deduction must be adjusted if the deductible amount is higher or lower than that to which the taxable person was entitled. Said adjustment is triggered when after the filing of the VAT return there is a change in the factors used to determine the deductible amount.

According to settled case law of the European Court, when a certain activity is started, the use is important to determine the extent of the right to deduct VAT and any subsequent adjustments. Previous EU case law confirmed that the VAT deduction should remain untouched when operations do not start for reasons beyond the taxpayer's control.

This position is based on the principle of VAT neutrality and in particular the consideration that there should be no difference (in the VAT deduction position) depending on whether entrepreneurs are successful in conducting their activities.

However, if the taxable person no longer intends to use the goods and services intended for taxable transactions, this situation may give rise to a VAT adjustment.

In the case at hand, by reason of its liquidation and removal from the VAT register, Vittamed ultimately no longer had the intention of using the capital goods for the purposes of taxable transactions. In so far as that situation is confirmed, which is, however, for the referring court to determine, the Court therefore concludes that the “close and direct relationship” which must exist between the input VAT deduction and the taxable transactions is breached, and the situation therefore must give rise to the application of the adjustment mechanism.

The underlying motivation for proceeding with liquidation – such as increasing losses, the lack of customer orders and the shareholder's doubts about profitability – is of no further importance, according to the Court.

However, the outcome would be completely different if the liquidation had resulted in taxable transactions. For example: the sale of assets for the purpose of settling debts, even if that does not fall within the economic activity initially envisaged by that taxable person.


The Court ultimately ruled that Vittamed should adjust the initial VAT deduction on the grounds that, due to the decision to go in liquidation, the goods and services were never used for taxable activities.

The ultimate goal is to link the VAT deduction on costs to the actual use of these goods and services, thereby increasing the precision of the deduction and neutrality. For this reason, investment goods for VAT purposes are also tracked for a number of years (so-called adjustment period).

This case relates to expenses which contributed to the creation of capital goods, which ultimately were never put into use and thus remained “unsold”.

Upon voluntary liquidation, the taxable person can still be confronted with an adjustment of the VAT initially deducted on the creation of these capital goods. When the business assets would have been sold in the event of liquidation, there should however be no question of a VAT adjustment. Of course, this only applies to assets which may be sold with VAT. A transfer of (old) buildings may therefore still trigger a VAT adjustment.

Obviously, as in any case, the Court based its decision on the factual circumstances as presented to the Court. In our view, this case should, therefore, be seen in its specific context.