European Commission shares its view on import VAT deduction by lessees: rigid approach?

The European Commission has published a working paper outlining its position on the deduction of import VAT by lessees of imported goods. The Commission appears to focus primarily on the importation of aircraft. It is evidently concerned by the fact that member states sometimes apply divergent rules, either granting or denying the right to deduct import VAT for lessees.

It now presents a rather drastic proposal to simply deny the right to deduct import VAT for lessees, toll manufacturers, and, by extension, anyone who does not sell the goods afterwards or is able to sell them. The Commission bases its position on case law from the Court of Justice. The question is whether such a position is desirable in light of VAT neutrality. Isn't the intention to protect entrepreneurs from VAT costs?

The VAT Directive gives member states the freedom to determine who is liable for import VAT. Article 201 of the VAT Directive states: "On importation, VAT shall be payable by any person or persons designated or recognized as liable by the Member State of importation".

In Belgium, this authority is delegated to the King (Article 52 § 1, paragraph 2 of the Belgian VAT Code). Who can act as the consignee (importer) is set out in Article 6 of the Royal Decree no. 7:
  • If there is a transaction (sale), the acquirer (buyer) must be the consignee at the time of import;
  • If there is no transaction, the owner of the goods is the importer
  • The seller or a previous seller may also act as the importer of record, provided they are established in Belgium or registered for VAT.

In certain exceptional cases (and under certain conditions), however, other persons may act as the importer.

The right to deduct import VAT is regulated in Article 168(e) of the VAT Directive, which states that the deduction is allowed insofar as the goods are used for taxed transactions (cf. Article 45, §1 of the Belgian VAT code). In accordance with Article 178(e) of the VAT Directive, that person must hold an import document specifying him as consignee or importer, and stating the amount of VAT due or enabling that amount to be calculated. A similar provision can be found in Article 3, §1, 3° of Royal Decree no. 3 (an exception is made for imports under the reverse charge scheme).

European Commission's position

The European Commission concludes in its working paper that lessees of goods (in this case: aircraft) are not entitled to deduct import VAT. This position is based on earlier guidelines from the VAT Committee and recent judgments of the Court of Justice of the European Union (CJEU). In the Iberdrola judgment (CJEU 14 September 2015, no. C-132/16) and the Vos Aannemingen judgment (CJEU 1 October 2020, no. C-405/19), the CJEU ruled that taxpayers who are not the owner of goods may, under certain conditions, still be entitled to deduct paid VAT on purchases.

Nevertheless, the European Commission argues that this case law does not apply to import transactions due to the specific context in which these cases were ruled. The Commission refers to additional EU case law to support its position. In the DSV Road case (CJEU 25 June 2015, no. C-187/14) and the Weindel Logistik Service case (CJEU 8 October 2020, no. C-621/19), the CJEU ruled that persons importing goods without being the owner are generally not entitled to deduct import VAT, unless they can demonstrate that the costs of the imported goods are included in the price of related supplies of goods or services. Following this case law, we have observed that certain countries have tightened their policies. The Commission also refers to the specific VAT exemptions that apply to the importation of aircraft by (internationally operating) airlines.

What's next?

Member states are now being asked to take a position on this issue. If a consensus or majority is found that agrees with the European Commission's position, formal guidelines from the VAT Committee may follow. The publication of such guidelines may be a trigger for changes in the national VAT legislation of EU member states.
It is noteworthy that the Commission focuses particularly on the importation of aircraft in its position – which is a very specific situation. The issue they raise to justify their position is somewhat understandable: if the right to deduct is granted to a lessee (who, by definition, uses the goods temporarily), the system of input VAT adjustment for capital goods may no longer function properly. On the other hand, one may wonder whether it is appropriate to have entrepreneurs act as the consignee for paying VAT in the importation process, but then deny them the right to deduct VAT. Let's not forget that this issue can also arise for toll manufacturers and many others.

It is essential to avoid throwing the baby out with the bathwater. In any case, we will keep you informed!