European Court upholds right to VAT deduction, despite "Null and Void" agreement

The case revolved around a taxpayer, W., who claimed VAT deduction on an invoice for the transfer of trademarks. The tax authorities contested W.'s right to VAT deduction, arguing that the transaction was null and void according to national civil law. Notably, the ruling does not delve into the reasons why the transaction should be considered null and void, even listing it as a cause for inadmissibility of the question. However, the Court does not respond to this and answers the question posed to it on theoretical grounds.

Preliminary Question

Poland's highest administrative court, the Naczelny Sąd Administracyjny, referred the case to the European Court, seeking to know whether national legislation denying the right to VAT deduction solely on the grounds of a transaction's invalidity under national civil law is in accordance with EU law, particularly the principles of fiscal neutrality and proportionality.

The Court began by emphasizing the importance of the right to VAT deduction as a fundamental principle of the VAT system, stating that it should not be limited if the material and formal requirements are met. However, a fictitious transaction cannot serve as the basis for VAT deduction. If a transaction is not actually performed, it does not give rise to a right to VAT deduction. The burden of proof lies with the taxpayers. They must demonstrate that their purchase is "real" and related to their economic activities. National rules of evidence play a role here. The Court does indicate that the objective fact that the parties in this case continued to act as if the assignor still held the rights to the trademarks in question should be taken into account.

Additionally, the right to deduction can, of course, also be denied in cases of VAT fraud and abuse of rights. It stated that EU law cannot be invoked for fraudulent or abusive practices. The objective evidence of this must be provided by the tax authorities. The right to deduct VAT can be denied if it is proven that the taxpayer consciously participated in a transaction related to VAT fraud or when there is abuse.

However, the Court concluded that national legislation automatically denying VAT deduction solely based on the fact that a transaction is considered fictitious and invalid under national civil law goes beyond what is necessary to achieve the objectives of EU VAT legislation. To deny the right to deduction, it must be shown that there is, objectively speaking, a fictitious transaction, VAT fraud, or abuse.

Implications for practice

This ruling provides a good overview of the cases in which the VAT administration can deny the right to VAT deduction. The "authenticity" of a transaction and its link to taxable activities must be demonstrated by the taxpayer. In addition, the tax authorities can demonstrate that there is fraud or abuse.

Furthermore, it becomes clear once again that concepts from civil law cannot simply be transferred to VAT. In everyday language, the notion of "fraud" can encompass any form of dishonest or corrupt behavior. However, when it comes to VAT fraud, merely violating other societal rules or legal provisions is not enough. VAT fraud requires fraudulent intentions specifically related to VAT legislation. Thus, simply violating other laws or regulations does not automatically constitute VAT fraud.

It is well known that penalties can be significant. In Belgium, for example, a 200% fine can be imposed when the tax authorities dispute the VAT deduction. While this 200% fine is typically imposed in cases of fraudulent intent, we have found that the tax authorities do not limit this assessment to violations of VAT legislation, but also sanction in cases of other violations when there is fraudulent intent. This ruling shows that a VAT assessment in cases not related to VAT fraud goes a step too far.