VAT Newsletter 4/2012

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The European Court of Justice („ECJ”) has ruled on the case Tóth (C-324/11)

The dispute in this case consists of the fiscal authorities’ refusal to accept the VAT deduction for an operation deemed as questionable/debatable.

In 2007, a real estate developer undertook constructions works for taxable persons partly using subcontractors. As one of the subcontractors had not complied with his fiscal obligations since 2003 and had not registered his employees, in 2007 the authorities withdrew his business operator’s license. Given these irregularities, the fiscal authorities decided that the subcontractor no longer qualified as a taxable person and as such no longer had the right to issue the invoices for which the real estate developer deduced the related VAT. Therefore, the fiscal authorities refused the real estate developer’s right to deduct the VAT related to the invoices issued by the subcontractor. Moreover, the fiscal authorities considered that the real estate developer should have known the situation of the subcontractor as well as the of fact that he was involved in a VAT fiscal fraud.

The ECJ considered that the fiscal authorities cannot refuse to a taxable person the right to deduct the VAT for the services supplied by a taxable person to whom the business operator license was cancelled before the related services were rendered, if the related invoice contains the mandatory elements.

Moreover, the ECJ considered that the fiscal authorities cannot refuse the right to deduct VAT on the ground that the issuer of the invoice had committed irregularities, such as not declaring his employees, without further proving, based on objective evidence, that the beneficiary knew or ought to have known that the operation was involved in a fiscal fraud.

Furthermore, the fact that the beneficiary did not verify the legal reports between his supplier and the employees does not represent objective evidence that could lead to the refusal of the deduction right for the invoices received.

In consequence, the ECJ considered that the right to deduct VAT can be refused only if it is proved that the beneficiary knew that he was involved in a fraud.

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