The Court of Justice of the EU (“Court”) recently issued its ruling in case C-159/17 Dobre. The ruling mentions that the tax authorities are entitled to refuse a taxable person’s right to deduct input VAT if (1) the tax authorities cannot determine whether the purchased goods / services were used in taxable economic activities, due to failure to submit VAT returns or if (2) the VAT deduction right was exercised fraudulently / abusively.
The Romanian taxable person Dobre did not pay VAT to the state budget for its sales made after the cancellation of its VAT code, but deducted input VAT on its purchases made during the same period, after it reregistered for VAT purposes. Although the tax authorities required the company to pay output VAT for the sales made during that period, they rejected its right to deduct input VAT on the corresponding purchases.
The Court decided that taxable persons are not entitled to deduct input VAT if that right is exercised fraudulently or abusively, or if they cannot prove that the purchased goods / services are used in a taxable economic activity (which was for the referring court to check in the case of Dobre).
This decision reiterates the importance of the principles of neutrality and the prohibition of abuse of rights. Although the cancellation of a VAT code does not automatically imply the rejection of the right to deduct input VAT, if such inactivity leads to the non-payment of VAT or it concerns fraud / abuse, the right to deduct may be denied.
It remains to be seen whether local legislation will eventually reflect the Court’s rulings on inactive taxpayers’ rights. In the meantime, however, it is important that companies with cancelled VAT codes know that, in order to benefit from the right to deduct input VAT on purchases made during the period in which they are not registered for VAT purposes, they are required to at least collect and pay VAT for corresponding sales.