Public authorities acting as taxable persons when acquiring goods / services are entitled to deduct input VAT later

In brief

The Court of Justice of the European Union (“the Court”) has recently issued its ruling in case C-140/17 Gmina Ryjewo, stating that public authorities acting as taxable persons when acquiring goods / services are entitled to deduct VAT later.

In detail

Gmina Ryjewo (municipality of Ryjewo) is a public authority in Poland, qualifying as a taxable person, registered for VAT purposes. The municipality had a building constructed, for which it did not deduct input VAT, without expressing - at the time - its intention to allocate the property to its taxable or non-taxable transactions (conducted in its capacity as a public authority). Although in 2010 the taxpayer entrusted the management of the property to another public authority, subsequently, in 2014, it expressed its intention to restore ownership of the property and allocate it to both its taxable and non-taxable activity. The Polish tax authorities ruled that the taxpayer had not acted in its capacity as a taxable person at the time of the property construction and rejected the municipality’s deduction of input VAT.

The Court decided that, as long as, upon incurring costs in relation to the goods:

• goods can, by their nature, be used for both taxable and non-taxable activities, but are used, initially, for non-taxable activities;
• taxpayers do not specifically express their intention to use the goods for a taxable activity, but they do not exclude this possibility either;
• taxpayers act as taxable persons (to be decided upon by the local court), taxpayers are entitled to deduct input VAT on investment expenditure, when using those goods for a taxable activity.

[Source: Judgment of the Court of Justice of the European Union in Case C-140/17 Gmina Ryjewo, published on the Curia.europa.eu website on 25 July 2018]

The takeaway

The decision emphasizes that public authorities are entitled to deduct input VAT paid on property acquired, at that time they use such goods for a taxable activity, even if they had not expressed such an intention upon the acquisition of the goods concerned. Of course, at the time, taxpayers must have acted as taxable persons while not excluding the possibility of allocating those goods to a taxable activity.

This decision is complementary to the case law of the Court, which has already confirmed the taxpayers’ right to deduct input VAT when acquiring goods / services intended to be used for a taxable activity. The Court confirmed that, in order to deduct input VAT, they are not required to wait for the actual commencement of that taxable activity, as long as, of course, they acted as taxable persons upon the acquisition of the goods / services concerned.