The Court of Justice of the EU (“Court”) recently issued its rulings in cases C–533/16 Volkswagen and C–8/17 Biosafe. The court ruled that the right to deduct input VAT exercised after the expiry of the statute of limitation period cannot be refused, if, at the expiration date, the beneficiary did not hold an invoice indicating the correct amount of VAT to be deducted.
In case C–533/16, Volkswagen is a German company that, between 2004 and 2010, purchased goods from suppliers established in Slovakia and treated those supplies as VAT exempt. In 2010, when the parties found that the application of the VAT exemption was incorrect, the suppliers issued correction invoices, with Volkswagen paying the invoiced VAT and requesting reimbursement thereof from the Slovakian authorities. The tax authorities rejected the Company’s refund claim for the purchases performed in the period 2004 – 2006, on the grounds that the claim had been made after the expiry of the statute of limitation period. In making this decision, the tax authorities took the view that the reimbursement right materialised on the date of supply of the goods, i.e. when the VAT became chargeable, so the reimbursement right statute of limitation for the period 2004 - 2006 had already expired by the time the refund request was submitted.
The Court ruled that, when correcting the VAT treatment applied to an operation (e.g. the application of the taxation regime instead of the exemption regime), beneficiaries are entitled to deduct VAT even after the expiry of the statute of limitation period, as long as the parties determined in good faith the VAT treatment initially applied (erroneously). In making this ruling, the Court held that the substantive and formal conditions for exercising the VAT deduction right were not fulfilled before the date when the invoices were corrected and the related VAT paid, only subsequently.
In case C–8/17, Biosafe - Indústria de Reciclagens SA is a Portugese company that, between 2008 and 2010, sold goods to a customer using the reduced VAT rate. In 2011, the tax authorities imposed additional payable VAT on the company for the difference between the reduced VAT rate erroneously applied and the standard VAT rate provided by law. As such, the Company requested that its customer pay the VAT difference included in the correction invoices issued in this respect in 2012. The customer considered that the statute of limitation period had expired for the purchases carried out in 2008 and, therefore, it no longer had the right to deduct the related input VAT, so it refused to pay that amount to Biosafe.
Using the same reasoning as in the Volkswagen AG case, the Court decided that, when correcting the VAT treatment applied to an operation (e.g. applying the standard VAT rate instead of the reduced VAT rate), beneficiaries have the right to deduct the (additional) input VAT, even after the statute of limitation period expires, as long as the parties determined in good faith the VAT treatment initially applied (erroneously).
These decisions confirm that, under certain conditions, input VAT may be deducted at the date of receipt of invoices correctly mentioning VAT to be deducted (irrespective of the date when the chargeable event of that acquisition occurs).
Note that these judgments are applicable not only to situations in which parties erroneously treat taxable transactions as VAT exempt or transactions subject to the standard VAT rate as eligible for the reduced VAT rate, but to any case where VAT to be deducted is not correctly determined and the VAT treatment for which is subsequently corrected. Of course, the initial VAT treatment should not have been fraudulently or abusively applied by the parties.