VAT on advance payments for purchases not performed is deductible

27/06/18

In brief

The Court of Justice of the European Union (“the Court”) recently issued the judgement in joint cases C-660/16 Finanzamt Dachau v Achim Kollross and C-661/16 Finanzamt Goppingen v Erich Wirtl, stating that VAT on purchases not actually performed is deductible, under certain conditions.

In detail

Mr. Achim Kollross and Mr. Erich Wirtl are two German taxable persons who made advance payments for purchases of goods, deducting the related input VAT. The suppliers subsequently became insolvent and did not sell the goods to those taxable persons for which they had cashed the advance payments, nor did they refund the advance payments. Since the two taxable persons had deducted VAT at the time of making the advance payments, the German tax inspectors rejected this deduction, on grounds that those suppliers had been involved in fraudulent trading practices, but without committing any tax evasion offences.

The Court ruled that the right to deduct VAT on advance payments for a purchase which does not occur cannot be refused if the beneficiary made the advance payment in good faith and can no longer recover those amounts from its supplier. ‘In good faith’ in this context means that, based on the available information, the beneficiary could be expected to know that the supply of goods appeared to be certain. Of course, if the beneficiary knew or should have known about the uncertainty of that acquisition, then that right could be denied.

[Source: Judgement of the Court of Justice in joint cases C-660/16 Finanzamt Dachau v. Achim Kollross and C-661/16 Finanzamt Goppingen v. Erich Wirtl, published on curia.europa.eu website on the 31st May 2018]

The takeaway

This decision emphasises that the right of a taxable person to deduct input VAT on advance payments may be maintained when finding out that the purchase will no longer take place, as long as the purchaser:

  • is unable to recover that VAT from the supplier that cashed the advance payment; and
  • did not know or could not have known about the uncertainty regarding that purchase.

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