Flashback on ECJ Cases – C-395/09 (Oasis East) – No exclusion of VAT deduction if Trading partners are established in a tax haven

On September 30, 2022, the ECJ issued its decision in the case C-395/09 (Oasis East).

Context: Sixth VAT Directive – Directive 2006/112/EC – Accession of a new Member State – Right to deduct input tax – National legislation excluding the right to deduct tax on the provision of certain services – Commercial partners established in a territory classified as a ‘tax haven’ – Option for Member States to retain rules excluding the right to deduct at the time when the Sixth VAT Directive entered into force

Article in the EU VAT Directive

Article 17(6) of the Sixth VAT Directive (Article 176 of the EU VAT Directive 2006/112/EC).

Article 176 (Restrictions on the right of deduction)
The Council, acting unanimously on a proposal from the Commission, shall determine the expenditure in respect of which VAT shall not be deductible. VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.
Pending the entry into force of the provisions referred to in the first paragraph, Member States may retain all the exclusions provided for under their national laws at 1 January 1979 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession.

Facts

Oasis East produces and sells water refrigeration devices. As part of its activities, which also include after-sales services, it makes use of services offered by an undertaking established in one of the territories listed in Annex 9 to the 1993 Law on VAT, which has been replaced by Annex 5 to the 2004 Law on VAT. That undertaking provides management and technical assistance services to Oasis East. Those services relate, in particular, to the following activities: marketing, organisation and participation in international trade fairs, operational activities relating to production planning, engineering services, financial and accounting consultancy, transport organisation, services connected with the use of information-technology services, and coordination of purchases and sales.
On 28 December 2007, before the Katowice tax authority, Oasis East asked whether, from 1 May 2004, it was entitled to deduct the input tax paid at the time of the importation of administrative services in respect of which payment had been made to an undertaking which had established its registered office in one of the territories listed in Annex 5 to the 2004 Law on VAT.
By decision of 4 April 2008, the Director of the Katowice tax authority replied in the negative to the question posed by Oasis East. He expressed the view that Oasis East was not entitled to deduct the input tax, given that the price of the services concerned had been paid to an undertaking which had established its place of residence, registered office or central management in one of the States or territories listed in Annex 5 to the 2004 Law on VAT.
The Director of the Katowice tax authority stated that the national legislation was not incompatible with European Union law, since Article 17(6) of the Sixth Directive allowed Member States to retain all of the exclusions provided for under national legislation at the time when that directive entered into force. He inferred from this that the Republic of Poland had retained the power to maintain in force the restrictions relating to the deduction of VAT which were in existence on the date of its accession to the European Union.
On 18 June 2008, Oasis East brought an action before the Wojewódzki Sąd Administracyjny w Gliwicach (Regional Administrative Court, Gliwice) against that decision of 4 April 2008.
By decision of 22 December 2008, that court dismissed Oasis East’s action. It held that the retention in national law of the exclusion provided for in Article 88(1)(1) of the 2004 Law on VAT did not amount to a breach of Article 17(6) of the Sixth Directive.

Questions

Does Community law (in particular, Article 17(6) of [the Sixth Directive … ], now Article 176 of … Directive 2006/112/EC … ) entitle a Member State to apply national provisions which exclude the right of a taxable person to reduce the amount of tax due, or to receive a refund of the difference, in the case of the purchase of imported services in connection with which payment of the amount due is made directly or indirectly to a person having its place of residence, registered office or central management in one of the territories or countries referred to in national law as so-called “tax havens”, regard being had to the fact that such exclusion was applied in the Member State prior to its accession to the Community?

AG Opinion

None

Decision

Article 17(6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, the provisions of which have, in essence, been reproduced in Article 176 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, must be construed as not authorising the retention of national legislation, applicable when Sixth Directive 77/388 entered into force in the Member State concerned, which excludes in general the right to deduct input value added tax paid at the time of the purchase of imported services, the price of which is directly or indirectly paid to a person established in a State or territory classified as a ‘tax haven’ by that national legislation.

Summary

Trading partners established in a tax haven – exclusion from the right to deduct input tax

Article 17(6) of the Sixth Directive , the provisions of which are essentially reproduced in Article 176 of the VAT Directive, must be interpreted as precluding the maintenance of national legislation which, upon the entry into force of the Sixth Directive Directive was applicable in the Member State concerned, and generally excludes the right to deduct input tax paid on the acquisition of imported services, in respect of which compensation is paid directly or indirectly to a person classified in a ‘tax haven referred to in this legislation ” qualified country or territory is located.

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