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Briefing document: ECJ C-475/23 (Voestalpine Giesserei Linz) – ECJ allows VAT deduction for goods provided to subcontractors under conditions

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On October 4, 2024. the ECJ issued its judgment in the case C-475/23 (Voestalpine Giesserei Linz).

This Briefing doument analyses the European Court of Justice (ECJ) Judgment in Case C-475/23 concerning the right to deduct Value Added Tax (VAT) on goods made available free of charge to a subcontractor and the implications of not maintaining separate accounts.

Sources:

1. Introduction:

This briefing document provides an overview and analysis of the ECJ’s judgment in Case C-475/23, Voestalpine Giesserei Linz GmbH (VGL) v Administraţia Judeţeană a Finanţelor Publice Cluj. The case concerns the deductibility of VAT incurred by VGL, an Austrian company, on the acquisition of a crane that was made available free of charge to a Romanian subcontractor (GEP) for processing VGL’s goods in Romania. The judgment also addresses the refusal of VAT deduction due to VGL’s failure to keep separate accounts for its Romanian permanent establishment.

2. Background of the Dispute:

VGL, registered for VAT in Romania, produced moulded parts and contracted with another Austrian company, Austrex, which then engaged GEP in Romania to process these parts. VGL owned a building and a crane in Romania, providing the crane free of charge to GEP for the processing activities. During a tax inspection, the Romanian tax authority denied VGL’s VAT deduction on the crane acquisition, arguing that VGL had not sufficiently demonstrated that the acquisition was for its own economic activity, especially given the free provision to GEP and the lack of separate Romanian accounts. The Romanian courts upheld this decision, leading to a referral to the ECJ.

3. Key Themes and Most Important Ideas/Facts:

3.1. Right to Deduct VAT on Goods Provided to a Subcontractor:

  • Fundamental Principle of Deduction: The ECJ reiterated that the right to deduct VAT under Article 168(a) of Directive 2006/112/EC is a fundamental part of the VAT system and, in principle, cannot be limited. It is exercisable immediately for taxes charged on input transactions, provided the goods and services are used for the purposes of the taxable person’s taxed transactions. As the judgment states, “The deduction system is intended to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his or her economic activities.”
  • Direct and Immediate Link: The Court emphasised the necessity of a “direct and immediate link” between the input transaction (acquisition of the crane) and the taxable person’s output transactions or overall economic activity. This link exists when the input costs are a component of the price of the output transactions or form part of the taxable person’s general costs and are thus components of the price of their supplies.
  • Objective Necessity: The ECJ ruled that the denial of VAT deduction was precluded as long as making the goods (the crane) available to the subcontractor “does not go beyond what is necessary to enable that taxable person to carry out one or more taxable output transactions or, failing that, to carry out its economic activity”. This introduces a principle of proportionality. If the provision of the crane was essential for VGL’s processing and subsequent taxed sales, the deduction should be allowed.
  • Irrelevance of Direct Subcontractor Benefit (in principle): The judgment clarifies that the fact that the subcontractor (GEP) directly benefited from the free use of the crane does not automatically negate VGL’s right to deduct VAT, provided the necessary link to VGL’s own taxed activities exists. As the ECJ states, “The fact that Austrex and its subcontractor GEP derive a direct benefit from the crane in question, because it is made available free of charge, cannot result in the denial of VGL’s right to deduct VAT relating to its acquisition of the crane if a direct and immediate link is established between that acquisition and either one or more taxed output transaction carried out by VGL or its economic activity as a whole”.
  • Cost Component: The Court further specified that the cost of acquiring the goods must be “part of the cost components of either the transactions carried out by that taxable person or the goods or services which that taxable person supplies in the course of its economic activity.”
  • Potential Limitation: The ECJ noted that if the making available of the crane “went beyond what was necessary to ensure the processing of the moulded parts”, the direct and immediate link could be partially broken, leading to a potential restriction of the deduction to the objectively necessary portion.

3.2. Relevance of Not Keeping Separate Accounts:

  • Formal vs. Substantive Requirements: The ECJ distinguished between the “substantive requirements” for the right to deduct VAT (e.g., use for taxed transactions) and the “formal requirements” (e.g., accounting obligations). The Court reiterated the settled case law that the fundamental principle of VAT neutrality requires deduction to be allowed if the substantive requirements are met, even if some formal requirements have not been complied with.
  • Ability of Tax Authorities to Verify: The judgment states that a taxable person cannot be prevented from exercising their right of deduction for not keeping sufficiently detailed accounts “if the tax authority is in a position to carry out its review and to verify that the substantive requirements are satisfied.” Even without separate accounts, if the Romanian tax authorities could otherwise determine whether the acquisition of the crane was linked to VGL’s taxed output transactions, the deduction should not be denied solely based on the lack of separate accounts.
  • Proportionality of Penalties: The ECJ highlighted that denying the right of deduction for accounting failures “clearly goes beyond what is necessary to attain the objective of ensuring the correct application of those obligations”, as Member States can impose proportionate fines or penalties for such infringements.

4. Questions Referred and Answers by the ECJ:

The Curtea de Apel Cluj (Court of Appeal, Cluj) referred two questions to the ECJ:

(1) Deduction for goods provided free of charge to a subcontractor: The ECJ answered that Article 168(a) of the VAT Directive “must be interpreted as precluding a national practice whereby, where a taxable person has acquired goods which that taxable person then makes available free of charge to a subcontractor, in order for that subcontractor to carry out work for that taxable person, that taxable person is denied the deduction of the VAT relating to the acquisition of those goods, in so far as the making available of those goods does not go beyond what is necessary to enable that taxable person to carry out one or more taxable output transactions or, failing that, to carry out its economic activity, and the cost of acquiring those goods is part of the cost components of either the transactions carried out by that taxable person or the goods or services which that taxable person supplies in the course of its economic activity.”

(2) Deduction and lack of separate accounts: The ECJ answered that Article 168(a) of the VAT Directive “must be interpreted as precluding a national practice whereby a taxable person is denied the deduction of input VAT on the ground that that taxable person has not kept separate accounts for its fixed establishment in the Member State in which the tax inspection is carried out where the tax authorities are in a position to determine whether the substantive conditions of the right of deduction are satisfied.”

5. Implications of the Judgment:

  • Reinforces the Principle of VAT Neutrality: The judgment underscores the fundamental principle that businesses should not bear the burden of VAT on costs directly linked to their taxed activities, even when those costs involve subcontractors.
  • Focus on Economic Reality: The ECJ emphasises looking at the economic reality of the transactions. The fact that a subcontractor uses the goods does not automatically sever the link to the main contractor’s taxed activities.
  • Importance of Substantive Requirements: The judgment reaffirms the primacy of meeting the substantive requirements for VAT deduction over strict adherence to formal requirements, particularly when tax authorities can otherwise verify the link to taxed activities.
  • Proportionality in Deduction: The introduction of the “necessity” test for the provision of goods to subcontractors implies that the extent of the deduction might be limited if the provision goes beyond what is required for the taxable person’s own taxed transactions. This will require careful assessment of the factual circumstances.
  • Limits on National Practices: The ruling clarifies that Member States cannot implement national practices that automatically deny VAT deduction in these scenarios if the underlying economic link to the taxable person’s taxed activities can be established.

6. Conclusion:

The ECJ’s judgment in Case C-475/23 provides important clarifications regarding the right to deduct VAT in situations involving subcontractors and the impact of non-compliance with formal accounting requirements. It confirms that VAT deduction should be allowed when the acquisition of goods is intrinsically linked to a taxable person’s taxed output transactions or overall economic activity, even if those goods are used by a subcontractor, provided the provision is necessary and the cost is reflected in the taxable person’s supplies. Furthermore, the judgment limits the ability of national tax authorities to deny deduction solely based on the lack of separate accounts if they can otherwise verify the substantive conditions for deduction are met. The case now returns to the Curtea de Apel Cluj to be decided in accordance with the ECJ’s interpretation of EU law.

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