Flashback on ECJ cases C-110/98 to 140/98 (Gabalfrisa and Others) – EU Court Protects VAT Deduction Rights for Taxpayers

On March 21, 2000, the ECJ issued its decision in the joined ECJ cases C-110/98 to 140/98 (Gabalfrisa and Others).

Context: Meaning of national court or tribunal for the purposes of Article 177 of the EC Treaty (now Article 234 EC) – Admissibility – Value added tax – Interpretation of Article 17 of Sixth Directive 77/388/EEC – Deduction of tax paid on inputs – Activities prior to carrying out economic transactions on a regular basis

Summary

Right to Deduct VAT: The Court ruled that Article 17 of the Sixth Directive prohibits national laws from conditioning VAT deduction rights on specific requirements, such as prior requests or time limits before starting taxable activities.
Objective Evidence for Economic Activity: While taxpayers must provide objective evidence of intended economic activities, the right to deduct VAT should not be forfeited or deferred if these activities have not commenced within a specific timeframe.
Preventing Fraud: Member States can impose measures to prevent fraud and ensure tax collection, but these should not undermine the fundamental right to deduct VAT as established by EU law.
Independence of Tribunales Económico-Administrativos: The Court confirmed that these tribunals qualify as courts under EU law, enabling them to refer questions for preliminary rulings.
Cost Responsibility: Costs incurred by governments and the Commission in submitting observations are not recoverable, and the decision on costs remains with the national court

Article in the EU VAT Directive

Article 17 of the Sixth VAT Directive (Articles 167 and 168 of the EU VAT Directive 2006/112/EC).

Article 17 of the Sixth Directive, which governs the right to deduct, states:

1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

Facts

Various departments of the AEAT refused the applicants in the main proceedings a deduction of VAT paid in respect of transactions carried out prior to the commencement of their activity, often building works, by reason of infringement of the requirements laid down in Article 111 of Law No 37/1992 or Article 28 of Royal Decree No 1624/1992.
The applicants in the main proceedings took the view that the requirements laid down in Article 111 of Law No 37/1992 were contrary to Article 17(1) and (2)(a) of the Sixth Directive and commenced proceedings to challenge the decisions of the various departments of the AEAT before the Tribunal Económico-Administrativo Regional de Cataluña.
The orders for reference state that, according to an order of the Tribunal Económico-Administrativo Central (Central Economic-Administrative Court) of 29 March 1990, Tribunales Económico-Administrativos are courts or tribunals for the purposes of Article 177 of the Treaty, since they satisfy the five conditions laid down in the case-law of the Court of Justice relating to the concept of court or tribunal within the meaning of that provision, namely statutory origin, permanence, compulsory jurisdiction, inter partes procedure and the application of rules of law.

Questions

With respect to the VAT paid by a taxable person liable thereto before he starts regularly carrying out taxable transactions, may the terms in which the right to deduct VAT is defined in Article 17 of the Sixth Council Directive 77/388/EEC of 17 May 1977 be interpreted as meaning that the exercise of that right may be made conditional, with a view to avoiding fraud, upon the fulfilment of certain requirements such as the submission of an express request before the tax concernedbecomes due and commencement of taxable transactions on a regular basis within a specified time-limit reckoned from the date of that request, the penalty for infringement of those requirements being forfeiture of the right to deduct or, at least, deferment of its availability until the time at which taxable transactions begin to be carried out on a regular basis

AG Opinion

In the light of the foregoing, I propose that the Court declare that the question referred by the Tribunal Económico-Administrativo Regional de Cataluña is inadmissible on the ground that the latter is not a ‘court or tribunal of a Member State within the meaning of Article 177 of the EC Treaty (now Article 234 EC).

In the alternative, I propose that the Court reply to the question as follows:

– makes exercise of the right to deduct VAT paid before taxable transactions commence on a regular basis conditional upon fulfilment of the requirements that

(a) an express request to that effect be submitted before the tax becomes chargeable;

(b) a time-limit of one year be observed between submission of that request and the actual commencement of taxable transactions;

– penalises failure to fulfil those requirements by forfeiture of the right to deduct or deferment of the exercise of that right until such time as taxable transactions commence on a regular basis.

Decision

Article 17 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 precludes national legislation which makes the exercise of the right to deduct value added tax paid by a taxable person liable thereto before he starts regularly carrying out taxable transactions conditional upon the fulfilment of certain requirements such as the submission of an express request to that effect before the tax concerned becomes due and compliance with a time-limit of one year between that submission and the actual commencement of taxable transactions, and which penalises infringement of those requirements by forfeiture of the right to deduct or deferment of the exercise of that right until the time at which taxable transactions actually begin to be carried out on a regular basis.

Source