CJEU judgment on the right to deduct VAT in insolvency proceedings   

On 03.06.2021, in its preliminary ruling’s judgment in case C-442/2021, the Court of Justice of the European Union (“The Court”) ruled on the right to deduct VAT due in insolvency proceedings in certain cases.

With the request for a preliminary ruling the Court of Appeal Suceava, Romania, asks the CJEU to establish whether the provisions of Articles 184 to 186 of Directive 2006/112 / EC of 28 November 2006 on the common system of value added tax (“VAT Directive”) must be interpreted as precluding national legislation or practice, whereby the initiation of insolvency proceedings in respect of an economic operator, entailing the liquidation of its assets for the benefit of its creditors, automatically places an obligation on that operator to adjust the VAT deductions, which it has made in respect of goods and services acquired before it was declared insolvent.

To answer the question raised, the Court clarifies the scope of the concept of “economic activity”, examines the VAT mechanism, and in particular, the adjustments to the deductions provided for in the VAT Directive, observing the principle of fiscal neutrality.

The judgment states that according to the VAT Directive, this type of tax applies only to activities of an economic nature - VAT is levied on supplies of goods made for consideration in the territory of a Member State by a taxable person acting in that capacity. The concept of "economic activities" is defined in the second subparagraph of Article 9 (1) of the VAT Directive, further developed in the practice of the Court, and covers all activities of producers, traders and service providers, and in particular transactions involving the use of material goods or intangible assets for the purpose of obtaining regular income from it, regardless of its objectives or results. Thus, an activity qualifies in principle as economic activity when it is carried out regularly and against remuneration received by the supplier.[1]

Therefore, since the activity must be considered on its own, regardless of its objectives and results, the opening of insolvency proceedings against a taxable person and the finding that the transactions carried out by that person relate only to the liquidation of their property with a view to repaying obligations and the subsequent winding-up of the undertaking, may not affect the economic nature of the transactions carried out within that undertaking.

Economic activity is not suspended due to the declaration of insolvency of the economic operator concerned, in so far as, under national law, insolvency has the effect that subsequent transactions can only serve to liquidate that operator's assets to satisfy its creditors.

Furthermore, in the present case the undertaking continues to be registered as a taxable person for VAT purposes and the tax authorities have taxed the transactions carried out in the insolvency proceedings. According to the Court, this is an indication that the company has in fact continued its economic activity and has carried out taxable transactions despite the insolvency proceedings.

As stated in other decisions of the Court, the right to deduct is an integral part of the VAT mechanism and cannot be limited.[2] The deduction adjustment mechanism is an integral part of the established VAT deduction regime. Its purpose is to increase the accuracy of the deductions in a way that ensures VAT neutrality, so that the right to deduct the tax paid on the transactions of the previous stage is reserved only in so far as they are used for taxable supplies. Thus, this mechanism aims to establish a close and direct link between the right to deduct VAT paid on supplies received and the use of the relevant goods or services for the purpose of carrying out taxable transactions.[3]

In that sense, only those amounts of tax, which are levied on the supply of goods or services, which the taxable persons use for the purposes of taxable transactions carried out by them, may be deducted. The deduction of the tax on the received supplies is connected to the collection of the tax on the supplies performed. Where goods or services acquired by a taxable person are used for the purposes of transactions, which are exempt or do not fall within the scope of VAT, no supply tax may be levied or tax on supplies received deducted.

In light of the principle of fiscal neutrality, which precludes, in particular, two transactions which are identical or similar from the consumer's point of view and therefore, in competition with each other, to be treated differently from the point of view of VAT, and thus, the transactions performed after the insolvency should be considered as having an economic nature. Although insolvency proceedings have been opened, the company continues to operate and competes with other taxable persons who make supplies similar to its own, so that the supplies in question must in principle be treated equally for VAT purposes.

Although the taxable person should, as a result of their declaration of insolvency, initially adjust the deducted VAT on supplies received, they are entitled to a deduction. According to the Court, the entity has the possibility to subsequently claim refund of the sums in question, since it actually continued to carry on its economic activity during the insolvency proceedings. Otherwise, his right to deduct will be limited.

The obligation for the company to effectively pay VAT, allegedly due upon an adjustment decision, constitutes an obstacle to the deduction of input VAT, since it requires from the obligated person to retain funds until the tax authorities refund the overpaid VAT, whereas other operators who have not been declared insolvent may use those funds for their economic activities without being required to make such a payment.[4]

In light of the foregoing, the Court considers that Articles 184 to 186 of the VAT Directive must be interpreted as precluding national legislation or practice whereby, the initiation of insolvency proceedings in respect of an economic operator, entailing the liquidation of its assets for the benefit of its creditors, automatically places an obligation on that operator to adjust the value added tax deductions which it has made in respect of goods and services acquired before it was declared insolvent, where the initiation of those proceedings is not such as to prevent that operator’s economic activity, within the meaning of Article 9 of that directive, from being continued, in particular for the purposes of the liquidation of the undertaking concerned.

[1] Judgment of 5 July 2018, Marle Participations, C ‑ 320/17, EU: C: 2018: 537, item 22.

[2] Judgment of 18 March 2021, A., C ‑ 895/19, EU: C: 2021: 216, item 32

[3] Judgment of 27 March 2019, Mydibel, C ‑ 201/18, EU: C: 2019: 254, item 27

[4] Judgment of 9 November 2017, Wind Innovation 1, C-552/16, EU: C: 2017: 849, item 44