The Court of Justice of the EU Decided in Slovak VAT Case

On 21 March 2018 the Court of Justice of the EU decided in Slovak VAT case C-533/16 Volkswagen AG v Finančné riaditeľstvo Slovenskej republiky.

The Case

Suppliers of German company Volkswagen AG supplied between 2004 and 2010 to this company moulds for the production of parts. They did not include VAT in the invoices they issued, as they considered the transactions as not being supplies of goods; however, ‘financial compensation’. They corrected this mistake in 2010 – they additionally charged VAT, filed supplementary VAT returns and paid the VAT to the State Budget. In 2011, Volkswagen AG submitted an application for a refund of this VAT.

The Tax Authorities however denied to refund VAT related to the supplies which took place in the period from 2004 to 2006, due to the expiry of the 5-years limitation period. According to the Tax Authorities, the right to VAT refund arose already on the date of supply of the goods, i. e. when the VAT become chargeable, with the result that the right to claim VAT refund for the period from 2004 to 2006 had expired by the time the application for VAT refund was submitted.

The Question

Provided the VAT was charged to the taxable person and paid by this person several years after supply, is it possible to deny the right to VAT refund on the grounds that the limitation period for the exercise of that right began to pass on the date of supply and expired before the application for VAT refund was submitted?

The Judgement

The Court of Justice of the EU in its judgement held:

• the substantive requirements or conditions needed in order to claim the right to VAT deduction are:
  • the person concerned must be a taxable person,
  • this person must use the goods and services in question for the purposes of his taxable transactions,
  • these goods and services must be supplied by another taxable person,
• the formal condition for exercising the right to deduction provides that the taxable person must possess an invoice issued in accordance with the VAT Directive,
• the right to VAT deduction:
  • although it arises at the same time as the VAT becomes chargeable, it can be exercised only once the taxable person holds an invoice,
  • must be in principle exercised during the same period it has arisen, namely once the VAT becomes due – a taxable person however can deduct VAT even if he did not exercise his right during the period in which the right arose, subject to compliance with the conditions and procedures determined by national legislation,
  • the possibility of exercising this right without any temporal limit would be contrary to the principle of legal certainty, which requires the tax position of the taxable person, having regard to his rights and obligations vis-à-vis the tax authority, not to be open to challenge indefinitely,
• a limitation period the expiry of which has the effect of penalising a taxable person who has not been sufficiently diligent and has failed to claim input VAT deduction, by making him forfeit his right to deduct, is compatible with the regime established by VAT Directive, in so far as upon application of this limitation period the principle of equivalence and principle of effectiveness are observed,
• the Member States may impose also other obligations which they deem necessary for the correct collection of VAT and for the prevention of evasion – these; however, must not go further than necessary to attain such objectives; and therefore, they cannot be used in such a way that they would have the effect of systematically undermining the right to deduct VAT and, consequently, the neutrality of VAT.

To the present case the Court of Justice of the EU noted:

• even though the supply of goods at issue was carried out during 2004 to 2010, the suppliers adjusted the VAT until 2010 when they drew up invoices including the VAT, filed supplementary VAT returns and paid the VAT due – the risk of tax evasion or non-payment of VAT has thus been excluded,
• it was objectively impossible for Volkswagen AG to exercise its right to VAT refund prior to this adjustment, as it had neither been in possession of the invoices nor aware that the VAT was due – only following that adjustment, the substantive and formal conditions giving rise to a right to VAT deduction were met and Volkswagen AG could therefore apply for VAT refund,
• as Volkswagen AG did not demonstrate a lack of diligence, and in the absence of an abuse or fraudulent collusion with the suppliers, it is not possible to deny the right to VAT refund on the grounds of the limitation period.

The Court of Justice of the EU thus rules that it is not possible to deny to the taxable person the right to refund VAT that was invoiced and that this person paid several years after delivery of the goods, on the grounds that the limitation period for the exercise of that right began to pass on the date of supply and expired before the application for VAT refund was submitted.