Court of Justice EU (CJEU): Mandatory revision of VAT in case of liquidation of company
The Court of Justice of the EU recently ruled in the Vittamed case (No. C-293/21). In short, the CJEU finds that VAT must be revised if investment goods due to a corporate liquidation are not and will not be used for business activities for which the business is entitled to recovery of VAT on costs. In this article, we discuss this important outcome and discuss the consequences in practice.
Background: the revision rules
In VAT, the starting-point is that incurred VAT can be deducted if the entrepreneur uses the acquired goods or services for business activities for which the business is entitled to recovery of VAT on costs (such as VAT taxable sales). However, this initial deduction is not always definitive when purchasing or manufacturing investment goods. Based on the so-called "revision rules", the deduction is adjusted if at any time it appears that the actual use deviates from the intended (deduction-eligible) use. The period in which the deduction of VAT on investment goods is followed – the ‘revision period’ – in the Netherlands concerns five years for movable investment goods and ten years for immovable property.
VAT at the Lithuanian company Vittamed
Vittamed was a Lithuanian company that has acquired goods and services in the past to produce licences and prototypes of medical diagnostics devices. The intention was to use the manufactured investment goods for VAT taxable activities. Vittamed deducted the VAT it incurred. However, the company was liquidated after several loss-making financial years. The tax authorities reclaimed the deducted VAT based on the revision rules. The referring Lithuanian court asked the CJEU whether the deduction of VAT incurred in this case should indeed be revised.
Judgment of the CJEU
In this case, the CJEU finds that the revision rules are intended to establish a close and direct link between the deduction right and the use of the goods or services concerned. Therefore, a business is obliged to adjust the deduction if the manufactured investment goods have not been used for activities for which the business is entitled to recover VAT on costs and will never be used for this because the sole shareholder has decided to put it in liquidation. However, revision may be omitted if there is still an intention to use the goods for an activity for which the business is entitled to recover VAT on costs . This condition does not appear to have been met in a case in which the business is liquidated.
Analysis and relevance for practice
The judgment of the CJEU is surprising. On the basis of previous case law (see the case INZO, no. C-110/94), the practice assumed that VAT deduction initially claimed will be retained if an activity, against expectations, ultimately did not lead to VAT taxable activities. It now follows from the present ruling that a business will have to revise the initial deduction if the investment goods for which it has claimed a deduction will not be used for the initially intended activities for which the business is entitled to recover VAT on costs and can also not be intended for other activities based on an objectively demonstrable intention. This can especially affect businesses that invest heavily, such as tech companies, start-ups and pharmaceutical companies. They may be confronted with the obligation to repay VAT in cases where investment projects ultimately fail for whatever reason.
Although the judgment of the CJEU appears to tighten the revision obligation, it also contains an opportunity. In our view, it is possible to prevent revision by simply selling unused investment goods subject to VAT. In that case, they will still be used for purposes for which the business is entitled to recovery of VAT on costs. Alternatively, a business may intend to use the investment goods at a later stage for deductible purposes. Even then, revision can be omitted – provided the intention is real and is properly documented. In any case, the decision of the CJEU has raised many questions. The future will have to show in which specific cases the revision rules apply.
Should you wish to discuss the possible consequences of this decision for your organisation, please contact us without any obligation. We are happy to assist you.
The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly consultant.