On 7 March 2024, the Court of Justice of the European Union delivered judgment C-341/22 - Feudi, which declared that certain Italian VAT anti-abuse legislation was incompatible with EU VAT law. The judgment and the Advocate General's opinion highlighted an important issue in EU VAT law - how far can an EU Member State go in its anti-abuse legislation?
This case provides a fundamental schooling on the basics of EU VAT law, including the principles of fiscal neutrality and proportionality, and the Advocate General's opinion is of particular interest, as it substantially disagreed with the Court's decision.
The case covers the Italian VAT anti-abuse legislation which classifies certain companies as ‘shell' or ‘non-operational'. If the company in question falls below certain financial thresholds, it is then considered to be a non-operational company and therefore its right to VAT refunds would be restricted, and after three consecutive years of being classified as a non-operational company, the right to deduct input VAT would be outright denied.
The law provides for a rebuttal opportunity, whereby the company, which is deemed to be non-operational, can argue that there were objective reasons for the low revenue during the relevant periods.
The law limits the right to deduct VAT in three ways:
- a company cannot deduct input VAT in excess of output VAT in the same year as it was deemed to be a non-operating company;
- the excess VAT cannot be set off or transferred to a third party; and
- the excess VAT is lost and cannot be deducted if the company has been non-operational for three consecutive years.
The company, Feudi (formerly known as Vigna), challenged the Italian VAT anti-abuse law after it was denied the right to claim deductions of the input VAT expenses. The company was engaged in the winemaking business and had limited sources of income for a period of time (consisting of license fees and the sale of second-hand equipment), the value of which fell below the threshold set by the Italian anti-abuse law. The question therefore arose as to whether the Italian legislation infringed the EU VAT Directive and the principles of fiscal neutrality, proportionality and legal certainty.
The Court reiterated the fundamental principle of EU VAT law as stated in the VAT Directive, that the definition of a ‘taxable person' is broad and does not contain any financial preconditions. There are no pre-defined amounts of revenue which must generated for a person to be granted the status of a taxable person for VAT purposes, and therefore any legislation imposing such thresholds is contrary to the EU VAT Directive.
The Court also discussed at length the fundamental right to input VAT refund/deduction and that this right can only be restricted in very limited circumstances, the presence of fraud being one such circumstance.
The Court noted that in order for the right to deduct input VAT two essential conditions needed to be met:
- the VAT expenditure must have been incurred by the taxable person acting as such; and
- the expenditure must have been used to provide a taxable supply.
The Court cited the judgments of C-42/19 Sonaecom and C-98/21 Finanzamt R, which confirmed that the right to deduct VAT is available irrespective of whether there is a direct and immediate link between a VAT input and output transaction (i.e. a link between an expense and the corresponding sale), as long as the input VAT expenses form at least part of the general overheads of the taxable person and therefore part of the price of the goods or services.
The Court cited extensive case law, discussing the grounds on which an EU Member State may restrict the right to deduct input VAT. The Court concluded that an EU Member State cannot create a presumption that a taxpayer must rebut in order to be able to exercise their right to deduct input VAT - this level of legal standard being inappropriate. The right to deduct should be restricted only when there is objective evidence of fraud or abuse. The Court also referred to the earlier judgment in C-6/16 Eqiom and Enka, which held that the general presumption of fraud could not be used to justify a tax measure.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
