News

he Court of Justice of the European Union (CJEU) after hearing a question referred for a preliminary ruling by the Supreme Administrative Court of Lithuania (SACL) has confirmed the latter’s doubts concerning the right of the applicant (a limited liability company) to deduct input value added tax (VAT).

The request has been made in proceedings concerning a decision of the State Tax Inspectorate under the Ministry of Finance of the Republic of Lithuania (hereinafter – the State Tax Inspectorate) refusing deduction of the input VAT paid by the applicant in the context of the creation of a Baltic mythology recreational and discovery path (‘the recreational path’).

When implementing the project the applicant included costs of production (acquisition) of certain capital goods (parking lots, trails, observation decks, steps, fireplaces, information stand) into its accounts, including input VAT which it declared as deductible. The State Tax Inspectorate stated that the applicant had no right to deduct VAT as the capital goods were intended for tax-free activities (public use free of charge), and the applicant has not proven that the goods acquired were intended to be used for the purposes of an activity subject to VAT.

The panel of judges of the SACL had doubts on whether the applicant indeed did not have the right to deduct input VAT, paid in production (acquisition) of the aforementioned capital goods. The SACL has referred the case to the CJEU for a preliminary ruling asking whether Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereinafter – the VAT Directive) can be interpreted as granting a taxable person the right to deduct the input VAT paid in producing or acquiring non-current assets intended for business purposes, which (1) are directly intended for use by members of the public free of charge, (2) but may be recognised as a means of attracting visitors to a location where the taxable person, in carrying out his economic activities, plans to supply goods and/or services.

Referring to its settled case-law, the CJEU recalled that the right of deduction provided for in the VAT Directive is an integral part of the VAT scheme and in principle may not be limited. The right to deduct is exercisable immediately in respect of all the taxes charged on input transactions. The deduction system is intended to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT. In so far as the taxable person, acting as such at the time when he acquires goods, uses the goods for the purposes of his taxed transactions, he is entitled to deduct the VAT paid or payable in respect of the goods.

The CJEU has ruled that the VAT Directive must be interpreted as granting, in circumstances such as those in the main proceedings, a taxable person the right to deduct the input VAT paid for the acquisition or production of capital goods, for the purposes of a planned economic activity related to rural and recreational tourism, which are directly intended for use by the public free of charge, and may enable taxed transactions to be carried out, provided that a direct and immediate link is established between the expenses associated with the input transactions and an output transaction or transactions giving rise to the right to deduct or with the taxable person’s economic activity as a whole, which is a matter for the referring court to determine on the basis of objective evidence.

Full text of the CJEU judgment in case C‑126/14 (‘Sveda’ UAB v Valstybinė mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos), can be found here.

For more information see the website of the Supreme Administrative Court of Lithuania www.lvat.lt  Please indicate the source when using this content.