Deduction of VAT quotas borne prior to the commencement of the business activity
It is quite frequent the question that arise about the possibility to deduct the VAT which is borne in the acquisition of goods and services, which are necessary for the development of an activity, but prior to the commencement of such activity.
The article 93.1 of the Spanish VAT Act provides for the possibility of the taxpayer to deduct the input VAT quotas before starting with the realization of supplies of goods or services, as provided for in articles 111, 112 and 113 of the VAT law. Meanwhile, in general terms, the article 111 of the Act regulates the right to deduct when the taxpayer intends to allocate those goods and services acquired to carry out a business or professional activities, if confirmed by objective evidence. Therefore, we can say that to the extent where it is demonstrated by objective evidence that those goods and services purchased are necessary for the future development of a business or professional activity, the taxpayer is entitled to deduct the input VAT even if it has not carried out any supply of goods or services to date.
However, what happens when that activity is finally not carried out for reasons beyond the taxpayer? Can the Tax Authorities claim back these VAT quotas retroactively? This issue is resolved by the Central Administrative Court in its judgment dated April 27, 2015.
This refers to a company that was incorporated with a core business of property development, who acquired purchase options on some lots and parcels, bearing the corresponding amounts of VAT which deducted at the time, with the intention to allocate these goods to the promotion and selling of future buildings.
However, a few years later, the company was liquidated, without supplying any goods or provide services that could generate the right to deduct the VAT, so the Tax Authorities settled the VAT initially deducted by the company, stating that there is no longer initial intention to allocate these goods to a business activity as such intention disappears at the same time the company is dissolved, apart from that they considered insufficiently credited the intention to allocate these assets to a business. The Tax Administration considers that the control of the real intention of the taxpayer must be made a posteriori and in accordance with reality.
Having appealed the entity, the Administrative Court is pronounced on the matter, basing its decision on the Case-Law of the Court of Justice of the EU, and contrary to the opinion of the Tax Administration, it estimates the appeal of the company and allows the deduction of these quotas.
Under the criterion of the Administrative Court, in line with the ECJ, the taxable person status may not be withdrawn with retroactive effect if for reasons beyond to it the transactions never comes true. In this regard, the ECJ’s criterion is based on the principle of tax neutrality by which the right to deduct, once born, must subsist even where the tax authority is aware that the economic activity will not be performed.
According to the Court’s point of view, to decide on the deductibility of these taxes charged before the start of the activity must be addressed whether at the time the quotas were borne the taxpayer is able to prove the involvement of these goods and services to a business activity, regardless at a later time the entity does not perform it for reasons beyond the entity.
In conclusion, it is the present situation and objective elements of the taxpayer, and not what might happen in the future, which must be assessed to determine the right to deduct the VAT.
In any case, remember that is up to the taxpayer to demonstrate with objective evidence the involvement of these goods and services to the activity.
A copy of the resolution in Spanish is attached.