Despite the procedural flaws, VAT refund. Neutrality of VAT


Judgment of the Spanish Supreme Court, dated October 25, 2015, in response to the appeal filed by the State Attorney.

CIT GROUP FINANCE (IRELAND), (hereinafter, The Company), as a VAT tax payer, established in the Spanish VAT territory, proceeded to apply for VAT credits “to be offset” through the appropriate VAT returns on certain periods of 2003 and 2004. However, for the periods from May to December 2004, it asked for the refund of the VAT paid through the special procedure for entities not established in Spain, being agreed by the Tax Audit.

The auditor came to the following conclusions:

–          The Company was part of a corporate network where he stood societies through simulation of legal business (leasing of computer equipment to a Hungarian entity), whose only advantage to CIT GROUP FINANCE (IRELAND) consisted of the application of the Double Taxation Treatment signed between Spain and Hungary by which incomes are excluded from taxation.

–          In relation to the point above, the auditor concluded that CIT GROUP FINANCE (IRELAND) had no consideration of VAT tax payer established in Spain, so in sales made by this company to entities established in Spain would operate the reverse charge rule. For this reason CIT GROUP FINANCE (IRELAND) should not have charged the VAT.

–          As explained in the previous points, the auditor denied the refund of the VAT to The Company requested through regular VAT returns, to understand that the right procedure to be followed is the special procedure for non-established entities.

With regard to the VAT refund claim submitted by the company following the special procedure for non-established entities, the auditor approved said VAT refund.

Finally, the auditor considered the transactions carried out between The Company and the Hungarian company as fictitious, then the VAT payments related to the transactions done with the Hungarian company, included in the regular VAT returns were considered as improper income.

The Company appealed against this decision before the Spanish Administrative Court, which rejects the claim and subsequently before the Spanish Nacional Court, which partially estimated the appeal lodged by The Company, ordering the Administration to refund to The Company the VAT wrongly paid as a result of being unduly charged to the Hungarian company.

Before this decision, the Attorney for the State appealed before the Spanish Supreme Court, which ruled in the following way:

–          Regarding the first reason for annulment raised by the State Attorney, the Spanish Supreme Court understands that, against the approach of the inspection and the Spanish Administrative Court, considering that, even admitting the existence of a tax credit for VAT to the Treasury in favour of CIT GROUP FINANCE (IRELAND) which arises precisely as a result of the operational structure of the CIT Group, not applicable the refund for having followed the General Procedure through the submission of regular VAT returns and not the Special Procedure laid down for non-established entities, the statement responds to there can be no denying the VAT refund relying exclusively on merely formal defects, since otherwise it would be a breach of the principle of VAT neutrality. Therefore, the Tribunal dismisses this reason of Cassation.

–          As to the second reason for annulment, the Court understands that must also prevail right to the refunds unduly paid by CIT GROUP FINANCE (lRELAND). This right to the refund of undue payments should be recognized: (i) in favor of the Hungarian company in its condition of impacted or, subsidiarity, in favour of ClT GROUP FINANCE (lRELAND) at its status as VAT tax payer who must refund to the Hungarian company the amounts unduly charged.

In conclusion, that even in the case that could conclude that the operational of the CIT Group structure was constitutive of a relative simulation course, would proceed the refund of VAT resulting from the cancellation of VAT quotas charged by CIT GROUP FINANCE (IRELAND) to the Hungarian company since otherwise there would be a collapse of the principle of neutrality, generating unjustified enrichment in favour of the Administration.

In response to the arguments put forward, the Spanish Supreme Court rejected the appeal filed by the State Attorney.

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