Exclusion of the right to deduct VAT for non-compliance with formal requirements and fraudulent activity. Judgment of the ECJ of 28 July 2016


It is usual to find Case-Law from the European Court of Justice (ECJ) that deal with the right to deduct VAT when the material requirements are met but there is a formal defect. In principle, the criterion of the Court is positioned in favor of not limit the right to deduct, based as fundamental exercise and pilar for the correct working of the VAT system, by a mere breach of formal requirements, provided the material requirements are met by the taxpayer.

However, this is not always the case or at least not a fix rule, since it would not make sense to establish formal requirements otherwise, in view of the fact that formal requirements work as a control measure for the exercise of deduction and the proper functioning of the VAT system. In addition, the Court leaves in the hands of the national body to decide if there is a fraudulent invocation of the right to deduct for non-compliance with the formal requirements in which case it is legitimate to deny the exercise thereof.

This is the case of the decision from the European Court of Justice (case-law Giuseppe Astone), where the massive breach of formal requirements for the deduction are a clear proof of the fraudulent intention of the taxable person, which would lead to deny it. In this case, in the course of a tax inspection was detected that the taxable person had not submitted the relevant VAT returns corresponding to several periods nor had the corresponding VAT ledgers of invoices issued, thus the Tax Authorities did settled the corresponding VAT debt.

However, in the course of its defense, the taxable person provided with several purchases invoices received that had paid to their suppliers, but that had not been registered or accounted, by what the person claimed the VAT deduction against the VAT settlement issued by the Administration. However, this deduction was denied for failure to comply with formal requirements, as the invoices were not registered in the VAT Ledger, and the taxable person had not applied the right to deduct either in the annual VAT return or in the two subsequent periods, as it is provided in the national regulations. Therefore, in addition to the formal breach, the right to deduct had expired (2 years for deducting).

Faced with this situation the national body raises two preliminary rulings to the European Court of Justice. The first one is whether the existence of an expiration deadline for exercising the right to deduct is contrary to the EU VAT Directive provisions. The second question concerns the possibility of denying the right to deduct when it has been proved the breach of several formal requirements even though material requirements are met.

As regard the first question, the ECJ mentions that articles 180 and 182 of the VAT Directive allows the exercise to the VAT deduction by the taxable person in subsequent financial years although it has not been exercised in the period in which it was born, but nevertheless, this deadline cannot be without time limitation. Therefore, the existence of an expiration term for the deduction is not incompatible with the European Directive provided that period is consistent and compatible with similar rights in the whole national fiscal system, according to the principles of equivalence and effectiveness.

On the other hand, with respect to the fulfilment of the formal requirements and the exercise of the right to deduction, while it is true that the criterion of the European Court of Justice is aimed at not limiting this right by the mere failure to comply with the formal requirements, it must be borne in mind that such a massive failure (absence of declaration, invoices register, accounting, etc) can result in fraudulent activity by the taxable person (situation that must be judged by the national body) to which it is rightfully to deny the exercise of the right to deduction when it is invoked in a fraudulent manner.

Attached is a copy of the judgment with case number C-332/15.

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