62021CJ0227_RES
Case C‑227/21
UAB ‘HA.EN.’
v
Valstybinė mokesčių inspekcija
(Request for a preliminary ruling from the Lietuvos vyriausiasis administracinis teismas)
Judgment of the Court (Fourth Chamber), 15 September 2022
(Reference for a preliminary ruling – Value added tax (VAT) – Directive 2006/112/EC – Right to deduct input VAT – Sale of an item of immovable property between taxable persons – Vendor subject to insolvency proceedings – National practice under which the purchaser is denied the right of deduction on the ground that he or she knew or should have known of the vendor’s difficulties in paying the output tax – Fraud and abuse of rights – Conditions)
Harmonisation of fiscal legislation – Common system of value added tax – Deduction of input tax – Right of deduction – Denial of the right of deduction – Whether permissible – Conditions – Transaction connected with value added tax fraud or abuse – Taxable person who knew or should have known of the existence of fraud – Establishment to the requisite legal standard of the objective evidence demonstrating that knowledge
(Council Directive 2006/112)
(see paragraphs 25-28)
Own resources of the European Union – Protection of the European Union’s financial interests – Fight against fraud and other illegal activities – Concept of fraud affecting the financial interests of the European Union – Any intentional act or omission affecting revenue derived from applying a uniform rate to the harmonised value added tax assessment bases determined according to EU rules – Included
(Art. 325(1) TFEU; Convention on the protection of the European Communities’ financial interests, Art. 1; Council Directive 2006/112)
(see paragraphs 30, 31)
Own resources of the European Union – Protection of the European Union’s financial interests – Fight against fraud and other illegal activities – Taxable person having duly complied with his or her obligations to declare value added tax – Failure to pay the duly declared tax – No tax fraud – Whether the failure is intentional or not – Irrelevant
(Council Directive 2006/112)
(see paragraph 32)
Harmonisation of fiscal legislation – Common system of value added tax – Deduction of input tax – Origin and scope of the right of deduction – Principle of fiscal neutrality – Sale of an item of immovable property between taxable persons – Vendor subject to insolvency proceedings – Purchaser who knew or should have known of the vendor’s difficulties in paying the output tax – National practice denying the purchaser the right of deduction – Not permissible
(Council Directive 2006/112, Art. 168(a))
(see paragraphs 33-36, 38, 40, 42-47, operative part)
Résumé
In September 2007, a Lithuanian company (‘the vendor company’) obtained a loan from a Lithuanian bank to carry out real estate development activity. That loan was secured by a mortgage over a plot of land in Vilnius (Lithuania) on which a building was under construction.
By an assignment of claim agreement concluded in November 2015, the company HA.EN. acquired for consideration the monetary claims arising from that loan, and also the contractual mortgage. When concluding that agreement, HA.EN. confirmed, inter alia, that it had become acquainted with the vendor company’s economic and financial situation and legal status, and that it was aware that the vendor company was insolvent and the subject of pending administration proceedings.
After the auction, announced by order of a bailiff in May 2016, of the item of immovable property over which HA.EN. held the mortgage was unsuccessful, HA.EN. accepted the proposal made to it of acquiring that property for its initial price of sale at the auction, and this resulted in the extinction of a part of its claims. Thus, ownership of the item of immovable property was transferred to it for the total amount of EUR 5468000, that is to say, a sum of EUR 4 519 008.26 together with EUR 948 991.74 in value added tax (VAT). The invoice for that transaction was entered in the respective accounts of both parties to the transfer. As the vendor company was then declared insolvent, it never paid the output tax into the public purse.
HA.EN. requested the tax authority to refund it the excess VAT resulting from deduction of the input VAT, namely EUR 948 991.74. However, the tax authority found that, in entering into the transaction for acquisition of the immovable property at issue although it knew or should have known that the vendor company would not pay the VAT generated by that transaction into the public purse, HA.EN. had acted in bad faith and committed an abuse of rights. For that reason, the tax authority denied it the right to deduct that input VAT.
At first instance, the Lithuanian courts ruled in favour of the tax authority. However, the Lietuvos vyriausiasis administracinis teismas (Supreme Administrative Court of Lithuania), before which HA.EN. brought an appeal, expressed doubts as to whether a practice of the tax authority under which the deduction of VAT is denied in instances such as the present one is permissible from the point of view of EU law.
The Court of Justice, to which a reference was then made for a preliminary ruling, holds in its judgment that Directive 2006/112, (
1
) read in the light of the principle of fiscal neutrality, precludes a national practice, such as the Lithuanian practice, under which, in the context of the sale of an item of immovable property between taxable persons, the purchaser is denied the right to deduct input VAT merely because he or she knew or should have known that the vendor was in financial difficulty, or even insolvent, and that that circumstance could result in the vendor not paying or not being able to pay VAT into the public purse.
Findings of the Court
The Court recalls as a preliminary point that the right to deduct input VAT is a fundamental principle of the common system of VAT – which ensures that any economic activity subject to VAT is taxed in a neutral way – and that that right in principle may not be limited. However, EU law cannot be relied on for abusive or fraudulent ends. Thus, if it is established to the requisite legal standard, in the light of objective evidence, that the right of deduction is being relied on for fraudulent or abusive ends, the national courts and authorities must refuse the right of deduction.
In that regard, the Court states first of all that a taxable person who is a judgment debtor facing financial difficulties and sells one of his or her assets in a statutory compulsory sale procedure in order to settle his or her debts, then declares the VAT due on that basis, but subsequently is unable, because of those difficulties, to pay that VAT in whole or in part, does not commit VAT fraud on that account alone. Consequently, the purchaser of such an asset, a fortiori, cannot be criticised in such circumstances on the basis that he or she knew or should have known that, in acquiring that asset, he or she was participating in a transaction connected with VAT fraud.
Next, the Court notes the two conditions which, in the sphere of VAT, must be met in order to find that an abusive practice exists: the transactions concerned must result in the accrual of a tax advantage the grant of which would be contrary to the purpose of the VAT Directive, and it must be apparent from a number of objective factors that the essential aim of those transactions is solely to obtain that tax advantage.
In that regard, the Court holds that the very existence of the option made available to the Member States by the VAT Directive of having recourse to the reverse charge mechanism, which allows the VAT burden to be transferred to the taxable person to whom the taxable supply is made, inter alia in situations such as the one here, shows that the EU legislature did not regard deduction of the VAT paid by the purchaser of immovable property in a compulsory sale procedure as contrary to the objectives of the VAT Directive. Furthermore, an unlawful intention on the part of a debtor whose asset is sold by way of enforcement not to pay VAT cannot be inferred merely from his or her financial difficulties. Accordingly, the view cannot be taken on that basis alone that, in carrying out a commercial transaction with that debtor, the purchaser of the asset commits an abuse of rights.
In circumstances such as those at issue in the main proceedings, the fundamental reason for which a creditor takes over immovable property may be his or her wish to recover all or part of his or her debt, by legal means available to the creditor, such as a compulsory sale procedure. In the light of the prima facie legitimate objective which that procedure pursues, the taking over in question cannot be equated to a wholly artificial arrangement that does not reflect economic reality and is set up with the sole aim of obtaining a tax advantage.
Finally, the Court considers the Lithuanian practice at issue in the present case to be contrary to the principle of fiscal neutrality in so far as it implies that purchasers of immovable property must bear the burden of the input VAT, in particular as the Republic of Lithuania chose not to make use of the option of setting up, for the situation here, a reverse charge mechanism intended precisely to counter the risk of insolvency of the VAT debtor. Furthermore, such a practice is liable to restrict the circle of potential purchasers and therefore runs counter to the objective pursued by the compulsory sale procedure, namely the optimal realisation of the debtor’s assets in order to satisfy his or her creditors to the greatest possible extent. It also tends to isolate economic operators in financial difficulties and to hamper their ability to carry out transactions, in breach of the principle of fiscal neutrality, as that principle precludes distinctions between taxable persons on the basis of their financial situation.
(
1
)	Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1; ‘the VAT Directive’).