European Legal Review, vol. I 2011 – VAT Deduction for Goods or Services Prior to VAT Registration – Mission (Im)Possible?


the main principles governing the arising and the exercise of the right to VAT deduction for goods and services acquired prior to the VAT registration are set forth in articles 74 and 75 of the Bulgarian Value Added Tax Act (“VAT Act”).

The interpretation of those provisions shows that in order to be entitled to and to exercise its right to VAT deduction for such goods or services, not only should the taxable person meet the general VAT deduction conditions (e.g. to use the goods and services in the course of his economic activities, to dispose of an invoice for the goods or services, etc.), but he should also fulfill the following additional specific requirements:

  • The goods or services acquired should be treated as assets as per the Accountancy Act and the applicable accounting standards.
  • The assets must be available at the date of the taxable person’s VAT registration.
  • The taxable person must prepare an inventory of the available assets and describe each and every asset for which VAT deduction is claimed.  The inventory should be filed with the tax office no later than 7 days from the VAT registration date.
  • The right to VAT deduction for services is limited to services which are directly linked to the registration of the person under the Commerce Act and which are received no earlier than one month prior to that registration.
  • In order to be able to enjoy a right to VAT deduction, the taxable person needs to include once more all assets in its VAT purchase ledger filed for the period of its VAT registration or for one of the subsequent three tax periods.
  • The right to VAT deduction does not arise at all and cannot be enjoyed by the VAT registered person if the inventory of assets is submitted after the lapse of the 7-day period after the VAT registration date.

In my opinion, the requirements described above raise several important questions:

(a) Is it admissible to restrict the right to VAT deduction for supplies acquired prior to the VAT registration only to goods (as services are left largely outside the scope of the VAT deduction system) which are treated as assets as per the accounting legislation and standards and which are available at the date of the VAT registration?

(b) Do the Court of Justice case-law and the VAT principles preclude national legislation which subjects the arising of the right to VAT deduction to the fact of the VAT registration and the preparation of an inventory of goods within a 7-day period?

(c) Should the 7-day deadline for filing the inventory and the 3-month term for enjoying the right to VAT deduction be treated as too short in the light of the Court of Justice case-law?

(d) Should the preclusion of the right to VAT deduction in case of non-filing of the inventory within the 7-day deadline be considered as a disproportional sanction violating the principles of neutrality and effectiveness?

As you would see from the analysis of the Bulgarian tax administration practices and the case-law of the Bulgarian courts and the Court of Justice, one and the same question may have many different answers…