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


This analysis makes no pretence to be exhaustive or representative and therefore I would allow myself to examine only two recent orders of the Bulgarian Supreme Administrative Court (“SAC”) which in my opinion are particularly relevant to the issues raised herein.

SAC Order in administrative case No. 15842/2010

With its Order of 03.05.2011 on administrative case No. 15842/2010 SAC refused to make a reference to the Court of Justice for a preliminary ruling concerning questions closely related to the right of VAT deduction for assets acquired prior to the VAT registration.

The case reviewed by SAC concerns the right to VAT deduction for advance payments paid by the taxable person in relation to a preliminary contract for purchase of a real estate. The dispute in the main proceedings refers to the date on which the taxable person has filed the inventory of available assets, as the tax administration claims that the inventory submitted by post within the 7-day term has not been received and therefore denies the taxable person the right to VAT deduction.

SAC’s grounds for refusing to make a reference for a preliminary ruling to the Court of Justice concerning the interpretation of Directive 2006/112/EC as regards the requirement to submit an inventory of assets and the time limits for that are as follows:

– Directive 2006/112/EC does not contain provisions concerning the right to VAT deduction for assets acquired prior to the VAT registration, as this is a specific legal instrument stipulated only in the national law.

– The questions which the party to the court proceeding asks the national court to refer for a preliminary ruling to the Court of Justice cannot concern the interpretation of the relevant national provisions on the right to VAT deductions for assets acquired prior to the VAT registration because the questions cannot be phrased in a way that the Court is asked to reply which Directive provisions preclude the national provisions.

– Limitation periods as such in the main proceedings exist both in the national laws and in the Directive and the Court of Justice has already adjudicated that the Directive does not preclude national legislation which lays down a limitation period for the exercise of the right to deduct. Therefore, SAC does not adhere to the opinion that the right to deduct cannot be limited in time.

As a result, SAC rules that the EU law does not contain provisions on this specific issue but at the same time it acknowledges the limitation of the right to deduct without investigating the nature of the limitation period and its compliance with the principle of effectiveness.

SAC Order on Administrative Case No. 14721/2010  

Only a few days later – on 25.05.2011 another SAC chamber referred a preliminary ruling request to the Court of Justice on another case which concerns the right to VAT deduction for goods subject to intra-Community acquisition which has took place prior to the taxable person’s VAT registration and was enjoyed after the lapse of the 3-month limitation period. The case reveals certain specifics due to the fact that between the date the VAT deduction right arose and its enjoyment new VAT Act provisions were enforced which provided for more favourable conditions for VAT deduction where the so called “reverse charge” mechanism applied and for a longer 12-month VAT deduction period compared to the previous 3-month time limit.

In its preliminary ruling request SAC asked the Court of Justice to answer whether Directive 2006/112/EC and the principle of effectiveness precluded national provisions providing for a three-month VAT deduction limitation period, such as that in force until 01.01.2009. SAC posed one more important question – whether the principle of neutrality precluded a national tax audit practice which imposes sanctions for late accrual of VAT which result in denial of the right to VAT deduction.