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

Although the two court orders concerned different court cases, they both touch on several common important questions which are however interpreted differently by the national court.

In its first order SAC takes the opinion that Directive 206/112/EC does not contain any provisions concerning the right to VAT deduction for goods acquired prior to the VAT registration while in its second order the court already invokes the Court of Justice Judgment in case C-385/09 Nidera in which the Court of Justice concludes that the VAT identification is not a prerequisite for the arising of the VAT deduction right – a right which arises at the time where the VAT becomes chargeable, but is only a formal requirement with a view to the exercise of control functions. In this regard, SAC entirely rejects the tax administration’s claim that only a VAT registered person is entitled to VAT deduction.

Further, SAC sets out its considerations regarding the different VAT deduction limitation periods and compares the 3-month period as per the VAT Act in force until 31.12.2008 with the new 12-month period in force as of 01.01.2009 for VAT charged by the supplier and with the lack of any limitation period for VAT deduction in case of reverse-charge.

Apart from that, SAC touches on another important issue – if a taxable person may be liable to default interest if he has deducted VAT outside the limitation period, should it be also subject to another sanction in the form of VAT deduction denial? And, I would allow myself to add, can an administrative sanction for failure to meet a deadline take in practice the form of VAT deduction denial?

Following the preliminary ruling request referral to the Court of Justice, we expect with great interest the Court of Justice interpretation and its subsequent application not only to cases where the goods or services were acquired by registered persons but also to goods and services acquired prior to the VAT registration.


The Court of Justice has interpreted on numerous occasions the Directive in cases concerning the right to VAT deduction and its constant case-law consistently and steadily reconfirms the basic principles of the VAT system which must be respected by all MemberStates:

  • Principle of neutrality of VAT  

Pursuant to the principle of neutrality the VAT deduction system is meant to relieve the operator entirely of the burden of the VAT paid or payable in the course of all his economic activities2. The right to deduct forms an integral part of the VAT mechanism and in principle cannot be limited.3

The principle of neutrality of VAT requires the Member-States to allow VAT deduction if the substantive requirements are satisfied, even if the taxable person has failed to comply with some of the formal requirements4.

The measures which the Member States may adopt under Article 273 of the VAT Directive to ensure the correct collection of VAT and to prevent evasion must not go further than is necessary to attain those objectives and must not undermine the neutrality of VAT5.

  • Principle of proportionality 

The measures taken by the Member States to ensure that taxable persons comply with their obligations relating to declaration and payment of VAT must not go further than is necessary to attain their objectives. Such measures may not therefore be used in such a way that they would have the effect of systematically undermining the right to deduct VAT, which is a fundamental principle of the common system of VAT6.

  • Principle of effectiveness 

As a general rule, the Member States can set time limits to the right to VAT deduction as long as, however, the national limitation period rules do not render virtually impossible or excessively difficult the exercise of the right to deduct7.

  • Principle of equivalence  

The principle of equivalence requires from Member States that their national procedural rules governing the measures for guaranteeing the rights which persons derive from the Community law are not less favourable than those laid down for the exercise of analogous domestic procedures8.