VAT deduction of entepreneurs limited in case of use by other party?


VAT deduction of entepreneurs limited in case of use by other party?

Entrepreneurs may incur costs that benefit other parties as well, while those costs are made for commercial reasons. A pending CJEU case called Iberdrola might have an effect for the deduction of VAT on those costs. On 6 April 2017 the opinion of Advocate-general Kokott was released in this case.

25 April 2017

Facts in the Iberdrola case

Iberdrola owns land on which it plans to construct a holiday village. The holiday village needs to be connected to the existing municipal waste-water pump station. The pump station had to be extensively renovated to collect waste water from the planned buildings owned by Iberdrola. Iberdrola and the Bulgarian municipality involved agreed that Iberdrola would repair the water pump and would bear the costs for the repair.

Iberdrola deducted the VAT on the repair costs. The Bulgarian tax authorities challenged the VAT deduction on these costs. They stated that Iberdrola had supplied the municipality a service free of charge.


Opinion of Advocate-general Kokott

In her opinion Kokott states that a merely causal link between inputs and economic outputs is not sufficient for the deduction of input VAT. Economic allocation precedes over an economic cause. Therefore the fact that the repair of the municipal infrastructure was a condition for the implementation of the construction project is not material in this case. The underlying purpose (the motive) of that repair is also irrelevant according to Kokott.

Instead, the crucial factor is who actually uses the repairs and whether this gives rise to untaxed final consumption. In this case only the municipality directly uses the construction services for waste-water disposal. Kokott therefore sees no direct and immediate link between the output transactions of Iberdrola and the repair costs.

According to Kokott the VAT is deductible for Iberdrola only if there is a supply for consideration to the municipality or a deemed supply under art. 26 of the VAT Directive. There may be a supply for consideration according to Kokott because by granting a permission to build, the municipality would appear to provide Iberdrola with an advantage which is at least equivalent to the amount of the repair costs.


If the opinion of the Advocate-general is followed by the CJEU this might have negative VAT consequences for entrepreneurs. Either VAT cannot be deducted on business investments made that are used by other parties free of charge or VAT needs to be paid to the tax authorities on a (deemed) supply. This may lead to situations where the VAT becomes a cost for the entrepreneur.

In the Netherlands the Dutch Supreme Court in a similar case granted the entrepreneur a right to deduct VAT. A different judgment of the CJEU in the Iberdrola case will thus end this favorable position.

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