VAT deduction of entrepreneurs not 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. On 14 September 2017 the CJEU ruled in the Iberdrola case that the VAT on such costs is still deductible for the entrepreneur.

15 September 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 holiday houses. Iberdrola and the Bulgarian municipality involved agreed that Iberdrola would repair the waste-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

For VAT to be deductible costs must have a direct and immediate link with output transactions of Iberdrola. In her opinion Kokott stated that 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.


Judgement of the CJEU

Unlike Kokott the CJEU rules that there is a direct and immediate link between the repair costs and Iberdrola’s output transactions. According to the CJEU it would be impossible to connect the holiday village to the pump station without the repairs.

Without the repairs Iberdrola would thus not have been able to carry out its taxable transactions. VAT deduction may however be limited, according to the CJEU, when the repairs go further than necessary to ensure the connection of the holiday village to the pump station. It is up to the referring court to check this.



The CJEU judgment has a favourable outcome for entrepreneurs compared to the Advocate-general’s opinion. VAT will not be a cost to the entrepreneur as long as costs made are necessary for the economic activities of the entrepreneur. The mere fact that another party (also) benefits, is in that respect not relevant. However, the VAT deduction is limited when more is done than is necessary for the entrepreneur to carry out his taxable activities.

In the Netherlands the Dutch Supreme Court in a similar case granted the entrepreneur a right to deduct VAT. This is in line with the CJEU judgment.


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