The taxable person status and the right to VAT-deduction may not depend on a minimum return on assets
C‑341/22. – Feudi di San Gregorio Aziende Agricole SpA | The VAT Directive precludes national regulation that ties the taxable person status to reaching a certain income threshold and that deprives a taxable person of the right to VAT-deduction for not reaching the minimum income expected by law.
In Case C-341/22, the European Court of Justice examined Italian VAT regulation. Under Italian law, any company whose revenue does not reach a threshold equivalent to the expected proportional return on capital, as defined by the legislation, is considered a non-operating company (so-called „shell company”).
If such a company cannot prove that it was unable to reach the revenue threshold due to objective circumstances, it cannot reclaim the deducted VAT. Furthermore, if its revenue falls short of the threshold for three consecutive tax assessment periods, it cannot carry forward the deductible VAT to the subsequent period. The plaintiff in the case is an Italian company engaged in wine production and distribution. The tax authority denied the plaintiff the right to deduct VAT due to the failure to reach the mentioned revenue threshold.
The Italian court initiated a preliminary ruling procedure in this case. The European Court of Justice affirmed in its judgment that the taxable person status must be assessed on an objective basis, regardless of its purpose and result of the economic activity. Therefore, the Italian regulation, under which a taxable person is considered as non-operating due to failure to achieve an expected revenue threshold, contravenes this legal principle.
Furthermore, the European Court of Justice confirmed that VAT deduction is a fundamental right, which is an integral part of the VAT system and may not, in principle be limited. Every taxable person is entitled to VAT deduction if the specific purchase transaction is directly and immediately related to the sale transaction(s) entitling to VAT deduction, or if, even in the absence of a direct and immediate link, the costs of the products and services in question constitute part of the taxable person’s general expenses and, as such, elements of the price of the taxable person’s products and services. Therefore, it violates the principles of tax neutrality and proportionality to have a regulation that denies VAT deduction in a tax return due to failure to achieve an expected revenue.
The court pointed out that Member States may adopt administrative measures to prevent tax fraud, but a rule that ties VAT deduction to a sales threshold is not suitable for this purpose, as it does not automatically imply intent of tax fraud without further evidence. This case cannot occur in Hungary because Hungarian law does not differentiate between taxable persons based on their performance, and deductible VAT can be carried forward to subsequent reporting periods without limitation; the Hungarian VAT law only requires, as a condition for refund, that the amount of recoverable tax reached a certain threshold.
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