In more detail

Facts

Voestalpine Giesserei Linz GmbH (VGL), an Austrian manufacturer, produces and sells large moulded metal parts in Romania. To handle production in Romania, VGL (established and registered for VAT in Romania) engaged an Austrian subcontractor (i.e., Austrex), which further outsourced to a Romanian company, Global Energy Products (GEP). As part of this arrangement, VGL provided a building and a crane, free of charge, for use by GEP in the production process in Romania. The crane was essential to process parts weighing over ten tons, a necessary step for fulfilling VGL's contracts with European customers.

VGL initially deducted the input VAT on the purchase of the crane in its Romanian VAT return. However, the Romanian tax authorities rejected the deduction on the grounds that:

1. The crane was made available to another taxable person (i.e., GEP) free of charge, suggesting it was not for VGL's own use.
2. VGL did not maintain separate local accounts for its permanent establishment in Romania, allegedly impeding the tax authorities' ability to verify the use of the equipment.

These issues led to a preliminary question before the CJEU on whether VAT deduction can be denied in such circumstances.

CJEU

The CJEU ruled in favour of VGL, affirming the company's right to deduct input VAT it had paid towards the purchase of the crane. The CJEU based its ruling on several key principles regarding VAT neutrality, the purpose of deductions, and the link to economic activity:

1. Right to VAT deduction: The Court emphasized that the right to deduct VAT is fundamental to the VAT system, intended to relieve businesses of the VAT burden on costs incurred in economic activities. The deduction right applies even if certain formal requirements are not met, provided the substantive conditions are satisfied.
2. Objective link to economic activity: The CJEU found that VAT deduction depends on whether the expense (i.e., the crane purchase) is objectively linked to the taxable person's economic activities. For VGL, the crane was necessary for processing heavy moulded parts, a core component of its production. Without the crane, VGL's ability to meet its contractual obligations to sell these parts would be compromised.
3. Free supplies to subcontractors: The CJEU clarified that providing equipment free of charge to a subcontractor does not automatically break the link with the respective economic activity. Although GEP derived a direct benefit from using the crane, the CJEU ruled that this does not negate VGL's right to deduction of input VAT if a direct and immediate link exists between the acquisition of the crane and VGL's downstream taxable transactions or its overall economic activity.
4. Extent of equipment use: The CJEU emphasized the requirement to assess whether the use of the crane was limited to only what was necessary for VGL's production. If the equipment served purposes beyond what was essential for VGL's activities, the deduction might only apply to the portion of input VAT directly tied to VGL's taxable outputs. Thus, the deduction must reflect the extent of the equipment's role in supporting VGL's own economic activities  . The CJEU refers here to its previous case law in relation to the limitation of input VAT deduction about what is objectively "necessary" to carry out the respectivetaxable transactions (CJEU 14. 9. 2017, Iberdrola Inmobiliaria Real Estate Investments, C-132/16).

The CJEU also addressed the issue of VGL's lack of local accounts in Romania. It noted that while VAT rules generally require sufficient record-keeping for tax authorities to verify the use of assets, formal requirements like separate local accounts should not bar input VAT deduction if the substantive conditions (such as the actual use of the crane in taxable activities) are met. The CJEU ruled that failure to maintain separate accounts should not prevent input VAT deduction if the tax authority can still verify the substantive use of the equipment.

The CJEU concluded that the Romanian tax authority could not deny VGL the deduction solely due to the absence of local accounts, provided that it could confirm the equipment's use in VGL's taxable economic activity.

Implications for Belgium

In Belgium, this decision underscores that businesses providing equipment to subcontractors for free should still be able to claim input VAT deduction if the equipment serves their taxable economic activities.

This approach challenges restrictive practices observed in prior Belgian jurisprudence, where free supplies often led to disallowance of input VAT deductions. Belgian courts, such as Court of Appeal in Liège (2018/RG/427)  have historically restricted input VAT deductions in similar scenarios, where the link between free supplies and taxable outputs was deemed insufficient. The CJEU's position suggests that such restrictive interpretations require reconsideration to uphold the neutrality principles under EU VAT law.

The Belgian tax authorities should rather assess whether equipment purchased is genuinely linked to a company's taxable activities. If such equipment is essential for production or other economic activities that lead to taxable sales, input VAT deduction should be allowed.

Implications for Austria

In the Austrian literature it is discussed if the goods provided have to be used in the interest of VGL, (depending on the specific facts of the case) a transaction similar to an exchange ("tauschähnlicher Umsatz") would arise. The question of "Self-supply" ("Eigenverbrauch") within the meaning of Section 3a (1a) Austrian VAT Act could also be examined in this context.

The fact that a taxable person cannot be prevented from exercising its right of deduction on the ground that it did not keep sufficiently detailed accounts as long as the tax authorities are in a position to carry out their review and are able to verify that the substantive requirements are satisfied is already partially reflected in Austrian guidance. However, the decision of the CJEU strengthens the positions of taxpayers in Austria when they do not keep separate accounts for their fixed establishment in Austria, i.e., that the tax authorities cannot deny their right to deduct input VAT paid when the Austrian tax authorities are in a position to carry out any checks necessary to establish the existence and the extent of that right.

Recommended actions

This preliminary ruling reiterates for taxpayers and tax administrations that when a company makes assets available free of charge to others, such as subcontractors, it can deduct the input VAT related to that asset, provided that the use of this asset is objectively linked to the company's taxable activities. Furthermore, the input VAT deduction cannot be precluded solely if a formal condition is not fulfilled , provided that the substantive condition for the input VAT deduction (i.e., the use of the asset for a taxable activity) is met.

This is an important ruling for companies that make company assets available for use by unrelated parties free of charge in the framework of their taxable activities. Should you have any questions about what this preliminary ruling means for the VAT position of your company, please reach out to your local Baker contact.