VAT anti-abuse and domestic presumptions

The CJEU has held that Italian VAT rules introduced to prevent VAT evasion and avoidance by the use of shell companies was contrary to EU law: Feudi v Agenzia delle Entrate (Case C-341/22). Whilst tax authorities are obliged to prevent the use of fraudulent or abusive transactions to obtain deductions of input VAT, the rebuttable presumptions put in place by the Italian rules, which related to turnover volume, were unconnected with the criteria necessary to demonstrate fraud or abuse and could not be relied on to prevent the deduction of input VAT.

The decision emphasises that whilst Member States may, and should, take action to deny input VAT deduction in cases of fraud or abuse, it is unlikely that any general presumptions (even where rebuttable) designed to prevent VAT evasion or avoidance will be sufficiently targeted and proportionate to be considered a legitimate application of the principle of abuse of rights.

Background

The case concerns Italian anti-avoidance legislation designed to prevent the use of inactive entities. The legislation deemed certain entities to be “non-operational” if their total income was below certain percentages. Any excess input VAT credits accrued by such non-operational entities was not eligible for reimbursement and, where the non-operational entity did not carry out sufficient (based on the same percentages) relevant transactions for VAT purposes for three consecutive tax periods, then it would also lose the right to carry forward the input VAT credit to future periods. However, where the entity demonstrated that objective circumstances rendered it impossible to achieve the necessary turnover for VAT purposes, then the anti-avoidance provisions could be disapplied.

These rules were applied to a wine producing company which was deemed to be non-operational in 2006 to 2008, denying the company input VAT of €42,000. The taxpayer appealed contending that the rules were contrary to EU law and the Italian courts referred various questions to the CJEU on the interpretation of taxable person, the right to deduct and the principle of abuse of rights.

Decision of the CJEU

In the first place, the Court has held that it was not possible to restrict the definition of a taxable person for the purposes of Article 9 of the VAT Directive in this way. Where a person carries out economic activities during a period they met the requirement for being a taxable person and the status as taxable person cannot be subject to separate domestic requirement based on carrying out transactions exceeding a set income threshold.

Secondly, the right to deduct input VAT granted by Articles 167 and 168 of the VAT Directive depended on being a taxable person and incurring input VAT which has a direct and immediate link to taxable output transactions. There was no basis on which that deduction could be made conditional on having a certain level of output transactions during a period.

However, the Court did recognise that the prevention of tax evasion and avoidance is an objective recognised and encouraged by the VAT Directives and that EU law cannot be relied on for fraudulent or abusive ends. Therefore, even if the substantive conditions for being a taxable person or deduction of input VAT are met, it is necessary for the national tax authorities to refuse that right if it is established in the light of objective evidence, that the right is being invoked fraudulently or abusively.

Because the refusal of a right to deduction is an exception to the fundamental right, it is incumbent on tax authorities to establish the objective evidence that there is fraud or abuse involved. In this case, the Italian rules sought to prevent fraud by discouraging shell companies through the mechanism of a rebuttable presumption based on the amount of transactions carried out. The Court pointed out that this criteria is unconnected with the criteria for demonstrating fraud or abuse. It was not based on an assessment of whether transactions were actually carried out or whether they were used for taxable purposes. Those criteria could not, therefore, be relied on as being capable of demonstrating the right to deduct was relied on fraudulently or abusively. This conclusion was not affected by the fact the presumption was rebuttable.

In any event, the Court noted that it had previously held that a general presumption of fraud and abuse cannot justify a fiscal measure that compromises the objectives of a directive.

Accordingly, the Court has held that the Italian provisions go beyond what is necessary to achieve the objective of preventing fraud or abuse and were contrary to EU law.

Comment

The decision of the Court stands as a warning to Member States against the use of broad presumptions designed to identify cases of fraud or abuse. Even the ability of the taxpayer to rebut such presumptions is no defence where the presumptions themselves are not sufficiently targeted. It is clear that the application of the abuse of law principles requires tax authorities to identify fraud and abuse objectively in the particular circumstances of the case.