VAT Deduction in Cross-Border Transactions

Right to deduct VAT

The right to deduct VAT incurred on costs and investments constitutes a fundamental element of the VAT system. As a starting point, taxable persons are therefore entitled to claim a VAT refund or to deduct input VAT from the amount of VAT due. However, exceptions exist, for example where a taxable person also carries out exempt activities, which may lead to a limitation of the right to deduct VAT.

50 years of jurisprudence

Over the past 50 years, extensive litigation has taken place within the EU on this subject. The issue mainly arises in cross-border situations in which taxable persons supply services or goods in different Member States. In such cases, the right to deduct VAT may differ between the Member State in which the taxable person is established and the other Member State involved. This is also relevant in situations involving a head office in the Member State of establishment and a fixed establishment in another Member State. The case law that has emerged from these proceedings has contributed to a better understanding of how to deal with the right to deduct VAT in various situations.

New case

Recently, a new case has been brought before the General Court of the European Union which is relevant for many businesses (T-96/26 – Tellus Tax Advisory). The case concerns a taxable person established in Sweden who seeks to reclaim VAT via the Swedish VAT return. The VAT relates to supplies made to that taxable person in Sweden. However, these supplies, on which Swedish VAT has been charged and which the taxable person seeks to recover, are partly used for activities carried out by that taxable person in Luxembourg. In Luxembourg, those activities are exempt from VAT. If the taxable person were to seek a local VAT refund in Luxembourg, this would not be possible due to the VAT-exempt nature of the activities. The question is therefore whether carrying out activities in Luxembourg affects the right to deduct VAT in Sweden. According to the Swedish tax authorities, the right to deduct VAT is limited by the activities carried out in Luxembourg.

This issue is somewhat remarkable, as the (EU/Dutch) VAT legislation appears to contain an explicit provision for such a situation. That provision stipulates that the right to deduct VAT must be assessed as if the relevant supply had been carried out in Member State A and would therefore give rise to a right of deduction. It appears that in this case reliance has been placed on earlier EU case law on this subject. That case law concluded that a certain dual test must be applied in order to determine the extent of the right to deduct VAT. In that dual test, account must be taken, in summary, of the legislation of both Member State A and Member State B. However, that case law concerns different factual situations and is therefore not applicable to the new case.

The further development and resolution of this case remain to be seen. In any event, the outcome will be of great importance for practice, either confirming or restricting the right of deduction. The significance is particularly relevant for businesses operating cross-border. Moreover, the issue is especially relevant for companies providing financial services, as the VAT rules for such services may differ between Member States, being either subject to VAT or exempt.

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