Deduction of Input VAT by Branch

On June 21st 2016, the European Court of Justice (the “ECJ”) issued a ruling (C-393/15) on the possibility for a branch established in Poland to deduct input VAT incurred on the acquisition of goods and services used for the purpose of internal supplies to its Slovakian head-office.

The business of the Slovakian company consists in the sale of antivirus software to customers, which is subject to VAT in Slovakia. The Polish branch contributes to the activity of its head-office by producing components to be included in the software products.

The Polish VAT authorities denied the recovery of input VAT incurred by the branch on the goods and services acquired by it in Poland, on the grounds that the branch did not carry out any activity falling within the scope of VAT in Poland.

The ECJ had to deal with the question, whether articles 168 and 169 a) of the 2006/112/EC Directive on the common system of value added tax (the “VAT Directive”) preclude the possibility for a foreign permanent establishment, realising internal operations for its head office established in another Member State, to deduct input VAT in the Member State where it (i.e. the permanent establishment) is registered for VAT purposes, despite the fact that said input VAT is ultimately related to VAT taxable supplies carried out by the head office in another Member State.

The ECJ decided to rule by reasoned order, which constitutes a simplified procedure, available i.a. in cases where the reply to the referred question admits no reasonable doubt.

Before addressing the specific question referred to it, the ECJ recalled that the fundamental principle of VAT neutrality relies upon the right to deduct input VAT, so that said right should in principle not be restricted in any way.

Further, the ECJ referred to article 169 under a) of the VAT Directive, which provides that any VAT taxable person shall be entitled to deduct input VAT incurred on goods or services acquired for the purpose of transactions carried out outside the Member State in which the input VAT is incurred, provided that said input VAT would have been deductible had the transactions been carried out within the relevant Member State. The ECJ concluded from the above wording that the right to deduct input VAT should be granted or denied to a VAT taxable person contemplated in its entirety and that consequently the effective place of taxation of the VAT taxable supplies carried out by said person should not be relevant for the purpose of determining the extent of its right to deduct input VAT.

The ECJ’s conclusion is further confirmed by the fact that article 9 of the VAT Directive provides for a broad definition of the notion of economic activity without any limitation whatsoever as to the place where the activities are carried out.

"The ECJ consequently held that the Polish permanent establishment should be entitled to deduct the input VAT incurred in connection with subsequent supplies to its Slovakian head office."