C-107/13 FIRIN

JUDGMENT OF THE COURT (Second Chamber)

13 March 2014 ( *1 )

‛Common system of value added tax — Deduction of input tax paid — Payments made on account — Refusal to allow the deduction — Fraud — Adjustment of the deduction in the case where the taxable transaction is not carried out — Conditions’

In Case C‑107/13,

REQUEST for a preliminary ruling under Article 267 TFEU from the Administrativen sad Veliko Tarnovo (Bulgaria), made by decision of 14 February 2013, received at the Court on 4 March 2013, in the proceedings

FIRIN OOD

v

Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ – Veliko Tarnovo pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite,

THE COURT (Second Chamber),

composed of R. Silva de Lapuerta, President of the Chamber, J.L. da Cruz Vilaça, G. Arestis, J.-C. Bonichot (Rapporteur) and A. Arabadjiev, Judges,

Advocate General: J. Kokott,

Registrar: A. Calot Escobar,

having regard to the written procedure,

after considering the observations submitted on behalf of:

the Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ – Veliko Tarnovo pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite, by A. Manov, acting as Agent,

the Bulgarian Government, by E. Petranova and D. Drambozova, acting as Agents,

the Estonian Government, by N. Grünberg and M. Linntam, acting as Agents,

the Italian Government, by G. Palmieri, acting as Agent, and A. De Stefano, avvocato dello Stato,

the European Commission, by L. Lozano Palacios and N. Nikolova, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 19 December 2013,

gives the following

Judgment

Legal context and the dispute

1This request for a preliminary ruling concerns the interpretation of Articles 65, 90(1), 168(a), 185(1), 193 and 205 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1).

2The request has been made in proceedings between FIRIN OOD (‘FIRIN’) and the Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ – Veliko Tarnovo pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite (Director of the ‘Appeals and Tax and Social Security Office’ Directorate for the city of Veliko Tarnovo, attached to the central office of the National Public Revenue Agency; ‘the Direktor’) concerning the right to deduct, in the form of a tax credit, value added tax (‘VAT’) relating to the payment on account made by that company in respect of the supply of flour.

Legal context

European Union law

3Article 2(1)(a) and (c) of Directive 2006/112 provides that the supply of goods and the supply of services for consideration within the territory of a Member State by a taxable person acting as such are to be subject to VAT.

4As set out in Article 14(1) of that directive:

‘“Supply of goods” shall mean the transfer of the right to dispose of tangible property as owner.’

5Article 63 of Directive 2006/112 provides that the chargeable event is to occur and VAT is to become chargeable when the goods or the services are supplied.

6Article 65 of the directive states:

‘Where a payment is to be made on account before the goods or services are supplied, VAT shall become chargeable on receipt of the payment and on the amount received.’

7Article 90(1) of Directive 2006/112 provides:

‘In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.’

8Article 167 of that directive provides that the right of deduction is to arise at the time when the deductible tax becomes chargeable.

9Article 168 of Directive 2006/112 states:

‘In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:

the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;

…’

10Article 178 of the directive specifies that:

‘In order to exercise the right of deduction, a taxable person must meet the following conditions:

for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Articles 220 to 236 and Articles 238, 239 and 240;

…’

11Article 184 of Directive 2006/112 provides that the initial deduction is to be adjusted where it is higher or lower than that to which the taxable person was entitled.

12Article 185 of Directive 2006/112 is worded as follows:

‘1. Adjustment shall, in particular, be made where, after the VAT return is made, some change occurs in the factors used to determine the amount to be deducted, for example where purchases are cancelled or price reductions are obtained.

2. By way of derogation from paragraph 1, no adjustment shall be made in the case of transactions remaining totally or partially unpaid or in the case of destruction, loss or theft of property duly proved or confirmed, or in the case of goods reserved for the purpose of making gifts of small value or of giving samples, as referred to in Article 16.

However, in the case of transactions remaining totally or partially unpaid or in the case of theft, Member States may require adjustment to be made.’

13Under Article 186 of Directive 2006/112, Member States are required to lay down the detailed rules for applying Articles 184 and 185 of that directive.

14Article 193 of the directive states:

‘VAT shall be payable by any taxable person carrying out a taxable supply of goods or services, except where it is payable by another person in the cases referred to in Articles 194 to 199 and Article 202.’

15Under Article 203 of Directive 2006/112, VAT is payable by any person who enters the VAT on an invoice.

16Under Article 205 of that directive:

‘In the situations referred to in Articles 193 to 200 and Articles 202, 203 and 204, Member States may provide that a person other than the person liable for payment of VAT is to be held jointly and severally liable for payment of VAT.’

Bulgarian law

17Article 70(5) of the Law on Value Added Tax (Zakon za danak varhu dobavenata stoynost), in the version applicable to the dispute in the main proceedings (DV No 63 of 4 August 2006; ‘the ZDDS’), provides that there is no right to deduct input VAT paid where it has been invoiced improperly.

18Article 177 of the ZDDS provides as follows:

‘1. A registered person who is the recipient of a taxable supply is liable for the unpaid tax owed by another registered person where the right to deduct input tax directly or indirectly connected with the tax owed but not paid has been exercised.

2. Liability under paragraph 1 arises if the registered person knew or should have known that the tax would not be paid and this is proved by the investigating authority in accordance with Articles 117 to 120 of the Tax and Social Security Code of Procedure.

3. Knowledge is imputed to a person for the purposes of paragraph 2 where the following cumulative conditions are satisfied:

the tax owed, within the meaning of paragraph 1, for a particular tax period has ultimately effectively not been paid by any prior provider of a taxable supply of goods or a taxable service, whether or not in the same, a changed or a processed form;

the taxable supply merely appears to have been made, circumvents legislation, or is made at a price that differs significantly from the market price.

4. Liability under paragraph 1 is not dependent on obtaining a specific advantage on account of the non-payment of the tax owed.

5. In the circumstances envisaged in paragraphs 2 and 3, the upstream supplier of the taxable person who owes the unpaid tax is also liable.

6. In the cases referred to in paragraphs 1 and 2, liability is enforced against the taxable person who is the direct recipient of the supply in respect of which the tax owed has not been paid, and, where recovery fails, liability may be enforced against any downstream recipient in the chain of supply.

7. Paragraph 6 shall also apply mutatis mutandis to upstream suppliers.’

The dispute in the main proceedings and the questions referred for a preliminary ruling

19FIRIN, which succeeded to the rights of ‘Hlebozavod Korn’, is a company incorporated under Bulgarian law whose objects are the production and marketing of bread and pastries. York Skay EOOD (‘York Skay’) holds 99% of its share capital and the remainder is held by Mr Yorkishev.

20At the end of 2010, FIRIN placed an order for 10000 tonnes of wheat with Agra Plani EOOD (‘Agra Plani’), a company wholly owned by Mr Yorkishev. In respect of that transaction, which was payable in advance, Agra Plani issued, on 29 November 2010, an invoice for 3600000 Bulgarian leva (BGN), referring to VAT payable in the amount of BGN 600000.

21Following an audit, the Bulgarian tax authority challenged the deduction of that sum of BGN 600 000 that FIRIN had made in its VAT returns for the period from November to December 2010.

22The tax authority substantiated that challenge by claiming that the supply had not been made and that the invoice of 29 November 2010 was part of a fraudulent scheme revealed by the audit. As it was not registered with the National Office for Grain, Agra Plani was not authorised to trade in grain under national law, a fact of which FIRIN could not have been unaware. Furthermore, the total amount of the payments made, from 30 November 2010, by FIRIN to Agra Plani, amounting to BGN 4 170 000, a sum greater than the amount payable according to the invoice, was transferred on that date to York Skay’s account. On that same date also, the sum of BGN 3 600 000 was paid into FIRIN’s bank account by York Skay.

23In the absence of reliable justification, the tax authority did not accept the explanations provided as to the nature of those transfers, the first of which, according to FIRIN, stemmed from a loan from Agra Plani to York Stay, and the second from an additional contribution to FIRIN’s capital.

24A tax adjustment notice was issued on 26 September 2011 as a consequence of that audit. FIRIN lodged an administrative objection to that notice with the Direktor. By decision of 16 January 2012, the Direktor confirmed that notice.

25FIRIN thereupon brought an action against the Direktor’s confirmatory decision before the Administrativen sad Veliko Tarnovo (Administrative Court, Veliko Tarnovo), claiming that it satisfied all of the conditions for entitlement to deduct the sum of BGN 600 000 and that the grounds for refusal of that deduction referred to circumstances, including the fictitious nature of the transaction, that are relevant, not for the purposes of refusing the right of deduction, but for the triggering of FIRIN’s liability for its supplier’s unpaid VAT.

26Against that background, the referring court is unsure whether a right to deduct VAT can be accepted in a situation where, for various reasons, the supply envisaged could not be made and whether a subsequent adjustment remains possible. It also expresses uncertainty as to whether the national system of joint and several liability for VAT is compatible with European Union law.

27In those circumstances, the Administrativen sad Veliko Tarnovo decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:

In cases such as that in the main proceedings, in which VAT connected with a payment made in advance for a future clearly defined taxable supply of goods is immediately and effectively deducted, are the provisions of Article 168(a), in conjunction with Article 65, Article 90(1) and Article 185(1), of … Directive 2006/112 … to be consistently interpreted as meaning that, in light of a failure, for objective and/or subjective reasons, to render the principal counter-performance in accordance with the terms and conditions of supply, the right to deduct input tax at the date on which it is exercised must be refused?

Does it follow from such a consistent interpretation, having regard to the principle of the neutrality of VAT, that, in this situation, the supplier’s objective possibility of adjusting the VAT charged and/or the basis of assessment of the tax on the invoice in the manner provided for under national law is (or is not) significant; and how might such an adjustment affect the refusal to allow the original deduction of input tax?

In the light also of recital 44 in the preamble to Directive 2006/112, is Article 205, in conjunction with Article 168(a) and Article 193, to be interpreted as meaning that the Member States are permitted to refuse to allow the recipient of a supply to deduct input tax by applying only such criteria as they themselves have laid down in their national legislation, according to which a liability to tax is imposed on a person other than the taxable person where, in such a case, the ultimate tax outcome would differ from the outcome if the rules established by the Member State had been strictly observed?

If the answer to the third question should be in the affirmative: are national legal provisions such as those in the main proceedings permissible in the context of the application of Article 205 of Directive 2006/112 and compatible with the principles of effectiveness and proportionality if they introduce joint and several liability for the payment of VAT by reference to suppositions that are not based on objective facts that can be directly established but on expressed precepts of civil law, disputes in respect of which are conclusively settled on other legal grounds?’

Consideration of the questions referred

Admissibility

28By its questions, the referring court is seeking from the Court of Justice an interpretation of provisions in Directive 2006/112 concerning two separate aspects of the VAT system, namely, first, that which governs the right to deduct input VAT paid and, secondly, that which governs the joint and several liability of a taxable person in respect of tax payable by a third party as provided for in Article 205 of that directive.

29According to settled case-law, the procedure provided for in Article 267 TFEU is an instrument of cooperation between the Court of Justice and the national courts, by means of which the Court provides the national courts with the points of interpretation of European Union law which they need in order to decide the disputes before them (see, inter alia, Case C‑279/12 Fish Legal and Shirley [2013] ECR, paragraph 29).

30In the context of that cooperation, questions concerning European Union law enjoy a presumption of relevance. The Court may refuse a request for a preliminary ruling made by a national court only where it is quite obvious that the interpretation of European Union law that is sought bears no relation to the actual facts of the main action or its purpose, where the problem is hypothetical, or where the Court does not have before it the factual or legal material necessary to give a useful answer to the questions submitted to it (see, inter alia, Fish Legal and Shirley, paragraph 30).

31Although it is common ground that the dispute in the main proceedings concerns the challenge to FIRIN’s right to deduct VAT, it is apparent, on the other hand, from the decision of the referring court that the Bulgarian tax authority did not regard FIRIN as being jointly and severally liable for payment of the VAT owed by Agra Plani.

32Consequently, in so far as they concern the scope of such joint and several liability, the referring court’s third question, in part, and fourth question, concerning the interpretation of the provisions of Article 205 of Directive 2006/112, are clearly unrelated to the subject-matter of the dispute in the main proceedings and must, for that reason, be declared inadmissible.

Substance

33By its questions concerning the rules governing the right to deduct VAT, which it is appropriate to examine together, the referring court asks, in essence, whether Articles 65, 90(1), 168(a), 185(1) and 193 of Directive 2006/112 must be interpreted as meaning that the deduction of VAT made by the recipient of an invoice drawn up with a view to a payment on account being made in relation to the supply of goods must be adjusted where, in circumstances such as those in the main proceedings, that supply is ultimately not made, even if the supplier remains liable for that tax and has not refunded the payment made on account.

34Under Article 167 of Directive 2006/112, the right to deduct input VAT paid arises at the time when the tax becomes chargeable and, under Article 63 of that directive, the chargeable event for VAT occurs and the tax becomes chargeable when the goods or the services are supplied.

35Article 65 of Directive 2006/112, which provides that, where payments are made on account before the goods or services are supplied, VAT becomes chargeable on receipt of the payment and on the amount received, constitutes a derogation from the rule laid down in Article 63 and, as such, must be interpreted strictly (Case C-419/02 BUPA Hospitals and Goldsborough Developments [2006] ECR I-1685, paragraph 45).

36Thus, in order for VAT to become chargeable in such circumstances, all the relevant information concerning the chargeable event, namely, the future supply of goods or services, must already be known and therefore, in particular, the goods or services must be precisely identified at the time when the payment on account is made (to that effect, BUPA Hospitals and Goldsborough Developments, paragraph 48).

37It is necessary to verify whether that is the case in the main proceedings in order to be able to conclude that the right of deduction exercised by FIRIN on the basis of the payment on account at issue exists.

38In this connection, it is apparent from the order for reference that, when FIRIN made the payment on account at issue in the main proceedings, the goods which were to be the subject of the supply were clearly identified.

39None the less, as the Advocate General has observed in point 24 of her Opinion, Article 65 of Directive 2006/112 cannot apply where, at the time of the payment on account, it is uncertain whether the chargeable event will take place. This would be the case, in particular, where there is fraudulent conduct.

40The prevention of tax evasion, avoidance and abuse is an objective recognised and encouraged by Directive 2006/112. In that connection, the Court has held that European Union law cannot be relied on by individuals for abusive or fraudulent ends. It is therefore for the national courts and judicial authorities to refuse the right of deduction if it is shown, in the light of objective factors, that that right is being relied on for fraudulent or abusive ends (to that effect, Case C‑285/11 Bonik [2012] ECR, paragraphs 35 to 37).

41That is the position where a tax fraud is committed by the taxable person himself. In such a case, the objective criteria which form the basis of the concepts of ‘supply of goods or services effected by a taxable person acting as such’ and ‘economic activity’ are not met (Bonik, paragraph 38 and the case-law cited).

42By contrast, it is incompatible with the rules governing the right of deduction under Directive 2006/112 to impose a penalty, in the form of refusal of that right, on a taxable person who did not know, and could not have known, that the transaction concerned was connected with fraud committed by the supplier or that another transaction forming part of the chain of supply, upstream or downstream of the transaction carried out by the taxable person, was vitiated by VAT fraud (Bonik, paragraph 41 and the case-law cited).

43The establishment of such a penalty system would go beyond what is necessary to preserve the public exchequer’s rights (see, to that effect, Bonik, paragraph 42 and the case-law cited).

44Consequently, since the refusal of the right of deduction is an exception to the application of the fundamental principle constituted by that right, it is incumbent upon the competent tax authorities to establish, to the requisite legal standard, the objective evidence needed to substantiate the conclusion that the taxable person knew, or should have known, that the transaction relied on as the basis for the right of deduction was connected with fraud committed by the supplier or by another trader acting upstream or downstream in the chain of supply (Bonik, paragraph 43 and the case-law cited).

45However, in proceedings brought under Article 267 TFEU, the Court has no jurisdiction to check or to assess the factual circumstances of the case before the referring court. It is therefore for the referring court to carry out, in accordance with the rules of evidence of national law, an overall assessment of all the facts and circumstances of that case (see, inter alia, Bonik).

46It follows that it is for the referring court alone to satisfy itself that the tax authorities in question have established the objective evidence on which they rely to substantiate the conclusion that FIRIN was not unaware, or could not have been unaware, that the purpose of the payment on account made to its supplier was not in fact the supply of goods as entered on the invoice issued by that supplier.

47Nevertheless, in order to provide the referring court with a useful answer, it is necessary to examine the questions concerning the adjustment of the VAT deducted by FIRIN, in the event that, following the assessment which it must carry out, the referring court should find that all the information relevant to the future supply could be considered to have been already known to that company at the time when the payment on account was made and that the supply did not therefore appear uncertain.

48In this connection, it should be noted that Articles 184 to 186 of Directive 2006/112 lay down the conditions under which the tax authority may require adjustment to be made by a taxable person (to that effect, Case C‑234/11 TETS Haskovo [2012] ECR, paragraph 26).

49So far as concerns the impact on the deduction of VAT made by a taxable person of any events occurring after the deduction has been made, it is apparent from the case-law that the use to which the goods or services are put, or are intended to be put, determines the extent of the initial deduction to which the taxable person is entitled and the extent of any adjustments in the course of the following periods, which must be made under the conditions laid down in Articles 184 to 186 of the directive (TETS Haskovo, paragraph 29 and the case-law cited).

50The adjustment mechanism provided for in those articles is an integral part of the VAT deduction scheme established by Directive 2006/112. It is intended to enhance the precision of deductions so as to ensure the neutrality of VAT, with the result that transactions effected at an earlier stage continue to give rise to the right to deduct only in so far as they are used to make supplies subject to VAT. That mechanism thus aims to establish a close and direct relationship between the right to deduct input VAT paid and the use of the goods or services concerned for taxable output transactions (TETS Haskovo, paragraphs 30 and 31).

51So far as concerns the coming into existence of an obligation to make an adjustment to an input VAT deduction, Article 185(1) of Directive 2006/112 establishes the principle that such an adjustment must be made, inter alia, where, after the VAT return is made, some change occurs in the factors used to determine the amount of the deduction (TETS Haskovo, paragraph 32).

52In a situation such as that in the main proceedings, in which it is apparent, according to the information provided by the referring court, that the supply of goods in respect of which FIRIN made a payment on account will not be made, it must be concluded, as the Advocate General has observed in point 35 of her Opinion, that a change in the factors used to determine the amount of the deduction has thus occurred after the VAT return was made. Therefore, in such a situation, the tax authority may require adjustment to be made to the VAT deducted by the taxable person.

53That conclusion cannot be called into question by the fact that the VAT payable by the supplier has not itself been adjusted.

54It must be recalled in this regard that, so far as concerns the treatment of VAT that has been improperly invoiced because there is no taxable transaction, it follows from Directive 2006/112 that the two traders involved are not necessarily treated identically. On the one hand, the issuer of an invoice is liable to pay the VAT entered on that invoice even if there is no taxable transaction, in accordance with Article 203 of Directive 2006/112. On the other hand, exercise of the right of deduction by the recipient of an invoice is limited solely to tax corresponding to a transaction subject to VAT, in accordance with Articles 63 and 167 of that directive (Case C‑643/11 LVK – 56 [2013] ECR, paragraphs 46 and 47).

55In such a situation, compliance with the principle of fiscal neutrality is ensured by the possibility, to be provided for by the Member States, of correcting any tax improperly invoiced where the issuer of the invoice shows that he acted in good faith or where he has, in sufficient time, wholly eliminated the risk of any loss of tax revenue (LVK – 56, paragraph 48).

56Furthermore, as the Advocate General has observed in point 43 of her Opinion, as long as, in circumstances such as those in the main proceedings, the payment made on account has not been refunded by the supplier, the taxable amount payable by the latter by virtue of receipt of that payment on account cannot be reduced pursuant to the provisions of Article 65, in conjunction with Articles 90 and 193, of Directive 2006/112 (see, to that effect, with regard to adjustment of the taxable amount in the case of discounts, Case C-86/99 Freemans [2001] ECR I-4167, paragraph 35).

57In those circumstances, and without prejudice to the right of the taxable person to obtain from its supplier, through the appropriate national legal remedies, a refund of the payment made on account for a supply of goods which ultimately was not made, the fact that the VAT payable by that supplier has not itself been adjusted does not affect the right of the tax authority to obtain repayment of the VAT deducted by that taxable person on the basis of the payment made on account corresponding to such a supply.

58In the light of the foregoing, the answer to the questions referred is that Articles 65, 90(1), 168(a), 185(1) and 193 of Directive 2006/112 must be interpreted as requiring that the deduction of VAT made by the recipient of an invoice drawn up with a view to a payment being made on account in relation to the supply of goods be adjusted where, in circumstances such as those in the main proceedings, that supply is ultimately not made, even if the supplier remains liable for that tax and has not refunded the payment made on account.

Costs

59Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

On those grounds, the Court (Second Chamber) hereby rules:

Articles 65, 90(1), 168(a), 185(1) and 193 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as requiring that the deduction of value added tax made by the recipient of an invoice drawn up with a view to a payment being made on account in relation to the supply of goods be adjusted where, in circumstances such as those in the main proceedings, that supply is ultimately not made, even if the supplier remains liable for that tax and has not refunded the payment made on account.

Signatures

[Signatures]

( *1 ) Language of the case: Bulgarian.

OPINION OF ADVOCATE GENERAL

KOKOTT

delivered on 19 December 2013 ¹

‛Tax law — VAT — Directive 2006/112/EC — Deduction of input tax — Adjustment of input tax deduction in respect of payments on account for a supply which is not made’

I – Introduction

1Once again, a Bulgarian court has referred questions to the Court of Justice concerning the refusal of an input tax deduction in connection with suspected value added tax (VAT) fraud. The unusual feature in the present case is that the input tax deduction has been claimed on the basis of a payment on account, in circumstances where no supply was made following that prepayment.

2To date, the Court has not considered what should happen to the input tax deduction in such a situation. For that reason, in the present case it is necessary not only to consider, as usual, the settled case-law of the Court on the refusal of an input tax deduction in the case of VAT fraud (which might be hard to prove) but also to answer a question of interpretation which has not been considered to date and which is of general importance for the law on VAT.

II – Legal framework

A – European Union law

3The right to deduct input tax is governed by Article 168(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ² (‘the VAT Directive’):

‘In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:

the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person’.

4Under Article 167 of the VAT Directive, the right to deduct VAT arises ‘at the time the deductible tax becomes chargeable’. Article 63 provides that VAT is to become chargeable ‘when the goods or the services are supplied’. Article 65, however, lays down the following special rule:

‘Where a payment is to be made on account before the goods or services are supplied, VAT shall become chargeable on receipt of the payment and on the amount received.’

5The VAT Directive provides for adjustment of the chargeable VAT and the right to deduct input tax in certain circumstances. Article 90(1) provides for the adjustment of the chargeable tax:

‘In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.’

6Article 184 of the VAT Directive provides that ‘[t]he initial deduction shall be adjusted where it is higher or lower than that to which the taxable person was entitled’. In this respect, Article 185 of the VAT Directive provides:

‘1. Adjustment shall, in particular, be made where, after the VAT return is made, some change occurs in the factors used to determine the amount to be deducted, for example where purchases are cancelled or price reductions are obtained.

2. By way of derogation from paragraph 1, no adjustment shall be made in the case of transactions remaining totally or partially unpaid or in the case of destruction, loss or theft of property duly proved or confirmed, or in the case of goods reserved for the purpose of making gifts of small value or of giving samples, as referred to in Article 16.

However, in the case of transactions remaining totally or partially unpaid or in the case of theft, Member States may require adjustment to be made.’

7In addition, Article 192a et seq. of the VAT Directive contain provisions concerning ‘[p]ersons liable for the payment of VAT to the tax authorities’. According to the general rule in Article 193, VAT is to be payable by any taxable person ‘carrying out a taxable supply of goods or services …’.

8In this connection, recital 44 in the preamble to the VAT Directive states: ‘Member States should be able to provide that someone other than the person liable for payment of VAT is to be held jointly and severally liable for its payment.’

9To this end, Article 205 of the VAT Directive accordingly provides:

‘In the situations referred to in Articles 193 to 200 and Articles 202, 203 and 204, Member States may provide that a person other than the person liable for payment of VAT is to be held jointly and severally liable for payment of VAT.’

B – National law

10Under Article 177 of the Bulgarian Zakon za danak varhu dobavenata stoynost (Law on value added tax), a registered person who receives a taxable supply is liable for the unpaid tax owed by another registered person where the right to deduct input tax directly or indirectly connected with the tax owed but not paid has been exercised.

III – Main proceedings and proceedings before the Court

11The main proceedings concern a tax notice by which the claimant Firin OOD (‘Firin’) was refused the right to deduct input tax on the basis of an invoice issued by Agra Plani EOOD (‘Agra Plani’).

12In 2010 those two companies concluded a purchase contract for 10000 tonnes of wheat, notwithstanding the fact that under Bulgarian law Agra Plani was not entitled to trade in grain. Agra Plani was required to deliver the wheat at the latest by 31 December 2012, and Firin was to pay the purchase price of BGN 3.6 million (approximately EUR 1.8 million) in advance. On that basis Firin claimed a deduction of input tax, after it had paid 4.17 million Bulgarian lev (BGN) to Agra Plani.

13This amount was immediately transferred by Agra Plani to the company York Skay EOOD as an ostensible loan, and on the same day that company transferred BGN 3.6 million back to Firin as an ostensible capital contribution. The shareholders in Firin were York Skay EOOD and a natural person who was also the sole shareholder in Agra Plani.

14Following non-payment by Agra Plani of any VAT on the basis of the purchase contract and its non-delivery of the wheat, and also following its automatic de-registration as a taxable person in April 2011, the Bulgarian tax authorities demanded from Firin repayment of the input tax already claimed on the basis of the purchase contract. Those authorities take the view that an initial right to deduct input tax on the basis of a payment on account ceases if the supply contracted for is not subsequently made. In addition, those authorities assume that the case involves a fictitious transaction and a fictitious money flow, for which reason Firin knew that the VAT charged on the basis of the purchase contract would not be paid.

15The Administrativen sad Veliko Tarnovo (Administrative Court, Veliko Tarnovo), before which the dispute concerning the refusal of the right to deduct input tax has been brought, has now referred the following questions to the Court pursuant to Article 267 TFEU:

In cases such as that in the main proceedings, in which VAT connected with a payment made in advance for a future clearly defined taxable supply of goods is immediately and effectively deducted, are the provisions of Article 168(a), in conjunction with Article 65, Article 90(1) and Article 185(1), of the VAT Directive to be consistently interpreted as meaning that, in light of a failure, for objective and/or subjective reasons, to render the principal counter-performance in accordance with the terms and conditions of supply, the right to deduct input tax at the date on which it is exercised must be refused?

Does it follow from such a consistent interpretation, having regard to the principle of the neutrality of VAT, that in this situation the supplier’s objective possibility of adjusting the VAT charged and/or the basis of assessment of the tax on the invoice in the manner provided for under national law is (or is not) significant; and how might such an adjustment affect the refusal to allow the original deduction of input tax?

In the light also of recital 44 in the preamble to the VAT Directive, is Article 205, in conjunction with Article 168(a) and Article 193, to be interpreted as meaning that the Member States are permitted to refuse to allow the recipient of a supply to deduct input tax by applying only such criteria as they themselves have laid down in their national legislation, according to which a liability to tax is imposed on a person other than the taxable person where, in such a case, the ultimate tax outcome would differ from the outcome if the rules established by the Member State had been strictly observed?

If the answer to the third question should be in the affirmative: are national legal provisions such as those in the main proceedings permissible in the context of the application of Article 205 of the VAT Directive and compatible with the principles of effectiveness and proportionality if they introduce joint and several liability for the payment of VAT by reference to suppositions that are not based on objective facts that can be directly established but on expressed precepts of civil law, disputes in respect of which are conclusively settled on other legal grounds?’

16In the proceedings before the Court, the Bulgarian tax authorities, the Republic of Bulgaria, the Republic of Estonia, the Italian Republic and the Commission have submitted written observations.

IV – Legal analysis

17The national court asks four questions touching on two different regulatory areas of the VAT Directive. On the one hand, the first, second and third questions concern the refusal of the right to deduct input tax, and in particular the conditions for the right of deduction laid down by Article 167 et seq. and by Article 184 et seq. of the VAT Directive. On the other hand, the fourth question, and also in part the third question, concern the joint and several liability of a taxable person for the tax debt owed by another person under Article 205 of the VAT Directive.

18It should be stressed that the refusal of the right to deduct input tax is to be strictly distinguished from liability for the tax debt of another person. This is because deduction of input tax and liability are respectively subject to different conditions and provisions of the VAT Directive.

19In its request for a preliminary ruling, the national court itself explained that the Bulgarian tax authorities have not made a claim against Firin, the taxable person, on the basis of joint and several liability for Agra Plani’s tax liability, but have refused it the right to deduct input tax. According to the Court’s settled case‑law, it may refuse to rule on a question referred to it where it is quite obvious that the interpretation that is sought bears no relation to the actual facts of the main action. ³ On that basis the questions referred are inadmissible in so far as they concern joint and several liability of a taxable person for another person’s tax debt, as the grounds on which the request for a preliminary ruling has been made do not show those questions to have any relevance to the main proceedings. It follows that neither the fourth question nor the third question, in so far as it likewise concerns the interpretation of Article 205 of the VAT Directive, need be answered.

20In relation to the right to deduct input tax, by its first, second and third questions the national court asks whether this right is to be refused where a payment on account within the meaning of Article 65 of the VAT Directive has been made but the supply has not been made (see B below), and whether it makes any difference that the supplier continues to be liable for VAT on the supply that has not been made (see C below). In order to be able to provide the national court with a helpful answer, ⁴ I will first consider the question as to the circumstances in which a right to deduct input tax on the basis of a payment on account arises at all (see A below).

A – Creation of a right to deduct input tax in the case of a payment on account

21According to Article 167 of the VAT Directive, the right to deduct input tax arises at the time when the deductible tax becomes chargeable. Accordingly, for Firin to have the right to deduct which is disputed in the main proceedings, having regard to the purchase contract which it concluded with Agra Plani, it is necessary that the tax authorities’ tax claim against Agra Plani should have arisen. Article 63 of the VAT Directive provides that this tax claim in principle arises only when the goods are supplied; Agra Plani, however, has not in fact done this.

22However, where a payment on account is made in respect of the taxable transaction, Article 65 of the VAT Directive provides that the tax liability and, with it, the right to deduct input tax arise when the payment on account is received by the taxable person. Such a payment on account need not be limited to part of the consideration, but can — as in the present case — constitute the entire consideration. ⁵ According to the case-law of the Court, for Article 65 of the VAT Directive to apply all the relevant information concerning the chargeable event, namely the future supply of goods or services, must already be known and therefore, in particular, the goods or services must be precisely identified at the time the payment on account is made. ⁶

23The reasoning underlying the request for a preliminary ruling proceeds on the basis that, regardless of subsequent payments, the consideration was effectively made available to Agra Plani, the supplier, and that there was therefore a payment on account within the meaning of Article 65 of the VAT Directive. In addition, the first question, in particular, assumes that the requirements laid down by the above case-law as regards the identification of the supply are satisfied in the present case. From this, the national court concludes that in principle Firin has a right to an input tax deduction.

24However, the national court must also have regard for the fact that Article 65 of the VAT Directive cannot apply where, at the time of the payment on account, it is not certain that the supply will be made.

25Thus, the Court has refused to apply this provision in one case inter alia because the buyer was entitled to terminate the contract unilaterally at any time. ⁷ This right of termination meant that it was not certain that a taxable supply would subsequently in fact be made.

26Moreover, Article 65 of the VAT Directive constitutes a derogation from the general rule in Article 63 of the VAT Directive and, according to the settled case-law of the Court, is therefore to be interpreted strictly. ⁸ Specifically, Article 62(1) of the VAT Directive provides that it is only through the occurrence of the chargeable event that the legal conditions for the tax authorities’ claim are satisfied. From this it follows that the tax liability can arise at the same time as or after the chargeable event, but in principle not before. ⁹ The chargeable event to be considered in the present case, namely under Article 2(1)(a) of the VAT Directive, occurs only when the supply of goods is made. If Article 65 of the VAT Directive were to allow a tax liability to arise in the case of a payment on account before the chargeable event occurred and the basis for imposing tax thereby came into being at all, it would have to be expected that in the ordinary course of events the taxable supply would also be made. If any realistic doubts exist in this respect, Article 65 of the VAT Directive is not applicable.

27Such doubts could exist in the main proceedings in the present case.

28This is so, first, having regard to the fact that in the grounds for the request for a preliminary ruling the national court at times describes the purchase contract as ‘fictitious’. It could therefore be the case that there was no serious intention from the outset to carry out the supply of wheat.

29Second, in this context account must also be taken of the fact that Agra Plani did not have the necessary legal authorisation to supply wheat, and for that reason the purchase contract may have been invalid. It is true that the principle of fiscal neutrality precludes distinguishing generally between legal and illegal transactions. ¹⁰ However, a legal prohibition of the supply may raise the question, at the time of the payment on account, as to whether the supply will ever be made.

30Since both of these circumstances concern the facts and the interpretation of national law, they must be clarified by the national court in the main proceedings. To the extent that Article 65 of the VAT Directive is not applicable in the present case because of real doubts existing at the time of the payment on account as regards the future supply, pursuant to Article 167, in conjunction with Article 63, of the VAT Directive no right to deduct input tax would have yet arisen at the time of the payment on account. However, to answer the questions referred I will assume in what follows that such a right did arise in favour of Firin.

B – Refusal of the right to deduct input tax in the case where the supply is not made

31By its first question the national court essentially asks whether the right to deduct input tax in the case of a payment on account, which leads to application of Article 65 of the VAT Directive, continues to exist if the taxable supply is subsequently not made.

32In this connection the parties to the proceedings have pointed out that, according to settled case-law, the right to deduct input tax is to be refused where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent or abusive ends. That is the position where a tax fraud is committed by the taxable person himself or when he knew, or should have known, that he was taking part in a transaction connected with VAT fraud. ¹¹

33However, the question as to whether the right to deduct input tax is to be refused because of fraudulent conduct logically comes after the question as to whether such a right exists at all under general provisions, that is, regardless entirely of any fraud that is yet to be proved. Therefore, in the present case it is first necessary to establish whether the right to deduct input tax is to be adjusted in any event pursuant to Article 184 et seq. in the case where a payment on account pursuant to Article 65 of the VAT Directive has been made and the supply of goods has not followed.

34Article 185(1) of the VAT Directive provides that an adjustment is, in particular, to be made where, after the VAT return is made, some change occurs in the factors used to determine the amount to be deducted. As I have already explained in more detail in the case of TETS Haskovo, this concerns inter alia the question as to whether the expectations that gave rise to the right to deduct input tax have subsequently in fact been realised. ¹²

35The factors to be taken into account in determining the input tax deduction in the present case include, in the case of a payment on account within the meaning of Article 65 of the VAT Directive — as already explained, ¹³ — the expectation that in the normal course of events the taxable supply will be made. If it is established that this expectation can no longer be maintained because it is anticipated that no taxable supply will be made, the factors taken into account in determining the input tax deduction will then have changed. Therefore, in accordance with Article 185(1) of the VAT Directive the input tax deduction must in principle be adjusted if it is no longer expected that the supply will be made. This is a matter for the national court to clarify in the main proceedings.

36The derogating rule in Article 185(2) of the VAT Directive does not preclude adjustment. That provision specifies various cases in which no adjustment is to be made. However, it does not mention the failure to make a supply after a payment has been made on account.

37Thus, in principle the answer to the first question is that, where there is a payment on account which has led to the application of Article 65 of the VAT Directive, the input tax deduction is to be adjusted if the taxable supply is ultimately not made.

C – Connection with the adjustment of the tax liability

38By its second and third questions the national court, however, essentially asks in addition whether, having regard to the principle of fiscal neutrality, the adjustment of the input tax deduction in the present case depends on the objective possibility of adjusting the corresponding tax liability. Specifically, if this tax liability is not adjusted, although the input tax deduction is adjusted, the tax authorities could ultimately receive more than they would have done in the normal course of events.

39The principle of fiscal neutrality constitutes not only a particular manifestation of the principle of equality in VAT law, but also means that each trader should, by means of the deduction mechanism, be relieved entirely of the burden of the VAT payable or paid in the course of all his economic activities. ¹⁴ The present case might be regarded as involving an imposition on a taxable person in a manner inconsistent with the system of VAT in so far as the supplier, Agra Plani, could still be liable to pay VAT even though its contracting partner Firin had made a payment on account but has had to adjust the input tax deduction that had arisen.

40In this regard it must be borne in mind that in a situation such as that in the present case a tax liability exists for two reasons.

41First, the supplier owes the VAT, as the parties to the proceedings have correctly pointed out, in accordance with Article 203 of the VAT Directive on the basis of the VAT indicated by him in his invoice. According to settled case-law, this tax liability can be adjusted by the supplier subject to certain conditions, ¹⁵ and adjustment is not precluded by the fact that at the time of the adjustment he is no longer registered as a taxable person. ¹⁶ So long as there has been no adjustment, the tax liability continues, whereas, as indicated above, the corresponding input tax deduction is to be adjusted.

42Consistent with this, in Stroy trans and LVK — 56 the Court has accordingly already held that the traders involved in a transaction need not necessarily be treated identically if the issuer of an invoice has not corrected it. This is because the issuer of an invoice is liable, under Article 203 of the VAT Directive, to pay the VAT entered on that invoice even if there is no taxable transaction, whereas the recipient of the invoice in such a case does not have any right to deduct input tax. ¹⁷

43Second, in the present case the supplier is liable for the VAT also under Article 193, in conjunction with Article 65, of the VAT Directive on the basis of the payment on account. In principle, a tax liability of this type can be extinguished if the taxable amount is reduced, in accordance with Article 90 of the VAT Directive. However, it is doubtful whether this can occur without the payment on account being repaid. This is because the judgment of the Court in Freemans ¹⁸ can be understood as meaning that a reduction in the taxable amount generally presupposes that any amounts paid to the taxable person are in fact repaid. ¹⁹ Thus, if the supplier does not pay back the payment on account, the tax liability can no longer be adjusted, in contrast to the position under Article 203 of the VAT Directive, even though at the same time the input tax deduction is to be adjusted.

44In this regard two different aspects are to be considered.

45First, it must be recalled that, according to case-law, it is in general unobjectionable that a tax liability exists even though the corresponding right to deduct input tax cannot be claimed. Thus, in Petroma Transports and Others the Court held that the charging of VAT is not conditional upon the actual exercise of the right to deduct input tax. Accordingly, VAT can be charged on turnover even if the corresponding right to deduct input tax cannot be claimed because of a formal irregularity in the invoice. ²⁰

46Furthermore, however, the question arises as to whether an adjustment of an input tax deduction specifically in the case of a payment on account requires that the payment on account be repaid. On the one hand, this would correspond to the requirements set out above for adjusting the taxable amount and thus the tax liability. On the other hand, in the case of the supplier’s insolvency this would prevent the person entitled to deduct input tax from incurring a loss in the amount of the VAT element of his payment on account.

47Regardless of whether the statements in the judgment in Freemans were intended to apply also to cases of payments on account, there are different requirements underlying adjustment of the taxable amount under Article 90 and adjustment of the input tax deduction under Article 184 et seq. of the VAT Directive. Thus, the Court based its judgment in Freemans on the fact that, according to settled case-law, the definitive taxable amount is the consideration actually received. ²¹ However, in regard to the right to deduct input tax there is no corresponding principle making the right to make such a deduction dependent on actual payment of the consideration. This is clear simply from the fact that the first subparagraph of Article 185(2) of the VAT Directive precludes adjustment of the input tax deduction in the case of transactions remaining totally or partially unpaid. In this case the taxable person thus retains the right to deduct input tax, even if he has not made any payment at all.

48In addition, the principle of fiscal neutrality does not require that, where a payment on account has been made, the right to deduct input tax is not to be adjusted so long as the payment on account has not been repaid. The Court has already held that it is in principle consistent with this principle if the recipient of the supply has only a private law right to repayment from his contracting partner, in order to safeguard his financial interests. ²²

49In the corresponding case of Reemstma Cigarettenfabriken the Court granted the recipient of a supply a direct right against the tax authorities for repayment of VAT that had been wrongly paid where his contracting partner had become insolvent, but this is not comparable to the facts of the present case, in which the tax authorities have not received any VAT. In this regard, the Italian Republic correctly stated that in the present case the refusal of the right to deduct input tax, at the same time as the tax liability is not paid, in effect merely avoids a loss to the tax authorities, but does not levy VAT in a manner inconsistent with the tax system. The circumstance that this loss is suffered instead by the potential recipient of a supply, who may not receive back his payment on account, is justified by the fact that the recipient himself has sought out his contracting partner and knowingly assumed the risk of making a payment on account.

50Thus, in conclusion the answer to the second and third questions of the national court is that the adjustment to the right to deduct input tax does not depend on either the adjustment of the corresponding tax liability or repayment of the payment on account.

V – Conclusion

51On the basis of all of the foregoing considerations I propose that the questions posed by the Administrativen sad Veliko Tarnavo should be answered as follows:

It is a condition for the creation of a tax claim under Article 65 of the VAT Directive that it is expected that in the normal course of events the taxable supply will in fact be made.

In accordance with Article 185(1) of the VAT Directive, a deduction of input tax claimed on the basis of a payment on account within the meaning of Article 65 of the VAT Directive is to be adjusted if the taxable supply is ultimately not made. The adjustment to the right to deduct input tax does not depend on either the adjustment of the corresponding tax liability or repayment of the payment on account.

¹ Original language: German.

² OJ 2006 L 347, p. 1.

³ Case C‑290/12 Della Rocca [2013] ECR, paragraph 29 and the case-law cited.

⁴ On this power of the Court of Justice, see Case 35/85 Tissier [1986] ECR 1207, paragraph 9, and Case C‑342/12 Worten [2013] ECR, paragraph 30.

⁵ Case C‑549/11 Orfey [2012] ECR, paragraph 37, and Case C‑19/12 Efir [2013] ECR, paragraph 39.

⁶ Case C-419/02 BUPA Hospitals and Goldsborough Developments [2006] ECR I-1685, paragraph 48; Case C-270/09 MacDonald Resorts [2010] ECR I-13179, paragraph 31; Case C‑520/10 Lebara [2012] ECR, paragraph 26; Orfey, paragraph 28; and Efir, paragraph 32.

⁷ BUPA Hospitals and Goldsborough Developments, paragraph 51.

⁸ BUPA Hospitals and Goldsborough Developments, paragraph 45; Orfey, paragraph 27; and Efir, paragraph 32.

⁹ BUPA Hospitals and Goldsborough Developments, paragraph 46.

¹⁰ Case C-283/95 Fischer [1998] ECR I-3369, paragraph 22, and Case C‑275/11 GfBk [2013] ECR, paragraph 32.

¹¹ Case C‑78/12 Evita-K [2013] ECR, paragraphs 39 and 40 and the case-law cited.

¹² See the Opinion in Case C‑234/11 TETS Haskovo [2012] ECR, points 25 to 28.

¹³ See above, point 24 et seq.

¹⁴ Case C‑174/11 Zimmermann [2012] ECR, paragraphs 46 to 48 and the case-law cited.

¹⁵ Case C‑138/12 Rusedespred [2013] ECR, paragraphs 25 to 27 and the case-law cited.

¹⁶ Case C‑643/11 LVK — 56 [2013] ECR, paragraph 49.

¹⁷ Case C‑642/11 Stroy trans [2013] ECR, paragraph 41 et seq., and LVK — 56, paragraph 46 et seq.

¹⁸ See the judgment of the Bundesfinanzhof (German Federal Finance Court) of 2 September 2010, V R 34/09, paragraph 17, referring to its judgment of 18 September 2008, V R 56/06, paragraph 43 et seq.

¹⁹ Case C-86/99 Freemans [2001] ECR I-4167, paragraph 35.

²⁰ Case C‑271/12 Petroma Transports and Others [2013] ECR, paragraphs 41 to 43.

²¹ Freemans, paragraph 27.

²² Case C-35/05 Reemtsma Cigarettenfabriken [2007] ECR I-2425, paragraph 39.