C-227/21 HA.EN.

JUDGMENT OF THE COURT (Fourth Chamber)

15 September 2022 ( *1 )

(Reference for a preliminary ruling – Value added tax (VAT) – Directive 2006/112/EC – Right to deduct input VAT – Sale of an item of immovable property between taxable persons – Vendor subject to insolvency proceedings – National practice under which the purchaser is denied the right of deduction on the ground that he or she knew or should have known of the vendor’s difficulties in paying the output tax – Fraud and abuse of rights – Conditions)

In Case C‑227/21,

REQUEST for a preliminary ruling under Article 267 TFEU from the Lietuvos vyriausiasis administracinis teismas (Supreme Administrative Court of Lithuania), made by decision of 31 March 2021, received at the Court on 9 April 2021, in the proceedings

UAB ‘HA.EN.’

v

Valstybinė mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos,

THE COURT (Fourth Chamber),

composed of C. Lycourgos, President of the Chamber, S. Rodin, J.‑C. Bonichot, L.S. Rossi and O. Spineanu-Matei (Rapporteur), Judges,

Advocate General: J. Kokott,

Registrar: A. Calot Escobar,

having regard to the written procedure,

after considering the observations submitted on behalf of:

UAB ‘HA.EN.’, by G. Kaminskas and Z. Stuglytė, advokatai,

the Lithuanian Government, by K. Dieninis and V. Kazlauskaitė-Švenčionienė, acting as Agents,

the Czech Government, by O. Serdula, M. Smolek and J. Vláčil, acting as Agents,

the European Commission, by J. Jokubauskaitė and L. Lozano Palacios, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 5 May 2022,

gives the following

Judgment

Legal context and the dispute

1This request for a preliminary ruling concerns the interpretation of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1; ‘the VAT Directive’).

2The request has been made in proceedings between UAB ‘HA.EN.’ and the Valstybinė mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos (State Tax Inspectorate under the Ministry of Finance of the Republic of Lithuania; ‘the tax authority’) concerning denial of the right to deduct value added tax (VAT) on account of an alleged abuse of rights by HA.EN.

Legal context

European Union law

3Recitals 7 and 42 of the VAT Directive are worded as follows:

The common system of VAT should, even if rates and exemptions are not fully harmonised, result in neutrality in competition, such that within the territory of each Member State similar goods and services bear the same tax burden, whatever the length of the production and distribution chain.

…

Member States should be able, in specific cases, to designate the recipient of supplies of goods or services as the person liable for payment of VAT. This should assist Member States in simplifying the rules and countering tax evasion and avoidance in identified sectors and on certain types of transactions.’

4Article 168 of the VAT Directive provides:

‘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;

…’

5Article 193 of the VAT 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.’

6Article 199(1) of the VAT Directive provides:

‘Member States may provide that the person liable for payment of VAT is the taxable person to whom any of the following supplies are made:

…

the supply of immovable property sold by a judgment debtor in a compulsory sale procedure.’

7As set out in Article 273 of the VAT Directive:

‘Member States may impose other obligations which they deem necessary to ensure the correct collection of VAT and to prevent evasion, subject to the requirement of equal treatment as between domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.

…’

Lithuanian law

8Article 58(1) of the Lietuvos Respublikos pridėtinės vertės mokesčio įstatymas (Law of the Republic of Lithuania on value added tax), as amended by Law No IX‑751 of 5 March 2002, provides:

‘A VAT payer shall have the right to deduct input and/or import VAT in respect of goods and/or services acquired and/or imported, if those goods and/or services are intended to be used for the following activities of that VAT payer: … the supply of goods and/or services on which VAT is chargeable;

…’

9Article 719(1) of the Lietuvos Respublikos civilinio proceso kodeksas (Code of Civil Procedure of the Republic of Lithuania), as amended by Law No XII‑889 of 15 May 2014, provides:

‘If an auction is declared void due to the absence of any bidder …, the property shall be transferred to the person seeking enforcement, for the initial price of sale of the property at the auction.’

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

10By agreement of 21 September 2007, UAB ‘Medicinos Bankas’ (‘the bank’) granted UAB ‘Sostinės būstai’ (‘the vendor’) a loan to carry out real estate development activity. For the purpose of securing due performance of the agreement, the vendor granted the bank a contractual mortgage over a plot of land in the city of Vilnius (Lithuania) on which a building was under construction.

11By an assignment of claim agreement concluded on 27 November 2015, HA.EN. acquired from the bank for consideration all the monetary claims arising from the credit agreement concluded between the bank and the vendor and all the rights established to secure the performance of obligations, including the contractual mortgage. When concluding that agreement, HA.EN. confirmed, inter alia, that it had become acquainted with the vendor’s economic and financial situation and legal status, and that it was aware that the vendor was insolvent and the subject of administration proceedings pending before the Vilniaus apygardos teismas (Regional Court, Vilnius, Lithuania). By agreement concluded on 18 December 2015, the bank assigned the mortgage over the vendor’s property to HA.EN.

12The auction of a part of the vendor’s item of immovable property (‘the immovable property at issue’) was announced by order of a bailiff of 23 May 2016, but no purchaser showed an interest in acquiring it. As the auctioning had been unsuccessful, HA.EN. was offered, in the context of the auction procedure, the immovable property at issue for its initial price of sale at the auction, an acquisition which would extinguish a part of HA.EN.’s claims. HA.EN. exercised that right and took over the immovable property at issue.

13For that purpose, on 21 July 2016 a bailiff drew up an instrument recording the transfer of ownership of the immovable property at issue to HA.EN.

14On 5 August 2016, the vendor issued an invoice indicating that ownership of the immovable property at issue had been transferred to HA.EN. by that instrument for the total amount of EUR 5468000, that is to say, a sum of EUR 4 519 008.26 together with EUR 948 991.74 in VAT. HA.EN. entered the invoice in its accounts and deducted the input VAT set out on the invoice in its VAT declaration for November 2016. The vendor also entered the invoice in its accounts and it declared the output tax set out on it, as VAT payable, in its declaration for August 2016, but it never paid that tax into the public purse.

15On 1 October 2016, the vendor was declared insolvent.

16On 20 December 2016, HA.EN. requested the tax authority to refund it the excess VAT resulting from deduction of the input VAT, namely EUR 948 991.74. After conducting a tax inspection in respect of HA.EN., the tax authority found that, in entering into the transaction for acquisition of the immovable property at issue although it knew or should have known that the vendor would not pay the VAT generated by that transaction into the public purse, HA.EN. had acted in bad faith and committed an abuse of rights. It was on the basis of that reasoning that, by decision of 12 July 2017, the tax authority denied HA.EN. the right to deduct that input VAT, charged it interest of EUR 38 148.46 for late payment of VAT and imposed upon it a fine of EUR 284694.

17HA.EN. contested that decision before the Mokestinių ginčų komisija prie Lietuvos Respublikos Vyriausybės (Tax Disputes Commission under the Government of the Republic of Lithuania), which, by decision of 22 January 2018, set aside the tax authority’s decision so far as concerns the interest for late payment and the fine but, finding that HA.EN. had committed an abuse of rights, upheld it in so far as it denied HA.EN. the right to deduct VAT.

18HA.EN. brought an action against that decision of the Tax Disputes Commission under the Government of the Republic of Lithuania before the Vilniaus apygardos administracinis teismas (Regional Administrative Court, Vilnius, Lithuania), which, by judgment of 14 November 2018, confirmed the tax authority’s position and dismissed the action as unfounded.

19On 12 December 2018, HA.EN. brought an appeal before the referring court, the Lietuvos vyriausiasis administracinis teismas (Supreme Administrative Court of Lithuania), which, by order of 13 May 2020, partially upheld the appeal, set aside the judgment of the Vilniaus apygardos administracinis teismas (Regional Administrative Court, Vilnius) and referred the case back to it, stating in particular that it had to assess the conditions for, and indications of, the presence of abuse of rights in the case in point.

20After re-examining the tax dispute, the Vilniaus apygardos administracinis teismas (Regional Administrative Court, Vilnius), by judgment of 3 September 2020, again found that HA.EN. had committed an abuse of rights and consequently held that the tax authority was justified in denying it the right to deduct input VAT. HA.EN. then brought a fresh appeal before the referring court.

21The referring court states that, since the invoice relating to the compulsory sale transaction indicated a net amount of EUR 4 519 008.26 and VAT amounting to EUR 948 991.74, HA.EN. in fact bore the VAT. On that basis, the referring court takes the view that there was prima facie no justification for the tax authority to hold that the substantive and formal conditions laid down by the VAT Directive for exercise by HA.EN of its right of deduction were not met.

22Nevertheless, the referring court is uncertain whether, in order to deny HA.EN. the right to deduct the VAT relating to the acquisition of the immovable property at issue, the tax authority was entitled to rely on the fact that it knew or should have known that the vendor, because of its financial difficulties and potential insolvency, would not pay, or would not be able to pay, the VAT into the public purse.

23It is in those circumstances that the Lietuvos vyriausiasis administracinis teismas (Supreme Administrative Court of Lithuania) decided to stay the proceedings and to refer the following question to the Court of Justice for a preliminary ruling:

‘Is [the VAT Directive], in conjunction with the principle of fiscal neutrality, to be interpreted as prohibiting or not prohibiting a practice of national authorities under which the right of a taxable person to deduct input VAT is denied where that person, when acquiring items of immovable property, knew (or should have known) that the supplier, due to his insolvency, would not pay (or would not be able to pay) the output VAT into the public purse?’

Consideration of the question referred

24By its question, the referring court asks, in essence, whether Article 168(a) of the VAT Directive, read in the light of the principle of fiscal neutrality, must be interpreted as precluding a national practice under which, in the context of the sale of an item of immovable property between taxable persons, the purchaser is denied the right to deduct input VAT merely because he or she knew or should have known that the vendor was in financial difficulty, or even insolvent, and that that circumstance could result in the vendor not paying or not being able to pay VAT into the public purse.

25First of all, it should be recalled that, in accordance with settled case-law of the Court, the right of taxable persons to deduct from the VAT which they are liable to pay the VAT due or paid on goods purchased and services received by them as inputs is a fundamental principle of the common system of VAT established by EU legislation. The deduction system, of which Article 168 of the VAT Directive is part, is intended to relieve the trader entirely of the burden of the VAT due or paid in the course of all his or her economic activities. The common system of VAT therefore ensures that all economic activities, whatever their purpose or results, provided that they are, in principle, themselves subject to VAT, are taxed in a neutral way (see, to that effect, judgment of 15 September 2016, Senatex, C‑518/14, EU:C:2016:691, paragraphs 26 and 27 and the case-law cited). As the Court has repeatedly held, the right of deduction provided for in Article 167 et seq. of the VAT Directive is an integral part of the VAT scheme and in principle may not be limited (judgment of 16 October 2019, Glencore Agriculture Hungary, C‑189/18, EU:C:2019:861, paragraph 33 and the case-law cited).

26In that regard, the Court has already held that the question whether or not the supplier of the goods has paid the VAT due on sale transactions to the public purse has no bearing on the right of the taxable person to deduct input VAT (judgment of 22 October 2015, PPUH Stehcemp, C‑277/14, EU:C:2015:719, paragraph 45 and the case-law cited). Making the right to deduct VAT conditional upon the actual prior payment of that VAT by the supplier of goods would lead to the taxable person being subject to an economic burden which should not be his or hers and the avoidance of which is the specific aim of the rules governing deduction (see, to that effect, judgment of 29 March 2012, Véleclair, C‑414/10, EU:C:2012:183, paragraph 30).

27At the same time, the prevention of tax evasion, tax avoidance and abuse is an objective recognised and encouraged by the VAT Directive and the Court has consistently held that EU law cannot be relied on for abusive or fraudulent ends. It is therefore for the national courts and authorities to refuse the right of deduction if it is shown, in the light of objective evidence, that that right is being relied on for fraudulent or abusive ends (judgment of 10 July 2019, Kuršu zeme, C‑273/18, EU:C:2019:588, paragraph 34 and the case-law cited).

28However, 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 on the tax authorities to establish, to the requisite legal standard, the objective evidence from which it may be concluded that the taxable person committed fraud or an abuse of rights or knew or should have known that the transaction relied on as a basis for the right of deduction was connected with fraud. It is for the national courts subsequently to determine whether the tax authorities concerned have established the existence of such objective evidence (see, to that effect, judgment of 11 November 2021, Ferimet, C‑281/20, EU:C:2021:910, paragraph 50 and the case-law cited).

29It is in the light of that case-law that it should be determined whether, where an item of immovable property is sold by a company in financial difficulty, the national tax authorities may legitimately deny the purchaser of that property the right to deduct input VAT on the ground that, because of his or her knowledge of that financial difficulty and its possible consequences for payment of VAT into the public purse, he or she knew or should have known that he or she was participating in a transaction connected with VAT fraud or was committing an abuse of rights.

30First, as regards any participation of the purchaser of the item of immovable property in a transaction connected with VAT fraud, it should be pointed out that the financial interests of the European Union include, in particular, revenue arising from VAT (judgment of 2 May 2018Scialdone, C‑574/15, EU:C:2018:295, paragraph 27 and the case-law cited).

31It should also be noted that the concept of ‘fraud affecting the European Communities’ financial interests’, as defined in Article 1 of the Convention drawn up on the basis of Article K.3 of the Treaty on European Union, on the protection of the European Communities’ financial interests, signed in Brussels on 26 July 1995 and annexed to the Council Act of 26 July 1995 (OJ 1995 C 316, p. 48), covers, inter alia, ‘any intentional act or omission relating to … the use or presentation of false, incorrect or incomplete statements or documents, which has as its effect the illegal diminution of the resources of the general budget of the European Communities or budgets managed by, or on behalf of, the European Communities’. Therefore, and as follows from the previous paragraph, that concept encompasses any intentional act or omission affecting revenue derived from applying a uniform rate to the harmonised VAT assessment bases determined according to EU rules (see, to that effect, judgment of 8 September 2015, Taricco and Others, C‑105/14, EU:C:2015:555, paragraph 41).

32The Court has already held that, in so far as the taxable person has duly complied with his or her obligations to declare VAT, the mere failure to pay duly declared VAT cannot constitute VAT fraud, irrespective of whether such a failure is intentional or not (see, to that effect, judgment of 2 May 2018, Scialdone, C‑574/15, EU:C:2018:295, paragraphs 38 to 41).

33Therefore, a taxable person who is a judgment debtor facing financial difficulties and sells one of his or her assets in a statutory compulsory sale procedure in order to settle his or her debts, then declares the VAT due on that basis, but subsequently is unable, because of those difficulties, to pay that VAT in whole or in part, cannot be regarded as committing VAT fraud on that account alone. Consequently, the purchaser of such an asset, a fortiori, cannot be criticised in such circumstances on the basis that he or she knew or should have known that, in acquiring that asset, he or she was participating in a transaction connected with VAT fraud.

34Second, so far as concerns the existence of any abuse of rights on the part of the purchaser of the immovable property at issue, it should be pointed out that EU law on VAT precludes any right of a taxable person to deduct input VAT where the transactions from which that right derives constitute an abusive practice (judgment of 21 February 2006, Halifax and Others, C‑255/02, EU:C:2006:121, paragraph 85). That right cannot extend to abusive practices by economic operators, that is to say, transactions carried out not in the context of normal commercial operations but solely for the purpose of wrongfully obtaining advantages provided for under EU law (see, to that effect, judgment of 22 December 2010, Weald Leasing, C‑103/09, EU:C:2010:804, paragraph 26).

35In the sphere of VAT, two conditions must be met in order to find that an abusive practice exists. First, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the VAT Directive and the national legislation transposing it, must result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions. Second, it must be apparent from a number of objective factors that the essential aim of the transactions concerned is solely to obtain that tax advantage (see, to that effect, judgments of 21 February 2006, Halifax and Others, C‑255/02, EU:C:2006:121, paragraphs 74 and 75, and of 11 November 2021, Ferimet, C‑281/20, EU:C:2021:910, paragraph 54 and the case-law cited). Within that framework, it is for the national court to verify in accordance with the rules of evidence of national law whether action constituting an abusive practice has taken place. However, the Court, when giving a preliminary ruling, may, where appropriate, provide clarification designed to give the national court guidance in its interpretation (see, to that effect, judgment of 21 February 2006, Halifax and Others, C‑255/02, EU:C:2006:121, paragraphs 76 and 77).

36As to the first condition, even assuming that the deduction that is sought by the purchaser of immovable property of the input VAT paid by him or her when taking over that property may be classified as a tax advantage, that advantage cannot be regarded as contrary to the objectives of the VAT Directive. As the Advocate General has stated in points 40 to 44 of her Opinion, that is what is revealed by Article 199(1)(g) of the VAT Directive, which permits the Member States, in the case of the supply of immovable property sold by a judgment debtor in a compulsory sale procedure, to have recourse to the reverse charge mechanism and to transfer the VAT burden to the taxable person to whom the taxable supply is made. Whilst the Republic of Lithuania chose not to have recourse to that mechanism, the very existence of the option provided for by that provision shows that the EU legislature did not regard deduction of the VAT paid by the purchaser of immovable property in a compulsory sale procedure as contrary to the objectives of the VAT Directive.

37It is true that, in paragraphs 42 to 45 of the judgment of 20 May 2021, ALTI, (C‑4/20, EU:C:2021:397), the Court ruled, in essence, that the VAT Directive does not preclude national legislation pursuant to which the other party to a contract with a person liable for payment for VAT, in respect of whom it has been established that he or she knew or should have known that that person liable for payment would not pay that VAT, while exercising him or herself the right to deduct input tax, is deemed to be a debtor jointly and severally liable for the unpaid VAT and increases thereto.

38However, for the reasons set out by the Advocate General in points 46 and 47 of her Opinion, the situation of a taxable person who purchases immovable property at the end of a statutory compulsory sale procedure, under the supervision of the public authorities, is not comparable to the situation of the other party to the contract with the principal VAT debtor that was at issue in the case which gave rise to that judgment. An unlawful intention on the part of a debtor whose asset is sold by way of enforcement not to pay VAT cannot be inferred merely from the financial difficulties that he or she faces. Accordingly, the view cannot be taken on that basis alone that, in carrying out a commercial transaction with that debtor, the purchaser of the asset commits an abuse of rights.

39Under the second condition for an abuse of rights, it must be apparent from a number of objective factors that the essential aim of the transaction concerned is solely to obtain a tax advantage. In that regard, it should be pointed out first of all that it is apparent from the documents before the Court that, in the main proceedings, HA.EN. was a creditor of the vendor and held a mortgage over the immovable property at issue, which was the subject of a compulsory sale. In such circumstances, the view is to be taken that the fundamental reason for which a creditor, after an unsuccessful auction, has taken over immovable property over which he or she held such security may be not in order to obtain some tax advantage, but the creditor’s wish to recover all or part of his or her debt from a debtor in administration, by legal means available to the creditor, such as a compulsory sale procedure.

40Having regard to the fact that it takes place in a statutory procedure, which is admittedly intended to apply in a context that is exceptional – that of an economic operator’s insolvency – but nevertheless one inherent in economic life, and in the light of the prima facie legitimate objective that it pursues, such a transaction cannot be equated to a wholly artificial arrangement that does not reflect economic reality and is set up with the sole aim of obtaining a tax advantage, which the principle that abusive practices are prohibited has the effect of barring (see, to that effect, judgments of 17 December 2015, WebMindLicenses, C‑419/14, EU:C:2015:832, paragraph 35 and the case-law cited, and of 20 May 2021, ALTI, C‑4/20, EU:C:2021:397, paragraph 35 and the case-law cited).

41The fact that the purchaser is aware of the vendor’s financial difficulties, his or her potential insolvency or, as in the present instance, the initiation of administration proceedings, and of the possible impact of such circumstances on payment of the VAT relating to the transaction into the public purse, seems to constitute a circumstance inherent in compulsory sale procedures and cannot in itself be sufficient to establish that the transaction at issue is an abuse and, therefore, to justify denial of the right of deduction.

42In the light of the foregoing, the tax authorities of a Member State cannot, from the point of view of EU law, legitimately take the view that, in the context of the sale of an item of immovable property between taxable persons following a statutory compulsory sale procedure, the mere fact the purchaser knew or should have known that the vendor had financial difficulties and that that could result in the vendor not paying VAT into the public purse means that the purchaser committed an abuse of rights, and therefore deny him or her the right to deduct input VAT.

43A national practice of that kind would also be contrary to the principle of fiscal neutrality in that it implies that purchasers of immovable property are not allowed to deduct the input VAT that they have paid in a compulsory sale procedure, which effectively makes them bear the burden of that tax, whereas the principle of fiscal neutrality is meant specifically to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his or her economic activities (see, to that effect, judgment of 13 March 2014, Malburg, C‑204/13, EU:C:2014:147, paragraph 41 and the case-law cited).

44That practice effectively makes such purchasers bear the risk that the vendor’s insolvency entails for actual payment of the VAT into the public purse, a risk which is, however, in principle for the public purse to take on.

45Such a conclusion is all the more compelling as the Republic of Lithuania chose not to make use of the option made available by Article 199(1)(g) of the VAT Directive of setting up, in these specific circumstances, a reverse charge mechanism, which is intended precisely to counter the risk of insolvency of the VAT debtor (see, to that effect, judgment of 13 June 2013, Promociones y Construcciones BJ 200, C‑125/12, EU:C:2013:392, paragraph 28).

46As the Advocate General has observed in points 47, 51 and 52 of her Opinion, that practice, in that it effectively deprives taxable persons who have acquired immovable property in a compulsory sale procedure of their right of deduction, could also contribute to restricting the circle of potential purchasers. Therefore, it runs counter to the objective pursued by that type of procedure, namely the optimal realisation of the debtor’s assets in order to satisfy his or her creditors to the greatest possible extent. It also tends to isolate economic operators faced with financial difficulties and to hamper their ability to carry out transactions, in a way which is not consistent with the principle of fiscal neutrality, as that principle precludes distinctions between taxable persons on the basis of their financial situation.

47In the light of all the foregoing considerations, the answer to the question referred is that Article 168(a) of the VAT Directive, read in conjunction with the principle of fiscal neutrality, must be interpreted as precluding a national practice under which, in the context of the sale of an item of immovable property between taxable persons, the purchaser is denied the right to deduct input VAT merely because he or she knew or should have known that the vendor was in financial difficulty, or even insolvent, and that that circumstance could result in the vendor not paying or not being able to pay VAT into the public purse.

Costs

48Since 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 (Fourth Chamber) hereby rules:

Article 168(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in conjunction with the principle of fiscal neutrality,

must be interpreted as precluding a national practice under which, in the context of the sale of an item of immovable property between taxable persons, the purchaser is denied the right to deduct input value added tax (VAT) merely because he or she knew or should have known that the vendor was in financial difficulty, or even insolvent, and that that circumstance could result in the vendor not paying or not being able to pay VAT into the public purse.

Signatures

[Signatures]

( *1 ) Language of the case: Lithuanian.

OPINION OF ADVOCATE GENERAL

KOKOTT

delivered on 5 May 2022 ¹

(Request for a preliminary ruling – Tax law – Value added tax (VAT) – Directive 2006/112/EC – Right to deduct input VAT – Scope of the case-law on fraud – Existence of an abuse of rights – Refusal of the right to deduct input VAT because the recipient of the supply knew or should have known that the supplier would not be able to pay the VAT incurred to the tax authorities due to his or her financial situation – VAT burden where the price is set off against existing debts)

I. Introduction

1This preliminary ruling procedure might lead one to think of a passage from ‘The Sorcerer’s Apprentice’ by Johann Wolfgang von Goethe: ‘Sir, my need is sore. Spirits that I’ve citedMy commands ignore.’ Indeed, this preliminary ruling procedure once again highlights the uncertainties and problems that arise when value added tax (VAT) law is understood less conventionally, but rather is also used to combat fraud and abuse in the case-law.

2According to that line of case-law, the tax authorities should be entitled or even obliged to deny a taxable person the right to deduct input tax if he or she knew or should have known that a transaction before or after him or her in a chain of supplies was involved in VAT fraud. ² The penalising of fraud through tax law, outside the framework of the criminal law actually intended for that purpose, already raises questions with regard to the (fundamental) rights of taxpayers. That is all the more true ³ if it is to be sufficient in that regard that the taxpayer knew or should have known that the contracting partner would not pay the VAT owed by him or her. On the one hand, the mere possibility of non-payment of a tax does not constitute tax fraud; on the other hand, that makes it practically impossible to do business with undertakings in financial difficulties (that is to say, those that are in or are close to insolvency).

3An undertaking that takes over goods from its debtor, who is heavily indebted to it, to cover part of the debt, could always be accused to the effect that it should have known that the debtor might not (or might not be able to) pay the VAT incurred from the sale of the goods. That now seems to have become the established practice of the tax authorities in Lithuania. In that country, the acquisition of goods from an undertaking experiencing financial difficulties is regarded as an abuse of rights and, therefore, the right to deduct input VAT is denied.

4Thus, the present case gives the Court the opportunity to shed light on the limits of its case-law on fraud.

II. Legal framework

A. European Union law

5The legal framework is formed by Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’). ⁴

6Article 168(a) of the VAT Directive regulates the substantive scope of the right of deduction:

‘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.’

7Article 199(1)(g) of the VAT Directive allows Member States to provide for a reverse charge to the recipient of the supply:

‘1. Member States may provide that the person liable for payment of VAT is the taxable person to whom any of the following supplies are made:

…

the supply of immovable property sold by a judgment debtor in a compulsory sale procedure.’

8Article 273 of the VAT Directive, on the other hand, provides for options for the Member States inter alia to combat evasion:

‘Member States may impose other obligations which they deem necessary to ensure the correct collection of VAT and to prevent evasion, subject to the requirement of equal treatment as between domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers. …’

B. Lithuanian law

9Article 58(1), point 1, of the Lietuvos Respublikos pridėtinės vertės mokesčio įstatymas (Law on value added tax of the Republic of Lithuania) (in the version of Law No IX-751 of 5 March 2020) provides:

‘A VAT payer shall have the right to deduct input and/or import VAT in respect of goods and/or services acquired and/or imported, if those goods and/or services are intended to be used for the following activities of that VAT payer: … the supply of goods and/or services on which VAT is chargeable …’

10Article 719(1) of the Lietuvos Respublikos civilinio proceso kodeksas (Code of Civil Procedure of the Republic of Lithuania) (as amended by Law No XII-889 of 15 May 2014) reads:

‘If an auction is declared void due to the absence of any bidder …, the property shall be transferred to the person seeking enforcement, for the initial price of sale of the property at the auction.’

III. Facts and preliminary ruling procedure

11By a credit agreement of 21 September 2007, ‘Medicinos bankas’ UAB (‘the bank’) granted a loan to ‘Sostinės būstai’ UAB (‘the seller’) to carry out real estate development activities. For the purpose of securing due performance of the agreement, the seller granted the bank a contractual mortgage over a plot of land in the city of Vilnius (Lithuania) together with a building under construction located on it.

12By an assignment of claim agreement of 27 November 2015, ‘HA.EN.’ UAB (‘the applicant’) acquired from the bank for consideration all the financial claims arising from that credit agreement, together with all the rights established to secure the performance of obligations, including the aforementioned contractual mortgage. By entering into that arrangement, the applicant, inter alia, confirmed that it had become acquainted with the seller’s economic and financial situation and legal status and was aware that the seller was insolvent and subject to restructuring proceedings.

13By order of a bailiff of 23 May 2016, the auction of a part of the seller’s immovable property was announced but no purchaser showed an interest in that immovable property. Following the auction’s failure to take place, the offer to take over that property of the seller (‘the immovable property’) was made to the applicant in the sale procedure, thereby meeting a part of the latter’s claims. The Court is unaware of whether that took place for the net amount (that is to say, the value without VAT) or the gross amount (that is to say, the value including VAT). The applicant exercised the right and took over the property.

14For this purpose, an instrument for the transfer of property to a person seeking enforcement was drawn up on 21 July 2016, whereby the bailiff transferred to the applicant the immovable property for a price of EUR 5468000.

15On 5 August 2016, the seller drew up a VAT invoice, stating that the immovable property was being transferred for EUR 4 519 008.26 and VAT of EUR 948 991.74. The applicant entered the VAT invoice in its accounts and deducted the input VAT indicated in that invoice in the VAT declaration for November 2016. The seller also entered the VAT invoice in its accounts and declared the output VAT that was indicated in the VAT invoice in the VAT declaration for August 2016, but did not pay it. On 1 October 2016, the seller acquired the status of a company subject to insolvency proceedings.

16On 20 December 2016, the applicant submitted a request to the Valstybinė mokesčių inspekcija (State Tax Inspectorate, Lithuania; ‘the tax authority’) for refund of the overpaid amount of VAT that resulted from the declared deductible input VAT. After conducting a tax inspection in respect of the applicant, the tax authority found that the applicant – in that it entered into transactions for the acquisition of the immovable property and knew or should have known that the seller would not pay VAT for such a transaction – acted dishonestly and abused rights, and therefore did not acquire the right to deduct VAT. For this reason, by decision of 12 July 2017, the applicant was refused the right to the VAT deduction of EUR 948980, was charged interest of EUR 38 148.46 for late payment of VAT, and a VAT fine of EUR 284694 was imposed upon it.

17The applicant brought a complaint against that decision of the tax authority before the Mokestinių ginčų komisija prie Lietuvos Respublikos Vyriausybės (Tax Disputes Commission under the Government of the Republic of Lithuania; ‘the Tax Disputes Commission’) which, by decision of 22 January 2018, set aside the parts of the decision of the tax authority in respect of the interest for late payment and the fine, but, after stating that the applicant abused rights, upheld the decision in that respect.

18The applicant brought an action against the latter part of the decision of the Tax Disputes Commission before the Vilniaus apygardos administracinis teismas (Regional Administrative Court, Vilnius, Lithuania), which dismissed the action as unfounded by judgment of 14 November 2018.

19The Lietuvos vyriausiasis administracinis teismas (Supreme Administrative Court of Lithuania) partially upheld the applicant’s appeal by order of 13 May 2020, stating, inter alia, that it was necessary for the court of first instance to assess the conditions for, and indications of, the presence of abuse of rights in the case in point.

20The Vilniaus apygardos administracinis teismas (Regional Administrative Court, Vilnius) after re-examining the tax dispute, found by judgment of 3 September 2020 that the applicant abused rights, and therefore the tax authority was justified in refusing its right to deduct input VAT. The applicant again appealed to the Lietuvos vyriausiasis administracinis teismas (Supreme Administrative Court of Lithuania). That court stayed the proceedings and referred the following question to the Court of Justice for a preliminary ruling under Article 267 TFEU:

‘Is Council Directive [2006/112], in conjunction with the principle of fiscal neutrality, to be interpreted as prohibiting or not prohibiting a practice of national authorities under which the right of a taxable person to deduct input VAT is denied where that person, when acquiring items of immovable property, knew (or should have known) that the supplier, due to his [or her] insolvency, would not pay (or would not be able to pay) the output VAT into the State budget?’

21In the proceedings before the Court, the applicant, Lithuania, the Czech Republic and the European Commission submitted written observations. In accordance with Article 76(2) of the Rules of Procedure of the Court of Justice, the Court did not consider it necessary to hold a hearing.

IV. Legal assessment

A. The question referred and the course of the investigation

22The question referred concerns, in essence, the handling of transactions carried out by a supplying taxable person in payment difficulties. In this specific case, that question arises in relation to the situation where the right of a recipient of a supply to deduct input VAT is denied (Article 168 of the VAT Directive).

23The VAT treatment of transactions between undertakings in the case where one of them is experiencing payment difficulties seems to be generally problematic for tax authorities. Such difficulties also exist in the case of transactions vis-à-vis a recipient of a supply which is experiencing payment difficulties. The Court has already delivered a number of judgments on that situation. Those judgments are considered first in order to achieve a consistent solution (Section B).

24It will then be examined whether the Court’s case-law on fraud – on which the Czech Republic relies, in essence – applies at all in the present case (Section C) or whether – in line with the view taken by Lithuania – abusive conduct on the part of the recipient of the supply is to be assumed (Section D). Lastly, it may then be possible to deny the right of deduction on the basis of Article 273 of the VAT Directive (Section E).

25That must be distinguished from the question of whether the conditions for a deduction of input VAT under Article 168(a) of the VAT Directive are met at all where the entire value of the supply received is not paid for but is used in full to satisfy existing debts that the supplier has with the recipient of the supply. Even though the referring court does not expressly ask about this, fulfilment of the conditions for deducting input VAT is a prerequisite for even considering a refusal of the right to deduct input VAT. Therefore, an answer to that logical preliminary question will be helpful for the purpose of resolving the dispute in the main proceedings (Section F).

B. Influence of a taxable person’s payment difficulties on VAT revenue

26From a substantive perspective, the aim of VAT as a general tax on the consumption of goods is to impose a tax not on the supplier, but on consumer capacity, which is demonstrated by consumers’ expenditure of assets to procure a consumable benefit. ⁵ This is particularly clear from the provisions of Article 73 of the VAT Directive. According to that article, the taxable amount consists of everything which constitutes the consideration which ‘has been or is to be obtained’ by the supplier (that is to say, the service provider).

27Consequently, the Court has explicitly ruled on several occasions ⁶ that ‘the taxable amount serving as a basis for the VAT to be collected by the tax authorities cannot exceed the consideration actually paid by the final consumer which is the basis for calculating the VAT ultimately borne by him [or her]’.

28The VAT Directive proceeds on the assumption that the default of the recipient of a supply due to its insolvency also entails the default of the corresponding tax revenue of an indirect tax on consumption, which would otherwise have arisen had the intended payment been made. Consequently, with regard to the tax revenue, the tax authorities bear the risk of insolvency of the private party involved in the collection of tax. The Court has already expressly clarified this with regard to the case where the recipient of a supply becomes insolvent. ⁷

29The question to be decided in the present case is whether that changes if it is not the recipient of a supply but the supplier who experiences payment difficulties. As a taxable person, the latter is also only an accessory of the State in the collection of tax. As a result, the question here is also whether the State or the taxable business partner of a taxable person is liable for defaults due to insolvency. However, in the present case, that question does not arise at the level of tax liability, but at the level of the deduction of input VAT under Article 168 of the VAT Directive, which is intended to relieve undertakings of the burden of VAT. Therefore, the principle of neutrality of VAT must additionally be taken into account for the answer in the present case.

30The principle of neutrality represents a fundamental principle ⁸ of VAT. It requires, inter alia, that the undertaking, acting as tax collector on behalf of the State, should be relieved of the final burden of VAT, ⁹ in so far as the economic activity carried on by the undertaking is itself geared towards the realisation of taxable transactions. ¹⁰

31In accordance with the Court’s settled case-law, the question of whether the VAT payable on the prior or subsequent sales of the goods concerned has or has not been paid to the public purse ¹¹ is irrelevant to the right of the taxable person to deduct input VAT, where the recipient of the supply has sustained a charge to that VAT.

32As a result, the right of deduction of input VAT by the recipient of the supply continues to exist, in principle, even if the supplier does not use the amount received to pay his or her VAT liability and, due to a lack of assets, the tax authorities cannot successfully enforce that tax liability.

C. Court’s case-law on combating tax fraud

33However, the outcome may be different if the Court’s case-law on combating tax fraud in VAT law – as advocated by the Czech Republic – can be applied. This is because, as the Court has repeated time and time again, the prevention of tax evasion, avoidance and abuse is an objective recognised and encouraged by the VAT Directive. ¹²

34For the purpose of combating tax evasion, it is sufficient – in contrast ¹³ to combating abuse (Section D) – if the taxable person does not evade the tax himself or herself. ¹⁴ Rather, it is sufficient if the taxable person knew or should have known ¹⁵ that he or she was participating in a transaction connected to VAT fraud. In that case, he or she must, for the purposes of the VAT Directive, be regarded as a participant in that fraud. ¹⁶ This requires the Member States to refuse the taxable person deduction of VAT (where, as in this case, he or she is the recipient). ¹⁷

35However, that situation – participation in a transaction connected to VAT fraud – is not present here, as the Commission also states. The mere late payment or non-payment of declared VAT cannot be regarded as tax evasion or VAT fraud within the meaning of the abovementioned case-law.

36As the Grand Chamber of the Court has already ruled in Scialdone, a distinction must be drawn between mere non-payment and non-declaration of VAT by the person liable for payment of VAT. ¹⁸ Failure to pay declared VAT within the time limit prescribed by law does not give the taxable person a benefit since the tax is still payable. The Court went on to say ¹⁹ therefore, that that such failures to pay declared VAT do not present the same degree of seriousness as VAT fraud.

37Consequently, there is no tax fraud if – as in the present case – a taxable person in financial difficulties sells goods in order to pay off his or her debts and declares the VAT incurred in that context, but subsequently fails to pay it or to pay it in full. Therefore, it cannot be said, to the applicant’s detriment, that it knew or should have known that it was involved in VAT fraud.

D. Existence of abuse in the acquisition of assets of an undertaking experiencing payment difficulties

38Therefore, the question arises as to whether the applicant can be accused of an abuse of rights. The abuse could consist in the fact that the applicant took over the immovable property in the course of enforcement even though it knew that the seller was experiencing payment difficulties and therefore might not be able to pay the resulting tax debt in full.

39In accordance with the Court’s case-law, two conditions must be met for a finding of an abuse of rights. First, the transactions concerned must result in the accrual of a tax advantage the grant of which would be contrary to the purpose of the VAT Directive, and, second, it must also be apparent from a number of objective factors that the essential aim ²⁰ of the transactions concerned is to obtain that tax advantage. ²¹

1. Wording and principles of the VAT Directive

40In the present case, only the applicant’s deduction of VAT and the simultaneous tax liability of the insolvent seller could be considered an ‘advantage’. The very wording of the VAT Directive clearly militates against that tax advantage being contrary to the purpose of the VAT Directive. This is shown in particular by Article 199(1)(g) of the VAT Directive, which allows Member States to provide for a shift of tax liability to the recipient of the supply in the case of a compulsory sale of immovable property. This is because three statements can be derived from that legislative decision.

41First, unlike the Lithuanian tax authorities, the EU legislature does not regard the acquisition of goods from a company whose assets are being compulsorily auctioned (that is to say from an undertaking in financial difficulties) as an abuse of rights. Otherwise, the EU legislature would not offer Member States that possibility to shift the tax liability.

42Second, the EU legislature has recognised that the tax authorities experience difficulties in establishing and enforcing the tax liability of a taxable person in respect of whom a compulsory sale procedure has been initiated. This is the reason why provision is made for an optional shifting of tax liability. The law does not contain an unintended loophole that gives rise to a special risk of default for tax authorities.

43Third, the EU legislature provided for the possibility to shift tax liability only in respect of the compulsory sale of immovable property. It follows, by a contrario reasoning, that the normal regime (tax liability of the supplier) applies to other goods acquired in a compulsory sale procedure. However, if the EU legislature proceeds on the assumption that the party against whom enforcement is sought remains the taxable person in the case of a compulsory sale, the acquisition of goods in a compulsory sale procedure from an undertaking (which will usually be insolvent in such cases) can hardly constitute an abuse of rights. The Commission also emphasises this.

44That is not altered by the fact that the purchaser of goods in a compulsory sale procedure knows positively that the party against whom enforcement is sought (that is to say the supplier) is so over-indebted that he or she is more likely to be unable to pay his or her tax debt. The assumption of an abuse of rights in that situation would counteract the intention of the legislature.

2. Application of the statements in the ALTI case?

45That is not altered by the far-reaching statements recently made by the Court in ALTI. ²² In that case, the Court stated in the reasoning for its decision that a ‘party [to a contract] – which is deemed, as a result of its voluntary participation in VAT abuse, to have subscribed from the outset to the unlawful intention not to pay the tax on the part of the person liable for payment – [is obliged] to remedy the effects of the late payment of that tax, for which it is also answerable in part’.

46However, on the one hand, that statement concerned ‘only’ the question of the scope of liability under Article 205 of the VAT Directive, which is not at issue in the present case. On the other hand, it is scarcely possible to speak of an ‘unlawful intention not to pay the tax’ in the case of an undertaking experiencing payment difficulties. Nor can a ‘VAT abuse’ be assumed if it is merely a case of legal transactions being carried out with economic operators experiencing payment difficulties. That applies all the more so where – as in the present case – the acquisition takes place in or after the conclusion of a State-organised compulsory sale procedure.

47If the Court’s statement from ALTI were to be taken as the basis, the purpose of the compulsory sale procedure would be reduced to absurdity. The realisation of the assets of a commercial undertaking against whom enforcement is sought would be de facto possible only for private individuals (and undertakings that do not carry out any transactions in respect of which VAT is deductible), since their deduction could not be reduced. This would considerably restrict the circle of potential purchasers and would thus run counter to the purpose of the compulsory sale procedure. The latter consists in trying to realise the assets in the best possible way in order to satisfy the creditors to the greatest degree possible.

3. Wholly artificial arrangement?

48For the existence of abuse, the Court also requires purely formal or artificial transactions devoid of any economic and commercial justification, carried out with the essential aim of benefiting from an improper advantage. ²³ The acceptance of an offer provided for in the public compulsory sale procedure is not artificial.

49Nor is an assumption of abuse appropriate on the basis of the legal consequence. In tax law, where an abusive practice exists, the transactions involved must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice. ²⁴

50In the present case, however, there is no alternative for the recipient of the supply by which it would have avoided an abuse of rights and which could then be relied upon. It cannot pay the net price only and then pay the VAT itself if it is not the person liable to pay the tax. It cannot seriously be accused of having taken over the debtor’s asset in order to settle the debt instead of acquiring a similar asset from a third party which might then have been able to pay the tax.

4. Prohibitions on trade through VAT law?

51Lastly, a finding of abuse in the situation in the present case would be tantamount to a prohibition on trade with certain (non-criminal) persons, which is even more alien to VAT than the penalising of criminal conduct or of knowledge of criminal conduct of other persons. ²⁵ An undertaking in financial difficulties also carries out a (legal) economic activity within the meaning of Article 9 of the VAT Directive, therefore owes VAT and must state that VAT separately (see point 10 of Article 226 of the VAT Directive) in an invoice (see Article 220 of the VAT Directive).

52To deny the recipient of a supply its right of deduction in that respect simply because it knew that its contracting partner was in financial difficulties and therefore might not (be able to) pay the VAT debt would cut those taxable persons off from a large part of the market and thus constitute a barrier to market access. That would run counter to the rationale behind the principle of neutrality, which, as is the case with VAT law as a whole, does not distinguish between undertakings that are successful or less successful, those that are already established or are in the process of being founded, or those that are financially strong or are over-indebted.

53Moreover, the Court’s case-law ²⁶ under discussion in the present case was developed in the light of VAT’s particular susceptibility to fraud. However, the present case does not concern that particular susceptibility to fraud, which, in accordance with the case-law of the Court, obliges the undertakings involved to exercise increased due diligence. Rather, the issue is the allocation of the risk of insolvency (with regard to VAT) in transactions with undertakings in financial difficulties.

54That risk of insolvency, which is borne by the State, could be reduced by the EU legislature at any time. Over 10 years ago, there were already corresponding initiatives by individual Member States to move to a system of direct taxation for business-to-business transactions (reverse charge), but the EU legislature did not further pursue them. ²⁷ The EU legislature made that decision deliberately, because there are good reasons for the collection of indirect tax on a fractional basis. The Commission also stated the following in 2008: ‘A generalised reverse-charge system would clearly be a new concept that could generate both positive and negative consequences.’ ²⁸ There was clearly no desire to accept those negative consequences.

55However, if the EU legislature opts not to take such measures to combat risks of insolvency, a taxable person who carries out transactions with undertakings in financial difficulties cannot be accused of an abuse of rights simply because he or she should have known (or even knew) that the existing risk of insolvency might materialise.

56Moreover, the EU legislature has in any case granted the Member States the option to implement the reverse charge procedure. Lithuania could have made use of the possibility in Article 199(1)(g) of the VAT Directive. In that case, the tax revenue from the immovable property transaction would not have been lost and the right of deduction of VAT would have been granted to the applicant automatically.

5. Conclusion

57The extension of the abovementioned case-law to cover an accusation of an abuse of rights where transactions are carried out with undertakings in financial difficulties is therefore, in my view, not reconcilable with the VAT Directive.

E. Existence of a measure to ensure the correct collection of VAT

58If, therefore, refusal of the right of deduction of VAT is ruled out due to the lack of fraud on the part of the supplier and due to the lack of an abuse of rights on the part of the recipient of the supply, Article 273 of the VAT Directive could at most still allow the Member State (in casu, Lithuania) to refuse that right.

59That provision allows measures to ensure the correct collection of VAT and to prevent evasion. No tax evasion has been already committed. It is the same concerning the correct collection of VAT. The tax owed by the supplier must be levied on him or her if, as in the present case, it is not a reverse charge situation. Therefore, denying the recipient of the supply his or her right of deduction of VAT does also not ensure the correct collection of VAT.

60Furthermore, the measures based on Article 273 must not go further than is necessary to attain those objectives and must not undermine the neutrality of VAT. ²⁹ This would be the case, however, if the recipient of the supply remained liable for the VAT simply because he or she knew (or should have known) of his or her contracting partner’s financial difficulties. This is because he or she has no influence on whether the taxable person will nevertheless pay the tax incurred or whether the tax authorities will successfully assess and enforce it.

F. Logical preliminary question: are the requirements for the deduction of VAT met?

61Thus, the VAT Directive, in conjunction with the principle of fiscal neutrality, is to be interpreted as prohibiting a practice of national authorities under which the right of a taxable person to deduct input VAT is denied where that person, when acquiring items of immovable property, knew (or should have known) that the supplier, due to his or her insolvency, would not pay (or would not be able to pay) the output VAT into the State budget.

62However, this does not mean that the requirements for the deduction of VAT under Article 168(a) of the VAT Directive are also met in the present case. Even though the referring court did not expressly ask about that point, a closer look at it might be helpful for the purposes of providing a useful answer. That is because fulfilment of the requirements for the deduction of VAT is a logical condition for the question posed by the referring court in relation to denial of the right of deduction of VAT. However, in my view, it is unclear whether the requirements for the deduction of VAT by the applicant are met at all in the present case – as the referring court apparently assumes.

63The deduction of VAT is only intended to relieve the recipient of the supply of a VAT burden. ³⁰ Therefore, in principle, the deduction system allows the deduction of only the sums actually paid by each taxable person to his or her own suppliers (or into the State budget in a reverse charge procedure) in respect of VAT on the corresponding transaction. ³¹ In the present case, however, there was only a set-off against existing debts with the applicant (as the recipient of the supply). That might be regarded as a sufficient VAT charge; after all, the claims have been extinguished to the corresponding extent.

64However, such an approach conflicts with the scheme of the VAT Directive and the function of the supplying undertaking in VAT law, as emphasised by the Court in settled case-law. Accordingly, supplying undertakings (in casu, the seller) simply act ‘as tax collectors for the State and in the interest of the public exchequer’. ³²

65If the applicant had paid the seller the price as stated in the invoice (EUR 4 519 008.26 plus VAT in the amount of EUR 948 991.74), then the seller could have used that amount to settle its debts to the applicant in the amount of EUR 4 519 008.26 only if it had fulfilled its obligation as tax collector for State. The seller should have used the amount of EUR 948 991.74 to settle the VAT debt incurred.

66The outcome would be the same if Lithuania had made use of Article 199(1)(g) of the VAT Directive and provided for a reverse charge to the applicant. In that scenario too, payment of the debt would have been possible only in the amount of the net amount (EUR 4 519 008.26), since the applicant would have had to use the amount of EUR 948 991.74 to pay its own tax debt.

67Consequently, in the present transaction, only debts of the seller in the amount of the net amount would have been paid to the applicant. Can that outcome be different if the agreed consideration is immediately used to satisfy the supplier’s debt with the recipient of the supply?

68I do not think so. The way the tax is collected – indirect taxation with the supplier as the tax debtor or direct taxation where the tax debt is reverse charged to the recipient of the supply – is merely a question of the taxation technique. It does not change the fact that it is only the net amount that is always available for the payment of the supplier’s debt with the recipient of the supply. In both cases, the VAT incurred is intended from the outset to be paid to the State – as Lithuania rightly emphasises. In a system of indirect taxation such as that in the present case, it is ultimately paid only in trust to the supplier – as tax collector on behalf of the State.

69If that fiduciary concept is taken as the basis, a deduction of VAT by the applicant can be considered only if the applicant has paid to the supplier the VAT incurred in addition to the (net) amount intended for payment of the debt. Only in that case is VAT charged to the recipient of the supply. However, VAT can also be deducted if the recipient of the supply assumed or had to assume that the supplier would not use that amount to pay the VAT debt but, for example, to pay off other debts. That is because, even in that case, deduction of VAT cannot be denied to the recipient of the supply either because of abuse or because of knowledge of fraud or the like.

V. Conclusion

Conclusion

70I therefore propose that the Court answer the question referred for a preliminary ruling by the Lietuvos vyriausiasis administracinis teismas (Supreme Administrative Court of Lithuania) as follows:

Article 168(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, in conjunction with the principle of fiscal neutrality, is to be interpreted as prohibiting a practice of national authorities under which the right of a taxable person to deduct input value added tax (VAT) is denied where that person, when acquiring items of immovable property, knew (or should have known) that the supplier, due to his or her insolvency, would not pay (or would not be able to pay) the output VAT into the State budget.

However, it is for the referring court to decide whether the taxable person (recipient of the supply) in the present case is really charged with VAT collected from it by the supplier. This is not possible if the recipient of the supply has never made the funds available to the tax debtor for the payment of the VAT debt.

¹ Original language: German.

² See, in that regard, the detailed references in footnote 15 et seq.

³ Critical in that regard: Opinion of Advocate General Cruz Villalón in R. (C‑285/09, EU:C:2010:381, points 58 et seq. and 104 et seq.); likewise critical in that regard, for example, the President of one of the two turnover tax chambers of the Bundesfinanzhof (Federal Finance Court, Germany; ‘BFH’), Wäger, C., Der Kampf gegen die Steuerhinterziehung, UR 2015, p. 81 et seq.

⁴ (OJ 2006 L 347, p. 1; in the version applicable in the year at issue (2016)).

⁵ See, for example, judgments of 3 March 2020, Vodafone Magyarország (C‑75/18, EU:C:2020:139, paragraph 62); of 11 October 2007, KÖGÁZ and Others (C‑283/06 and C‑312/06, EU:C:2007:598) paragraph 37 – ‘it is proportional to the price charged by the taxable person in return for the goods and services which he or she has supplied’; and of 18 December 1997, Landboden-Agrardienste (C‑384/95, EU:C:1997:627, paragraphs 20 and 23).

⁶ Judgments of 15 October 2020, E. (VAT – Reduction of the taxable amount (C‑335/19, EU:C:2020:829, paragraph 21), and of 24 October 1996, Elida Gibbs (C‑317/94, EU:C:1996:400, paragraph 19); similarly the judgments of 16 January 2003, Yorkshire Co-operatives (C‑398/99, EU:C:2003:20, paragraph 19), and of 15 October 2002, Commission v Germany (C‑427/98, EU:C:2002:581, paragraph 30); likewise the Opinion of Advocate General Léger in MyTravel (C‑291/03, EU:C:2005:283, point 69).

⁷ Judgment of 15 October 2020, E. (VAT – Reduction of the taxable amount (C‑335/19, EU:C:2020:829, paragraph 53, read in conjunction with paragraphs 48 and 50).

⁸ The Court refers in its judgment of 13 March 2014, Malburg (C‑204/13, EU:C:2014:147, paragraph 43), to the principle of interpretation.

⁹ Judgments of 13 March 2008, Securenta (C‑437/06, EU:C:2008:166, paragraph 25), and of 1 April 2004, Bockemühl (C‑90/02, EU:C:2004:206, paragraph 39).

¹⁰ Judgments of 13 March 2014, Malburg (C‑204/13, EU:C:2014:147, paragraph 41); of 15 December 2005, Centralan Property (C‑63/04, EU:C:2005:773, paragraph 51); and of 21 April 2005, HE (C‑25/03, EU:C:2005:241, paragraph 57); and my Opinion in Centralan Property (C‑63/04, EU:C:2005:185, point 25).

¹¹ Judgments of 11 November 2021, Ferimet (C‑281/20, EU:C:2021:910, paragraph 56); of 9 November 2017, Wind Inovation 1 (C‑552/16, EU:C:2017:849, paragraph 44); of 6 December 2012, Bonik (C‑285/11, EU:C:2012:774, paragraph 28); and of 12 January 2006, Optigen and Others (C‑354/03, C‑355/03 and C‑484/03, EU:C:2006:16, paragraph 54).

¹² Judgment of 24 February 2022, SC Cridar Cons (C‑582/20, EU:C:2022:114, paragraph 33), order of 3 September 2020, Vikingo Fővállalkozó (C‑610/19, EU:C:2020:673, paragraph 50), and judgments of 16 October 2019, Glencore Agriculture Hungary (C‑189/18, EU:C:2019:861, paragraph 34), and of 6 December 2012, Bonik (C‑285/11, EU:C:2012:774, paragraph 35 and the case‑law cited).

¹³ See, expressly in relation to that separation, judgment of 11 November 2021, Ferimet (C‑281/20, EU:C:2021:910, paragraph 46 on the one hand, and paragraph 54 on the other); see also order of 14 April 2021, Finanzamt Wilmersdorf (C‑108/20, EU:C:2021:266, paragraph 35).

¹⁴ Judgments of 24 February 2022, SC Cridar Cons (C‑582/20, EU:C:2022:114, paragraph 34); of 16 October 2019, Glencore Agriculture Hungary (C‑189/18, EU:C:2019:861, paragraph 35); and of 6 December 2012, Bonik (C‑285/11, EU:C:2012:774, paragraph 38 and the case‑law cited).

¹⁵ In some earlier decisions the Court still used the wording ‘could not know’ (see, for example, judgment of 6 July 2006, Kittel and Recolta Recycling (C‑439/04 and C‑440/04, EU:C:2006:446, paragraph 60). However, this excessively broad wording, stemming solely from the question referred, now seems to have been rightly abandoned.

¹⁶ Judgments of 20 June 2018, Enteco Baltic (C‑108/17, EU:C:2018:473, paragraph 94); of 22 October 2015, PPUH Stehcemp (C‑277/14, EU:C:2015:719, paragraph 48); of 13 February 2014, Maks Pen (C‑18/13, EU:C:2014:69, paragraph 27); of 6 September 2012, Mecsek-Gabona (C‑273/11, EU:C:2012:547, paragraph 54); of 6 December 2012, Bonik (C‑285/11, EU:C:2012:774, paragraph 39); and of 6 July 2006, Kittel (C‑439/04 and C‑440/04, EU:C:2006:446, paragraph 56).

¹⁷ See judgments of 16 October 2019, Glencore Agriculture Hungary (C‑189/18, EU:C:2019:861, paragraph 34); of 22 October 2015, PPUH Stehcemp (C‑277/14, EU:C:2015:719, paragraph 47); of 18 December 2014, SchoenimportItalmoda Mariano Previti and Others (C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 62); of 13 March 2014, FIRIN (C‑107/13, EU:C:2014:151, paragraph 40); of 13 February 2014, Maks Pen (C‑18/13, EU:C:2014:69, paragraph 26); of 6 December 2012, Bonik (C‑285/11, EU:C:2012:774, paragraph 37); of 21 June 2012, Mahagében and Dávid (C‑80/11 and C‑142/11, EU:C:2012:373, paragraph 42); and of 6 July 2006, Kittel and Recolta Recycling (C‑439/04 and C‑440/04, EU:C:2006:446, paragraphs 59 and 61).

¹⁸ Judgment of 2 May 2018, Scialdone (C‑574/15, EU:C:2018:295, paragraphs 39 and 40).

¹⁹ Judgment of 2 May 2018, Scialdone (C‑574/15, EU:C:2018:295, paragraphs 41 and 42).

²⁰ See also, in detail in that regard, the Opinion of Advocate General Pitruzzella in W (VAT deduction linked to a shareholder contribution) (C‑98/21, EU:C:2022:160, points 68 and 78 et seq.).

²¹ Judgment of 11 November 2021, Ferimet (C‑281/20, EU:C:2021:910, paragraph 54); See, inter alia, judgments of 18 June 2020, KrakVet Marek Batko (C‑276/18, EU:C:2020:485, paragraph 85); of 17 December 2015, WebMindLicenses (C‑419/14, EU:C:2015:832, paragraph 36); and of 21 February 2006, Halifax and Others (C‑255/02, EU:C:2006:121, paragraphs 74 and 75).

²² Judgment of 20 May 2021 (C‑4/20, EU:C:2021:397, paragraph 43).

²³ Judgment of 26 February 2019, T Danmark and Y Denmark (C‑116/16 and C‑117/16, EU:C:2019:135, paragraph 98), Opinion of Advocate General Pitruzzella in W (VAT deduction linked to a shareholder contribution) (C‑98/21, EU:C:2022:160, point 67), and judgment of 22 May 2008, Ampliscientifica and Amplifin (C‑162/07, EU:C:2008:301, paragraph 28), even use the word ‘sole’.

²⁴ Judgment of 22 November 2017, Cussens and Others (C‑251/16, EU:C:2017:881, paragraph 46).

²⁵ See, similarly, but in the sense of a prohibition on trade in goods: order of 14 April 2021, Finanzamt Wilmersdorf (C‑108/20, EU:C:2021:266, paragraphs 36 and 37).

²⁶ See, expressly, judgment of 18 December 2014, Schoenimport Italmoda Mariano Previti and Others (C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 62).

²⁷ The requests of Austria and Germany under Article 27 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1) for authorisation to introduce a provision derogating from Article 21 of the Sixth VAT Directive, namely to introduce a general reverse charge from the previous taxable person (= supplier) to the recipient of the supply, were refused by the Commission on 19 July 2006.

Subsequently, in 2007, the Council invited the Commission to consider the creation of the possibility of applying the generalised reverse charge on an optional basis, but the Commission was not convinced; see Communication from the Commission to the Council and the European Parliament on measures to change the VAT system to fight fraud (SEC(2008) 249) of 22 February 2008 – COM(2008) 109 final, in particular point 5.1.

²⁸ Communication from the Commission to the Council and the European Parliament on measures to change the VAT system to fight fraud (SEC(2008) 249) of 22 February 2008 – COM(2008) 109 final, point 4.3.

²⁹ See, inter alia, judgment of 9 July 2015, Salomie and Oltean (C‑183/14, EU:C:2015:454, paragraph 62 and the case‑law cited).

³⁰ See my Opinion in Biosafe – Indústria de Reciclagens (C‑8/17, EU:C:2017:927, point 44 et seq.); see also the Opinion of Advocate General Campos Sánchez-Bordona in Volkswagen (C‑533/16, EU:C:2017:823, point 64).

³¹ For example, judgment of 22 February 2018, T – 2 (C‑396/16, EU:C:2018:109, paragraph 24 and the case-law cited). See also judgment of 29 April 2004, Terra Baubedarf-Handel (C‑152/02, EU:C:2004:268, end of paragraph 35). It is true that in the German version of that judgment the Court uses the wording ‘abgeführt’ (‘paid’ in the English version). However, since it is referring to the recipient of the supply who pays that VAT not to the tax office but to the service provider, it is clearly the latter that is meant. The French version also uses the phrase ‘avoir été acquittée’, which can also be naturally translated correctly as ‘gezahlt wurde’ (‘has been paid’). This becomes particularly clear in paragraph 36 – in which it is also correctly translated.

³² Judgments of 21 February 2008, Netto Supermarkt (C‑271/06, EU:C:2008:105, paragraph 21), and of 20 October 1993, Balocchi (C‑10/92, EU:C:1993:846, paragraph 25).