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No limits to input VAT deductibility

Preventive activity is key

A state cannot restrict deductibility of input VAT even when there had been subsequent transactions without output VAT based on a different classification of a transaction among EU states


The EU Court ruled on 22-12-2010 (case of RBS Deutschland Holdings, C-277/09) that deductibility of input VAT does not depend on the subsequent output tax. The ruling examined the case of an English company requesting the return of input VAT for the purchase of vehicles after it had later paid a lease to a German company.

As the tax treatment of the leasing transaction differed in Great Britain and Germany (in one country it was regarded as an exempt supply of goods and, in the other, an exempt supply of services), in practice the leasing transaction was not taxable in either country. This motivated the denial of the refund of input VAT by British authorities as they argued that a balance had to be struck between input and output tax.

Following a detailed examination of the relationship between input and output tax, the Court ruled that the denial of the VAT refund was not justified, and it reached the conclusion that anti-fraud regulations were not applicable in this case either. The principle of VAT neutrality prevails over the different classification of the leasing transaction. Finally, the court ruled that, when a taxpayer is entitled to choose among different transactions, said taxpayer is also entitled to choose the structure of its business in order to reduce the relevant tax burden. Tax planning is not prohibited and is legitimate.

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