Contractor vs. Subcontractor: ECJ Defines VAT Adjustment Rights

Insolvency is not new in the business world. However, it can complicate business relationships, particularly those that include subcontractors. The case between the Mokoryte and the Romanian Ministry of Finance – Directorate-General and Tax Authority brings us an interesting scenario, where a Romanian construction subcontractor's seemingly straightforward VAT recovery attempt collided with the fundamental architecture of EU VAT law.

The case involves two contractual relationships, debt claims, assignment of claims, and one key dilemma: when a debt changes hands through assignment, do the VAT rights attached to it travel with it, or do they remain permanently anchored to the taxable person who originally declared them?

Background of the Case 

In 2007, the CBC Development Design, as developer, hired Modern Bau as contractor to build a business centre. However, the contractor then subcontracted part of the construction work to Mokoryte. Problems arose when the developer became insolvent in December 2014. Following the end of the insolvency procedure, the Mokoryte registered a claim in the developer’s insolvency proceedings for over RON 9.4 million (around EUR 1.84 million), representing amounts allegedly owed under the main construction contract.

At the same time, the contractor failed to pay Mokoryte for construction work already completed, resulting in Mokoryte bringing legal proceedings against the contractor at the end of 2014, demanding around RON 1.97 million (approximately EUR 386,000), including VAT.

In July 2015, the dispute was partially settled through mediation, followed by a court-approved settlement in September 2015, resulting in the contractor paying approximately RON 270,000 (around EUR 53,000), including VAT. Nonetheless,, this payment covered only part of the outstanding debt. Regarding the rest of the debt of RON 1.7 million (approximately EUR 333,000), the company and contractor agreed on the assignment of claims. Under the agreement, the company took over the contractor’s claim against the insolvent developer.

As a result, the developer's insolvency records were amended so that Mokoryte became directly registered as a creditor in the developer’s insolvency estate for the remaining unpaid amount of RON 1.7 million, including VAT. However, the developer’s insolvency proceedings ended in April 2021 without any payment being made to settle that debt.

Consequently, the company attempted to recover the VAT previously paid on the unpaid invoices. In December 2021, the company issued five cancellation invoices to the developer to reverse invoices originally issued in 2009 for the construction works. By doing so, the company reduced the VAT it had previously declared and paid by approximately RON 265,358 (around EUR 52,000) in its VAT return for the fourth quarter of 2021. Because this action created a negative VAT balance, the company also requested a VAT refund from the Tax Authorities.

The Tax Authority denied the adjustment during a subsequent tax inspection, arguing that the company was not entitled to reduce the VAT because, legally, it had supplied services to the contractor, not directly to the developer. Only the contractor, as the direct supplier to the developer under the main works contract, could invoke the VAT adjustment linked to the developer’s insolvency. 

In March 2022, the Tax Authority formally assessed additional VAT against the company for RON 265,358 and rejected its request for a VAT refund. The company challenged that decision. However, in April 2023, the Ministry of Finance upheld the tax assessment and confirmed the previous decision. The company again challenged the decision before the Regional Court, seeking annulment of both the tax assessment notice and the Ministry’s decision. 

In June 2024, the Regional Court dismissed the action, leading to the company's appeal before the Court of Appeal. The Court of Appeal identified the core legal uncertainty in this case, and referred a request for the preliminary ruling to the Court of Justice of the European Union (ECJ).

Main Questions from Request For Ruling

The Court of Appeal asked whether EU VAT law prevents a subcontractor, acting as an assignee of a debt claim, from adjusting the VAT taxable amount after acquiring the contractor’s claim against the final customer.

Applicable EU VAT Directive Article

The ECJ outlined several articles from the EU VAT Directive as the most relevant ones for this case, including Articles 2(1), 9(1), 28, 63, 73, 90, and 185. Article 90 was the most critical one, as it requires EU countries, in situations such as cancellation, refusal, or total or partial non-payment, to reduce the taxable amount accordingly.

Romania National VAT Rules

When it comes to national rules and regulations applicable to this case, the ECJ combined VAT rules governing bad debt relief with civil law provisions on assignment of claims, construction contracts, and subcontracting relationships. This includes Article 287(d) of the Romanian Tax Code, Point 32 of Government Decision No. 1/2016, and Articles 1.568, 1.851, and 1.852 of the Civil Code.

Importance of the Case for Taxable Persons

The case highlights the distinction between the economic ownership of a debt claim and the VAT position connected to the original taxable transaction, which is important for businesses that frequently use assignments of claims, factoring arrangements, or restructuring mechanisms in insolvency situations. 

Additionally, the ECJ in its decision clarifies some of the most important general rules, including which entity is considered the actual supplier for VAT purposes within multi-layered contractual chains. Also, the case explores one significant question of whether the right to reduce the taxable amount constitutes an independent financial right transferable under civil law, or whether it is intrinsically linked to the taxable person that originally declared the VAT.

Analysis of the Court Findings

The ECJ recalled that Article 90(1) requires the taxable amount, and therefore the amount of VAT due, to be reduced whenever the supplier does not actually receive part or all of the agreed consideration after a taxable transaction has taken place. This rule reflects one of the most fundamental EU VAT principles of fiscal neutrality.

The ECJ also clarified that under the established case law, EU countries may impose only those formalities necessary to prove that payment has definitively not been received. In practical terms, the right to reduce VAT cannot be made excessively difficult to exercise where a debt has clearly become irrecoverable. 

Notably, the ECJ identified the key issue in this case: who exactly owns the right to reduce the VAT taxable amount. More specifically, the unresolved question is whether that right belongs exclusively to the taxable person that originally carried out the taxable supply and became liable for VAT on it, or whether it can also pass to a third-party taxable person that later acquires the debt claim through assignment.

In answering this question, the ECJ emphasized that taxable persons are not merely intermediaries who collect VAT on behalf of the government, but are themselves the entities legally responsible for paying VAT when carrying out taxable supplies. The VAT liability generally rests with the taxable person who supplies the goods or services, and the obligation arises independently of whether the supplier has actually received payment from the customer.

The ECJ continued clarifying general rules by explaining that VAT becomes chargeable at the moment the goods or services are supplied, meaning that the taxable event occurs when the transaction takes place, regardless of whether the supplier has been paid. 

Importantly, the obligation to pay VAT to the Tax Authorities remains with the supplier even if its status changes after the taxable transaction has taken place. However, because the taxable amount is based on the consideration actually received, the supplier retains the possibility to adjust the VAT amount if it later becomes clear that payment will not be fully received.

Another critical consideration for settling this dispute is the different contractual relationships involved. The first relationship was between the subcontractor and the contractor, under which the subcontractor performed construction services and issued invoices. The second relationship refers to a separate works contract between the contractor and the developer. The ECJ noted that Mokoryte, as the subcontractor, 

This distinction is vital because the subcontractor’s VAT rights must be assessed solely in relation to the transaction in which it actually participated. From that perspective, the developer’s insolvency and non-payment are relevant only indirectly, as they affect the contractor’s ability to pay its own debt, but they do not change the legal structure of the subcontractor’s taxable supply.

Given the specifics of the case, the ECJ had to examine another question: whether the condition of non-payment under Article 90(1) of the EU VAT Directive is met in relation to the subcontractor’s own transaction with the contractor. In addition to determining that the assignment of a claim can itself have economic value and may constitute part of the consideration received by the subcontractor, the ECJ also determined that there was no unpaid consideration in the subcontractor–contractor relationship.

Concerning the second relationship between the contractor and developer, the ECJ noted that the developer ultimately did not pay the contractor, nor the subcontractor who had acquired the claim, meaning there is clearly non-payment. A non-payment which, in principle, could justify a VAT adjustment because the consideration due for the works was never actually received.

However, the ECJ immediately distinguishes the question of non-payment from the question of entitlement to adjust VAT. Importantly, the ECJ stated that the contractor was the taxable person who carried out the supply of services to the developer and was therefore the person who became liable for VAT at the time the chargeable event occurred. Moreover, the contractor remained the person liable for VAT on the transaction with the developer even after assigning the civil law claim to the subcontractor.

Given that the contractor was the taxable person that carried out the supply and declared the VAT, only it could reduce the taxable amount if the developer failed to pay. Since the taxable amount must reflect the consideration actually received, the contractor was entitled to seek a VAT reduction so that the Tax Authorities would not retain VAT on sums that were never ultimately collected due to the developer’s insolvency.

While the contractor remained the supplier of the services for VAT purposes, the subcontractor merely acquired the debt claim, whereas the underlying taxable transaction between contractor and developer remained unchanged. Thus, the right to adjust VAT continued to belong to the contractor because it was the taxable person.

Furthermore, the ECJ drew an important legal distinction between civil law and VAT law, underlying that determining who may adjust VAT is a matter governed exclusively by EU VAT law, not by national civil law rules concerning assignments of receivables. Even if the national rules provide that all ancillary rights attached to a claim pass to the assignee, that principle cannot extend to rights that are specifically linked to VAT liability under EU law. And the right to an adjustment of the taxable amount, as the ECJ views it, is an ancillary or related right connected to the taxable person’s own VAT debt and entitlement to recover VAT overpaid to the Tax Authorities.

Courts Final Decision

Based on its interpretation and established case law, the ECJ concluded that Article 90 of the VAT Directive prevents a subcontractor, such as Mokoryte, that has acquired, through assignment, a contractor’s claim against a developer from reducing the VAT taxable amount when the developer fails to pay that claim.

Conclusion

The message of the ECJ decision is unambiguous and, for many businesses, a cautionary tale: VAT rights do not follow debt claims across contractual boundaries, no matter how compelling the economic logic may seem. By ruling that only a contractor can invoke VAT adjustment, the ECJ set a clear line between what civil law permits and what EU VAT law allows, firmly placing the latter beyond the reach of private assignment agreements.

Source: Case T‑233/25 - Mokoryte SRL v Ministry of Finance – Directorate-General, Romania, EU VAT Directive