ECJ Case C-624/23: Late VAT Registration and Deduction Issues Explained

ECJ case C‑624/23 addresses issues of VAT deduction due to late VAT registration and incorrect invoicing. The case includes four companies: SEM Remont, a Bulgarian company that carries on a construction activity building underground and overground railways; Gidrostroy, a non-EU company specializing in the provision of ships for the performance of dredging work; EIS – Stroitelna kompania (EIS), the representative of Gidrostroy in Bulgaria, and ES BILD, a company formed between SEM Remont and EIS. 

The issue arose when the Tax Administration declined SEM Remont's right to deduct VAT after conducting the tax audit in Gidrostroy.

Background of the Case 

SEM Remont is a VAT-registered company in Bulgaria that concluded a contract with Gidrostroy. Under the agreement, Gidrostroy had to supply ships that SEM Remont would use to carry out dredging operations in the aquatic area of the port of Varna in Bulgaria.

Since Gidrostroy was not registered for VAT in Bulgaria, it issued two invoices to SEM Remont without calculating VAT, in the amounts of BGN 1.32 million (approximately EUR 675,200) and BGN 2.44 million (approximately EUR 1.25 million), respectively. The work was conducted for ES BILD, a joint company formed by SEM Remont and EIS.

After Gidrostroy issued these invoices on October 20 and November 15, 2020, it submitted the VAT registration application in Bulgaria. After the registration procedure was completed on December 11, 2020, the Bulgarian Tax Administration conducted a tax audit. It determined in the process that Gidrostroy should have registered for VAT in December 2019 and that its liabilities started then, not in December 2020.

With that conclusion, the Tax Administration ordered Gidrostroy to calculate the VAT on all taxable transactions from December 2019 and submit a report. The Gidrtostroy did so in July 2021, and among other transactions, two relating to invoices issued to SEM Remont were included in the report, stating a total VAT amount of BGN 752,303.05 (approximately EUR 384,650).

Based on this report, SEM Remont granted an exact loan of BGN 752,303.05 to EIS, which used the loan to pay the Bulgarian State Treasury the VAT due. Afterward, SEM Remont stated a right to deduct VAT in its purchase ledger and in the VAT return.

However, the Tax Administration denied the right to a VAT deduction. It stated that on the date the relevant report was issued, the chargeable event did not occur, and VAT was deemed not payable then. Furthermore, it added that SEM Remont did not have a valid VAT invoice and that the report itself is not a valid document for proving the right to deduct VAT. 

Finally, the Tax Administration concluded that Gidrostroy, as a supplier, failed to register for VAT on time and, thus, could not retroactively issue a valid invoice that included VAT for the supplies made to SEM Remont.

Since the SEM Remont disagreed with this decision, it appealed to the Administrative Court in Varna. The Administrative Court needed clarification about the compatibility of the Bulgarian national VAT law and Tax Administration practices with the EU VAT Directive and the principle of VAT neutrality. More specifically, the Administrative Court was uncertain if SEM Remont's right to deduct VAT should depend on the supplier's registration status and issuance of a report instead of a corrected invoice, given that the transaction was taxable and VAT was later identified.

Therefore, the Administrative Court decided to refer questions to the ECJ for a preliminary ruling.

Main Questions from Request For Ruling

The Administrative Court referred three questions to the ECJ. The first one is whether it is permissible for the Tax Administration, based on strict formal requirements, to deny a right to deduct VAT to the service recipient, SEM Remont, when the VAT was paid, but documentation is incomplete or informal.

The second question depends on the answer to the first question. Therefore, if the answer to the first question is negative, meaning that the Tax Administration practice is impermissible, when can the right to deduct VAT be exercised? Should it be when the original invoice was issued, although the VAT was not included, or upon the issuance of the report by the Gidrostroy?

The third question addresses whether refusing  Gidrostroy the right to issue corrected invoices for retroactive VAT calculation undermines the SEM Remonts' rights and, therefore, violates EU VAT rules and regulations and neutrality principles.

Applicable EU VAT Directive Article

Several articles from the EU VAT Directive are crucial for this case: Article 63, Articles 167 and 168, Article 176, Articles 178 and 179, Article 203, Articles 218 and  219, and Article 226. 

All stated articles can be put in two groups. Articles 63, 167, 168, 176, 178, and 179 provide information on the right of deduction, whereas articles 203, 218, 219, and 226 provide necessary information on invoicing and related documents.

Article 63 states that VAT becomes chargeable when goods or services are supplied and that the right to deduct VAT arises at that time. EU VAT Directive further states that taxable persons can deduct VAT on goods and services used for taxable transactions provided they have correct invoices that meet specific requirements. In addition, Article 179 explains how VAT is deducted by defining the process of subtracting deductible VAT from the total amount due.

Articles 203, 218, 219, and 226 provide necessary information on the content of invoices. Documents considered invoices must comply with the EU VAT Directive invoicing requirements, including suppliers' VAT numbers, supply dates, and taxable amounts. Article 219 specifies that amendments to the original invoice must be treated as valid if they explicitly refer to the original invoice.

Bulgarian National VAT Rules 

Several articles from the Bulgarian VAT Law are essential for this case. The first one is Article 25, which defines the concept of the VAT chargeable event. Article 71 of the Bulgarian VAT Law sets the conditions for exercising the right to deduct input VAT. The primary condition is to have a valid tax document, such as an invoice, that meets the requirements, including stating the VAT as a separate line on the invoice.

Article 96 defines the VAT registration threshold and outlines the deadline for submitting the VAT registration application. Article 102 is crucial as it determines that the Tax Administration has the right to retroactively register a taxable person for VAT if that person fails to register on time.

While Article 114 provides information on mandatory content on invoices, Article 116 forbids amending them and states that incorrect invoices must be canceled or reissued.

Importance of the Case for Taxable Persons

This case highlights the importance of timely VAT registration and proper invoicing for VAT compliance and deduction rights under the national VAT laws, such as the Bulgarian VAT Law and the EU VAT Directive. 

More specifically, this case clarifies EU VAT Directive provisions that establish the fundamental VAT chargeability and deduction principles, emphasizing proper invoicing and documentation as prerequisites for claiming VAT deductions. Furthermore, this case explains the principle of neutrality for VAT purposes, which ensures that businesses involved in VAT-taxable transactions can recover incurred VAT if all necessary procedural and formal requirements are met.

Analysis of the Court Findings

The ECJ's initial task was to examine whether the EU VAT Directive prohibits EU Member States from implementing rules that deny the right to deduct VAT when the supplier, in this case Gidrostroy, fails to register for VAT and issues an invoice without calculating VAT, and if during the tax audit, that same supplier issues a report identifying due VAT and itself as a recipient of the supply.

In its decision, the ECJ underlined that under the settled case law, the right to deduct VAT is a fundamental principle of the EU VAT Directive, and generally, it cannot be restricted. However, the ECJ noted that certain conditions, such as VAT being due and paid, must be met to exercise this right.

Furthermore, the ECJ stated that the assumption that the price includes VAT if the supplier cannot recover VAT could not apply to this case because the invoices issued by the Gidrostroy referred only to the taxable amount without VAT, whereas VAT was identified only in a report drafted during a tax audit.

Although prior case law allows certain documents to replace invoices if they provide the required information, a report issued by Gidrostroy cannot qualify as such a document since it was submitted during the tax audit and not before. Additionally, the report identifies Gidrostroy as both the supplier and recipient.

Furthermore, since the VAT was not paid and not payable by SEM Remont,  and because the Tax Administration determined that invoices relate to an additional transaction carried out by another involved company, ES BILD and that the loan contract did not create a VAT liability for SEM Remont or correct issued invoices, ECJ concluded that substantive requirements were not met. Under the EU VAT Directive, it is possible to deduct VAT if the formal requirements are not met, but only if these substantive requirements are.

The ECJ further underlined that VAT neutrality generally allows VAT deductions if the substantive requirements are met, including the actual VAT payment. Moreover, case law allows retroactive invoice correction, but only if the underlying VAT has been paid. However, in this case, the VAT was never paid and was reported by Gidrostroy as a supplier only during the tax audit, which does not satisfy the substantive requirements.

In the end, the ECJ concluded that allowing corrections in cases where the supplier or recipient has not paid the VAT could lead to a loss of tax revenue, which is the opposite of VAT principles defined under the EU VAT Directive.

Courts Final Decision

In its judgment, the ECJ ruled that national legislation of EU Member States has the right to deny a recipient, SEM Remont, the right to deduct VAT if the supplier failed to register for VAT when required by national law, issued invoices that did not include VAT, and issued a report stating VAT only because of the tax audit by the Tax Administration, where the supplier is noted both as supplier and recipient.

Regarding the exclusion of the possibility to correct invoices, the ECJ ruled that EU Member States had this right when the original invoice provided to the recipient did not include VAT and when the supplier, Gidrostroy, tried to rectify this only during a tax audit without ensuring substantive compliance.

Conclusion

Following the letter of the ruling, the ECJ stated that the denial of VAT deduction is consistent with the principles of the EU VAT Directive. Additionally, the ECJ decision supports ensuring the proper collection of VAT and preventing fraud while emphasizing that substantive requirements, such as VAT payment, must be met for deduction or corrections to be valid.

Ultimately, the decision highlights the necessity for taxable persons to comply with VAT laws, ensure proper documentation, and register and pay VAT promptly to avoid deduction denials. This case clarifies the scope of the EU country's authority to enforce national VAT rules and regulations in line with the EU VAT Directive while protecting tax revenue and maintaining legal certainty.

Source: Case C‑624/23 - SEM Remont EOOD v Direktor na Direktsia Obzhalvane i danachno-osiguritelna praktika Varna pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite, EU VAT Directive