ECJ Case C-640/23: VAT Deduction Dispute Between Greentech and Romanian Tax Authorities

The recently ruled case between Greentech and the Romanian Tax Authorities refers to the VAT dispute concerning the classification of a transaction between Greentech and Greenfiber. The leading cause for the disagreement was the Tax Authorities' reclassification of the transaction. Greentech treated the sale of equipment from Greenfiber as a standard supply of goods subject to VAT, thus allowing a deduction of input VAT.

Since the reclassification led to additional VAT liabilities for Greentech, the company appealed against such a decision, which ultimately resulted in a request for a preliminary ruling before the ECJ.

Background of the Case 

As one of the main parties in the case, Greentech was subject to a tax audit from November 2015 to July 2016. The Romanian Tax Authority determined that the company must pay an additional EUR 882,352 of VAT and related charges.

During a tax audit, the Tax Authority reclassified the Greentech transaction with Greenfiber, which was initially considered a supply of goods subject to VAT, giving Greentech the right to deduct the input VAT. However, company Greenfiber was also subject to a tax audit in 2015, when it was concluded that the transaction was correctly treated as subject to VAT, with Greenfiber properly collecting and remitting the tax. Nevertheless, Greenfiber could not correct the invoices since the time the Appeal Court decided, the limitation period had expired.

After the initial complaint against the tax notice issued by the Tax Authority was partially rejected, Greentech brought the case before the Court of Appeal, which upheld the appeal and partially annulled the Tax Authority's decision to reject the initial complaint. Furthermore, the Court of Appeal partially annulled the tax notice and audit report.

However, following the 2018 and 2019 Court of Appeal decisions, the Tax Authority appealed before the High Court of Cassation and Justice (Cassation Court).

The Cassation Court first overturned the ruling, annulling Greentech's additional VAT liability for 2009 while rejecting the remainder of the claim. After Greentech requested a revision of the decision, arguing that it conflicts with EU case law, which confirms the right to deduct VAT even when a transaction is later determined to be outside the VAT scope,  the Cassation Court approved the request. It partially annulled the 2021 ruling regarding the reclassification of transactions.

However, the Cassation Court continued its work on the case and observed the Tax Authorities' inconsistent approach. On one hand, the transaction was deemed subject to VAT for Greenfiber, which collected and paid taxes; conversely, the same transaction was not considered subject to VAT for Greentech. This discrepancy created a contradiction in tax treatment.

With that conclusion, the Cassation Court paused the proceedings and referred a question to the ECJ for clarification.

Main Questions from Request For Ruling

The Cassation Court sought that the ECJ determine whether the principles of VAT neutrality, legal certainty, and the protection of legitimate expectations prevent the Tax Authority from denying the right to deduct VAT on a transaction that was later reclassified as not subject to VAT. 

Two key issues must be addressed when assessing the question. The first one is that the state has already collected the VAT, but due to national legal constraints, it cannot be refunded to taxable persons. The second issue is whether such denial contradicts EU law.

Applicable EU VAT Directive Article

Several articles were singled out regarding the EU VAT Directive as key to answering the question raised. Those articles are Article 2(1), 19, 29, 167, 168, 179, and 203.

Article 2(1) established the principle that the supply of goods for a fee within an EU country is subject to VAT. However, Article 19 allows EU countries to treat the transfer of a totality of assets or parts as falling outside the VAT's scope. This means that no VAT is charged on such transactions. Additionally, Article 29 extends the provision under Article 19 to the supply of services.

Furthermore, under Article 167, the right to deduct VAT arises when the VAT becomes chargeable. Article 168 states that taxable persons may deduct VAT on goods and services used for their taxed transactions, including VAT paid on supplies, intra-EU acquisitions, and imports.

Article 179 includes a provision on how deductions are made, allowing EU countries to impose restrictions on occasional transactions. Finally, Article 203 states that any person issuing invoices with VAT is liable for its payment.

Romania Country National VAT Rules 

Two laws were considered regarding the Romanian national applicable rules: Articles 3(a), 126(1), 128(7), and 145(2) of the Tax Law and Articles 84, 90, and 91 of the Law of Tax Procedure.

The highlighted article from the Tax Law establishes key principles for taxation, including neutrality of tax measures, the definition of taxable transactions, the transfer of assets, and the right to deduct VAT.

In addition, rules from key articles of the Law of Tax Procedure state that taxable persons may correct their tax return within the legal limitation period, which is five years, but not after the tax audit is finalized, except in specific legal situations. Under Article 90, tax liabilities can be reviewed later, and tax notices can be amended or canceled by the Tax Authority or at the taxable persons' request.

Importance of the Case for Taxable Persons

The importance of the present case can be seen in the fact that it examines whether a taxable person can be denied the right to deduct VAT on a transaction initially treated as taxable but later reclassified as out of VAT's scope, thus imposing additional VAT liability for the taxable person.

Additionally, the case addresses the conflict of the tax treatment of the same transaction for different parties involved, as one taxable person correctly paid VAT. At the same time, the other was denied a deduction. The ECJ’s ruling on this matter will clarify whether VAT neutrality and protecting legitimate expectations prevent Tax Authorities from denying the right to deduct VAT in such cases.

Analysis of the Court Findings

The ECJ underlines that the right to deduct VAT is a fundamental part of the VAT system and cannot be unduly limited. The rules for VAT deductions are designed to ensure that VAT does not burden taxable persons on their economic activities. Moreover, the common EU VAT system aims to maintain neutrality by ensuring that all economic activities subject to VAT are taxed similarly and fairly.

Regarding the present case, the ECJ stated that the Romanian Tax Authority classified the transaction between Greenfiber and Greentech as not subject to VAT, leaving Greenfiber unable to correct the issued invoice due to the expiry of the limitation period for such correction.

The EU VAT Directive and EU case law state that when a taxable person pays unduly invoiced VAT, the issuer is responsible for correcting incorrect invoices. However, the EU VAT Directive does not contain rules on how the issuer should correct, leaving it up to EU countries to define rules and conditions under which such correction can be made.

Furthermore, EU countries must allow for the possibility of adjusting any VAT improperly invoiced if the issuer can demonstrate that it acted in good faith.

The ECJ added that when a VAT refund is impossible or excessively difficult, the principles of VAT neutrality and effectiveness mandate that EU countries provide mechanisms for taxable persons to recover the improperly invoiced VAT. More precisely, the buyer, in this case Greentech, should be able to directly apply to the Tax Authority for a refund, especially when the seller, Greenfiber, can no longer correct the invoice, and the buyer cannot obtain a refund from the seller.

If the transaction is not subject to VAT, the taxable persons cannot claim the right to deduct VAT, even if no tax revenue would be lost. Thus, the right can only be exercised if the VAT corresponds to a transaction subject to VAT. Therefore, given that the Tax Authority classified the transaction in question as not subject to VAT, the VAT paid by Greentech was not considered due, making it nondeductible.

Courts Final Decision

In its decision, the ECJ stated that the EU VAT Directive does not prevent EU countries from implementing national laws or rules for denying a taxable person the right to deduct input VAT on a transaction reclassified by the Tax Authority as not subject to VAT. 

However, when it is impossible or complicated for a taxable person to receive a VAT refund from the seller, national legislation must provide an option for the taxable person to apply directly to the Tax Authority for a refund.

Therefore, since Greenfiber could no longer correct its invoice and VAT return, it became impossible for Greentech to reclaim the VAT charged. Under EU VAT rules, the national legislature must allow Greentech to apply directly to the Tax Authority for a VAT refund.

Conclusion

The ECJ case C-640/23 between Greentech and the Romanian Tax Authority depicts a unique and complex tax situation surrounding VAT deduction, where the transaction is reclassified after the limitation period for correcting invoices passes.

In the end, the ECJ ruled that national laws must include alternative mechanisms to ensure VAT neutrality and fairness, such as allowing the taxable persons to apply directly to the Tax Authority for a refund when obtaining reimbursement from the seller is impossible.

Source: Case C‑640/23 - Romania v Greentech SA, EU VAT Directive