ECJ Rules on VAT Deduction for Healthcare Equipment

At the heart of the dispute between Nemocnice Kolín, a Czech hospital, and the Czech Tax Authority lies a question of how far VAT deduction rules can stretch when regulation and taxation collide. The dispute touches on a few fundamental EU VAT principles and addresses the tension between strict rules relating to minimum technical and material equipment for healthcare facilities and home care contact on one side, and EU-wide VAT rules and regulations on the other.

Background of the Case 

Nemocnice Kolín mainly provides healthcare services that are exempt from VAT, meaning it cannot normally deduct input VAT relating to those core medical activities. Additionally, the hospital provides several taxable additional services, such as clinical research, accommodation for patients' companions, medical training, sterilization services for third parties, and certain diagnostic examinations, for which VAT can be deducted proportionally.

In 2019, the hospital submitted a supplementary VAT return for 2016, claiming a partial VAT deduction of about CZK 4.18 million (approximately EUR 172,000). The Czech Tax Authority accepted only part of the claim, arguing that the disputed costs were mainly linked to healthcare activities that are VAT-exempt, rather than to the taxable additional services.

This decision was later confirmed by both the Tax Authority and the Regional Court, which stated that the costs of technical and material hospital equipment cannot automatically be treated as general overheads linked to taxable services, since such equipment is primarily used for exempt healthcare activities and does not directly form part of the price of taxable outputs.

As a result, the hospital appealed to the Supreme Administrative Court, arguing that this equipment should in fact be considered general costs. Moreover, the hospital claimed that maintaining and acquiring such equipment is essential not only for providing healthcare services but also for being legally allowed to perform its taxable additional services, since licensing requirements impose minimum technical and material standards.

The Supreme Administrative Court was uncertain whether the hospital’s argument about VAT deduction has merit, particularly in relation to the legal requirements imposed by Decree No 92/2012. Therefore, it decided to pause the proceedings and refer a question to the Court of Justice of the European Union (ECJ).

Main Questions from Request For Ruling

The core issue raised by the Supreme Administrative Court concerns Article 173(1) of the EU VAT Directive and whether certain costs can be treated as deductible general overheads. More specifically, the Court asked whether goods and services that form the minimum technical and material equipment required under national law for a healthcare facility’s licensing should be considered to have a direct and immediate link with the hospital’s overall economic activity.

Applicable EU VAT Directive Article

ECJ outlined Article 168(1) and 173(1) as the most relevant for settling the dispute. Article 168(a) provides that a taxable person has the right to deduct VAT on goods and services supplied to them by another taxable person, but only to the extent that those goods and services are used for their taxable transactions. On the other hand, Article 173(1) deals with situations where inputs are used for a mix of activities, some of which give rise to a right of deduction and others that do not. 

Czech Republic National VAT Rules

The Czech Decree No 92/2012 sets out detailed rules on the minimum technical and material standards that healthcare facilities must meet to operate. Therefore, the ECJ interpreted Paragraph 1(1) and Annex No 4, Part II, of the Decree, as they contain extensive lists of required items covering nearly all aspects of a healthcare facility’s operation.

Importance of the Case for Taxable Persons

The case is significant for all taxable persons who carry out both VAT-exempt and VAT-taxable activities, as it clarifies a practical and recurring VAT issue: when costs linked to regulatory requirements can actually be included in the VAT deduction base. 

Moreover, the ECJ provided guidance not only to Tax Authorities and Courts on how to determine the tax treatment of such costs, but also to taxable persons in assessing whether these expenses can be regarded as directly linked to taxable outputs or only as part of general overheads.

Analysis of the Court Finding

As a preliminary point, the ECJ noted that the right to deduct VAT is a fundamental element of the VAT system and, as a rule, cannot be restricted. As such, the right arises immediately for all input VAT and is designed to ensure that taxable persons are fully relieved of the burden of VAT incurred in the course of their economic activities. 

Combined with the principle of fiscal neutrality, they set a rule that when a taxable person acquires goods or services and uses them for taxable transactions, they are, in principle, entitled to deduct the related input VAT. Regarding situations where goods or services are used for both taxable and non-taxable or exempt transactions, the ECJ recalled that Article 173(1) defines that only the proportion of VAT attributable to taxable activities can be deducted. 

Notably, a direct and immediate link must generally exist between a particular input transaction and the output transactions that give rise to a right of deduction. In practical terms, this means that input costs must form part of the cost of taxable outputs to qualify for deduction. Without such a link, VAT on those inputs cannot be deducted.

Nonetheless, the ECJ noted an important exception to the requirement of a direct and immediate link. Under this exemption, a taxable person may still be entitled to deduct VAT where such a link cannot be identified with a specific output transaction, provided that the costs in question form part of the taxable person’s general overheads. In such cases, those costs are treated as components of the price of all goods or services supplied by the taxable person.

In contrast, in situations where inputs are used exclusively for exempt activities or activities falling outside the scope of VAT, no right to deduct arises, since there is no taxable output against which input VAT can be offset.

Regarding the existence of such a link in the present case, the ECJ emphasized that the existence of a statutory obligation under Decree No 92/2012 to incur certain costs is not sufficient on its own to establish it. The key factor is the objective relationship between the inputs and either the taxable outputs or the economic activity as a whole. While the ECJ underlined that it is up to the national Court to carry out the detailed assessment needed to resolve the VAT deduction issue, it provided a legal interpretation to guide that assessment.

Essentially, the ECJ clarified that if it turns out that certain equipment is used exclusively for exempt healthcare services, then no right to deduct input VAT arises on its purchase. In contrast, if the equipment is used for both exempt healthcare services and taxable healthcare or other services, then a partial right to deduct may arise. Based on information provided by the Czech Court, the ECJ determined that the equipment in question appears to be used mainly for exempt healthcare services rather than for the taxable additional services.

Regarding the additional services, the ECJ underlined that the assessment must still be carried out on a case-by-case basis in line with the general VAT principles. If it is found that part of the technical and material equipment is also necessary for providing these additional services, then a sufficient connection between the purchase of that equipment and taxable outputs may exist. In such cases, the equipment could be treated as contributing to taxable economic activity, which justifies a proportional right to deduct input VAT.

Notably, even if a particular item is not physically used for providing a specific service, this does not automatically break the potential direct and immediate link, as long as the equipment forms part of the broader functional resources necessary for carrying out taxable activities. 

Court's Final Decision

While the ECJ  left it for the national court to carry out the detailed assessment needed to resolve the VAT deduction issue, it held that costs incurred for acquiring goods and services required under national law for providing healthcare services that are VAT-exempt cannot automatically be treated as general overheads giving rise to a right of proportional VAT deduction, even if those same goods or services are also used for taxable activities.

Conclusion

With its ruling, the ECJ once again reaffirmed the fundamental importance of the direct and immediate link principle in EU VAT law. From a practical point of view, the decision ultimately places the burden of proof on taxable persons with mixed activities to objectively demonstrate a sufficient connection between specific equipment costs and their taxable outputs.

Source: Case C‑513/24 - hospital in the Central Bohemia Region, in Kolín, a public limited company v. the Appellate Tax Directorate, Czech Republic, EU VAT Directive