European Court of Justice Decision - VAT Deduction Rights for Low-Revenue Companies

The Italian company Feudi SPA, after losing all legal battles before the national courts, issued an appellation claim before the ECJ. The case covers the possibility for the economic operator to use its rights to claim the input tax credit, even when the “national” legislative framework precludes it based on missing the minimum income generated threshold based on the company's assets.

The European Court of Justice issued a decision registered under number C-341/22 on March 7, 2024, holding that the national legislative framework cannot preclude the deductibility rights of the Italian VAT registered taxpayer on the merits of the” insufficient income threshold” looking at the value of the company's assets. 

The ECJ was asked to give its opinion on the following two main questions: 

1. Whether an Italian company's right to deduct VAT could be denied because it did not reach a certain income threshold set by Italian law and

2. Whether the Italian legislation was compatible with Article 167 of the VAT Directive and VAT neutrality and proportionality principles.      

Case Analysis

The first question covered whether taxable persons could lose their status and, consequently, the right to deduct VAT solely because their output transactions did not meet a national income threshold. The ECJ clarified that under Article 9(1) of the VAT Directive, the status of a taxable person is determined by whether an entity independently carries out any economic activity, regardless of the purpose or outcome of that activity. 

The Court found that national legislation denying VAT deductions based on an income threshold undermines the fundamental principle of the right to deduct VAT. This principle, enshrined in the VAT Directive, is essential for ensuring VAT neutrality, meaning businesses should not bear the VAT cost when engaging in taxable economic activities. The ECJ held that the right to deduct VAT is not conditional on the profitability or volume of output transactions as long as the transactions are part of the taxable person's economic activity​.

Conclusion

In conclusion, the ECJ ruled that Article 9(1) of the VAT Directive precludes national laws from denying the status of a taxable person based solely on failing to meet a national income threshold. Additionally, Article 167 and the principles of VAT neutrality and proportionality preclude national laws from denying VAT deductions based on the volume of output transactions. 

The decision reinforces the broad and objective scope of "economic activity." It protects the right to deduct VAT, ensuring businesses are not unfairly penalized under national thresholds unrelated to fraud or abuse.​

Source: Curia: ECJ Judgment case C-341/22 (Feudi di San Gregorio Aziende Agricole SpA)