Lithuania VAT Case: Court Clarifies Taxable Person Rules

The Supreme Administrative Court of Lithuania (hereinafter referred to as LVAT) has provided clarification on the taxation of income from economic activity with VAT and joint activity agreements. Let us examine the relevant clarifications. 

In this interesting case, the dispute arose over the additional income tax and VAT calculated for the applicant, with the tax administrator finding the following during the audit of the amounts related to these taxes: The applicant carried out economic activities subject to VAT, but did not calculate, declare or pay VAT on the income received from these activities to the budget. The case concerned a dispute over the fact that, in order to obtain tax benefits – not to pay income tax on the income received from the resale of real estate (hereinafter – RE) – the Applicant only formally declared his place of residence in the purchased RE, even though he did not actually live there, thereby reducing his income subject to personal income tax and the personal income tax payable.

Deductibility of Construction and Improvement Costs

It should be noted that the dispute also concerned the assessment of the construction costs of the RE objects for calculating the applicant's PIT base, as well as the application of the relief provided for in Article 17(1)(54) of the PIT Law.

The Supreme Administrative Court of Lithuania stated that the grounds for the appeal, namely that the applicant's income tax base had been calculated without taking into account the applicant's necessary (minimum) costs for the construction and/or improvement of the taxable real estate, were unfounded, the court of first instance had unjustifiably refused to accept and assess the UAB assessment report (expert opinion), which determined the amount of necessary expenses for the construction and/or improvement of the taxable real estate, and had unjustifiably failed to apply the provisions of Article 70(1) of the Tax Administration Act. 

Documentary Requirements Under Article 19(3) of the Personal Income Tax (PIT) Act

In general, the court recalled that Article 19(3) of the Income Tax Act sets out the requirements for evidence on the basis of which income-reducing expenses may be recognised, namely: only amounts supported by documents containing all the mandatory accounting document details specified in the Accounting Act of the Republic of Lithuania and other legal acts may be deducted, and, if the Government of the Republic of Lithuania has established relevant requirements for document forms, – meeting the requirements and/or valid transactions, and/or documents drawn up by foreign entities and residents, if the content of the economic operation can be determined from these documents.

According to Article 19(1), Article 16(1)(4) and Article 16(3) of the Income Tax Act, a taxpayer may deduct the costs of acquiring (producing) property and the costs related to the sale of property from taxable income if two essential conditions are met: 1) such amounts (expenses) were actually incurred, 2) the taxpayer can substantiate them with relevant supporting documents. If at least one of these conditions is not met, the taxpayer loses the right to deduct the aforementioned amounts from taxable income, in which case income tax must be calculated on the total amount received for the sale of the property.

Why the Expert Assessment Report Was Rejected

It should be noted that the court emphasizes that during the tax audit, all documents submitted by the applicant to confirm the costs of acquiring the real estate were assessed, as were the additional documents submitted by the applicant during the examination of the comments. The UAB assessment report was submitted after the contested decision was adopted and was submitted to the MGK, which, after a detailed assessment of the document, reasonably concluded that it was not an accounting document, a valid transaction or a document drawn up by a resident from which the content of the economic operation could be determined, namely to determine the amount of expenses actually incurred by the taxpayer. 

Thus, in this dispute, the tax administrator set deadlines for the taxpayer to submit the aforementioned documents during the audit, but for some transactions, the taxpayer did not submit them at all. Therefore, the tax administrator assessed this data, and the applicant's arguments (sentences taken out of context) that the court of first instance did not rule on the case in question in its decision, stating that all the documents submitted by the applicant during the audit to confirm the costs of acquiring real estate had been assessed, are unfounded. 

Article 16(3) of the Income Tax Act establishes the right of a resident to decide not to deduct/ deduct the expenses referred to in paragraph 1(4) of this article, which cannot be linked to the tax administrator's obligation to collect additional evidence in the tax inspection process when the taxpayer does not exercise or improperly exercises that right. 

In the court's opinion, no other interpretation can be inferred from Article 70 of the Tax Administration Act when the tax is calculated according to the tax administrator's assessment, because the tax is calculated on this basis (a specific means of proof in a tax case) and therefore no decision is made on the taxpayer's individual improper actions or unimplemented rights when the tax is calculated without reference to Article 70 of the Tax Administration Act. 

Abuse of Rights and the Primary Residence Tax Relief

The Supreme Administrative Court of Lithuania found that in the case under consideration, the State Tax Inspectorate had collected sufficient factual data during the audit to refute the possibility of applying the relief provided for in Article 17(1)(54) of the Income Tax Act to the applicant (with the exception of one case). The inspection report described and assessed the relevant facts in detail, and the conclusions mentioned in the STI's decision were confirmed. 

In the court's opinion, the State Tax Inspectorate reasonably concluded that there were no grounds for applying the aforementioned relief because the applicant did not act as a taxable person and abused his rights. In all cases (except one), the applicant only formally declared his place of residence in both the sold and acquired dwellings, which could not be considered a person's place of residence as defined in the legislation (place of residence – the main place where a person actually lives most of the time and with which he is most closely connected). Therefore, in the court's opinion, the State Tax Inspectorate reasonably concluded that the applicant was not eligible for the benefit associated with the provision of housing to residents. Regarding the classification of supplies for VAT purposes. 

Joint Activity Agreements and VAT Liability

In addition, the Supreme Administrative Court of Lithuania stated that the grounds for the appeal, namely that the court of first instance had incorrectly assessed the evidence submitted by the applicant regarding the performance of the joint activity agreement, i.e. that the relevant transactions were not concluded with a view to generating income, but were intended to divide the applicant's, his brother's and his friend's share of the residential house built by the applicant, and cannot be regarded as the applicant's economic activity. 

ECJ Guidance on Partnerships Without Legal Personality

It is also interesting to note that, with regard to the classification of supplies for VAT purposes where several natural persons have concluded a joint activity agreement, the ECJ has clarified that Council Directive 2006/112/EC on the common system of value added tax (hereinafter referred to as the VAT Directive) must be interpreted as meaning that a natural person who who has signed a joint activity agreement with another natural person, forming a partnership without legal personality, characterised by the fact that the first person has the right to act on behalf of all partners, but who alone and in his own name enters into relations with third parties when carrying out activities constituting the economic activity of that partnership, must be regarded as a ‘taxable person’ within the meaning of Article 9(1) of the VAT Directive and the only person liable for the payment of VAT due under Article 193 of that directive, since he acts on his own behalf or on behalf of another person as a commission agent within the meaning of Article 14(2)(c) and Article 28 of that directive.

The Supreme Administrative Court of Lithuania emphasised that, according to the established case law of the Court of Justice, the words used in Article 9 of the VAT Directive, in particular ‘any person’, give the concept of ‘taxable person’ a broad meaning based on the pursuit of an economic activity independently, i.e. all natural and legal persons, whether public or private, and even entities without legal personality, which objectively meet the criteria laid down in that provision, are to be regarded as taxable persons for VAT purposes.

The "Independent Economic Activity" Test

However, in order to determine who, in circumstances such as those in the present case, should be considered a 'person liable for VAT' for the supplies in dispute, it is necessary to verify who carried out the relevant economic activity 'independently'.

In the opinion of the Supreme Administrative Court of Lithuania, for this purpose, it is necessary to verify whether the person concerned carries out the activity in his own name, for his own benefit and on his own responsibility, and whether he himself assumes the economic risk associated with his activity.

Court's Final Conclusions

The Supreme Administrative Court of Lithuania found that in the case under consideration, the State Tax Inspectorate, the Tax Dispute Commission, and the court of first instance had rightly concluded that it was the applicant, and not the other participants in the joint activity agreement, who should be recognized as a taxable person for VAT purposes. After examining the facts, it was reasonably concluded that it was the applicant who carried out the activities in his own name, for his own benefit and on his own responsibility, and that he himself assumed the economic risk associated with his activities. 

Therefore, in the opinion of the Supreme Administrative Court of Lithuania, this conclusion was correctly made after assessing both the terms of the joint activity agreement and the circumstances confirming its implementation.