Right to Deduct VAT on Fixed Asset Reconstruction: Court Ruling

Introduction: Right to Deduct Purchase VAT

Right to deduct purchase VAT: reconstruction of fixed assets

Although a specific example will be examined below, companies in similar circumstances may apply the same approach to their own situation. Therefore, the circumstances of the situation will be examined in sufficient detail to ensure a proper understanding of the context when interpreting the operation of the purchase VAT deduction when fixed assets are reconstructed.

Background of the Case

Thus, in one Supreme Administrative Court case, a dispute arose over a tax administrator's decision to approve an inspection report in which the local tax administrator refused to recognize the applicant's right to deduct purchase VAT for (1) the reconstruction of fixed assets manufactured by the entity from several objects, and (2) services purchased for the preparation of a technical project for the reconstruction of another fixed asset, and additionally calculated and ordered the payment of VAT and tax penalties and imposed a VAT fine.

The local tax administrator adopted this decision essentially on the grounds that the applicant had transferred the fixed assets created during the reconstruction of the objects to a third party for use without remuneration, and did not carry out any economic activity giving rise to the right to deduct VAT and, according to the circumstances established during the inspection, did not intend to carry out such activity.

Position of the Supreme Administrative Court

The Supreme Administrative Court of Lithuania noted that the local tax administrator denied the applicant's right to the initial VAT deduction, i.e., it essentially questions the applicant's original intention to use the fixed assets produced and the services acquired (preparation of a technical reconstruction project) in its taxable economic activity. In other words, in this case, the tax administrator does not raise the issue of the applicant's obligation to adjust the VAT deduction in the cases (grounds) provided for in Article 66(2) and Article 67(5) of the VAT Law and Article 185 of the VAT Directive, but denies the existence of conditions for the initial deduction when the purchase VAT became deductible.

The facts of the case and the circumstances assessed are described in more detail below. This is done in order to show what evidence is relevant in the context of VAT, as this is the only way to understand and apply VAT rules in practice.

The Core Dispute: Intention to Use in Taxable Activity

In addition, in the author's opinion, it is interesting and relevant in the practical example that the Supreme Administrative Court of Lithuania found that the dispute essentially arose from whether whether the objective evidence collected during the tax audit and submitted by the applicant confirms that, at the time of the VAT deduction for the purchase of the disputed fixed assets and design services, the applicant intended to use these assets and services in its taxable activities.

Legal Reasoning and Reference to EU VAT Directive

Thus, in its ruling on the reconstruction of fixed assets, the Supreme Administrative Court of Lithuania stated that, in the case at hand, the dispute essentially arose from whether the applicant, when manufacturing (acquiring) the fixed assets in question, intended to use them for the purpose of obtaining taxable income. Thus, on this issue and in the context of the facts of the case, it noted that, as stated by the Court of Justice, when acquiring fixed assets which, by their nature, can be used for both taxable and non-taxable activities, a person who already has the status of a taxable person, without expressly stating his intention to allocate that property to taxable activities, but without ruling out the possibility that it will be used for that purpose, the initial use of that property for non-taxable activities does not preclude (after examining all the facts of the case, which is a matter for the national court) conclude that it fulfilled the condition laid down in Article 168 of the VAT Directive, according to which the taxable person had to act as such at the time of the acquisition of the property in question.

It is important to note that, in this regard, it cannot be concluded, inter alia, from an assessment of the nature of the fixed assets at issue and of the applicant's activities, that the applicant did not, in general, intend to use the fixed assets at issue in a taxable economic activity. However, in the present case, it has been established by objective evidence that, under the terms of the Agreement, the applicant was unable to use the fixed assets produced in the course of the Project in its economic activity, both during the implementation of the Project and for a period of five years. Thus, first, the applicant knew at the time of the implementation of the Project that it would have to transfer the property to the Operator for management (use) free of charge, i.e., that the first use of the manufactured fixed assets would not be related to the applicant's taxable economic activity. Secondly, when assessing the applicant's actions and objective evidence of his intentions, it should also be noted that the property in question was transferred to the Operator for free for a period of 10 years, i.e. for a period longer than the restriction laid down in the Agreement (in the context of all the circumstances discussed and established in the case, in the circumstances of the case at hand, objectively refute the applicant's arguments regarding his intention to use the disputed long-term property in his taxable activities after the expiry of the period of restriction of activities provided for in the Agreement).

Evidence Against the Applicant’s Intention

The Supreme Administrative Court of Lithuania specifies that such circumstances confirm that the applicant used the disputed long-term (both movable and immovable) property for at least 10 years from the date of its manufacture, i.e. essentially longer than the period for adjusting the disputed VAT deduction (Article 67(2) of the VAT Law (as amended by Law No. IX-751 of 5 March 2002); Article 187 of the VAT Directive), primarily intended to use it for activities other than those specified in Article 58(1) of the VAT Law. Having regard to the essence and purpose of the adjustment period for VAT on fixed assets and the objective of the VAT Directive to link the right to deduct input VAT closely and directly to the use of the goods or services in question for taxable transactionsTherefore, the court consistently interprets that, in the circumstances of the case at hand, the applicant's arguments regarding the amounts of VAT on the disputed purchase that were deducted by the applicant are not valid.

VAT Deduction and Administration Fee

Therefore, the court consistently interprets that, in the circumstances of the case at hand, the applicant's arguments regarding the fixed administration fee paid to the Operator do not refute the assessment in question. In fact, the taxable value of services consists of the total consideration for the service provided, so the provision of services is taxable only if there is a direct link between the service provided and the consideration received. It follows that a service provided "for consideration" within the meaning of Article 2(1)(c) of the VAT Directive is taxable only if there is a legal relationship between the supplier and the recipient, where a mutual obligation is fulfilled, and the consideration received by the supplier is the real value of the service provided to the recipient.

What is the Summary?

Based on the Supreme Administrative Court case under analysis and the court's own interpretation, several conclusions can be drawn:

1) as mentioned above, the Agreement prohibited the use of the disputed long-term assets created (manufactured) during the implementation of the Project in economic activities;

2) from an economic logic perspective (the ratio between the value of the long-term assets to be transferred to the Operator and the amount of the administration fee) it cannot be considered that this administration fee corresponds to the real value of the service or that the applicant intended to use the disputed long-term assets for 10 years to provide services with a taxable value equal to the average monthly gross salary;

3) the purpose and content of the administration fee in question also imply that the Operator pays this fee for administration services and not for the acquired right to use the disputed long-term asset.

Thus, for VAT purposes, there is no direct link between the administration fee in question and the service consisting in the granting of the right to use the disputed long-term assets; this fee, inter alia, cannot be regarded as real consideration for the latter service, given its amount and purpose.

Furthermore, it should be noted that the LVAT points out that the appellant's arguments in no way refute this assessment — in the present case, the assessment of the administrative fee as consideration for the right granted to the operator to use the long-term assets is refuted, and the link between this fee and the applicant's other activities is not relevant.