Avoid This Costly Mistake: Understanding VAT on Economic Activities, According to Lithuania's Highest Court!

Taxation of income from economic activities with VAT.

According to the Supreme Administrative Court of Lithuania, an activity qualifies as economic activity if it is permanent and performed for remuneration received by the entity performing it. Accordingly, Article 2(8) of the VAT Law defines economic activity as any activity (including manufacturing, trade, provision of services, agricultural activity, fisheries, mining, professional activities, the use of property and/or property rights) which is carried out with the aim of obtaining any income (regardless of whether it is carried out with the aim of making a profit).

As a general rule, it is persons engaged in economic activities as defined in those provisions who are recognized as taxable persons. According to Article 9(1)(1) of Directive 2006/112/EC, "a taxable person is any person who independently carries out economic activities in any place, regardless of the purpose or results of those activities."

Defining Economic Activity: Insights from the VAT Law and CJEU

The Supreme Administrative Court of Lithuania also mentions that the CJEU has indicated that Article 9(1) of the VAT Directive gives the concept of "taxable person" a broad meaning based on the independent pursuit of economic activity, 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.

It follows from Article 9(1) of the VAT Directive that one of the mandatory characteristics of a taxable person is the independence of economic activity, which requires verification of whether the person concerned carries out activities in their own name, on its own account and under its own responsibility, and that it bears the economic risk associated with its activities (this is mentioned in the case law of the ECJ and the Supreme Administrative Court of Lithuania). Therefore, in order to establish independence of activity, it is taken into account that there was no hierarchical subordination between economic entities that were not integrated into the public administration and public authorities, as well as the fact that they operated at their own expense and responsibility, freely organized their work, and received the payments that constituted their income. As explained by the Supreme Administrative Court of Lithuania, when assessing the condition of independence of activities, the same criteria apply to private individuals.

The Principle of Independent Economic Activity in VAT Taxation

With regard to the specific circumstances, it is relevant to mention that the Supreme Administrative Court of Lithuania found that, based on the evidence gathered in the administrative case, it was entirely reasonable to conclude that the applicant made decisions on the financing of the construction, organized the construction of the object, completed it, and carried out the sale independently and without hindrance. In the opinion of the Supreme Administrative Court of Lithuania, it has been proven in this case that the appellant substantially reconstructed the house. The reconstruction was planned shortly after the acquisition of the property, which completely refutes the applicant's argument that the disputed property was acquired for personal needs. All the signs were found that let the tax administrator say that there was economic activity, which led to the applicant being charged extra VAT. There's no reason to think this part of the appeal is valid.

Case Study: Independent Construction and Sale Deemed Economic Activity

Incidentally, the Supreme Administrative Court of Lithuania always points out that the Sixth Council Directive on the harmonization of the laws of the Member States relating to turnover taxes (hereinafter referred to as the Sixth Directive) of May 17, 1977, and subsequently the Sixth Directive Sixth Council Directive on the harmonisation of the laws of the Member States relating to turnover taxes (hereinafter referred to as the Sixth Directive) and, subsequently, Council Directive 2006/112/EC of 28 November 2006 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereinafter referred to as Directive 2006/112/EC), regulate the scope of VAT application, covering any economic activity of a manufacturer, trader, or service provider. In order for a person's activities to be subject to VAT, they must meet the essential conditions for such taxation, i.e. it must be established that such activities are carried out by a taxable person and that such activities fall within the category of taxable transactions. According to the second subparagraph of Article 9(1) of Directive 2006/112/EC, ‘economic activities shall be deemed to include the activities of producers, traders or persons supplying services, including mining and agricultural activities and the activities of the liberal professions. In particular, the use of tangible or intangible property for the purpose of generating regular income shall be considered an economic activity."

Harmonizing VAT Laws: The Sixth Directive and Directive 2006/112/EC

In another, also completely new, case before the Supreme Administrative Court of Lithuania, a dispute arose over the additional income tax and VAT calculated for the applicant, with the tax administrator finding during an audit that: 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 situation was such that the Applicant, seeking tax benefits – not to pay personal income tax on the income received from the resale of real estate (hereinafter – RE) objects, only formally declared his place of residence in the acquired RE objects, even though he did not actually live there, thereby reducing his income subject to personal income tax and the personal income tax payable.