The European Court of Justice (ECJ) confirmed once again that VAT deduction is fundamental part of the VAT mechanism and thus can only be narrowly restricted or limited.
The most recent ECJ ruling in the case of C-334/20 concerns a Hungarian manufacturing company which entered into an agreement with a marketing company to buy advertising space (i.e. stickers) on a car participating in Hungarian Speed Championship. The Hungarian tax authority challenged the VAT deduction on the advertising services on the basis that the price of the advertising service disproportionate (based on expert valuation, while the advertising space on both sides of the car was small) and it did not generate additional taxable output for the company. It is important that the Hungarian tax authority did not claim the transactions to be of ‘fictious’ nature.
Further to the request for preliminary ruling from the Hungarian Court, however, the ECJ, in line with its settled case law, considered the case from the perspective of the principle of tax neutrality.
The ECJ established that the services rendered are not expressly excluded from the scope deduction (e.g. luxury expenditure, representation), the mere fact that those are not directly linked to an increase in turnover does not mean that they do not serve business purposes. The ECJ also reminded that the precondition of VAT deduction is the direct and immediate link between the input transaction and the taxable activity of the company (either specifically or generally), i.e. that the cost is included in the price of the taxable transactions of the company.
Furthermore, for VAT deduction - as a general rule between independent parties - the consideration actually paid should be considered as basis, not the market price necessarily. Thus, the ECJ concluded, the mere fact that the cost of the service is excessive or the advertising services not directly lead to an increase in revenues does not preclude VAT deduction as costs incurred in relation to the business activity of the taxpayer.
As usual, it is still up to the national court (of Hungary) to establish the general preconditions of VAT deduction (direct and immediate link with the taxable activity) and the classification as business costs (whether the use of stickers actually aimed promoting the products and services marketed).
By Balint Zsoldos, Head of Tax, KCG Partners Law Firm
