The direct and immediate link with specialised services contracts as a measure for the right to deduct input VAT and the uncertainty in European tax law

ABSTRACT

The purpose of this paper is to reconstruct the meaning of the direct and immediate link test in light of the Court of Justice of the European Union (CJEU) case law in the purchase of specialised services. As will be shown, the CJEU adopted a broad method to recognise the right to deduct value added tax (VAT), allowing credits and, therefore, the right to deduct input VAT on the acquisition of goods and services indirectly related to the entrepreneurial activity of the taxable person. Nevertheless, the CJEU position states that the condition for granting the right of deduction is the analysis of the facts in each case, which generates uncertainty for the use of its case law as a source of law. Thus, the court should establish the general conditions regarding the right of deduction, in order to prevent wrongful usage of its case law and to avoid conflicting decisions.

KEYWORDS:

• Tax law
• value added tax
• direct and immediate link test
• certainty in law
• CJEU case law

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax OJ L 347, 11.12.2006, p. 1–118.

2 Dennis Ramsdal Jensen and Henrik Stensgaard, ‘The Direct and Immediate Link Test Regarding Deduction of Input VAT: a Consumption-Based Test Versus an Economic-Based Test?’ (2014) 3(2) World Journal of VAT/GST Law 72.

3 Council n (1).

4 For instance: Case C-110/94, INZO, ECLI:EU:C:1996:67.

5 Zheng Junping, ‘The Right of Deduction within the European VAT: A Perspective for the VAT Reform in China’ (DPhil thesis, Università di Bologna 2016) 76–78.

6 Oskar Henkow, ‘Sveda – The Increasing Obscurity of the Direct Link Test in EU VAT’ (2016) World Journal of VAT/GST 49.

7 Case C-126/14, Sveda, ECLI:EU:C:2015:712.

8 Barry Bracewell-Milnes, ‘Introduction: Tax Neutrality and Tax Policy’ in Philip Chappel, John Kay and Bill Robinson (eds), Which Road to Fiscal Neutrality? (IEA 1990) vol. 1, 2.

9 Rita de la Feria, ‘VAT: A New Dawn for the Principle of Fiscal Neutrality?’ (2011) Oxford University Centre for Business Taxation, 5–6.

10 ibid 9.

11 Due to that reason, this paper will not thematise the following cases: Case C-26/12, PPG-BV, ECLI:EU:C:2013:526; Case C-29/08, Skatteverket, ECLI:EU:C:2009:665; Case C-132/16, Iberdrola Inmobiliaria Real Estate Investments, EOOD. ECLI:EU:C:2017:683; Case C-165/18, University of Cambridge, ECLI:EU:C:2019:559; Case C-316/17, Morgan Stanley, ECLI:EU:C:2019:58.

12 Case C-4/94, BLP Group, ECLI:EU:C:1995:107.

13 Oskar Henkow, ‘Deduction – from a Direct to an Indirect Link Test’ in Jane Jones and Mary Green (eds), CJEU – Recent Developments in Value Added Tax (Series on International Tax Law 2015) 313–328, 314.

14 ibid 315.

15 Ben Terra and Julie Kajus, ‘A Guide to the European VAT Directives: Introduction to European VAT’ (IBFD 2018), vol. 1, 1194–1195.

16 Case C-98/98, Midland Bank, ECLI:EU:C:2000:300.

17 Ben (n 15) 349.

18 Anton Joseph, ‘The Vexed Question of Deductibility – Fini H and the Position in Australia and New Zealand’ (2006) 21(3) International VAT Monitor 191.

19 Charlène Adline Herbain, VAT Neutrality (Promoculture-Larcier 2015), vol. 1, 59–60.

20 Case-408/98, Abbey, ECLI:EU:C:2001:110.

21 Case C-16/00, Cibo, ECLI:EU:C:2001:495.

22 Joachim Englisch, ‘Input VAT Deduction by Holding Companies – German Practice and Community Law’ (2007) 18(3) International VAT Monitor 172.

23 Case C-465/03, Kretztechnik, ECLI:EU:C:2005:320.

24 Case C-435/05, Investrand BV, ECLI:EU:C:2007:87.

25 A strong evidence that the judges believed that they were not contradicting the precedent case is that in C-456/11 (Telecom, ECLI:EU:C:2012:557) they cited the Investrand BV case and the Kretztechnik case as representatives of the same thesis.

26 John Watson, Tom Cartwright and Eleanor Dixon, ‘A Recipe for Chaos’ (2010) 21(3) International VAT Monitor 185.

27 Case C-437/06, Securenta, ECLI:EU:C:2008:166.

28 Case C-29/08, SKF, ECLI:EU:C:2009:665.

29 Ad van Doesum, Herman van Kesteren and Gert-Jan van Norden, ‘Share Disposals and the Right of Deduction of Input VAT’ (2010) 2 EC Tax Review 1.

30 Dennis Ramsdal Jensen and Henrik Stensgaard, ‘The Distinction Between Direct and General Costs with Regard to the Deduction of Input VAT – The Case of Acquisition, Holding and Sale of Shares’ (2012) 4(1) World Tax Journal 22.

31 Ben (n 15) 1362.

32 Case C-104/12, Wolfram Becker, ECLI:EU:C:2013:99.

33 Case C-651/11, X BV, ECLI:EU:C:2013:346.

34 Case C-249/17, Ryanair, ECLI:EU:C:2018:834.

35 For the purposes of this article, judicial activism is a phenomenon in which the political decision-making is appropriated by the judicial authorities. For more details about that concept, which would go beyond the scope of the work, we recommend two texts: Ran Hirschl, Towards Juristocracy: The Origins and Consequences of the New Constitutionalism (Harvard University Press 2007); C Neal Tate and Torbjörn Vallinder, The Global Expansion of Judicial Power (New York University Press 1995).