The judgment was issued in joined cases: Mahagében kft v. Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága, C-80/11 Péter Dávid v. Nemzeti Adó- és Vámhivatal Észak-alföldi Regionális Adó Főigazgatósága; C-142-11 (21 June 2012)
A Hungarian taxpayer sought to deduct from its VAT liability the amount of VAT which it had paid to its supplier for a delivery of acacia logs. The supplier issued invoices to the taxpayer for the delivery of the logs, and then remitted the amount of VAT which the Hungarian taxpayer had paid to it. The Hungarian taxpayer then deducted the VAT.
The Hungarian tax authorities, on audit, determined that the quantity of acacia logs had not been sufficient to have satisfied the order as invoiced. Thus, because it was determined that the invoices did not reflect the genuine circumstances of the log deliveries, the tax authorities denied the taxpayer’s VAT deduction.
Following litigation before a Hungarian court, an issue—whether the VAT deduction may be denied when the invoices are formally correct but when, according to the tax authorities, the propriety of the conduct of the invoice issuer was questioned—was referred to the CJEU.
In the second case, a taxpayer / contractor sought to deduct VAT on payments made to subcontractors. The Hungarian tax authority, however, refused to allow the VAT deduction because of alleged improper acts of the subcontractors. Again, a Hungarian court referred an issue—whether a VAT deduction can be denied because of improper acts on the part of the invoice issuer when it is not established that the taxpayer was aware of the alleged improper acts—was referred to the CJEU.
Court of Justice’s judgment
As noted in a court release [PDF 90 KB], the CJEU concluded that a VAT deduction cannot be denied, in principle, because of irregularities committed by the issuer of the invoice.
The CJEU observed that EU Member States may refuse to allow the right to deduct VAT when it is established, on the basis of objective evidence, that such a deduction right was being used by the taxpayer for fraudulent or abusive ends—i.e., when the taxpayer (to whom the goods or services were supplied) knew, or ought to have known, that that transaction was connected with fraud previously committed by the supplier or by another trader at an earlier stage in the transaction. Still, it was noted that the tax authorities must establish that the taxpayer as aware, or ought to have been aware, of the existence of the fraud.
The CJEU further addressed the obligations of the taxpayer and of the tax authorities.
The judgment concluded that the VAT directive:
- Precludes the Hungarian tax authorities from denying the taxpayer’s right to deduct VAT paid because of improper acts on the part of the issuer of the invoice that forms the basis on which deduction is sought, absent proof that the taxpayer was aware, or ought to have been aware, of fraud committed earlier in the chain of supply
- Precludes the tax authorities from taking a position of refusing a taxpayer’s right to deduct VAT on the basis that the taxpayer did not satisfy itself that its commercial partner was in compliance with statutory obligations---in particular with regard to VAT—or on the basis that the taxpayer did not have other documents capable of demonstrating that the commercial partner had acted with propriety, even though the taxpayer did not have any material justifying a suspicion that irregularities or fraud had been committed