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SAC: no VAT deduction on repairs of leased goods

20 January 2012

In its judgment №12047/28.09.2011 the Supreme Administrative Court (SAC) confirmed the rejection of VAT deductions on purchases of replacement parts and repair services related to a leased truck under a finance lease contract for less than three years

The Case

The taxpayer, a Bulgarian company, entered into a finance lease contract with a leasing company for the lease of a truck and a trailer for 24 months with the option to acquire them at the end of the lease.

During the leasing period the leased assets needed certain repairs. The lessee purchased the required replacement parts and repair services from Bulgarian vendors and deducted VAT on their invoices. At the end of the lease term the lessee acquired the truck and the trailer from the leasing company.

The revenue office rejected the deductions of input VAT on the repairs claimed, with the argument that with these purchases the lessee rendered free of charge supplies to the lessor, who was at that time the owner of the goods and, therefore, according to the authorities, received the benefit of the repairs. The VAT assessment was confirmed by the Veliko Tarnovo Administrative Court and subsequently by the SAC.

The Judgment

The company maintained before the lower court and the SAC that the leased goods were properly recognized as own capital assets under National Accounting Standard No17 “Leasing”. On this basis the purchased repair goods and services were related to the company’s assets and were not therefore provided to the lessor for free.

The courts disregarded the accounting treatment and resorted to the commercial and contractual law according to which the rules for rent contracts apply to leases. As per Article 70(3)(3) of the VAT law, purchases used by lessees for repairs of hired assets give rise to input VAT deduction if the term of the rental agreement is longer than three years. The term of the lease contract in the case at hand was less than three years and therefore the taxpayer could not benefit from this provision of the VAT law. According to SAC the fact that the lessee in fact became owner of the leased goods was irrelevant because the VAT treatment is determined as at the time of the VAT event of the repair purchases when the lessee was not the owner.

As an alternative position, the taxpayer tried to resort to Article 25(3)(6) according to which the VAT event for free of charge supplies of repairs from tenants to lessors occurs at the date of returning the hired asset. Since the company in fact acquired the asset and did not return it to the lessor, it argued that no free of charge supply occurred and that the repair purchases were used for its own taxable business. Neither the SAC, not the lower court provided reasons why this argument is not valid.

The Implications

The judgment may be relevant to businesses that lease assets for periods shorter than three years with optional acquisition of the goods or under operating leases.

In our opinion, different ideas for mitigating the risk of rejecting input VAT deductions in similar cases may be considered – based on local as well on EU VAT legislation. We will be glad to be of assistance and provide support in similar situations.

For further information

Kalin Hadjidimov
Partner, Tax & Legal
Tel.: + 359 (2) 9697 700
Fax: + 359 (2) 9697 878
khadjidimov@kpmg.com

Arkadiusz Mierzejewski
Partner, Tax
Tel.: + 359 (2) 9697 700
Fax: + 359 (2) 9697 878
arekmierzejewski@kpmg.com

Ivan Vargoulev
Director, Indirect Taxes
Tel.: + 359 (2) 9697 700
Fax: + 359 (2) 9697 878
ivargoulev@kpmg.com

In this issue

The Case

The Judgment

The Implications

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