Lithuania: Supply recipient may deduct VAT even though supplier did not pay output VAT (CJEU judgment)

A CJEU judgment concerning the right to deduct VAT when supplier did not pay output VAT because of financial difficulties.

A CJEU judgment concerning the right to deduct VAT when supplier did not pay output VAT

The Court of Justice of the European Union (CJEU) held that a supply recipient has the right to deduct value added tax (VAT) even though the supplier did not pay output VAT because of financial difficulties.

The case is: HA.EN. (C-227/21)


A Lithuanian building company was unable to repay a loan secured by a mortgage on immovable property. The property was transferred to the creditor in partial satisfaction of the debt, and the company issued an invoice to the creditor indicating the tax base and VAT. The company declared the output VAT on that invoice in its tax return, but never paid it. The creditor declared the invoice in its tax return and exercised the related right to deduct VAT.

The Lithuanian tax authority denied the creditor the right to deduct VAT on the grounds that it knew or should have known that the supplier would not pay output VAT because of its financial difficulties.

The CJEU previously held that whether a supplier paid output VAT has no effect on the supply recipient’s right to deduct VAT. The right to deduct may only be denied if the taxable person has committed tax evasion or abuse of rights. To prove an abuse of rights, two conditions must be met:

  • The transactions in question must result in the obtaining of a tax advantage contrary to the purpose of tax legislation
  • Obtaining that tax advantage must be the main purpose of the transactions

In this case, the CJEU held that the creditor did not commit an abuse of rights. The CJEU reasoned that the VAT directive grants a right to deduct for similar types of transactions, as it allows the reverse charge procedure to be applied. Furthermore, it is not possible to infer solely from the supplier's financial difficulties an unlawful intention not to pay VAT. The supplier was actually selling the immovable property (albeit in a forced sale) to pay its debts.

KPMG observation

The Czech Republic has implemented the obligation to apply the VAT reverse charge mechanism to the sale of immovable property by a debtor in a forced sale under a court decision. However, this judgement gives taxpayers another point to argue if denied the right to deduct VAT by a tax authority.

Read an October 2022 report prepared by the KPMG member firm in the Czech Republic 


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