EU: VAT Committee working paper on deduction of import VAT by lessee of imported goods

The European Commission (EC) discussed in Working Paper 1061 of the EU Value Added Tax (VAT) Committee the possibility for a lessee of imported goods to deduct the VAT paid upon the importation of those goods, when the lessee is designated as liable for the payment of such VAT.

The EU VAT Committee is an advisory body to the EC set up to promote the uniform application of the provisions of the EU VAT Directive. The VAT Committee cannot take legally binding decisions but can only give guidance on the application of the EU VAT Directive.

The EU VAT Committee referred in Working Paper 1061 to its previous Working paper 762 dealing with an aircraft lease, in which it stated that the lessee does not actually bear the (overall) costs of the aircraft, simply the amount of the lease to be paid to the owner. Therefore, while the costs of the lease are included in the price of the output transaction of the lessee, that is not the case with the costs of the aircraft itself. The costs of the aircraft are costs for the owner, who passes them on to the lessee as part of the price charged for the lease.

In the discussed case, an operational lease was concerned. Within the EU, such leases are clearly regulated and subject to strict time-limits. These elements are relevant for the VAT analysis as they determine the economic background of the transaction. The EU VAT Committee holds the view that under these circumstances, allowing a full deduction to the lessee would be disproportionate and thus the previous conclusions expressed in Working paper No 762 must be maintained. For the importer to be allowed to deduct the VAT paid on the importation of goods, the goods imported must be necessary to carry out the economic activity of the taxable person and the costs of the importation need to be included in the cost of his output transactions. In the case of importation of an aircraft by the lessee, while the first condition is fulfilled, the second is not, as only the price of the lease and not the costs of the importation of the aircraft are included in the cost of the lessee’s output transaction.

However, the EC is aware that some EU Member States are applying a different criterion to these situations and granting a right to deduct the import VAT to the lessee. Furthermore, several rulings of the Court of Justice of the European Union (CJEU) have addressed situations in which deduction of the VAT paid is allowed for persons who are not the owner of the goods. The EC thus believes it is necessary to return to this topic and requested delegations to give their opinion on this matter. 

Although the working paper deals with a specific case of an aircraft lease, tax practitioners need to monitor developments of the discussions because they may be relevant for other types of import transactions as well.

Read an April 2023 report prepared by the KPMG member firm in Slovakia