Usefulness and profitability of expenses for the deduction of input VAT - EuGH-Urteil "Amper Metal Kft." (C-334/20)

In order for input VAT to be deductible, the purchased services must be directly and immediately related to an output transaction giving rise to an input VAT deduction or, as general expenses, to the overall economic activity. Hungarian authorities wanted to deny the input VAT deduction because the expenses were useless and overpriced. The ECJ (C-334/20, 25 November 2021) rejects this in principle - but there seems to be a certain limit.

Facts: Expensive and useless advertising stickers on cars

The Hungarian company Amper Metal had purchased advertising services, which consisted in placing stickers with the company logo on the cars at a car race. The Hungarian tax authority denied the input VAT deduction for two reasons: Firstly, the advertising measure was unsuitable and useless from the outset because the stickers on the racing cars were of no interest to the relevant target group and it did not lead to any increase in sales. Secondly, the advertising service was too expensive.

Article 168 S. 1 lit. a VAT Directive stipulates that a trader may deduct input VAT to the extent that the purchased services are used for the purposes of his taxed transactions. In a request for a preliminary ruling, the Hungarian court therefore asked the ECJ whether the term "used" should be interpreted in such a way that an expense that was not able to generate an output turnover could not be considered as used for a taxed turnover. The court also wanted to know whether the input VAT deduction could be denied because the price for the advertising service was excessive.

ECJ: Price and benefit alone do not matter

The ECJ first points out that the common VAT system ensures complete neutrality with regard to the tax burden on all economic activities - irrespective of their purpose and their result. However, the input transaction (in this case, the advertising service) itself must be subject to VAT. There must be a legal relationship between the service provider and the service recipient in which the remuneration constitutes the actual countervalue for the service provided. It is sufficient if there is an actual connection in this respect. The fact that the price is above or below the cost price or the market price is irrelevant. This also follows from Article 73 of the VAT Directive, according to which, as interpreted by the ECJ, the basis of assessment for VAT purposes depends on the price actually paid and has nothing to do with an objective value such as the market value. Something else only applies in the case of a close relationship between the supplier and the recipient - then, a minimum assessment basis applies.

As far as the uselessness of the advertising measure is concerned, the ECJ refers to its well-known case law on frustrated expenses, according to which the right to deduct input VAT, once it has arisen, remains valid even if the intended economic activity is not subsequently carried out. This was the ECJ's most recent ruling in the Sonaecom case (C-42/19): There, the input VAT deduction from market research services relating to the acquisition of a share remained in place, even if the share acquisition did not take place later.

Expense must have a strict business character

However, it should be noted that Art. 176 (1) VAT Directive excludes expenses from input VAT deduction that are not strictly of a business nature, such as luxury expenses, expenses for entertainment and representation expenses. In Germany, this roughly corresponds to Section 15 (1a) German VAT Code, according to which input VAT cannot be claimed on expenses to which certain income tax deduction prohibitions apply. The ECJ instructed the referring court to examine whether Amper Metal had pursued the goal of increasing sales with the stickers, or whether the expenses were found to be devoid of any commercial character and unrelated to economic activity. Should the latter be the case, the input tax deduction would have to be denied.

Conclusion: Proof of profitability not required, but there are limits

It is reassuring (and was also to be expected) that the ECJ does not impose any additional requirements on the usefulness and profitability of expenses for the deduction of input VAT. Irrespective of the fact that such requirements are difficult to derive from the VAT Directive, they would hardly be manageable in practice. On the other hand, the ECJ does not grant carte blanche for "fun expenses". However, since such expenses are not likely to be deductible for income tax purposes and could even give rise to criminal law issues in case of corporations, they should be the absolute exception in practice anyway.

(Dated: 4 January 2022)