The right to deduct input VAT for shell companies
Dr Sergio Finulli
by Dr Sergio Finulli
The use by the tax administrations of many countries of national “shell company” legislation for direct tax purposes to limit the deduction or refund of VAT has found a limit in the countries of the European Union after Judgement C-341/22 of the European Court of Justice (ECJ).
The Italian legislation on shell companies has been in force for many years. In addition to establishing a series of limitations and additional taxes for direct tax purposes for companies deemed to be shell companies on the basis of the amount of their revenues, this legislation provided for limitations for these companies to offset VAT and to obtain a VAT refund. The only possibility of non-application of the legislation was linked to the positive outcome of an “anti-abuse” ruling.
Clarification was needed on two points: firstly, whether the status of “taxable person” for VAT purposes could be restricted, and, secondly, whether such legislation could restrict the right to deduct VAT.
The ECJ first clarified that VAT Directive must be interpreted as meaning that it may not lead to a person being denied the status of taxable person for VAT purposes where that person, during a given tax period, carries out transactions that are subject to VAT, and the economic value of which does not reach the threshold prescribed by national legislation.
Secondly, the ECJ clarified that that no provision of the VAT Directive makes the right of deduction conditional on a requirement that the amount of output transactions subject to VAT (carried out by a taxable person during a given period) must reach a certain threshold. Moreover, measures adopted in order to ensure the correct collection of VAT, and to prevent evasion, must not go beyond what is necessary to achieve the objectives pursued. They cannot be used in such a way that they would have the effect of systematically undermining the right to deduct VAT and, consequently, the neutrality of VAT.
Finally, the ECJ stated that the presumption provided for in Italian law goes beyond what is necessary to achieve the objective concerning the prevention of fraud and abuse.
The ECJ judgement opens up the possibility for companies in other jurisdictions (subject to a limitation of their right to deduct and refund VAT because they are considered shell companies in their own country) to be able to overcome these limitations and consider a refund claim to the tax authorities for the tax periods for which it is still possible.
GGI member firmSofiae - Chartered Accountants & LawyersMilan, ItalyT: +39 02 760 22 407 Advisory, Auditing & Accounting, Corporate Finance, Tax
Sofiae Chartered Accountants & Lawyers’ cornerstone is the professional collaboration between chartered accountants and lawyers and offers its clients complete and inter-disciplinary services related to accounting, corporate and tax services, in the legal area and referring to business area, corporate restructuring and bankruptcy. Sofiae Chartered Accountants & Lawyers is based in Milan and provides integrated services to individuals, private and public companies as well as non-profit organisations.
Sergio Finulli specialises in tax and corporate law. He has built up considerable experience in assisting Italian and foreign clients with the setting up of a multidisciplinary approach to the management of their operations, for which purpose he works with lawyers and professionals specialising in other areas. Contact Sergio.
