This is to alert you to a favourable decision which CJEU handed down on 18 March 2021 in a Polish case (C-895/19) relating to the deduction of input tax on intra-Community acquisitions of goods (“ICA”).

The current Polish VAT Act provides that input tax on an ICA may be deducted by reference to the same period in which output tax is reported if the output tax is settled within three months from the end of the month in which the chargeable event occurred (see Article 86(10b)(2)(b) of the VAT Act). Thus, if an ICA is reported after those three months, interest on tax arrears has to be paid.

CJEU held that this Polish law is incompatible with VAT Directive. According to the court, the right of deduction may be contingent only on the substantive conditions provided in the VAT Directive, which in the case of ICA are that the taxable person’s business must involve taxable transactions.

While VAT Directive also imposes certain formal conditions (having an invoice and settling the output tax), CJEU said that the time to comply with these may not be limited.

Therefore, in CJEU’s view, Polish law regulating the right to deduct input tax on ICA after three months:

  • leads to a situation where input tax and output tax on the same ICA are reported in different periods of account, regardless of the circumstances of the case, the person’s good will or reasons for delay in output tax reporting, and as such imposes the burden of VAT on the taxable person contrary to the principle of neutrality;
  • exceeds that which is necessary to ensure proper collection of VAT, especially since, in the case of an ICA, no amount should be due to the tax authorities.

By so ruling CJEU acknowledged the line of authority from Polish courts which have consistently held that an additional requirement which leads to input tax and output tax on the same ICA being reported in two different periods of account is contrary to Union law. Even though the case is about ICA, its outcome and the court’s ratio may be of universal application and possibly concern also importation of services. In practice, then, Polish businesses have obtained an important argument to use in their disputes with tax authorities.

If these issues pertain to your business and you are interested in our assistance, please contact your WTS&SAJA consultant.

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