Supreme Court asks CJEU to rule on VAT deduction for client entertainment expenses
Supreme Court asks CJEU to rule on VAT deduction for client entertainment expenses
The Spanish Supreme Court (SC) has raised concerns about the compatibility of Spain’s VAT law with the EU VAT Directive, specifically with respect to a domestic law prohibition on the deduction of expenses related to client entertainment. The SC has also questioned why these expenses are deductible for corporate and personal income tax purposes, but not for VAT purposes. As a result, the SC referred the issue to the Court of Justice of the European Union (CJEU) for clarification on whether Spanish national law is aligned with EU law.
The Spanish Supreme Court (SC) has raised concerns about the compatibility of Spain’s VAT law with the EU VAT Directive, specifically with respect to a domestic law prohibition on the deduction of expenses related to client entertainment. The SC has also questioned why these expenses are deductible for corporate and personal income tax purposes, but not for VAT purposes. As a result, the SC referred the issue to the Court of Justice of the European Union (CJEU) for clarification on whether Spanish national law is aligned with EU law.
In general terms, the core of the dispute lies in the interpretation of article 96 of Spain’s VAT law, which disallows a deduction of input VAT on recreational shows and services and on goods and services intended for client entertainment, employees or third parties.
The VAT Directive allows EU member states to limit VAT deductions in certain cases (luxury, leisure or representation expenses), but only if these limitations were in effect before the country acceded to the EU ("standstill clause"). Spain joined the EU on 1 January 1986, and the VAT Act governing this matter came into force on the same day. However, before this date, Spain's consumption tax system did not include a right to deduct VAT, raising doubts about the legitimacy of the current prohibition.
The two questions referred to the CJEU are as follows:
In general terms, the core of the dispute lies in the interpretation of article 96 of Spain’s VAT law, which disallows a deduction of input VAT on recreational shows and services and on goods and services intended for client entertainment, employees or third parties.
The VAT Directive allows EU member states to limit VAT deductions in certain cases (luxury, leisure or representation expenses), but only if these limitations were in effect before the country acceded to the EU ("standstill clause"). Spain joined the EU on 1 January 1986, and the VAT Act governing this matter came into force on the same day. However, before this date, Spain's consumption tax system did not include a right to deduct VAT, raising doubts about the legitimacy of the current prohibition.
The two questions referred to the CJEU are as follows:
- Whether article 96 of the Spanish VAT Law is compatible with article 168 of the EU VAT Directive, which provides that if the goods and services are used for VATable transactions, the taxable person is entitled to deduct the VAT paid, and with article 176, which disallows the deduction of expenses that are not of a strictly professional nature.
- Whether the introduction of the restrictions in the Spanish VAT law on the same day that Spain joined the EU can be justified under the standstill clause. Specifically, the Supreme Court seeks clarification on whether Spain was allowed to impose such limitations even though they were not in effect before Spain became an EU member state.
BDO Insight
A CJEU decision on these issues will be relevant for ongoing and future cases before the CJEU and other Spanish courts. This issues are significant for companies or entrepreneurs that have paid VAT on relevant business-related goods or services, excluding these amounts from their VAT returns may have resulted in significantly higher payments. The CJEU decision may also lead to a change in the Supreme Court’s criterion.
Although the CJEU has not yet formally accepted the preliminary ruling request from Spain’s SC, businesses that have been affected by the expense deduction restriction should review previously filed returns so they will be ready to file a refund claim in the future in the event of a favorable decision by the CJEU.
A CJEU decision on these issues will be relevant for ongoing and future cases before the CJEU and other Spanish courts. This issues are significant for companies or entrepreneurs that have paid VAT on relevant business-related goods or services, excluding these amounts from their VAT returns may have resulted in significantly higher payments. The CJEU decision may also lead to a change in the Supreme Court’s criterion.
Although the CJEU has not yet formally accepted the preliminary ruling request from Spain’s SC, businesses that have been affected by the expense deduction restriction should review previously filed returns so they will be ready to file a refund claim in the future in the event of a favorable decision by the CJEU.