Upstream VAT deductibility right – Salomie&Oltean case

The Court of Justice of the European Union (CJEU) decided on the 9th of July 2015 to rule in favour of Mr. Salomie and Oltean within the context of the litigation the aforementioned persons had against the General Revenue Office Cluj.

Shortly, circumstances were the following: during 2007, Mr. Salomie and Oltean joined a partnership with other five natural persons, so that they could carry out a building project and the sale of four properties in Romania. Such partnership did not have any legal form and it has not been declared or registered for VAT in Romania.

During 2008 and 2009, out of a total of 132 apartments they built, 122 were sold and these sales have not been subject to VAT.

During 2010, as a result of a tax audit conducted by tax authorities, such authorities considered that the aforementioned operations constitute an uninterrupted business and that they ought to have been subject to VAT, as deliveries exceeded the exemption limit of EUR 35,000.

As a result, tax authorities required the payment of the VAT due plus all default charges related to it.

Although the right of VAT deduction is a fundamental principle of the mutual VAT system and VAT deduction upstream needs to be allowed if conditions in rem are fulfilled, Romanian rules and regulations are not compatible to this end with the provisions of the Directive 2006/112.

More explicitly, the Fiscal Code does not mention the fact that a person who is behind with their registration for VAT purposes is not allowed to exert their VAT deduction right before they settle their case by registering for VAT and filing VAT returns.

The registration for VAT, as stipulated under Art. 214 of the Directive 2006/112, does not constitute anything else but a formal requirement, and it cannot challenge the VAT deduction right when all material conditions generating such right are fulfilled.

As a result, persons who are taxable from a VAT perspective cannot be prevented from exerting their deduction right by arguing that they have not been registered for VAT purposes before using the goods obtained during its taxed business.

After considering all the aforementioned issues, the Court of Justice of the European Union ruled by their Decision No. 183 that the provisions of the Directive 2006/112/EC are to be applied to the detriment of Romanian regulations, according to which the deductibility right regarding VAT due or paid upstream for goods or services used during the taxed business is granted to the relevant taxable person only if they are registered for VAT and file VAT returns.

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