Possibility of reclassifying a transaction as an economic activity subject to VAT – Application of the EU VAT principles

Case C-183/14 Salomie and Oltean

The case analyses whether sales of immovable goods (buildings) performed by a natural person can, following a tax audit, be reclassified as operations subject to VAT, where personal income tax was previously applied for such transactions, being regarded as transfers of immovable assets forming part of the private patrimony of the natural person.

The Court of Justice of the European Union (“CJEU”) expressed its opinion in this case in conformity with the application of the principles of legal certainty and protection of legitimate expectations.

In the CJEU’s opinion the reclassification of the transaction as an economic activity subject to VAT, performed during the legal statute of limitation period, does not undermine the principle of legal certainty, where the applicable provisions of the national VAT law were sufficiently clear and precise.

Additionally, the CJEU held that the practice of the tax authorities not to regard similar activities as transactions within the VAT scope in a systematic manner, does not provide assurance to a prudent and well informed taxpayer that VAT will not be levied in respect of the transactions performed.

In this context, the CJEU stated that the principle of legitimate expectations cannot be invoked by the taxpayer unless the latter received express assurances from the competent national tax authorities that the transaction concerned would not be subject to VAT.

As regards additional surcharges, the CJEU stated that the tax authorities may impose penalties for non-compliance of the taxable person with its obligations, as long as the EU law principles, in particular the principle of proportionality, are observed and that such penalties are not excessive as compared to the seriousness of the taxable person’s breach of its obligations.

The CJEU concluded that tax authorities may decide, further to a tax audit, to reclassify transactions as being subject to VAT and impose related penalties, based on clear and precise law provisions and provided that the principles of protection of legitimate expectations and principle of proportionality are observed.

Also, on the other hand, in the CJUE’s opinion, the refusal of the tax authority to grant a taxable person the right to deduct input VAT due or paid on goods and services acquired for the purpose of taxable operations on the grounds that the taxable person is not registered for VAT purposes, goes further than it is necessary for the collection of VAT and for the prevention of evasion.

According to the CJEU, considering that the VAT deduction right may not be limited and can be exercised immediately by the taxable person, as well as the fact that, in this specific case, there is a risk for the taxable person to lose its VAT deduction right if this would be postponed until after the VAT registration formalities are completed and the first VAT return is submitted, the VAT deduction right cannot be denied by the tax authorities. It is particularly noted that the substantive requirements for exercising the VAT deduction right were satisfied and that the respective persons were regarded as taxable persons by the tax authorities during the tax audit.

Thus, the CJEU once again states that a taxable person’s failure to comply with certain formal requirements imposed by national law cannot in itself lead to the refusal of the VAT deduction right, as long as the substantive requirements of the operations performed are met.

Having in mind the decision of the CJEU in this case, natural persons should reassess the operations carried out in the past, in particular sales of personally owned immovable assets, in order to prevent any risk that their activities be regarded as economic activities within the VAT scope, despite a different practice of the tax authorities.

Additionally, the judgment of the CJEU provides strong arguments to be used by taxable persons, in their disputes with the tax authorities, for sustaining the correct application of the EU VAT principles, as interpreted by the CJEU.