The Court of Justice of the European Union (CJEU) issued a decision on 12 March 2026 providing an important clarification of the application of VAT deduction rules and the standstill clause under articles 168(a) and 176 of the EU VAT directive. The ruling addresses whether input VAT on entertainment and client hospitality expenses may be deducted and confirms that EU member states may continue to apply certain pre-existing restrictions where they fall within the scope of the standstill clause.
The dispute concerned Randstad España, which deducted input VAT on expenses for football matches, Formula 1 events and other recreational services, provided free of charge to its clients as part of its business development efforts. The Spanish tax authorities denied the deduction based on article 96 of the Spain’s VAT law, which excludes a VAT deduction on entertainment services and hospitality-related expenses. Randstad argued that these costs were directly linked to its business activity and, therefore, should be deductible under article 168(a) of the VAT directive. It further contended that Spain could not rely on the standstill clause because no comparable VAT system with such limitations existed before Spain’s accession to the EU.
The CJEU upheld the position of the Spanish tax authorities, concluding that:
The CJEU decision reinforces the durability of Spain’s restrictions on deducting input VAT for entertainment and client-related expenses. Notably, it confirms that the standstill clause can apply even in jurisdictions that lacked a fully developed VAT system before joining the EU, provided the economic effect of the restriction remains consistent. From a practical standpoint, the ruling significantly narrows the scope for challenging the nondeductibility of VAT on entertainment and hospitality expenses in Spain, even where such expenses are demonstrably linked to business activities.
Alvaro Gomez-Elvira
BDO in Spain
Background
The dispute concerned Randstad España, which deducted input VAT on expenses for football matches, Formula 1 events and other recreational services, provided free of charge to its clients as part of its business development efforts. The Spanish tax authorities denied the deduction based on article 96 of the Spain’s VAT law, which excludes a VAT deduction on entertainment services and hospitality-related expenses. Randstad argued that these costs were directly linked to its business activity and, therefore, should be deductible under article 168(a) of the VAT directive. It further contended that Spain could not rely on the standstill clause because no comparable VAT system with such limitations existed before Spain’s accession to the EU.
CJEU Decision
The CJEU upheld the position of the Spanish tax authorities, concluding that:
- The right to deduct VAT is a fundamental element of the VAT system but it may be subject to narrowly interpreted exceptions.
- Under article 176 of the VAT directive, member states may maintain exclusions from the right to deduct VAT that existed at the time of accession to the EU, provided the scope of those exclusions is not expanded.
- The standstill clause may apply even where a member state did not operate a full VAT system before accession, as long as the restriction reflects a pre-accession situation in which, in practice, no deduction right existed for the relevant expenses.
- Spain’s rules on entertainment and hospitality expenses do not broaden pre-existing limitations, but instead preserve the treatment of such expenses, which were not deductible before Spain’s accession.
- Excluding a VAT deduction for entertainment and representational expenses aligns with the logic of the VAT system, given their close connection to private consumption and non-essential business use.
BDO Perspective
The CJEU decision reinforces the durability of Spain’s restrictions on deducting input VAT for entertainment and client-related expenses. Notably, it confirms that the standstill clause can apply even in jurisdictions that lacked a fully developed VAT system before joining the EU, provided the economic effect of the restriction remains consistent. From a practical standpoint, the ruling significantly narrows the scope for challenging the nondeductibility of VAT on entertainment and hospitality expenses in Spain, even where such expenses are demonstrably linked to business activities.Alvaro Gomez-Elvira
BDO in Spain