If the intended activity does not take place, what do you do with the deducted VAT?
If a planned activity does not take place, the right to a VAT deduction is generally maintained. However, there may be an impact on the deduction when you use purchased goods or services for another activity. This was demonstrated by a recent judgment of the Court of Justice of the European Union (CJEU).
Deduction of VAT in case of an intended activity
Entrepreneurs who incur costs with the intent to carry out an activity subject to VAT in the future may deduct input VAT on those costs. The basic principle is that this right to deduct input VAT remains in place if an intended activity subject to VAT does not take place. Where purchased goods or services have not yet been used and are subsequently used for another purpose, however, this may affect the right to deduct input VAT. For example, if the purchased goods or services are later used for an exempt activity or a non-business activity, the right to deduct input VAT may be lost. The recent CJEU judgment in the Sonaecom case is based on this principle.
The Sonaecom case
The Sonaecom case concerns a holding company that, among other things, manages shareholdings. The holding company intended to buy shares in a new subsidiary and thus invest in new business activity. It carried out market research for this purpose and paid a commission to an investment bank in connection with the issue of bonds. With the proceeds of the bond issue, the holding company intended to acquire the relevant shares and then provide VAT taxable services to that new subsidiary. This constituted a taxable activity for VAT purposes, giving rise to a right to deduct input VAT on the costs incurred. However, the acquisition of the shares did not take place and, therefore, the holding company lent the proceeds from the bonds issue to its parent company.
The CJEU held that the holding company was entitled, in the first instance, to deduct input VAT but that its granting of the loan was the actual use of the services. That actual use ultimately determines the degree of VAT deduction. Since that use was for the provision of for exempt supplies, input VAT was not deductible.
What to do if your intended use changes
When it comes to analysing a situation, the starting point is that the right to deduct input VAT remains in place if an intended VAT taxable activity ultimately does not take place. However, if you are going to use the purchased goods or services for another activity, there may be consequences regarding the deducted VAT. It is, therefore, important to be alert and to consult an advisor when you decide to use these goods or services for another activity.
Miguel Nuno Cardiga