Third Party Benefit and Implications for Input VAT Deduction

Abstract: Abstract The principle of fiscal neutrality is at the core of the EU VAT system. Neutrality in the EU VAT system comprises of two main elements, that is, equal treatment of taxable persons in the same situation and giving taxable persons the right to deduct input VAT for cost components. The right to deduction is an important element of the VAT system to achieve fiscal neutrality. Deductibility ensures that the burden falls on the final consumer and not on taxable persons, so business decisions are not influenced by VAT considerations. The main aim of this paper is to understand under what conditions input VAT for free of charge goods is deductible when it also benefits a third person. This paper also analyses if the CJEU’s case law contributes to fiscal neutrality with regards to the right to deduction. The right to deduction exists when there is a link between goods and services acquired and the taxable transactions undertaken by the taxable person. The application of the direct and immediate link has become much broader and less stringent over time. The CJEU considers the overall business activity rather than the strict application of the direct and immediate link. According to settled case law, an entrepreneur can also deduct input VAT on costs that benefit a person other than the entrepreneur himself. However, the right to deduct input VAT for free of charge supplies that benefit third parties is not always straightforward and relevant case law highlights several factors that need to be considered. While a direct an immediate link must exist, case law show it is enough that the link is between the expenditure and the overall economic activity of the taxable person. The primary purpose of the free of charge supplies should not be to benefit the third party and it should have a link to the taxable supplies of the taxable person. The benefit to the third party should be limited to what is necessary to accomplish the business activity, otherwise there is a risk for this provision being misused. Although not decisive in determining a taxable person’s right to deduct input VAT, it should also not be possible to pass on the cost to the third person benefitting from the supply. The analysis of relevant case law in this paper shows that the decision of the CJEU to allow deductions based on the above conditions are necessary to achieve the objectives of fiscal neutrality.