Article 18(4) of Council Directive 77/388 (the sixth directive) and the principle of proportionality precluded national legislation which, in order to allow investigations required to prevent tax evasion and avoidance, extended from 60 to 180 days, as from the date of submission of the taxable person's VAT return, the period available to the national tax office for repayment of excess VAT to a category of taxable persons, unless those persons lodged a security deposit. Provisions such as those in issue did not constitute ‘special measures for derogation’ intended to prevent certain types of tax evasion or avoidance within the meaning of art. 27(1) of the sixth directive.

Facts

In her VAT return for the month of January 2006, the taxpayer reported a payment of excess VAT. Relying on art. 18(4) of the sixth directive, she then applied to the tax office for repayment of that excess to her within a period of 60 days from the date of submission of her VAT return. The tax office rejected her application, taking the view that the taxpayer could not obtain the repayment of the excess VAT within the period of 60 days because, since she had commenced her activities less than 12 months earlier and since she had not supplied to the tax office a special deposit, she had not satisfied the conditions established by the national law on VAT for entitlement to the repayment sought. The taxpayer's complaint against that decision was rejected by the Dyrektor.

The taxpayer appealed to the regional Administrative Court which, uncertain whether the national provisions in question were compatible with Community law, stayed the proceedings and referred to the ECJ for a preliminary ruling.

Issue

Whether art. 18(4) of the sixth directive precluded the national legislation in question.

Decision

The European Court of Justice (First Chamber) (ruling accordingly) said that the right, guaranteed by art. 17 of the sixth directive, of taxable persons to deduct the VAT they had already paid on goods purchased and services received as inputs from the VAT which they were liable to pay was a fundamental principle of the common system of VAT established by the relevant Community legislation. The right to deduct was an integral part of the VAT scheme and as a general rule might not be limited. In particular, that right was exercisable immediately in respect of all the taxes charged on transactions relating to inputs. Where, for a given tax period, the amount of the deductible tax exceeded the amount of tax due and therefore the taxable person could not effect the deduction by subtraction in accordance with art. 18(2) of the sixth directive, art. 18(4) provided that the member states might either make a refund or carry the excess forward to the following period according to conditions which they were to determine. As regards the former possibility, while the member states had a certain freedom to manoeuvre in determining the conditions for the refund of excess VAT, those conditions could not undermine the principle of neutrality of the VAT tax system by making the taxable person bear the burden of the VAT in whole or in part. In particular, the taxable person should be entitled, in appropriate circumstances, to recover the entirety of the credit arising from that excess VAT. That implied that the refund was made within a reasonable period of time by a payment in liquid funds or equivalent means, and that, in any event, the method of refund adopted must not entail any financial risk for the taxable person.

The national provisions did not appear to be in conformity with the condition that repayment of the excess VAT must be made within a reasonable time. The period for repayment of 180 days laid down for new taxable persons was, on the one hand, six times longer than the one month applicable accounting period for VAT and, on the other hand, three times longer than the period applied to other taxable persons. No argument had been put forward to explain why it was necessary, in order to prevent tax evasion and avoidance, to establish a difference in treatment of such a scale. Moreover, such a long period appeared to be even less necessary when, in any event, the tax office had the power under national law, in order to make wider inquiry into the lawfulness of repayment and to obtain the necessary clarification, to extend the period of 60 days within which repayment had to be made.

Lastly, the possibility offered to new taxable persons to lodge a security deposit in order to take advantage of the normal period of 60 days for the obtaining of repayment of excess VAT, was not proportionate either to the amount of the excess VAT to be repaid or to the economic size of the taxable person. In particular, the lodging of such a security deposit was likely to entail a not inconsiderable financial risk for undertakings which had just commenced their activities and might, consequently, lack significant resources.

In reality, the effect of the obligation to put in place such a security deposit, in order to be able to take advantage of the period which ordinarily applied, was only to replace the financial burden associated with the fact that the amount of the excess VAT was tied up for a period of 180 days with the burden consequent on the amount of the security deposit being tied up. There was even less justification when, first, the latter amount might be greater than the amount of the excess VAT at issue and the length of time over which the security deposit was tied up was greater than the period for repayment of the excess VAT laid down for new taxable persons.

Article 27(1) of the sixth directive provided that the option of a member state to introduce such derogating measures was subject to a specific procedure, in particular requiring the agreement of the Council of the European Union, acting unanimously. However, the documents before the court did not disclose that the measures at issue were authorised by the Council, in accordance with that provision, as special measures for derogation from the sixth directive. That being the case, national provisions such as those in issue could not fall within the scope of art. 27(1).

European Court of Justice (First Chamber).
Judgment delivered 10 July 2008.