CJEU Advocate General: input VAT related to services supplied free of charge to a third party is not recoverable, even if there is an indirect link with VAT taxable output.

The case

Iberdrola owns parcels of land on which it will construct a holiday village. This village will be leased with VAT. Iberdrola extensively renovated the existent pump station in order to connect it to the existing municipal waste-water pump station. Without this renovation, the collection of waste-water would be impossible. In this respect, Iberdrola and the municipality entered into an agreement on the basis of which Iberdrola will carry out the renovation of the municipal waste-water infrastructure at its own expense. Iberdrola outsourced the renovation works to a third party contractor. Iberdrola claimed VAT recovery with respect to VAT charged by this contractor. However, the tax authorities refused this claim. The national court referred the case to the CJEU.

The AG is of the opinion that a causal link between the acquired goods or services and an economic activity is not sufficient for the recovery of input tax. The VAT Directive does not refer to the cause of the acquired costs, but rather to a particular use of the acquired goods or services. The economic reason of the taxpayer for the acquisition of the goods or services is therefore not sufficient to establish a direct link between input and taxable output for VAT purposes.

According to the AG, it is crucial to assess who uses the acquired goods or services and whether such use gives rise to untaxed final consumption. The AG believes that in this case, only the municipality directly uses the construction services for waste-water disposal, because the municipality maintains and operates this now renovated infrastructure. This illustrates a direct link between the input costs and a service supplied free of charge to the municipality. An 'indirect link' cannot, in itself, result in a service supplied free of charge being treated as a service supplied for consideration, which would then give entitlement to deduct input VAT.