In BE, DT v Administraţia Judeţeană a Finanţelor Publice Suceava, Direcţia Generală Regională a Finanţelor Publice Iaşi (Case C-182/20), the CJEU has confirmed that Articles 184 to 186 of the Principal VAT Directive must be interpreted so as to preclude national legislation or practice whereby the initiation of insolvency proceedings in respect of an economic operator, entailing the liquidation of its assets for the benefit of its creditors, automatically places an obligation on that operator to adjust the VAT deductions which it has made in respect of goods and services acquired before it was declared insolvent, where the initiation of those proceedings is not such as to prevent that operator’s economic activity, within the meaning of Article 9 of the Principal VAT Directive, from being continued, in particular, for the purposes of the liquidation of the undertaking concerned.

DT was a partner and administrator of BE, a company which was subject to insolvency proceedings in 2015. Following the declaration of insolvency, the Romanian tax authorities issued a tax assessment notice to BE, in accordance with national legislation, in respect of adjustments to VAT deductions that the company had made for the period 2013 to 2014, during which time it carried out an economic activity and was registered as a taxable person for VAT purposes.

BE and DT appealed the notice to the Romanian tax authorities, who rejected the appeal on the basis that BE had ceased to carry out an economic activity when it was declared insolvent. The tax authorities noted, in that regard, that such a declaration of insolvency entails a procedure for the liquidation and sale of assets with a view to the repayment of debts, and that the transactions carried out in the context of that procedure do not, in themselves, have any economic purpose. BE and DT appealed the tax assessment and the tax authorities' decision to the Regional Court in Suceava, which upheld the appeal. The tax authorities then appealed to the Suceava regional court of appeal who referred to the CJEU the question of whether EU law precludes, in circumstances such as those in the main proceedings, national legislation which requires, once insolvency proceedings in respect of an economic operator have been initiated, automatically and without further checks, adjustment of VAT, by refusing to allow the economic operator to deduct VAT on taxable transactions that occurred prior to the declaration of insolvency and ordering the operator to pay the deductible VAT.

The CJEU noted that:

  1. 'economic activity' must be considered without regard to its purpose or results, therefore the mere fact that the initiation of insolvency proceedings in respect of a taxable person changes, in accordance with the rules laid down in national law, the purposes of that taxable person's transactions, cannot, in itself, affect the economic nature of the transactions carried out in the course of that business;
  2. as long as an undertaking continues its activities during insolvency proceedings, it is in competition with other taxable persons carrying out services similar to its own, so the services concerned must, in principle, be treated in the same way for VAT purposes, in accordance with the principle of fiscal neutrality;
  3. BE continued, during the insolvency proceedings, to be registered as a taxable person and the Romanian tax authorities made subject to VAT the transactions carried out in the course of those proceedings, which suggested that BE did in fact continue its economic activity and carried out taxed transactions despite being declared insolvent;
  4. the possibility for the taxable person concerned, in a situation in which it was required, initially, to adjust the input VAT deductions made on account of it being declared insolvent, despite the continuation of its economic activity, of requesting, subsequently, that the sums concerned be repaid to it precisely because it continued, during the insolvency proceedings, its economic activity, is not such as to compensate for the limitation of its right to deduct resulting from that obligation to adjust imposed by national law; and
  5. requiring the undertaking concerned, following an adjustment decision, to actually pay the VAT allegedly due constitutes, for that undertaking, an obstacle to the deduction of input VAT, since it requires that undertaking to commit funds until the tax authorities refund it overpaid VAT, whereas other operators who have not been declared insolvent may use those funds for their economic activities without being required to make such a payment.

Why it matters: This judgment confirms, amongst other things, that a business entering into insolvency does not affect the economic nature of the transactions carried out in the course of that business, even if the purpose of its liquidation is only to extinguish its debts. 

The judgment can be viewed here.