How to deduct VAT after the EU Court judgment? Polish VAT Law contradicts EU Law

According to the judgement, Polish rules for VAT deduction are inconsistent with EU law (Directive 2006/112/EC). The court found that if a business receives an invoice before the deadline for submitting the return, it is entitled to deduct tax for the month in which the transaction actually occurred. Polish regulations, which allow tax deduction only in the settlement for the period in which the invoice is received, are inconsistent with the principles of VAT neutrality and proportionality.

Behind the scenes of the landmark judgment. What was the VAT dispute about?

The dispute with the Director of the National Tax and Customs Information Office (KIS) concerned the timing of VAT deduction by the clearing house. The taxpayer argued that the material circumstances should be decisive, not the date of receipt of the invoice, provided the document was received before the tax return filing deadline.

The Office sought to deduct tax when the material conditions are met. It argued that this right arises when the supplier's tax liability arises, provided that the purchases are related to taxable activities and that there are no negative conditions under Article 88 of the VAT Act.

The key to this case is the right to deduct VAT once all material conditions are met. The taxpayer sought to settle the tax when this right arose (even before the deadline for submitting the tax return), without waiting for the physical receipt of the invoice, which arrived at the company only the following month.

Tax authorities and the Voivodeship Administrative Court, and the decision of the Supreme Administrative Court

According to the Director of the National Tax and Customs Information Office (KIS), the right to deduct tax arises only upon receipt of an invoice. The authority believes that this interpretation of the regulations is consistent with the principle of VAT neutrality, as the taxpayer is not deprived of their rights; the deadline for exercising them is merely extended.

The Voivodeship Administrative Court in Warsaw adopted a similar interpretation, indicating that effective deduction requires the cumulative fulfilment of two conditions: the completion of the transaction and the possession of a purchase document. The court found that the formal requirement specified in Article 178(a) of Directive 2006/112/EC determines the moment when the right to deduct arises, linking it to the date of receipt of the invoice. The case was brought before the Supreme Administrative Court, which, as part of its consideration of the cassation appeal, decided to refer a question to the European Court of Justice for a preliminary ruling.

What ruling from the EU Court?

The General Court of the European Union has unequivocally found Polish regulations that, in the circumstances described, require the postponement of the tax deduction deadline to the next settlement period to be inconsistent with Community law. The court emphasized that the right to deduct should, in principle, be exercised at the same time it arose, i.e., at the time the tax becomes due. According to the Court, a situation in which a taxpayer cannot make a deduction within a given period, despite having an invoice before filing the tax return, imposes an unjustified, temporary tax burden on them.

This ruling is crucial for tax practice. The EU Court reiterated the fundamental nature of the right to deduct VAT, which should not be subject to restrictions for purely formal reasons, provided that the substantive requirements are met. In practical terms, this means that the state is not authorized to postpone deduction solely due to a delay of several days in receiving an invoice if the taxpayer already has this document at the time of filing the return.

The court clearly stated that the practice in question violates the principles of neutrality and proportionality. It also pointed to the direct nature of the right to deduct, emphasizing that the structure of VAT should guarantee the immediate reduction of output tax by input tax when the substantive conditions are met. In the court's view, formal requirements cannot become a tool leading to unjustified postponement of this right.