Important EU ruling on VAT deduction

The Court of Justice of the European Union has issued a landmark ruling on the principles governing VAT deductions by businesses. The case concerned a Polish company that made a purchase in February but received the invoice in March - still before the deadline for filing its February VAT return. The tax authorities argued that since the invoice was received in March, the VAT could only be deducted for that month. The company disagreed, and the case ultimately reached the CJEU.

The EU court sided with the taxpayer. It held that Polish regulations making the right to deduct VAT dependent on the receipt of an invoice are incompatible with the EU VAT Directive. According to the Court, it is crucial to distinguish between the arising of the right to deduct VAT and the exercise of that right. The right arises once the substantive conditions are met - in other words, when the taxable transaction takes place. An invoice is a formal requirement enabling the taxpayer to exercise that right, but it cannot determine when the right itself comes into existence.

Experts point out that the ruling may significantly improve companies’ cash flow. Szymon Lipiński, tax expert at Crowe Poland, emphasizes that the judgment opens the door for taxpayers to deduct VAT earlier, provided the invoice is received before the deadline for filing the relevant tax return. In his view, this means that many businesses will no longer have to effectively finance the state budget out of their own funds for several weeks. He also notes that the ruling may encourage companies to review their past settlements and submit corrections, particularly in sectors handling large VAT amounts.

What else does this judgment mean, especially in the context of the National e-Invoicing System (KSeF)?

The full article (in Polish), including Szymon Lipiński’s commentary, is available on the Business Insider Poland website.