Direct and immediate link in terms of input VAT deduction

Facts

The plaintiff, Oblastní nemocnice Kolín, operated a hospital and, as such, mainly provided VAT-exempt healthcare services which did not allow for input VAT deduction. However, it also provided certain additional VAT taxable services, such as clinical trials, accommodation for patients’ companions, medical internships, sterilisation of instruments for third parties, antenatal classes, and X-ray, ultrasound and veterinary examinations. With regard to its technical and material equipment, the plaintiff claimed a pro rata input VAT deduction, arguing that these were general costs. The goods and services acquired for which the input VAT deduction was claimed were used exclusively for the provision of VAT-exempt services. The applicant argued, however, that the provision of the additional (VAT taxable) services required a licence to provide healthcare services, and that minimum technical and material requirements had to be met as a condition of this licence. The equipment therefore served both the VAT-exempt and the VAT taxable activities.

ECJ ruling

The ECJ first emphasised the necessity of a direct and immediate link between the input transactions and the VAT taxable output transactions. If this link was lacking in relation to certain output transactions, the input transaction could nevertheless entitle the taxable person to a (proportional) input VAT deduction if it formed part of the general costs directly and immediately related to the taxable person’s economic activity as a whole.

However, the mere legal obligation to acquire goods and services cannot, in the present case, establish a direct and immediate link – neither directly to the VAT taxable activities nor to the taxpayer’s economic activity as a whole. Rather, the referring court must examine separately for each input transaction, based on its actual use and the exclusive reason for its acquisition, whether there is a direct and immediate link with specific output transactions or the claimant’s economic activity as a whole. Although it is not required to decide this, the ECJ considers that, at first glance, the technical equipment appears to serve the provision of healthcare services rather than the additional services. However, it must also be borne in mind that healthcare services may include services not exempted from VAT, such as abortions. The ECJ points out that it must always first be examined whether there is a connection with specific output transactions before a connection with the economic activity as a whole can be considered.

Analysis

The decision comes as little surprise. In his opinion, the Advocate General had put his finger on the crux of the matter more clearly than the ECJ: the link between the input services and the additional output services is not of a commercial (factual), but of a legal nature. That is insufficient. One might say that the link is not a direct, but at most an indirect one. Although the ECJ left this open, there appears to be a strong case for directly and immediately attributing the input services in question to the healthcare services. Input VAT deduction would therefore only be possible to the extent that the input services relate to the (few) taxable healthcare services, or on a pro rata basis if and to the extent that the input services serve both areas of healthcare services. A link to the entire economic activity would therefore be out of the question.

Author: Nadia Schulte