Reduction of the tax base upon assignment

Facts

In this Romanian case, a building developer commissioned a contractor to carry out construction work. The contractor, in turn, commissioned a subcontractor to carry out the work. Insolvency proceedings were opened in respect of the developer’s assets, so the contractor lodged its claim in the insolvency register. As the contractor failed to pay the subcontractor, the latter brought an action. The two parties eventually agreed that the contractor would pay the smaller part of its debt and, in respect of the larger part, assign its claim against the developer to the subcontractor.

The subcontractor sent the client cancellation invoices for those amounts for which it had not received payment from the contractor. This served to meet the conditions for a reduction in the tax base under Romanian law, which it then carried out. The Romanian tax authority did not approve the reduction because the recipient of the subcontractor’s supplies was not the developer, but the contractor.

The insolvency proceedings against the developer ended with its removal from the commercial register, without any payments being made from the insolvency estate.

General Court decision

The General Court first established that the right to reduce the taxable amount under Article 90 of the VAT Directive is closely linked to the status of being liable for VAT on the transaction in question. The Court then found that the subcontractor had received full payment for its supplies: on the one hand through the payment itself and on the other hand through the assignment, as the assigned claim also constituted consideration. Consequently, there was no basis for a reduction of the taxable amount for the subcontractor.

A reduction in the taxable amount could only be considered for the contractor, as she had remained liable for VAT even after the assignment and, due to the insolvency, had ultimately received no payment. The VAT Directive does not provide for any provision allowing the transfer of the status as a VAT taxable person or the right to a correction through a private-law contract such as the assignment of a claim. The right to a correction of the tax base is accessory to the tax liability.

Analysis

The General Court’s approach results in more VAT being paid than corresponds to the remuneration actually received. After all, in the present supply chain, neither the subcontractor nor the contractor ultimately received their money (apart from the small payment made by the contractor to the subcontractor). Consequently, both the subcontractor and the contractor should therefore be permitted to correct the VAT. It remains to be seen whether the First Advocate General will request a review of this judgment before the ECJ.

Author: Nadia Schulte