The recent preliminary question referred to the Court of Justice of the European Union (CJEU) by the Spanish Supreme Court has opened a crucial debate on the deduction of VAT incurred on certain business expenses, especially customer service. The current regulations in Spain, set out in article 96 of the VAT Law, establish that some expenses, such as those for sporting events and customer service, are not deductible. This limitation has been the subject of criticism for being considered incompatible with the EU VAT Directive, which guarantees the deduction of tax on all business-related activities.
The conflict arises from the clash between the Spanish VAT Law and the European Council Directive 2006/112/EC. While EU law provides that businesses have the right to deduct input VAT provided that the goods and services purchased are linked to their business activity, Spanish law limits the deduction of certain expenses, including those destined for customers and employees. This raises a fundamental question: is it fair for Spanish businesses to bear this additional cost, when in theory VAT should be neutral for the business owner?
The keystone of VAT is the principle of neutrality, which seeks to prevent companies from becoming the last links in the chain of tax repercussions. In other words, VAT must be borne by the final consumer, not by the entrepreneurs who act as intermediaries in the production and distribution process. However, Spanish regulations, by excluding certain expenses from deduction, seem to contradict this basic principle, since companies are forced to assume a cost that should be transferred to the final consumer. This situation represents an additional economic burden that generates a competitive disadvantage for Spanish companies compared to their European counterparts.
The standstill clause: a valid justification?
One of the key aspects of this conflict is the so-called “standstill clause”, a provision that allows EU Member States to maintain pre-existing restrictions on VAT deductions if they were in force before their accession to the European Union. Spain introduced VAT into its tax system in 1986, coinciding with its accession to the then European Economic Community. However, the Spanish Supreme Court has questioned whether the limitations imposed by Article 96 of the VAT Law can be justified under this clause. The controversy lies in whether these restrictions were actually planned before Spain’s accession to the EU, or whether they were opportunistically introduced on the very day of accession, which could invalidate their application under the standstill clause.
The CJEU has already issued several rulings on the strict interpretation of this clause, highlighting cases such as Case C124/12 AES-3C Maritza East in which restrictions on the right to deduct can only be protected if they were clearly provided for in national legislation in force before EU accession. If the European court finds that the Spanish limitations do not meet this criterion, it could trigger a significant revision of the Spanish VAT law, which would have consequences for both businesses and the Spanish tax system.
This case represents the difficulties posed by tax harmonisation within the EU. Although the VAT Directive seeks to establish a common framework for all Member States, differences in the implementation of national regulations create distortions in the single market. The preliminary question raised by the Supreme Court underlines the need for a consistent interpretation of European tax rules to avoid inequalities between Member States.
The impact of the CJEU ruling
For companies, this situation represents a critical point. If the CJEU rules against the Spanish legislation, it would not only change the criteria for future proceedings, but would also open the door to retroactive claims, increasing the amount of VAT deductible by companies in previous years. In addition, any change in legislation would have a direct impact on companies' tax planning, as well as on other taxes, such as corporate tax and personal income tax.
VAT deduction is a key component of the tax structure of many companies, and a ruling that forces a change to current regulations will create an opportunity to optimize corporate taxation.
The CJEU ruling will not only be crucial for Spain, but could also set a precedent for other countries that apply similar restrictions. The decision could provide key guidance on how EU guidelines should be applied in national contexts that have adapted their tax legislation in different ways over time.
Conclusion
The preliminary question on the deduction of VAT on customer services is a clear example of how national laws can come into conflict with European regulations in a context of increasing economic integration. The Court of Justice of the European Union has the task of deciding whether the restrictions imposed by the Spanish VAT Law are compatible with the Community Directive and whether they can be justified under the standstill clause.
The potential incompatibility of the VAT Act with EU law not only affects the legal security of companies, but also the country's own competitiveness in the European market.
The CJEU's decision could mark a turning point in corporate taxation in Spain.
Leticia Minero Macías
Tax Area Manager
