In the course of its business, a commercial company may carry out both taxable supplies and supplies for which there is no right to a tax credit. In this regard, Article 73(1) of the VAT Act states that a registered person is entitled to a partial tax credit in respect of the tax on goods or services, which are used both for carrying out supplies in respect of which the person is entitled to a tax credit and for supplies or activities in respect of which the person has no such entitlement.
Pursuant to Article 73 of the Value Added Tax Act:
Article 73. (1) A registered person shall be entitled to a partial tax credit in respect of the tax on goods or services which are used both for the supply of goods or services in respect of which the person is entitled to a tax credit, and for supplies or activities in respect of which the person is not entitled to such a credit.
(2) The amount of the partial tax credit is determined by multiplying the sum of the tax credit by a coefficient calculated to two decimal places, obtained as the ratio of the turnover relating to the supplies in respect of which the person is entitled to a tax credit to the turnover relating to all supplies and activities carried out by the person.
(3) The turnover relating to supplies in respect of which the person is entitled to a tax credit shall include:
1. the tax bases of the taxable supplies made by the person;
2. the tax bases of the payments received by the person, in respect of which the tax became chargeable before the occurrence of the taxable event relating to a taxable supply;
3. the tax bases of supplies made by the person where the place of supply is outside the country, treated as taxable in accordance with Article 69(2), with the exception of supplies with a place of supply outside the country, carried out by a permanent establishment of the person outside the country;
4. the tax bases of the payments received by the person prior to the supply of goods or services referred to in point 3;
5. (amended – State Gazette No. 108 of 2006, in force from 1 January 2007) the taxable amount of supplies of goods or services in respect of which the right to deduct input tax has not been exercised pursuant to Article 70(1)(3) to (5).
(4) The turnover relating to all supplies and activities carried out by the person shall include:
1. the turnover referred to in paragraph 3;
2. the tax bases of supplies made by the person where the place of supply is outside the country’s territory, which are not treated as taxable within the meaning of Article 69(2), with the exception of supplies carried out by a permanent establishment of the person outside the country;
3. the taxable amounts of the exempt supplies made, with the exception of those referred to in Article 50(1)(2);
4. the value of supplies and activities falling outside the scope of the person’s economic activity, with the exception of those for which no tax credit is allowed pursuant to Articles 71a and 71b;
5. the tax bases of the payments received by the person prior to the performance of the supplies and activities referred to in points 2, 3 and 4;
6. the amount of subsidies received, other than those included in the tax base.
(5) The coefficient shall be calculated on the basis of the turnover referred to in paragraphs 3 and 4 for the entire preceding calendar year, and where no such turnover is available for the preceding calendar year, on the basis of the turnover referred to in paragraphs 3 and 4 for the tax period during which the right to claim a tax credit arises.
(6) The amount of the partial tax credit referred to in paragraph 2 shall be recalculated in the final tax period of the current calendar year on the basis of the figures set out in paragraphs 3 and 4 for the current calendar year.
(7) In the event of deregistration, the amount of the partial tax credit under paragraph 2 shall be recalculated at the end of the last tax period on the basis of the figures set out in paragraphs 3 and 4 for the part of the current calendar year during which the person was registered.
(8) The difference resulting from the recalculation under paragraphs 6 and 7 shall be included as an adjustment (increase or decrease) to the amount of the tax credit in the tax return for the most recent tax period.
The Act provides for a specific procedure for determining the amount of the partial tax credit – Article 73(2) of the VAT Act, whereby the amount of the tax credit is multiplied by a coefficient calculated to two decimal places, obtained as the ratio between the turnover relating to the supplies in respect of which the person is entitled to a tax credit and the turnover relating to all supplies and activities carried out by the person.
At the same time, Article 64(1) and (2) of the VAT Implementation Regulations specify cases of supplies which are not included in the turnover referred to in Article 73(3) and (4) of the Act. In view of Article 64(1)(4) of the VAT Regulations, for the purposes of calculating the coefficient under Article 73, (2) of the Act, the turnover referred to in Article 73(3) and (4) of the Act shall not include supplies of immovable property and financial services which are of an incidental nature.
The VAT Act and the VAT Regulations contain no clarification regarding the term ‘incidental’. In this regard, the case law of the ECJ should be taken into account, as the amendment in question, in the section concerning the right to a partial tax credit under the VAT Act, was made with the aim of ensuring full compliance and alignment with the provisions of Article 174(2), (a) and (b) of Council Directive 2006/112/EC on the common system of value added tax (Directive 2006/112/EC), which requires that sales of second-hand fixed assets, as well as transactions involving immovable property and financial transactions of an ancillary nature. There are also judgments of the Court of Justice of the European Union relating to these provisions. These were handed down under the Sixth Council Directive (Directive 77/388/EEC), but Article 19(2) of that Directive contained provisions analogous to Article 174 of Directive 2006/112/EC /Judgment of 6 March 2008 in Case C-98/07, and Judgment of 29 April 2004 in Case C-77/01 (EDM)/. According to those judgments, the purpose of Article 19(2) of the Sixth Directive is to exclude the elements referred to therein from the proportion, so that they cannot alter its actual meaning, as such elements do not reflect the taxable person’s business activity. This is the case with sales of assets, as well as with transactions involving immovable property or financial transactions which are of an ancillary nature. Alternatively, these are supplies of minor importance or of an exceptional nature in relation to the undertaking’s total turnover, and such supplies do not correspond to the taxable person’s usual business activity. They would distort the result of the calculation in such a way that the coefficient would cease to reflect the relevant proportion of goods and services of mixed use for the supply of both taxable and exempt supplies. These transactions are excluded only if they are not related to the taxable person’s usual business activity.
In the ECJ judgment in Case C-306/94, paragraph 21, the Court concluded that if all the proceeds from the taxable person’s financial transactions relating to a given taxable activity are included in the said denominator, even where their receipt is not linked to the use of goods or services on which VAT is due, or is linked, at the very least, only to their use to a very limited extent, the calculation of a partial tax credit would be incorrect.
In its judgment in Case C-378/15, the Court of Justice ruled that, when determining the deductible portion, the amount of turnover arising from ‘ancillary transactions to financial transactions’ must be excluded. The Court clarified that even where, in some cases, the revenue from financial transactions exceeds that from the undertaking’s main activity, this does not mean that such transactions do not qualify as ‘ancillary transactions’. An economic activity must be classified as ‘ancillary’ provided that it does not constitute a direct, permanent and necessary extension of the enterprise’s taxable activity and does not involve the significant use of goods or services on which VAT is due.
At the same time, by Decision No. 13622 of 13 November 2014, in Administrative Case No. 475/2014 of the Supreme Administrative Court, it was determined that where a person grants loans, even if this activity is not classified as their main business, the value of the interest should be taken into account when determining the rate of the partial tax credit.
Notwithstanding the provisions of this decision, in view of the aforementioned case law of the ECJ and the amendment to the VAT Implementation Regulations, the company should carefully assess whether the financial transactions it has carried out are ‘ancillary transactions’ of an incidental nature and, accordingly, will not be taken into account when calculating the partial tax credit ratio.
In view of everything stated so far, it may be concluded that the turnover from financial transactions of an ancillary or incidental nature should not be included when determining the turnover under Article 73, paragraphs 3 and 4 of the VAT Act, where the supplies are of secondary importance or of an exceptional nature in relation to the total turnover realised by the undertaking and where such supplies do not correspond to the taxable person’s usual business activity.
