Input Tax - Right to deduct - 3rd party beneficiary

October 2017

The recent Bulgarian case (Sofia v 'Iberdrola Inmobiliaria Real Estate Investments' EOOD) highlights an interesting issue. Namely the right to deduct input tax where expenditure is incurred on property owned by a third party.
In this particular instance the appellant intended to build a holiday village.  To ensure the holiday units were equipped with waste water provision, the appellant agreed to pay for extensive modifications of the local council's water pump.  After the modifications both the appellant and the local council would benefit from the water pump. 
The issue had been referred by the domestic court to the advocate general for a preliminary ruling on the right of the appellant to deduct input tax .  The AG decided that, as there was no 'direct and immediate' link between the works and the appellant's taxable outputs input tax deduction could not be permitted.
The CJEU decided not to follow the AG's decision noting that there was likely to be a direct and immediate link between the expense and the appellant's taxable activities.  However it also commented that deduction should be confined only to VAT on that expensditure which was necessary for the appellant to conduct its econmic activities.

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