CJEU Confirms Right to Deduct When VAT Is Incorrectly Charged: Analysis of Case C‑640/23

The judgment delivered by the European Court of Justice (CJEU) in Case C‑640/23 (Greentech) provides important clarification on how businesses can recover VAT that was incorrectly charged on transactions, and was later deemed to be outside the scope of VAT. The ruling addresses long‑standing practical problems created when tax authorities reclassify transactions after the fact, particularly where administrative deadlines prevent the correction of invoices.

Background

Greenfiber International SA (“Greenfiber”), established in Romania, sold equipment to their affiliated company, Greentech SA (“Greentech”) also established in Romania, and both companies treated this as a supply of goods subject to Romanian VAT. Greentech paid the VAT due to Greenfiber and subsequently reclaimed this Romanian input VAT in their Romanian VAT return.

A VAT audit conducted on the seller, Greenfiber, deemed the VAT charged to be correct but in a subsequent VAT audit of Greentech, the Romanian VAT authorities reclassified the transaction as a transfer of a going concern, outside the scope of VAT. As such, no Romanian VAT should have been charged meaning that Greentech were now in a position where they were unable to recover the Romanian VAT which they had paid.

Due to the time which had elapsed between the output VAT being charged and the Romanian VAT audit, the invoice correction period had expired in Romania, meaning that Greentech could not have the purchase invoice adjusted, nor could they recover the input VAT through their Romanian VAT return.

The issue went through the Romanian courts and was referred to the CJEU to be ruled upon, as the transaction had now led to a situation where VAT had been paid to the Romanian VAT Authorities by Greenfiber, but the same VAT was not deductible by Greentech, which did not maintain the EU VAT principle of neutrality.

The key question of the case was:

Can a taxable person be denied the right to deduct input VAT where VAT was incorrectly charged and paid on a transaction, which is later reclassified as the scope of VAT (e.g. transfer of a going concern), and it is impossible in practice to recover that VAT from the supplier (e.g. due to limitation periods)?

CJEU Ruling

The CJEU ruled that VAT deduction is not allowed for transactions reclassified as outside the scope of VAT because the VAT was never legally due be charged by the seller in the first place. However, the Court also ruled that the principles of fiscal neutrality and effectiveness require national tax systems to provide a practical way for businesses to obtain a refund, when invoice correction is impossible, ruling that a taxpayer cannot be left without remedy simply because deadlines have passed.

Therefore, Greentech was able to request a refund of the input VAT directly from the Romanian VAT Authorities.

Practical impact for businesses

The CJEU reaffirmed that the VAT system must remain fiscally neutral and businesses should not bear VAT costs that arise from mistakes or administrative limitations.

The judgment in C-640/23 reinforces the strict approach to input VAT deduction while simultaneously safeguarding the fundamental principle of fiscal neutrality. It confirms that businesses cannot rely on incorrectly charged VAT to support a deduction but also protects them from irrecoverable VAT costs where corrective mechanisms fail. As many EU Member States have strict time limits for invoice corrections, the CJEU ruling also means that these limits cannot prevent taxpayers from recovering VAT that was paid, but never due, if the invoice correction period has expired. This means businesses will have access to refunds even after statutory deadlines, where recovering the VAT from the supplier is impossible or excessively difficult.

For businesses, the case is highly relevant in practice. It underscores the risks associated with transaction misclassification, particularly in complex restructurings such as transfers of a going concern. It also highlights the importance of monitoring limitation periods and ensuring that contractual and tax positions are robust from the outset.

Companies should review their VAT compliance processes and prepare for possible reclassification scenarios.

If you wish to discuss any VAT related issues with respect to this ruling, please do not hesitate to contact Meridian Global VAT Services and we will be happy to assist you.