The bankruptcy administrator representing the bankrupting companies has purchased services (e.g., accounting, security of real estate, legal, electricity and others) which were essential and unavoidable while supervising the assets of the bankrupting companies and implementing obligatory procedures of bankruptcy process. The services mentioned were ordered by the bankruptcy administrator, however, the invoices for the services mentioned were issued to the bankrupting companies. The companies have deducted input VAT for the services acquired and requested the Tax Authority to refund or offset VAT overpaid.  The Tax Authority has challenged the right to deduct input VAT stating that after the decision to start bankruptcy procedure both companies did not carry out VAT taxable activity, i.e. did not declare VAT taxable income.

Based on the case-law of European Union Court of Justice (hereinafter – the EUCJ), The Court explained that the bankrupting companies have right to deduct input VAT if the goods or services acquired are used while terminating the company’s economic activity (liquidating company), unless such purchases fall into the scope of VAT fraud or misapplication.

The Court once again was of opinion that the right to deduct input VAT is related to the company’s economic activity, i.e., if the company has executed economic activity (before starting bankruptcy procedure) and it was recognised as a VAT taxable person, then the company is treated as a taxable person even if a bankruptcy procedure is started. The feature of being recognised as a taxable person cannot be cancelled even if the shareholders of the company decide not to pursue the company’s activity anymore and decide to liquidate it. Based on the case-law of the EUCJ, the economic activity process consists of works needed to start economic activity, economic activity itself and the works needed to terminate (liquidate) economic activity. Due to this, the Court ruled that the companies have right to deduct input VAT even though the liquidation of the company is not related to pursuit of profit but it is directly related the company’s economic activity, i.e. its termination.