If a property is unoccupied during a certain period, this does not necessarily affect the type of use of the property
The Court of Justice of the European Union issued the judgement in case C-672/16 regarding the obligation to adjust the deduction of input tax
In the Court’s opinion, properties should not be regarded as no longer being used for taxable purposes merely due to the fact that they remained unoccupied for over two years if, during that period, the taxpayer always provable had the intention of using those properties for the purposes of taxed transactions.
Right to deduction of input tax regarding properties
In accordance with Article 63 of the [Slovene] VAT Act (ZDDV-1), the taxpayer has the right to deduct the input tax it paid or is obliged to pay when purchasing goods or services if it used or intends to use these goods or services for the purposes of its taxable transactions. Furthermore, Article 63(a) ZDDV-1 stipulates that the taxpayer may exercise the right to input tax deduction when purchasing or building a property, however, only for the part used for the pursuit of its activity.
Adjustment to the deducted value added tax regarding properties
If, after the VAT return is made, some change occurs in the factors used to determine the amount to be deducted, the taxpayer is obliged to adjust the deduction in accordance with Article 68 ZDDV-1.
In accordance with Article 69 ZDDV-1, the adjustment for properties acquired as fixed assets is to be distributed over 20 years after they were first used. It follows that the taxpayer who exercised the right to a VAT deduction upon property acquisition is obliged to monitor the use of the property in question for 20 years and, in case that, during that period, the property is being used for the purposes of exempted activities, proportionally adjust the initial deduction.
The Court’s Judgement
In its judgement C-672/16, the Court examined the preliminary question concerning the obligation to adjust the VAT deduction in case of an unoccupied property.
In the Court's view, properties should not be regarded as no longer being used for the taxable purposes merely because they remained unoccupied for over two years. If the taxpayer, over these two years, always had the intention of using its properties for the purposes of taxable transactions and undertook the necessary steps to that end (actively sought to rent or sell them), it is not obliged to adjust the VAT deduction.
The entitlement to a reduction is retained if the taxpayer, by reason of circumstances beyond its control, does not make use of those goods and services which gave rise to a deduction in the context of taxable transaction.
If the taxpayer proves it has the intention to use the property for a taxed activity, the fact that the property remains unoccupied for a certain period does not suspend its use for the purposes of a taxable activity. Therefore, the taxpayer retains its entitlement to a VAT reduction and is not obliged to adjust it.
However, if the tax authorities of a Member State were to conclude that the right to deduct has been exercised fraudulently or abusively, they would be entitled to demand, with retrospective effect, repayment of the deducted input VAT.