Importation of leased goods to be used for taxed activities – Right to deduct VAT for the lessee?

In its 98th meeting, the VAT Committee opened in working paper 1061 the discussion on the possibility for a lessee of imported goods to deduct the VAT paid upon the importation of those goods, when the lessee is designated as liable for the payment of such VAT. The VAT Committee is an advisory committee providing (non-legally binding) guidance on the application of the EU VAT Directive. The Commission Services concluded more specifically for the case of import of a leased aircraft that the lessee of an imported good is not entitled to deduct VAT.

The right to deduct VAT in relation to costs incurred by a taxable person is dependent upon whether the costs incurred are necessary in order for the taxable person to carry out his or her economic activity and whether those costs are included in the price of the output transactions. If those conditions are fulfilled, the direct and immediate link between the VAT paid and the economic activity of the taxable person is demonstrated.

It seems in this respect that the second condition, i.e. the costs are included in the cost of the output transactions, is not fulfilled in cases where the importer is the lessee of the goods. Referring to a particular case that was examined in WP 762 (aircraft lease), it appeared that the lessee does not actually bear the (overall) costs of the good, but simply the amount of the lease to be paid to the owner. Therefore, while the costs of the lease are included in the price of the output transaction of the lessee, that is not the case with the costs of the good itself. The costs of the good are costs for the owner, who passes them on to the lessee as part of the price charged for the lease. This component of the cost would thus be duplicated for the lessee if it was to consider that the costs of the good are included in the price for the output transactions of the lessee.

The Commission Services are however aware that some Member States are applying a different reasoning, nevertheless granting a right to deduct the import VAT to the lessee. Furthermore, several decisions of the ECJ have addressed situations whereby deduction of the VAT paid is allowed for persons who are not the owner of the goods. Therefore, the Commission Services thinks that it is now necessary to further analyze the possibility for the lessee of imported goods to deduct the VAT paid upon their importation. In this regard, the delegations of the VAT Committee are requested to give their opinion on this matter.

While the working paper is referring to the import of leased aircrafts, we expect that the final conclusion of the VAT committee will also be applicable to other leased goods. Although the interpretation of the VAT Committee is not legally binding, it will be interesting to follow-up on further developments and to see if Member States would keep their approach.