The direct and immediate link test regarding deduction of input VAT: a consumption-based test versus an economic-based test?

Abstract

It follows explicitly from the EC VAT Directive that the deduction of input VAT depends on a positive link between on the one hand the incurred expenses and on the other hand the planned or actually completed taxed output transactions. In theory and in practice, however, the deeper nature of this link constantly gives rise to uncertainty, and thus also uncertainty in relation to the necessary distinction between direct costs and overhead costs. The purpose of this article is to analyse the recent case law of the Court of Justice of the European Union (ECJ) with a view to assessing the status of the relevant test used when establishing the link between a taxable person's different input and output transactions.