Not each value added tax may be refunded

As a rule, the basis for refund of VAT from other Member States of the European Union is invoices documenting business transactions (sale of goods or services) on which the output VAT on those transactions is indicated.

First of all, a taxable person not established in the Member State of refund must carry out transactions giving rise to a right of deduction in the Member State of establishment. If a taxable person’s purchases are only connected with VAT-exempt activities (even if the taxable person is formally registered as an active VAT payer), then invoices documenting such transactions may not constitute the basis for refund.

On the other hand, this is not the case if the taxable person’s activities are of a mixed nature (i.e. the taxable person carries out transactions that give rise to a right of deduction as well as transactions that do not give rise to a right of deduction) and, at the same time, it is not possible to clearly attribute purchases made in other countries to a given activity. In that event, only that part of the refundable VAT corresponding to the first type of transaction may be refunded by the Member State of refund. Of course, the provisions concerning the settlement of VAT on the basis of the so-called sales ratio apply here.

In addition to the necessity to demonstrate the connection between the purchases made and the taxable activity, the value added tax indicated on an invoice must be invoiced correctly.

If a foreign seller has incorrectly recognised its tax liability and indicated tax that is not output VAT under local tax regulations, the purchaser will not be entitled to a refund of such tax. What is more, if such invoices are used by taxable persons, the foreign tax administration may consider them as an attempt to defraud the tax, which may even result in criminal responsibility of the taxable person.

What should be noted is that value added tax is the main source of budget financing in each Member State of the EU. Therefore, in the process of its refund, the tax administration bodies verify each document submitted, both in formal and material terms.