Tax credit and the right thereto

This article will introduce you to the tax credit, when a right thereto arises, the relevant time limits and conditions and which supplies are eligible for the right to deduct tax credit.
European tax legislation provides that any taxable person using goods for the purposes of economic activity is entitled to credit for input tax upon acquisition of the said goods.
According to Art. 68 (1) of the Value Added Tax Act (VATA), the tax credit is the amount of tax which a registered person has the right to deduct from the tax liabilities under VATA for:

  • Goods or services received thereby in a taxable supply;
  • A payment effected thereby prior to the occurrence of the chargeable event for a taxable supply;
  • Importation effected thereby;
  • The tax chargeable therefrom as a payer under Chapter Eight of VATA.

Emergence of the right to tax credit

The right to deduct arises when the deductible tax becomes chargeable. In general (for supplies within the country) tax becomes chargeable on the date on which the chargeable supply event occurs. When, before the chargeable event occurs, full or partial advance payment is made for the supply, the tax becomes chargeable upon receipt of payment (for the amount of this payment), excluding payments received in connection with an intra-European Union supply. In these cases it is assumed that tax is included in the payment amount.
In order for the right of deduction to arise for the recipient in question, an actual taxable supply must be carried out and invoiced, such that the recipient must be entered in the tax document.

Supplies conferring the right to deduct tax credit

Art. 69 (1) VATA stipulates that where the goods and services are used for the purposes of the taxable supplies effected by the registered person, the person has the right to deduct credit for:

  1. The tax in respect of goods or services which the supplier, who is a person registered under the Act, has supplied or is to supply to the said person;
  2. The tax charged upon importation of goods by customs and the importer (if they are a registered person);
  3. The tax chargeable therefrom as a payer under Chapter Eight of VATA.

The right to deduct tax credit is also applicable to goods and services used for:

  1. The supplies within the framework of the economic activity of the registered person, whose place of transaction is outside the territory of the country but which would have been taxable if effected within the territory of the country;
  2. The supplies of financial services under Art. 46 herein and of insurance services under Art. 47, where the recipient of the services is established outside the European Union or where the supplies of such services are directly linked with goods for which the conditions of Art. 28 are fulfilled.


Restrictions to the right to deduct tax credit

The restrictions to deduction of tax credit are exhaustively listed in Art. 70 (1) of the Act. Some of the cases in which the right is not exercisable are:

  1. The goods or services are intended for effecting of any exempt supplies;
  2. The goods or services are intended for supplies effected free of charge or for activities other than the economic activity of the person – except for the cases contained in Art. 70 (3) VATA;
  3. The goods or services are intended for business entertainment purposes (what those are can be found under Art. 70 (1), item 3)  - this provision does not include organizing congresses, conferences and other such events that are directly connected with presenting or testing the goods or services offered by the person within the scope of their own economic activity;
  4. Acquisition or importation of a motorcycle or motor vehicle etc.

Conditions to be fulfiled in order to exercise the right to deduct credit tax

  1. Tax document evidencing the tax amount: The exercise of the right to tax credit does not depend on whether the tax is charged by the supplier. All that is necessary is that the recipient is in possession of a tax document, issued by the supplier (a registered person) in accordance with the requirements for invoices and debit and credit transactions, in which the tax is indicated on a separate line. Art. 71, items 2, 4 and 5 VATA regulate the conditions regarding the cases where there exists a right of deduction of tax credit, when the tax is chargeable by the recipient or importer (so-called reverse charge). The invoice is not required to contain the signature and names of the issuer.
  2. Reverse charge: Levying the tax as a condition for the entitlement to tax credit is reserved only for those cases where the recipients themselves are obliged to charge the tax.

According to Art. 73а VATA, in case of supplies the tax on which is chargeable on the recipient, the right to deduct tax credit further exists where the supplier of the goods has not issued a document as required by the Act, or the recipient has not compiled with the requirements of the Act, if the supply has not been concealed and data thereon is available in the accounts of the recipient. In these cases the right to deduct tax credit is exercised during the third period of taxation following the period during which the tax has become chargeable, applying Art. 126 (3), item 2 mutatis mutandis.

Period of exercisability of the right to deduct tax credit

According to Art. 72 VATA, the right is exercised when the person:

  1. Includes the amount of the tax credit upon assessment of the net tax result for the tax period in the VAT return;
  2. Indicates the document in the purchase day book under Art. 124 for the tax period referred to in item 1.

A person registered under VATA may exercise the right to deduct tax credit for the tax period during which the said credit becomes deductible or during one of the 12 succeeding tax periods. This period is preclusive and after its expiry the person cannot take advantage of their right.

Right to tax credit prior to the date of registration

The registered person may deduct the tax credit for assets and services received before the date of their registration under VATA once the conditions under Art. 74 VATA are satisfied. The right of deduction itself arises on the date of registration under this Act.
The right is exercised during the tax period during which the said right accrued or in one of the three succeeding tax periods, with the available assets, the services received and the tax included in the registration inventory being recorded in the purchase day book for the relevant tax period.