One of the most frequent areas of dispute between the tax authority and taxpayers relates to the conditions under which a taxable entity participating in a chain transaction can deduct the VAT passed on to it. The tax authority (NAV) was recently struck another blow in the tussle when the Supreme Court, in a precedent-setting ruling, took issue with the tax authority’s practice of regularly reclassifying the participants in chain transactions as agents. What’s more, the Curia’s ruling goes significantly further, and questions in general the tax authority’s right to reclassify the transactions of taxable entities on a whim.
NAV has very broad powers to classify a transaction for the purposes of taxation, based on its actual economic content. This reclassification does not affect the business or civil-law aspects of the relationship between the parties, but it can entail a serious additional tax and penalty payment obligation.