Advisory-costs ruling: input VAT on enforcing damages claims — the origin of the claim decides

Bundesfinanzhof (German Federal Fiscal Court), judgment of 7 May 2026 — V R 15/24, ECLI:DE:BFH:2026:U.070526.VR15.24.0 · Full text (PDF, German)

The case

A GmbH had concluded an operator agreement for the development and operation of a project and was required to pre-finance planning, development and set-up; remuneration was only to begin once the project actually started (para 1). When legal concerns emerged, the principal terminated the agreement. The GmbH successfully sued for damages — and deducted the input VAT on the third-party advisory services used to quantify and enforce the claim. Following a special VAT audit, the tax office refused the deduction for the year in dispute, 2020: the legal basis of the compensation lay outside the planned activity, there was no dissolution resolution and no formal winding-up, and at most an indirect link existed (paras 1, 3). The Berlin-Brandenburg Fiscal Court allowed the claim (judgment of 29 May 2024 — 7 K 7122/22, EFG 2024, 2086); the Fifth Senate dismissed the tax office’s appeal on a point of law.

The court’s reasoning

The Senate anchors the decision in the familiar two-track structure of input VAT deduction: as a rule, section 15(1) sentence 1 no. 1 of the German VAT Act, construed in conformity with Article 168(a) of the VAT Directive, requires a direct and immediate link between an input transaction and taxed output transactions (paras 9–11). Absent such a link, it suffices that the costs form part of the taxable person’s general costs — overheads — attributable to its economic activity as a whole; that in turn requires that they have “their exclusive origin in that activity” (para 12, citing CJEU Investrand, C-435/05; Becker, C-104/12; Baštová, C-432/15).

On that basis the Senate states the operative proposition: “A trader who procures a supply in order to enforce a claim which has its origin in a business activity — including one that was merely intended but never carried out — is entitled to deduct input VAT on that supply.” (para 13, also the official headnote; unofficial translation). Two neutrality arguments carry the result. First, no arbitrary distinction may be drawn between expenditure incurred before a business commences, during its operation, and for the purpose of terminating it (para 14, citing CJEU Abbey National, C-408/98; Fini H, C-32/03; Wind Inovation 1, C-552/16) — so even after the business has ended, input VAT remains deductible on supplies serving to satisfy claims whose exclusive origin lies in the former business activity; a parallel connection with a non-taxable event (here: damages) is “irrelevant” (para 14). Secondly, the same applies to an intended activity that was never carried out: the right to deduct, once it has arisen, survives where the activity fails for reasons beyond the trader’s control (para 15, citing CJEU INZO, C-110/94; Sveda, C-126/14) — otherwise unsuccessful start-ups would, without objective justification, be treated worse than established businesses (para 15).

The Senate is notably firm in rejecting the administration’s formalism: neither the opening of insolvency proceedings nor a dissolution resolution followed by liquidation under sections 60 et seq. of the GmbH Act is “required for the assumption of a formerly intended but not exercised business activity” (para 19). The fiscal court’s finding that the advisory costs served “as overheads directly the winding-up of an originally planned taxable activity” binds the Senate under section 118(2) of the Fiscal Court Code (paras 16–20). The Senate leaves open whether the compensation was in truth consideration for a taxable supply (para 21, citing CJEU RHTB, C-622/23) — nothing turned on it. No reference to the CJEU was required under the acte clair doctrine (para 23).

Where the decision sits in the case-law

The judgment carries the neutrality-based line of the CJEU (INZO — Sveda — Fini H) and of the Fifth Senate to its logical conclusion and joins two strands hitherto discussed separately: the “unsuccessful trader” and winding-up overheads. What is new is the combination — input VAT deduction for litigation costs of a company that never made a single output supply and no longer intends to, purely by virtue of the business origin of the claim enforced. The Investrand limit (no deduction where the claim does not stem from the business sphere) remains intact; it is refined, not abandoned (paras 12, 20). At the same time, the question left open on consideration (para 21) marks the next battleground: under the CJEU’s RHTB line, “compensation” for early contract termination may constitute taxable consideration — anyone collecting damages today should not leave the VAT characterisation to chance. For defence practice in denial cases the message is fundamental: the right to deduct is broad and outcome-independent by design; whoever wishes to take it away needs a proven exception — not mere doubts about the link.

The literature

The case-law survey by Wäger — the presiding judge of the deciding Senate — documents the framework in which this decision sits: denial of the deduction on fraud grounds remains the exception requiring justification, for which the administration must “precisely determine” and prove the constituent elements of the evasion (Wäger, UR 2025, 81 [109], on CJEU Global Ink Trade, C-537/22). Where that exception is invoked, the commentary literature warns of the de facto reversal of the burden of proof: “Where sufficient indicia of knowledge exist, a de facto reversal of the burden of proof occurs” (Heidner, in: Bunjes, UStG, 24th ed. 2025, § 25f marginal no. 9; unofficial translation). And Reiß has objected on principle that denying the input VAT deduction violates the neutrality principle and that the exchequer must be referred to loss-capped secondary liability instead (Reiß, UR 2020, 408 [415 f.]). V R 15/24 strengthens the systematic foundation of that critique: the more robust the deduction across the board, the clearer it becomes that its denial has the character of a sanction and is subject to strict conditions.

Three levels — kept strictly apart

Official headnote: “A trader who procures a supply in order to enforce a claim which has its origin in a business activity — including one that was merely intended but never carried out — is entitled to deduct input VAT on that supply.” (headnote; unofficial translation)

Administrative practice: No express administrative guidance on this decision exists (as at 19 August 2026).

Our conclusion for the defence: Expressly our own assessment: legal-enforcement costs — advisers, lawyers, experts — incurred to pursue claims of business origin carry the input VAT deduction, in the crisis, after the failure of the business model, and without any formal liquidation. For companies caught up in supply-chain proceedings this matters twice over. First, exactly such costs arise in defence and damages litigation flowing from denial and liability cases; their deductibility follows the business origin of the claim. Secondly, the judgment supplies the template against any denial “for lack of a link”: what counts is the origin of the claim, not the later use of the funds and not the company’s formal status. No all-clear applies to the consideration question: whether the compensation received is itself taxable was left open — every structure must close that flank itself.

Defence levers

• Document the origin of the claim: Attribute claim and advisory costs seamlessly to the business sphere — contract, termination, quantification, engagement letters; the exclusive origin is the element on which denials stand or fall (paras 12, 20).
• Cut off formalism objections: “No dissolution resolution”, “no insolvency proceedings”, “no outward activity” — irrelevant under para 19; the economic inevitability of the winding-up suffices.
• Run the overheads argument: That costs do not enter the price of specific outputs does no harm — as general costs of the (intended) overall activity they support the deduction (paras 12–13, 17).
• Insist on neutrality: Unsuccessful traders may not be treated worse than successful ones (para 15) — a lever in every special audit attacking start-up or winding-up input VAT.
• Control the consideration flank: For compensation and settlement payments, actively examine taxability (paras 21–22; CJEU RHTB, C-622/23) and keep returns consistent — otherwise a won input VAT dispute breeds a new dispute over section 14c or assessment.

Defence assessment: POSITIVE · Keywords: input VAT deduction; overheads; exclusive origin; neutrality principle; unsuccessful trader; damages

FAQ

Source box

• BFH, judgment of 7 May 2026 — V R 15/24, ECLI:DE:BFH:2026:U.070526.VR15.24.0 (court below: Berlin-Brandenburg Fiscal Court, judgment of 29 May 2024 — 7 K 7122/22, EFG 2024, 2086).
• CJEU, judgment of 8 February 2007 — C-435/05, Investrand, EU:C:2007:87, para 33; judgment of 3 March 2005 — C-32/03, Fini H, EU:C:2005:128; judgment of 29 February 1996 — C-110/94, INZO, EU:C:1996:67; judgment of 22 October 2015 — C-126/14, Sveda, EU:C:2015:712; judgment of 26 May 2005 — C-465/03, Kretztechnik, EU:C:2005:320; judgment of 28 November 2024 — C-622/23, RHTB, EU:C:2024:994 (consideration question, left open at para 21).
• Wäger, UR 2025, 81 (109); Heidner, in: Bunjes, UStG, 24th ed. 2025, § 25f marginal no. 9; Reiß, UR 2020, 408 (415 f.).