It is a rare day when the European Court of Justice faces a case where the plaintiff is demanding that it be allowed to pay taxes and an EU member state government is insisting it does not pay a levy such as Value Added Tax. 

     But that is the unusual situation the ECJ recently found itself when Portuguese tax authorities tried to revoke the right of a private Portuguese hospital to deduct VAT input duties. Besides the topsy-turvy legal conundrum, the case also has become particularly important with the rapid spread of the COVID-19 virus.

     The unusual legal dispute stemmed from services that the Portuguese private hospital group Idealmed Lii – Servicos de Saude SA provides to the Portuguese public health system. The amount of services gradually increased during the span of contracts signed between the two entities. With the increase the Portuguese tax authorities determined after an audit that Idealmed Lii must repay more than 2 million euros in VAT input deductions.

     The Portuguese tax authority decision was based on a threshold of public hospital services provided by the private hospital to patients covered by the national health care system. By surpassing the threshold, the Portuguese tax authorities decided that the private hospital should no pay VAT. Based on Art. 132 (1)(b)of the EU VAT legislation dating back to 1977 public health care systems are exempt from VAT.

      Along with being unusual in that a company is insisting on the right to be taxed, the case has significant economic implications for national health care systems in all EU member states, which are already straining in the face of an aging population. Add the desperate need for hospital beds, respiratory equipment and other services due to the corona virus crisis, it is clear that private hospital services will play a crucial role in overcoming the current emergency.

      While many ECJ tax rulings can be convoluted and make precise legal interpretation difficult, the decision in this case was fairly clear. It noted that EU VAT legislation does allow tax authorities to take into account contracts signed by private hospitals with public authorities “whose costs are partially borne by the social security institutions of the member state” when assessing whether they should or should pay VAT.

      However it added that the “principles of legitimate expectation, legal certainty and fiscal neutrality” means that EU member states cannot nullify a VAT exemption due to a “change in the conditions under which it [a private hospital] carried on its activities” under the terms and length of a contract.

      Had the ECJ backed the Portuguese tax authorities, private hospitals would be understandably reluctant to take on new services from public health systems. And that would mean serious legal issues would arise in the face of the emergency unfolding in Italy and likely to occur in other EU countries. That is especially true if private hospitals balk are requests for help and governments move to expropriate private hospital services and beds.

     Of course these VAT input deduction rights could be put into question if governments agree to calls by some politicians to adopt a blanket VAT holiday for companies in order to limit any economic losses caused by the COVID-19 outbreak. Let’s hope the crisis is contained before that is necessary, but if it is not the issue could again end up before the court with companies demanding to pay VAT.