Many companies engage in minor ancillary activities that were never explicitly included in their articles of incorporation. Until now, this could become a problem when the tax authorities review certain VAT deductions. The Supreme Court has just placed limits on this overly formalistic interpretation.
For years, during certain VAT audits, the tax authorities have maintained a rather rigid
stance. If an expense was not directly linked to the company’s main activity or its corporate purpose, the deduction of input VAT could be automatically denied. This led to some rather questionable situations.
For example, companies that carried out an additional economic activity—properly
invoiced and reported, with VAT charged and remitted—would later find that the tax
authorities denied their right to deduct the associated expenses simply because that
activity was not expressly listed in the articles of incorporation.
The practical consequence was peculiar. The company was required to pay the VAT on that activity but could not recover the VAT necessary to carry it out. And that is precisely where this new doctrine of the Supreme Court (SC) comes into play through its recent ruling of May 18, 2026.
It is important to review whether there are any secondary or complementary activities
that generate output VAT. Analyze whether the tax authorities have rejected deductions based solely on corporate purpose and verify any asset-related activities, leases, or ancillary operations within operating companies.
What matters for VAT purposes is not the corporate purpose.
The Supreme Court’s ruling emphasizes an idea that, although it seems obvious, was not always being applied correctly. From a VAT perspective, what matters is not what is written in the articles of incorporation, but the actual existence of an economic activity.
In other words, if a company organizes material or human resources to provide services, lease assets, or engage economically in the market, an economic activity exists for VAT purposes, even if that activity does not exactly match the wording of the corporate purpose.
The Supreme Court also notes that, unless proven otherwise, business corporations are considered business owners or professionals for tax purposes. Therefore, attempting to equate “corporate purpose” with “economic activity” amounts to conflating two distinct concepts.
One belongs to the commercial sphere. The other pertains to the technical operation of VAT. And they do not always coincide.
The corporate purpose may have commercial relevance, but it does not, by itself,
determine the right to deduct VAT. The economic reality and the activity actually carried out are of fundamental importance. It is advisable to properly document any
complementary activity that generates recurring income.
The principle of VAT neutrality is regaining prominence
The ruling also reinforces one of the essential principles of VAT, even though it is often obscured by legal provisions and formal requirements. Anyone who charges VAT on an economic activity must be able to deduct the VAT input associated with that same activity. That balance is precisely what maintains the tax’s neutrality.
The opposite would ultimately create a distorting effect. The business would act as a tax collector on behalf of the tax authorities, yet bear a tax burden that the system, in theory, does not intend for it to assume. That is why the Supreme Court holds that it makes no sense to require the collection of VAT derived from an activity while simultaneously preventing the deduction of the expenses necessary to carry out that activity.
The key lies not in the name of the activity, but in whether there is a genuine connection between the expenses incurred and the economic activity carried out.
Simply issuing invoices is not enough; there must be real and verifiable economic activity. The connection between expenses and revenue remains essential. Accounting records and supporting documentation continue to be decisive factors in an audit.
What might change from now on?
This ruling could have an impact on quite a few common situations. Companies that rent out real estate or parking spaces as a secondary activity. Operating companies that manage assets independently. Family-owned entities that engage in parallel activities not initially provided for in their articles of incorporation. Even certain leases or asset management arrangements that the tax authorities had been challenging almost automatically.
That said, the ruling does not mean that every expense will be deductible. The Court does not eliminate the standard VAT requirements. It remains necessary to prove:
- That a genuine economic activity exists
- That VAT is charged
- That the expense is related to that activity
- And that the transaction is not for private use or unrelated to the business activity
The difference is that now the mere fact that an expense does not align with the corporate purpose can no longer be used, on its own, as a definitive argument to deny the deduction.
Review past tax adjustments where VAT was denied due to a lack of connection with
corporate purpose. Analyze possible lines of defense in ongoing proceedings. Assess
whether certain ancillary activities should also be reflected in the articles of
incorporation as a matter of sound business judgment.
For more information, please contact our tax advisory service.
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