CJEU Clarifies Pro-Rata Input VAT Deductions for Hospitals
The Court of Justice of the European Union (CJEU) has clarified the conditions governing the pro-rata deduction of input VAT on minimum medical equipment required by law (CJEU, decision of March 19, 2026 – C-513/24). The mere fact that goods and services are required under national rules for the provision of VAT-exempt healthcare services and are also used for taxable supplies does not in itself make the corresponding expenditure an overhead cost.
The decisive factor remains the objective link between the input supplies received and the output transactions performed. Classification as general expenditure attributable to the taxable person’s economic activity as a whole can be considered only if direct allocation to specific output transactions is not possible.
Dispute Over a Hospital’s Technical and Material Equipment
The proceedings concerned a hospital in the Czech Republic. Its principal economic activity consisted of providing healthcare services that did not confer a right to deduct input VAT. In addition, the hospital provided other services that, in principle, conferred a right to deduct input VAT.
Additional Taxable Services
These additional activities included:
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The hospital conducted clinical trials on the effects of medicinal products.
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It provided accommodation for persons accompanying patients.
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It enabled physicians to complete internships.
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It sterilized instruments for third parties.
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It offered antenatal classes.
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It performed X-ray, ultrasound and veterinary examinations.
For December 2016, the hospital claimed a pro-rata input VAT deduction of 4,176,327 Czech koruna by filing a supplementary tax return. This was equivalent to approximately 164,500 euros.
The competent tax authority allowed part of the deduction. However, with regard to an amount of 3,287,723 Czech koruna, approximately 129,500 euros, it found that the required evidence had not been provided. In its assessment, the input supplies concerned were primarily intended and used for healthcare services that did not confer a right to deduct input VAT.
Appeal Only Partially Successful
The appeal against the supplementary tax assessment was only partially successful. The hospital then brought an action before the Prague Regional Court.
The court dismissed the action. It held that the costs of all the technical and material equipment that hospitals are required to maintain in order to ensure their operation and provide their services could not be regarded as overhead costs. In the court’s view, the equipment was not a cost component of the goods or services conferring a right to deduct input VAT. A pro-rata deduction based on use was therefore not permissible.
Statutory Minimum Equipment as a Licensing Requirement
The hospital lodged an appeal on a point of law with the Supreme Administrative Court of the Czech Republic. It argued that the expenditure on technical and material equipment formed part of its general costs.
In support of its position, the hospital stated that it could provide the additional taxable services only if it held authorization to provide healthcare services. Under Czech Regulation No. 92/2012, that authorization required a minimum level of technical and material equipment. The acquisition, repair, servicing and maintenance of the equipment were therefore also necessary for the additional services.
Scope of the Mandatory Equipment
The Czech rules covered numerous requirements applicable to healthcare facilities. These included, in particular, rooms such as treatment rooms, waiting areas, patient restrooms and storage rooms. Furnishings, instruments, and both basic and more complex medical devices were also mandatory.
For adult intensive care units, the rules required, among other things, a defibrillator. Other requirements concerned, for example, stethoscopes, blood pressure monitors, scales, blood glucose meters, ECG and ultrasound devices, laryngoscopes, and monitors for recording vital signs.
On the one hand, the Supreme Administrative Court considered it understandable to regard the mandatory expenditure as overhead costs. Without this equipment, the hospital was not permitted to provide healthcare services and, consequently, certain additional services. On the other hand, the relevant regulation applied only to healthcare services and not to all of a hospital’s activities, such as research and teaching.
Standard Under the VAT Directive
The right to deduct input VAT under Art. 168(a) of Directive 2006/112/EC on the common system of value added tax is an essential component of the VAT system. A taxable person may deduct the VAT due or paid on goods or services received insofar as those supplies are used for the purposes of their taxed transactions.
Art. 173(1) of Directive 2006/112/EC concerns cases of mixed use. Where goods or services are used both for transactions conferring a right to deduct input VAT and for transactions that do not confer such a right, only the proportion of VAT attributable to the former transactions is deductible. The deductible proportion is determined in accordance with Arts. 174 and 175 of the Directive.
Direct and Immediate Link to Output Transactions
According to the CJEU’s case law, the deduction of input VAT generally requires a direct and immediate link between an input supply and one or more output transactions conferring a right to deduct. The expenditure incurred for the input supply must be a cost component of the taxed output transactions.
If there is no such link to specific transactions, a right of deduction may nevertheless exist. This requires the costs to form part of the taxable person’s general expenditure and thus to be cost components of their economic activity as a whole. In that case, there is a direct and immediate link to the taxable person’s overall economic activity.
If, however, the supplies received are linked to exempt transactions or activities falling outside the scope of the VAT system, input VAT cannot be deducted.
Statutory Procurement Obligation Is Not Sufficient
The CJEU clarified that a regulatory obligation to acquire certain goods or services does not, in itself, establish a direct and immediate link to taxable output transactions or to the economic activity as a whole.
The objective relationship between the input supply and the output transactions is decisive. Otherwise, the uniform application of the EU VAT system would be undermined. However, the statutory obligation may be taken into account as one factor in the overall assessment.
Assessment of Each Individual Input Supply
The national court must assess each item of technical or material equipment separately. Its primary task is to determine whether the acquisition is directly linked to one or more specific output transactions. Only if no such allocation can be established must it examine whether the expenditure should be classified as an overhead cost of the economic activity as a whole.
For this assessment, the equipment’s actual use and its allocation within the business may be particularly relevant. According to the findings in the main proceedings, the medical equipment at issue initially appeared to be allocated more to healthcare services than to the additional services. However, the final assessment was left to the referring court.
Consequences of Different Forms of Use
According to the decision, the VAT treatment depends on the supplies to which the respective goods or services are objectively attributable.
Exclusive Use for Exempt Supplies
If part of the technical or material equipment is used exclusively to provide VAT-exempt healthcare services, there is no right to deduct input VAT on the corresponding acquisition.
Use for Taxable and Exempt Healthcare Services
If equipment is used for both taxable and VAT-exempt healthcare services, the deductible proportion must be determined pursuant to Art. 173(1), in conjunction with Arts. 174 and 175, of Directive 2006/112/EC.
The Court cited a defibrillator as a possible example. Its acquisition could be a licensing requirement irrespective of the tax treatment of the respective healthcare service, and the device could, where necessary, be used for both taxable and exempt services.
Use for Additional Taxable Services
The absence of an automatic link arising from the national rules does not preclude a direct link to additional taxable services in an individual case. If specific equipment is also required for those services, its acquisition may confer a pro-rata right to deduct input VAT.
The fact that an item is not actually used for a particular service is not decisive in every case. A right of deduction that has already arisen may continue to exist if an intended taxable activity is subsequently not carried out or if, for reasons beyond the taxable person’s control, the supply cannot be used for taxable purposes. The original allocation may therefore also be of decisive importance.
Classification as Overhead Costs Only in a Second Step
Only if there is no link to one or more specific output transactions must allocation to the economic activity as a whole be examined. Overhead costs may be considered, for example, where national rules require rooms to have certain equipment for reasons of safety or comfort and there is no specific link to individual supplies.
Key Finding of the CJEU
According to the decision, Art. 173(1) of Directive 2006/112/EC must be interpreted as meaning that expenditure required by regulation is not to be regarded as overhead costs solely because of that obligation. Hospitals may therefore not deduct input VAT pro rata merely because acquired goods or services form part of the minimum equipment required by law and are also used for supplies conferring a right to deduct input VAT.
The specific allocation remains decisive. The link to specific output transactions must be examined first, followed only then by any possible link to the economic activity as a whole. The actual use of devices, premises, IT systems and other supplies, as well as their allocation within the business, may therefore be highly relevant to both the extent of and justification for a pro-rata input VAT deduction.
Significance for VAT Classification
The decision makes clear that licensing requirements and allocation for VAT purposes must be assessed separately. A public-law obligation to acquire certain equipment does not in itself answer the question of the output transactions for which that equipment is used economically.
In cases involving mixed activities, the distinction between directly attributable input supplies, exclusively exempt uses and general expenditure can have far-reaching tax consequences. For questions concerning the classification of such circumstances, MTR Legal advises companies and service providers as part of its tax law advisory services.
