Reverse Charge VAT: A Wrong Invoice Kills Deduction

If you receive an invoice with VAT for a transaction that was subject to mandatory reverse charge and you deduct the tax from it, you lose the right of deduction. It does not matter that you paid the VAT to the supplier in good faith. The substantive conditions of the reverse charge were not met, the invoice is incorrectly issued, and the tax authority can refuse your deduction during an inspection. The rule was confirmed by the Court of Justice of the European Union in case C-424/12 Fatorie.

What the reverse charge is

The reverse charge is the mechanism that shifts the obligation to pay VAT from the supplier to the buyer. The supplier issues the invoice without VAT, marked „reverse charge", and the buyer records the tax simultaneously as output and input VAT in its own return. For domestic transactions, the mechanism is governed by article 331 of the Romanian Fiscal Code and applies only if both the supplier and the buyer are registered for VAT under article 316.

Transactions subject to mandatory reverse charge

The list in article 331 includes, among others:

• -ferrous and non-ferrous waste and recyclable materials, including after processing;
• -buildings, parts of buildings and land of any kind, where the supply is subject to the taxation regime;
• -cereals and technical crops, including oilseeds and sugar beet, until 31 December 2026, unless the directive changes;
• -wood and wood materials, until 31 December 2025, unless the derogation is extended;
• -greenhouse gas emission certificates and green certificates;
• -mobile phones, integrated circuits, game consoles, tablets and laptops, only where the invoice value, excluding VAT, is at least RON 22,500;
• -investment gold where the taxation option is exercised;
• -electricity and natural gas supplied to traders meeting the legal conditions.

Why you lose the deduction if the invoice carries VAT

The reverse charge is mandatory, not optional. When the supplier wrongly invoices with VAT a transaction from the article 331 list, the invoice fails the substantive conditions of the mechanism. The buyer who deducts the tax from such an invoice is left without the right of deduction, even though it actually paid the VAT to the supplier.

The practical consequence is double. You pay the VAT to the supplier, then the tax authority rejects your deduction and you end up bearing the tax twice, plus interest and penalties.

What the CJEU says: Fatorie and Luxury Trust

In case C-424/12 Fatorie, the CJEU confirmed that the buyer loses the right of deduction where the tax was paid on the basis of an incorrectly issued invoice, including where the error can no longer be corrected because the supplier went bankrupt. The supplier's insolvency risk falls on the buyer.

In case C-247/21 Luxury Trust Automobil, the CJEU ruled that in triangular transactions the missing „reverse charge" mention on the intermediary's invoice cannot be rectified later. Two missing words on an invoice create VAT obligations that cannot be repaired retroactively.

Watch real estate transactions between companies

For sales of buildings and land under the taxation regime between VAT-registered persons, the reverse charge is mandatory. Advances invoiced before a change of regime are settled under article 280 paragraph (7) of the Fiscal Code: the advance keeps the regime applicable at its chargeability date, and the balance follows the regime at the date of supply. A wrongly structured invoice flow in a high-value real estate deal creates exactly the kind of error tax inspections sanction.

How to protect yourself

• -check before paying whether the transaction falls under article 331 and whether both parties are registered under article 316;
• -do not deduct VAT from an invoice that should have been issued under reverse charge; ask the supplier to correct it;
• -in real estate deals, fix the VAT regime of advances and of the balance in the pre-sale agreement;
• -if a tax inspection rejected your deduction, review with a lawyer the exact ground of the rejection and the available remedies.

Conclusion

The reverse charge looks like a simple invoicing rule, but applying it wrongly costs the entire deduction, plus accessories. Checking the VAT regime before the transaction is far cheaper than the litigation after the inspection.

A legal review done before the transaction makes the difference between a safe deduction and a tax borne twice.