The standstill clause tested: advocate general’s view on Spanish VAT deduction restrictions

The recent case C-515/24, Randstad España v the Spanish State Administration, raises an unprecedented question in the field of VAT: can a member state acceding to the EU introduce limitations on the right to deduct VAT at the very moment of its accession, relying on the standstill clause laid down in Article 176, second paragraph, of the VAT Directive?

In her opinion delivered on October 23 2025 at the Court of Justice of the European Union (CJEU), Advocate General Juliane Kokott provides an interpretation of great significance for Spain, since this issue has long been debated in the country. Her reasoning may also have broader implications for other member states facing similar historical circumstances.

A Spanish company incurred expenses for client hospitality, including tickets to sports and leisure events. Although these expenses were deductible for Spanish corporate income tax purposes, the deduction of the related input VAT was denied under specific provisions of the Spanish VAT Law, which excludes the right to deduct VAT on entertainment or representation expenses.

The case reached the Spanish Supreme Court, which referred two questions to the CJEU:

• Whether a rule such as the Spanish one, which excludes the deduction of VAT even when client entertainment expenses are incurred for business purposes, is compatible with articles 168 and 176 of the VAT Directive; and

• Whether the Spanish exclusion can be justified under the standstill clause in Article 176, second paragraph, of the VAT Directive, given that the limitation entered into force on the same day that Spain joined the EU.

Article 176 of the VAT Directive provides that the Council of the European Union shall determine which expenditure shall not be eligible for deduction. Pending such a decision, member states may maintain all the exclusions provided for under their national legislation on the date of their accession.

The Spanish situation is unique. Before 1986, Spain did not have a VAT system equivalent to that of the EU, with input VAT deductions. Consequently, there were no rules restricting the right to deduct. The essential question is therefore whether a member state that had no deductible VAT system prior to accession may, at the very moment of introducing such a system, include a limitation on deduction and still rely on the standstill clause.

In paragraphs 19 to 35 of her opinion, the AG recalls that, under Article 168 of the VAT Directive, goods and services used for taxable transactions give rise to a right of deduction. However, the VAT Directive provides that the free supply of goods or services may be treated as a taxable transaction precisely to avoid untaxed final consumption.

Accordingly, ‘representation expenses’ (such as invitations to recreational events) may initially give rise to a right of deduction, but this is subsequently neutralised by the taxation of the free supply, except in the case of gifts of negligible value. The AG stresses that the purpose of these provisions is to prevent private, untaxed consumption, which would be contrary to the principle of neutrality.

Furthermore, Article 176, first paragraph, of the VAT Directive expressly recognises that expenditure on luxury, amusement, or entertainment must be excluded from the right to deduct VAT, as such expenses do not have a strictly professional character.

The most significant part of the opinion lies between paragraphs 36 and 55. The AG argues that although Spain introduced the exclusion from deduction at the same time as the introduction of its VAT system, that exclusion can nevertheless be covered by the standstill clause.

Her reasoning is straightforward: before accession, Spain had no VAT system with an input tax deduction. Therefore, deduction was, de facto, entirely excluded. By adopting its VAT Law in 1985, Spain did not extend an existing exclusion but rather recognised, for the first time, a right to deduct (albeit a limited one). Consequently, introducing the right to deduct and its limitations simultaneously does not infringe the VAT Directive.

The AG further emphasises that the wording of Article 176, second paragraph, only requires that the exclusion be “provided for” in national legislation on the date of accession, not necessarily already in force. In Spain’s case, the relevant law was published some time before accession, thereby satisfying this requirement.

Finally, the AG notes that denying Spain the possibility of introducing such an exclusion would create an unjustified inequality among member states: those that already had a VAT system could maintain their limitations, while new member states, simply because they had no VAT before, would be deprived of that option.

The AG concludes that member states acceding to the EU may provide for limitations on the right to deduct VAT as from the date of their accession, provided such limitations are sufficiently precise and consistent with the objectives of the VAT Directive.

The opinion reinforces the idea that entertainment and representation expenses, though indirectly linked to business activity, possess an element of private consumption that justifies their exclusion from the right of deduction.

From the perspective of the common VAT system, the AG’s opinion adopts a pragmatic interpretation of Article 176 of the VAT Directive, focusing on maintaining the coherence of VAT as a tax on final consumption.

The reasoning avoids an outcome whereby member states that lacked a VAT system before accession would be placed in a less favourable position than existing ones. At the same time, it preserves the principle of neutrality by preventing certain business expenses from effectively becoming untaxed private consumption.

If the court follows the AG’s opinion (as it often does), the validity of Spain’s restrictions on the deduction of VAT on representation expenses will be reaffirmed. The case could therefore bring an end to a long-standing debate on the compatibility of these restrictions with EU law.

In light of the AG’s reasoning, the standstill clause emerges not as a rigid formal rule but as a pragmatic mechanism ensuring that all member states may apply coherent and proportionate limitations necessary to preserve the nature of VAT as a tax on final consumption.