The CJEU confirms the Spanish limitation on VAT deduction for recreational and client entertainment expenses

The Court of Justice of the European Union (CJEU) has issued its Judgment of 12 March 2026 (Case C-515/24, ECLI:EU:C:2026:190) in response to the request for a preliminary ruling submitted by the Spanish Supreme Court (Tribunal Supremo) regarding the compatibility with Directive 2006/112/EC on VAT of the Spanish rules limiting the right to deduct input VAT on certain recreational and client entertainment expenses.

The judgment specifically analyses the compatibility with EU law of the restrictions laid down in Article 96.One.4 and Article 96.One.5 of Spanish VAT Law 37/1992 (Ley del IVA).

The dispute originates from a tax adjustment carried out by the Spanish Tax Authorities (AEAT), which denied a company the right to deduct input VAT incurred on certain expenses intended for clients.

These expenses included, among others:

• tickets for football matches

• access to VIP areas at sporting events

• other recreational services provided free of charge to clients

The tax authorities considered that such expenses were excluded from the right to deduct VAT pursuant to Article 96.One.4 and Article 96.One.5 of the Spanish VAT Law, which restrict the deductibility of VAT incurred on recreational services, entertainment events and benefits granted to clients, employees or third parties.

The Spanish Supreme Court referred two preliminary questions to the CJEU concerning the compatibility of this legislation with EU law.

In essence, the court asked:

1. Whether a national rule that fully excludes the deduction of VAT incurred on entertainment events and client hospitality expenses is compatible with Articles 168(a) and 176, first paragraph, of the VAT Directive, even where the taxpayer proves a direct and strict business link with taxable transactions.

2. Whether such exclusion may be justified under the “standstill clause” provided for in Article 176, second paragraph, of the VAT Directive, which allows Member States to maintain certain limitations on the right of deduction that were in force at the time of their accession to the European Union.

The issue was particularly relevant because the Spanish limitation entered into force on the same date as Spain’s accession to the European Economic Community (1 January 1986), when VAT was introduced into the Spanish tax system.

The CJEU first addresses the second preliminary question, concerning the scope of the standstill clause.

The Court recalls that:

• The right to deduct input VAT, recognised in Article 168(a) of Directive 2006/112/EC, constitutes a fundamental principle of the common VAT system.

• Any limitations to this right must be interpreted strictly.

Among the exceptions to this principle is Article 176, second paragraph, of the VAT Directive, which allows Member States to maintain exclusions from the right of deduction that existed at the reference date (1979 for original Member States and the date of accession for Member States joining later), until the Council adopts a harmonised list of non-deductible expenses, which has not yet occurred.

On this basis, the CJEU establishes several key conclusions.

First, the Court reaffirms that the standstill clause grants Member States a residual power to maintain national exclusions from the right of deduction, but not to extend them or introduce new restrictions that would depart from the objectives of the VAT Directive.

Second, the Court notes that prior to 1 January 1986 Spain did not have a consumption tax structurally comparable to VAT nor a general system allowing deduction of input tax.

The previous indirect taxes — such as the General Tax on Business Transactions (Impuesto General sobre el Tráfico de las Empresas) and the Luxury Tax (Impuesto sobre el Lujo) — did not include a general deduction mechanism.

However, the CJEU considers that the simultaneous introduction of VAT and the limitations on the right of deduction under the former VAT Law 30/1985 does not constitute a later extension of those exclusions, but rather the initial configuration of the VAT system in Spain.

These exclusions were subsequently reproduced in substance in the current Article 96.One.4 and Article 96.One.5 of VAT Law 37/1992.

The Court also emphasises that excluding the deduction of VAT on such expenses is consistent with the logic of the VAT system.

In particular, it highlights that:

• these expenses often have a close link with the satisfaction of private needs, which justifies limiting their deductibility;

• Article 176, first paragraph, of the VAT Directive expressly provides that expenses relating to luxury, entertainment or representation that are not strictly professional may be excluded from the right of deduction.

According to the CJEU, allowing a general deduction of VAT incurred on this type of expense could potentially conflict with the objectives of the VAT Directive.

The Court also considers that Spanish legislation sufficiently defines the nature of the goods and services concerned, thereby preventing the limitation from becoming a broad or indeterminate exclusion.

The CJEU also clarifies that it is irrelevant, for the purposes of compatibility with EU VAT law, that these expenses may be deductible under other taxes, such as:

• Personal Income Tax (IRPF)

• Corporate Income Tax (IS)

This is because these taxes are not harmonised at EU level and pursue objectives different from those of the VAT system.

The CJEU judgment confirms the validity, from the perspective of European Union law, of the limitations provided for in Spanish legislation on the deduction of input VAT incurred on recreational and representation expenses.

At ILIA ETL GLOBAL, we provide specialised tax advisory services on VAT deductibility and the correct tax classification of business expenses, carry out tax accounting reviews to identify risks in expense policies, and assist clients in tax procedures and inspections conducted by the Spanish Tax Authorities (Agencia Tributaria).