VAT and client hospitality: the CJEU and the Spanish Supreme Court settle the debate over input VAT deductibility

VAT and client hospitality: the CJEU and the Spanish Supreme Court settle the debate over input VAT deductibility

The right to deduct input VAT is one of the fundamental principles of the VAT system: in general, a company can recover the VAT incurred on goods and services it uses in the course of its business. However, this is not an absolute principle. Spanish law expressly excludes the deduction of VAT on certain expenses, including some forms of client hospitality and certain expenses relating to entertainment events or recreational services.

This limitation has raised an important question for years: Can Spain deny the deduction of input VAT even when a company demonstrates that an expense has a clear commercial purpose?

That was precisely the question raised in the Randstad España case. It has been clarified by the judgment of the Court of Justice of the European Union (CJEU) of 12 March 2026 in Case C-515/24, Randstad España, and the subsequent judgments of the Spanish Supreme Court No. 889/2026 of 13 July 2026 and No. 924/2026 of 16 July 2026. The company acquired tickets for sporting and recreational events and subsequently provided them free of charge to existing and prospective clients. According to Randstad, these expenses were directly related to its business activity: they were intended to build client loyalty, strengthen business relationships and generate new business opportunities.

The issue, therefore, was not whether the expenses served a business purpose. They could. The question was whether Spanish law could nevertheless maintain a specific exclusion preventing the deduction of input VAT.

What have the CJEU and the Spanish Supreme Court decided?

The Court of Justice of the European Union has confirmed that the VAT Directive allows Member States to retain certain exclusions from the right to deduct that existed at the time of their accession to the then European Economic Community.

In Spain, the limitation concerning certain client hospitality expenses was already included in the legislation that came into force in 1986, when Spain joined the European Economic Community.

The CJEU therefore considers that Spain may continue to apply this limitation, provided its scope has not subsequently been extended. Following the CJEU’s ruling, the Spanish Supreme Court confirmed that the current Spanish rules retain, in essence, the same scope of exclusion as at the time of accession.

The practical consequence is significant: the fact that an expense has a commercial or business purpose does not, in itself, make the input VAT deductible. If the expense falls within a category expressly excluded from deduction under the Spanish VAT Law, the input VAT cannot be recovered, even if the company can show that an invitation, event or other form of client hospitality was intended to improve its business relationships.

Not all expenses relating to clients are automatically excluded

The judgments do not mean that every expense relating to clients is necessarily ineligible for deduction.

Each expense must be assessed on a case-by-case basis. Relevant factors include who receives the goods or services, whether any consideration is provided, and the specific connection between the expense and the company’s business activity.

Conclusion

The recent judgments do not deny that client entertainment can serve a business purpose. They confirm, however, that such a purpose alone does not automatically give rise to a right to deduct input VAT.

Spanish law may retain certain longstanding exclusions from the right to deduct. Where an expense falls within one of those exclusions, the limitation applies.

Companies should therefore look beyond the commercial purpose of an expense and assess how it is classified for VAT purposes before claiming a deduction.