VAT treatment of chain transactions and VAT deduction – new CJEU’s judgments

On 7 July 2022, the Court of Justice of the European Union ("CJEU") published two new judgments in cases brought on the basis of preliminary rulings on the interpretation of provisions of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ("VAT Directive").

Case C-696/20 was rendered in the context of a dispute between a company, established and registered for VAT purposes in the Netherlands and a tax administration authority in Poland (the director of a tax inspection office) concerning the determination of the amount of refundable VAT.

During the disputed period, the company was also registered for VAT purposes in Poland and was involved in chain transactions between at least three economic operators for the same goods. The goods are transported directly from the first operator in the chain established in one Member State to the last operator in the chain established in another Member State. The company purchases the goods from its counterparty established in Poland, providing its Polish VAT number.

The company classifies the first supplies as domestic sales subject to 23 % VAT. However, the second supplies to the customers in other Member States were qualified as intra-Community acquisitions subject to 0 % VAT in Poland. As a consequence, the company claims VAT refund on the basis of the remitted VAT.

The tax authorities took the view that the second leg of supplies did not fall within the scope of the intra-Community supply of goods regime but should be taxed as supplies with place of performance in the Member States in which the dispatch of the goods was completed. As a result of the above stance, the company effectively owes 46 % VAT

In its judgment, the CJEU held that Article 41 of the VAT Directive does not preclude the legislation of a Member State, in case of chain transactions, where the first transaction is wrongly classified as a domestic sale and the second is wrongly classified as an intra-Community transaction, the acquirer to apply VAT for intra-Community transaction in the country where the shipment ends. That provision, read in the light of the principles of proportionality and fiscal neutrality, nevertheless, precludes such legislation of a Member State where the intra-Community acquisition of goods which is regarded as being realised within the territory of that Member State results from an intra-Community supply of goods which has not been treated as an exempt transaction in that Member State.

CJEU’s reasons to hold its judgement are based firstly on already established case law. Concretely, in cases of two chain transactions carried out by means of a single intra-Community transport, that transport can be attributed to only one of the two supplies, which will therefore be the only exempted taxable person in the Member State from which the transport begins as an intra-Community supply.

The CJEU clarifies that it is for the relevant tax authority to determine to which of the supplies the carriage relates, while the court is to rule on the law, given the factual findings provided. The tax authorities in Poland assumed that the carriage related to the first supply.

In its reasoning, the CJEU states that Article 41 of the VAT Directive applies where the Member State of identification is the Member State in which the carriage of the goods began. Moreover, the intra-Community acquisition of goods does not require that the taxable person has used a VAT identification number issued by a Member State other than the Member State in which the transport of the goods began.

Next, to determine the outcome of the case, the questions which person is to be identified as the person making the intra-Community acquisition of the goods and how that will affect the application of Article 41 of the VAT Directive need to be assessed. According to the ECJ, whether the goods are wrongly subject to VAT when the transactions are incorrectly classified is irrelevant.

It is also submitted that in this case, although the tax authority, had reclassified the first supply from an intra-Community to an inter-Community transaction, the seller was still liable to charge VAT at the standard rate on that supply. Since this transaction is therefore taxable in Poland, the intra-Community supply of goods under the first transaction should be considered not to be exempt. However, the application of the rule of Article 41 of the VAT Directive to an intra-Community acquisition resulting from an intra-Community supply of goods which is not exempt results in an additional charge which is not in accordance with the principles of proportionality and tax neutrality. The rule should therefore not apply in the presence of such contradictions.

The preliminary ruling on which judgment was given was in Case C-194/21 concerning the interpretation of provisions of the VAT Directive relating to the correction of a failure to deduct input VAT on the acquisition of a building loan.

A company acquired plots of land constituting building land and paid to its contractor the relevant amount of VAT charged on an invoice. After 7 years, the same company resold the land to another person and invoiced VAT on the sale price.

According to the Dutch tax authorities, the company owes VAT on the price paid and is not entitled to make adjustments by deducting the VAT paid on the purchase.

The company argues that the VAT invoiced to it on the acquisition is fully deductible when the plots in question are first used for taxable transactions, even though more than nine years have passed .

In its reasoning, the CJEU states that the possibility of exercising the right of deduction without time limit would be contrary to the principle of legal certainty.

The Court points out that the corrective mechanism is applicable in the case of an existing right of deduction provided for in legislation. Here, however, Articles 184 and 185 of the VAT Directive do not give rise to a right of deduction.Consequently, the correction mechanism should not apply where a taxable person has failed to exercise that right and the time-limit has expired.

In light of the above, the CJEU rules that Articles 184 and 185 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2010/45/EU of 13 July 2010,must be interpreted as not precluding a taxable person who failed to exercise, before the expiry of the limitation period laid down by national law, the right to deduct value added tax (VAT) relating to the acquisition of goods or services, from being denied the possibility of subsequently making that deduction, by way of an adjustment, at the time when those goods or services are first used for the purposes of taxed transactions, even where no abuse of rights, fraud or loss of tax revenue has been established.