Double taxation of intra-Community chain transactions is incompatible with the EU VAT Directive

On July 7, 2022, the Court of Justice of the European Union (CJEU) issued judgment No. C-696/20 in the case of B. v. Director of the Tax Chamber of W. concerning the so-called sanctioned intra-Community acquisition of goods (ICA).

Subject matter and history of the dispute

B. (‘the Company’) is a company established in the Netherlands whose activities are taxable in its country of residence and which is also registered for VAT in Poland. During the period at issue, the Company was involved in chain transactions involving three entities acting as an intermediary. The scheme of the transaction was as follows:

1. Company B. purchased goods from company BOP established in Poland identifying itself with a Polish VAT number.
2. Company B. and company BOP transactions were qualified as domestic transactions taxed with the appropriate VAT rate of 23%.
3. Company B. made supplies to its purchasers in the other Member States, qualifying them as intra-Community supplies of goods taxed at a 0% rate, which resulted in VAT refunds.

The Polish tax authority considered that the transactions in the chain had been misclassified, resulting in a reduction of the VAT due.

As a result, B. was found not to have a right to deduct input tax on domestic invoices because it was not a local transaction but an intra-Community acquisition of goods, and the company was ordered to pay penalty VAT under Article 25(2) of the VAT Act. This ultimately resulted in a 46% VAT charge to the taxpayer.

The taxpayer disagreed with the authority’s position, and the case was referred to the Supreme Administrative Court, which referred the case to the CJEU.

What did the CJEU say about this?

The case concerns the interpretation of Article 41 of Directive 112 which, based on the principles of proportionality and neutrality, makes it difficult to apply the rules of a Member State which treats VAT transactions as occurring within that State when:

1. An acquisition was wrongly classified as a local transaction by participants in the chain using a national VAT number.
2. A subsequent transaction was wrongly recognized as a VAT transaction and taxed in the country where the transport ended.

The CJEU found an infringement of fundamental VAT principles by Polish regulations not allowing a change in recognition of the first transaction, resulting in a failure to show a VAT transaction in the country of identification when the transaction is taxed in the country where the shipment ends. It held that the use of the Polish NIP number (the country of departure) does not prove the lack of intra-EU character of the transaction, and the identification number used cannot be the basis for its classification.

At this point, it should be noted that the judgment handed down relates to the legal situation before the implementation of the so-called „Quick fixes” package, which has been in force since 2020.

The case presented highlights the need for a case-by-case analysis of the chain transactions made and the classification of the transactions.

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