The European Court of Justice gave its judgment in case C-273/18 (Kuršu zeme) on 10 July 2019. The case deals with the right to deduct input VAT in a supply chain.
Decision
Article 168(a) 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 meaning that, for the purposes of refusing the right to deduct input value added tax (VAT), the fact that an acquisition of goods took place at the end of a chain of successive sale transactions between several persons and that the taxable person acquired possession of the goods concerned in the warehouse of a person forming part of that chain, other than the person mentioned as supplier on the invoice, is not in itself sufficient to find the existence of an abusive practice on the part of the taxable person or the other persons participating in that chain, the competent tax authority being required to establish the existence of an undue tax advantage obtained by that taxable person or those other persons.
Facts (simplified):
Kuršu zeme is a company established in Latvia which declared acquisitions of goods from another company established in Latvia, KF Prema, and deducted the input VAT on those transactions.
During a tax inspection, the Latvian Tax Authorities (“VID”) found that those acquisitions had taken place following a chain of successive transactions between several companies. The goods concerned had first been sold by UAB ‘Baltfisher’, a company established in Lithuania, to two companies established in Latvia. They were then sold by those companies to another company established in Latvia, which sold them to KF Prema, which finally sold them to Kuršu zeme, which transported those goods itself from Klaipėda (Lithuania) to its factory in Latvia.
Not having been able to find any logical explanation for that chain of transactions, the VID found, first, that the intermediary companies in practice did not do anything in connection with the execution of the acquisitions of goods at issue and, secondly, that Kuršu zeme could not fail to be aware of the sham nature of that chain.
The VID thus found that Kuršu zeme had in practice acquired the goods at issue directly from Baltfisher and therefore treated the acquisitions at issue as intra-Community acquisitions. Consequently, the VID corrected the VAT returns issued by Kuršu zeme by including the value of the goods at issue in the value of goods received originating from other Member States. As a result, the amount of VAT payable increased and the input VAT declared by Kuršu zeme was simultaneously reduced by the same amount.
Kuršu zeme argued that all the formal and substantive requirements for entitlement to the right of deduction had been satisfied, and that it had no reason to have doubts about KF Prema or the purpose of the transactions and, lastly, that it had gained no tax advantage from its transactions with that company.
The Augstākā tiesa (Supreme Court, Latvia) decided to ask the following question to the Court of Justice for a preliminary ruling:
‘Must Article 168(a) of [the VAT] Directive be interpreted as precluding a refusal of the deduction of input VAT where the refusal is based solely on the fact that the taxpayer is knowingly involved in the arrangement of sham transactions, but it is not indicated how the outcome of those specific transactions is detrimental to the Treasury because of failure to pay VAT or an unjustified claim for repayment of VAT, as compared with the situation that would have obtained had the transactions been arranged to reflect the actual circumstances?’
Judgment:
The ECJ rules as follows:
“For the purposes of refusing the right to deduct input VAT, the fact that an acquisition of goods took place at the end of a chain of successive sale transactions between several persons and that the taxable person acquired possession of the goods concerned in the warehouse of a person forming part of that chain, other than the person mentioned as supplier on the invoice, is not in itself sufficient to find the existence of an abusive practice on the part of the taxable person or the other persons participating in that chain.”
Source: Curia
