Subject: Interpretation of EU VAT Directive regarding the removal of taxable persons from the VAT register due to persistent failure to comply with tax obligations, and the principle of proportionality.
Key Issue: The case revolves around the compatibility of Bulgarian national legislation allowing for the removal of a taxable person from the VAT register for persistent failure to comply with obligations, specifically whether such removal is permissible under EU VAT law and general principles, particularly the principle of proportionality.
Background:
- Cityland EOOD, a Bulgarian company, was removed from the VAT register by the Bulgarian tax authorities due to persistent failure to pay declared VAT for several tax periods between 2013 and 2018. The total unpaid VAT amounted to a significant sum, although some smaller amounts were also cited.
- The Bulgarian law (ZDDS) allows for termination of VAT registration at the instigation of the tax authority if a person “persistently fails to comply with his, her or its obligations under this Law.” “Persistent infringements” are defined as those committed within one year of a prior penalty for a repeated offence of the same nature.
- Cityland challenged the decision, arguing that some of the unpaid VAT was due to commercial litigation and that the VAT at issue had been paid after the initial decision, with only interest remaining.
- The referring court (Administrativen sad Veliko Tarnovo) questioned whether the Bulgarian legislation, which permits removal based on formal infringements without a full examination of conduct, risk to revenue, and likelihood of fraud, is compatible with EU law, specifically Articles 213 and 273 of the VAT Directive and the principles of legal certainty and proportionality.
Main Themes and Important Ideas/Facts:
- VAT Identification and its Purpose: Articles 213 and 214 of the VAT Directive require taxable persons to state their activity status and Member States to ensure they are identified by a VAT number. The Court emphasizes that the VAT identification number is essential for the proper functioning of the VAT system, providing “proof of the tax status of the taxable person” and simplifying inspections. It is also a crucial element for invoicing and other documentation.
- Member States’ Discretion in Identification: Member States have a “certain discretion” in adopting measures for identifying taxable persons, but this discretion is “not unrestricted.” They cannot refuse to assign a VAT number without “legitimate grounds.”
- Lack of General EU Law on VAT Deregistration: The Court explicitly states that the “VAT Directive does not contain any provisions generally authorising Member States to provide, in their national legislation, for removal from the VAT register.” While specific special schemes (for non-established persons or distance sales) allow for removal in cases of persistent non-compliance, this is distinct from the general VAT identification under Article 214.
- Member States’ Obligation to Collect VAT and Prevent Fraud: Member States are required to take “all legislative and administrative measures appropriate for ensuring collection of all the VAT due” and “preventing fraud” (Articles 2 and 273 of the VAT Directive read with Article 4(3) TEU). Prevention of tax evasion and abuse is a “legitimate interest” and an objective “recognised and encouraged by the VAT Directive.”
- National Measures for Removal from VAT Register as a Penalty: The Court considers that national legislation providing for removal from the VAT register due to non-compliance is designed as a “penalty.”
- Member States’ Power to Impose Penalties (and Limitations): While Member States have the power to choose appropriate penalties for non-compliance in the absence of harmonised EU legislation, they must do so in accordance with “EU law and its general principles,” including the “principles of proportionality and fiscal neutrality.”
- Principle of Proportionality: To be consistent with proportionality, a penalty must take into account the “nature and the degree of seriousness of the infringement” and the means of determining its amount.
- Principle of Good Administration: National tax authorities must conduct a “diligent and impartial examination of all the relevant matters” to ensure they have “the most complete and reliable information possible” when adopting a decision.
- Principle of Effectiveness: Penalties must be “effective and dissuasive” to counter infringements and protect the EU’s financial interests.
- Severe Nature of VAT Deregistration: The Court highlights the “negative practical consequence” of removal from the VAT register. It can discourage transactions with the deregistered taxable person because their customers may be uncertain about their right to deduct input VAT. This consequence “resembles a temporary or permanent prohibition on pursuing that activity,” making it a “particularly severe penalty.”
- Failure to Analyse Infringements and Conduct is Disproportionate: The core finding of the Court is that removing a taxable person from the VAT register “without analysing the nature of the infringements committed and the conduct of the taxable person at issue” is not a penalty that complies with the principles of proportionality, effectiveness, and good administration.
- Need for Full Examination: Legislation that allows for removal based on merely “three formal infringements” (as cited by the referring court regarding Bulgarian law) without a “full examination of the conduct of that taxable person in order to assess whether there is a risk to tax revenue and a likelihood of VAT fraud” goes “beyond what is necessary for ensuring the collection of all the VAT and combating VAT fraud.”
- Principle of Legal Certainty: Removal from the VAT register without formally prohibiting the activity leaves the tax situation of both the taxable person and their customers “constantly and repeatedly called into question.” This is inconsistent with the principle of legal certainty.
- Compatibility of Bulgarian Law: The Court concludes that national legislation (specifically the Bulgarian ZDDS as interpreted) that allows for removal from the VAT register without the required analysis of the nature and seriousness of infringements and the taxable person’s conduct is incompatible with EU law and principles.
Conclusion:
The European Court of Justice ruled that the Bulgarian legislation, as interpreted and applied in the case of Cityland, is incompatible with EU law. The removal of a taxable person from the VAT register is a severe penalty that must comply with the principles of proportionality and legal certainty. Member States cannot implement such a measure based solely on persistent failure to comply with obligations without a thorough analysis of the nature and seriousness of the infringements and the overall conduct of the taxable person to assess the risk to tax revenue and likelihood of fraud. The principle of good administration requires a diligent examination of all relevant facts. Therefore, national legislation that permits removal without this analysis is precluded by Article 213(1) and Article 273 of the VAT Directive and the principles of legal certainty and proportionality.
See also
- Join the Linkedin Group on ECJ/CJEU/General Court VAT Cases, click HERE
- VATupdate.com – Your FREE source of information on ECJ VAT Cases
