Briefing Document & Podcast: VAT concept ”Chain Transactions” explained based on ECJ/CJEU cases

Analysis of CJEU Rulings on VAT treatment of chain transactions, focusing on the determination of which supply qualifies as an intra-Community supply and the right to deduct input VAT.

Introduction:

This document provides an overview of key themes and rulings from the provided sources related to Value Added Tax (VAT) within the European Union, specifically addressing complex scenarios involving chain transactions, intra-Community supplies, and the right to deduct input VAT. The rulings emphasize the importance of determining which supply in a chain of transactions is directly linked to the intra-Community transport of goods, as this dictates the place of supply, VAT exemption, and the ability to deduct input VAT. The complexities arise when multiple parties are involved in successive supplies of the same goods, with only one physical movement of those goods across Member State borders.

Key Themes and Concepts:

Chain Transactions: These involve successive supplies of the same goods between multiple taxable persons, where only one physical movement of goods occurs. The core issue is determining which supply qualifies for the VAT exemption applicable to intra-Community supplies.
Intra-Community Supply (ICS): The supply of goods transported from one Member State to another. Article 138(1) of the VAT Directive mandates Member States to exempt “the supply of goods dispatched or transported to a destination outside their respective territory but within the [European Union], by or on behalf of the vendor or the person acquiring the goods, for another taxable person, or for a non-taxable legal person acting as such in a Member State other than that in which dispatch or transport of the goods began.”
Intra-Community Acquisition (ICA): The acquisition of goods in one Member State where the goods have been dispatched or transported from another Member State. It is the corollary to an ICS. “Intra-Community acquisition of goods” shall mean acquisition of the right to dispose as owner of movable tangible property dispatched or transported to the person acquiring the goods, by or on behalf of the vendor or the person acquiring the goods to a Member State other than that from which the goods are dispatched or transported.”
Place of Supply: The location where a supply of goods is deemed to take place for VAT purposes. Article 32 of the VAT Directive states, “Where goods are dispatched or transported by the supplier, or by the customer, or by a third person, the place of supply shall be deemed to be the place where the goods are located at the time when dispatch or transport of the goods to the customer begins.” For goods not dispatched or transported, the place of supply is where the goods are located when the supply takes place.
Right to Deduct Input VAT: Taxable persons are generally entitled to deduct VAT paid on purchases (input VAT) to the extent that the goods and services are used for taxed transactions. Article 168(a) of the VAT Directive provides: ‘In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay: the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person’.
Legitimate Expectation: The principle that individuals and businesses should be able to rely on clear and consistent administrative practices and rulings. However, this principle has limitations in VAT cases, especially when there are underlying issues of fraud or evasion.

Key CJEU Rulings and Their Implications:

Case C-245/04, EMAG Handel Eder: This case established the fundamental principle that in chain transactions with only one physical movement of goods, the transport can only be ascribed to one of the supplies. The Court highlighted the purpose of the transitional arrangements to transfer tax revenue to the Member State of final consumption. The Court ruled that, “where two successive supplies of the same goods, effected for consideration between taxable persons acting as such, gives rise to a single intra-Community dispatch or a single intra-Community transport of those goods, that dispatch or transport can be ascribed to only one of the two supplies, which alone will be exempted from tax”.
Case C-430/09, Euro Tyre Holding: This ruling clarifies EMAG Handel Eder, emphasizing the need for an “overall assessment of all the specific circumstances” to determine which supply fulfills the conditions of an intra-Community supply. The Court emphasizes the objective nature of the terms “intra-Community supply” and “intra-Community acquisition”. It also notes the importance of the purchaser’s intentions at the time of acquisition, supported by objective evidence, in determining the nature of the transaction. The supplier must act in good faith and take reasonable measures to avoid participation in tax fraud.
Case C-386/16, Toridas: This case reinforces the principles established in previous rulings. It confirms that Article 138(1) of the VAT Directive cannot be used for the first supply of goods if there is a chain sale and that the second transfer of ownership occurred before the transport. It emphasizes the actual transport route and final destination of the goods. It also clarifies that processing the goods after the first supply does not change the fact that the first sale cannot be considered an intra-Community supply.
Case C-628/16, Kreuzmayr GmbH: This case examines the right to deduct input VAT in the context of successive supplies and potential VAT evasion. The Court considers whether the place of supply is determined in accordance with Article 32 of the VAT Directive (place of dispatch) when there are successive sales. It also considers the principle of legitimate expectation in situations where a taxable person has been incorrectly invoiced. The court ruled that, “in circumstances such as those in the main proceedings, the first paragraph of Article 32 of the VAT Directive must be interpreted as meaning that it applies to the second of two successive supplies of the same goods which gave rise to only one intra-Community transport.”

Key Considerations for Determining the Intra-Community Supply:

Based on the case law, consider the following:

Transfer of the Right to Dispose of Goods: When did the second transfer of ownership occur? If the second transfer occurred before the intra-Community transport, the transport cannot be ascribed to the first supply.
Objective Evidence of Intent: What was the purchaser’s intention at the time of acquisition? Is there objective evidence (e.g., contracts, correspondence) to support the claim that the goods were destined for another Member State?
Transport Responsibility: Who is responsible for the transport of the goods? Although who physically transports the goods is not the deciding factor, it provides a clue.
Good Faith & Due Diligence: Did the supplier act in good faith and take reasonable measures (e.g., verifying VAT numbers) to ensure the transaction was legitimate?
Actual Transport Route: What was the actual physical movement of the goods? The goods must physically leave the Member State of supply as a result of the transport.

Right to Deduct and Legitimate Expectations:

If the second supply in a chain is considered the intra-Community supply, the first buyer may not deduct VAT charged on the initial invoice.
The principle of legitimate expectations does not automatically grant a right to deduct where the VAT was incorrectly invoiced. The taxpayer can request the repayment of the tax unduly paid to the operator which produced an incorrect invoice, in accordance with national law.

VATupdate.com:

The note included in the prompt mentions that VATupdate.com is a useful resource for staying updated on ECJ, CJEU, and General Court VAT rulings.

Conclusion:

The correct VAT treatment of chain transactions is complex and fact-dependent. These CJEU rulings provide critical guidance for businesses and tax authorities in determining which supply should be treated as an intra-Community supply and how VAT should be applied. It emphasizes the crucial link between the transfer of ownership, the intention of the parties, and the actual movement of goods. Careful attention to detail, due diligence, and accurate documentation are essential for complying with EU VAT law and avoiding potential penalties.

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