Briefing Document & Podcast C-461/21 (Cartrans Preda) – Import records don’t guarantee inclusion of transport costs in VAT

This briefing document summarises the main themes and most important ideas derived from the provided sources, focusing on the Court of Justice of the European Union’s (CJEU) judgment in SC Cartrans Preda SRL v. Direcţia Generală Regională a Finanţelor Publice Ploiești. The case delves into critical aspects of VAT exemptions for carriage services connected with imports and the taxation of non-resident service providers, particularly concerning the EU’s fundamental freedom to provide services.

I. Key Themes and Principles

The Cartrans Preda case highlights several core concepts and principles of EU tax law:

A. VAT System and Exemptions:

Taxable Amount for Imports: The VAT Directive (Articles 85, 86) stipulates that the taxable amount for imported goods is the customs value, which must include incidental expenses like transport costs up to the first place of destination within the importing Member State.
- Crucially, “recording an import transaction does not mean, on that very same basis and systematically, that the costs of that carriage are included in the taxable amount for VAT purposes of the imported merchandise.” (Judgment, para 36) The existence of an MRN alone is insufficient proof for this inclusion.
Conditions for VAT Exemption (Article 144 VAT Directive): Services relating to the importation of goods are exempt from VAT if their value is included in the taxable amount of the imported goods (as per Article 86(1)(b)).
Rules of Evidence for Exemptions (Proportionality and Fiscal Neutrality): Member States lay down conditions for exemptions (Article 131 VAT Directive), but these must adhere to principles of legal certainty, proportionality, and fiscal neutrality.
- A Member State’s tax practice of “automatically refusing the exemption from VAT for carriage services connected with the importation of goods, on the ground that the person liable has not produced the specific documents required by national legislation, even though that person has produced other documents – there being no reason to doubt the authenticity and reliability of those documents – capable of establishing that the conditions for entitlement to exemption from VAT laid down in those provisions are satisfied” is precluded by EU law. (Judgment, Point 2 of the Ruling, and para 52)
- “Where those substantive conditions are satisfied, the principle of fiscal neutrality additionally requires that an exemption from VAT be allowed even if the taxable person has failed to comply with some of the formal requirements.” (Judgment, para 40) Refusal is only permissible in cases of intentional tax evasion or where non-compliance effectively prevents proof of substantive requirements.

B. Freedom to Provide Services (Articles 56 & 57 TFEU):

Broad Definition of “Services”: Article 57 TFEU defines “services” broadly to encompass any activity normally provided for remuneration not covered by other fundamental freedoms.
- The Court affirmed that “an activity consisting of recovering VAT and excise duties from the tax authorities of several Member States constitutes a supply of services, within the meaning of those articles.” (Judgment, Point 3 of the Ruling, and para 78) This classification applies regardless of national legal classifications (e.g., “commission”).
Restrictions on Freedom to Provide Services: National measures that “prohibit, impede or render less attractive the exercise of that freedom” (Judgment, para 63) are considered restrictions.
- The obligation for a resident recipient to “withhold at source the tax on the income received for the provision of those services, whereas no such obligation exists where that service is performed by a provider established in the same Member State as the recipient of the services” constitutes a restriction. (Judgment, Point 3 of the Ruling, and para 78) This creates an “additional administrative burden but also the risks concerning liability,” deterring use of non-resident providers. (Judgment, para 68)
Justifications for Restrictions (Effective Tax Collection and Proportionality): Restrictions can be justified by “overriding reasons in the public interest” if they are “suitable for securing the attainment of the objective pursued and must not go beyond what is necessary in order to attain that objective.” (Judgment, para 69)
- The “need to ensure the effective collection of tax constitutes an overriding reason of public interest capable of justifying a restriction on the freedom to provide services.” (Judgment, para 71) Withholding tax can be a legitimate and appropriate means, particularly for occasional service providers.
Comparability and Deduction of Business Expenses: A significant restriction arises when resident and non-resident service providers are treated differently regarding expense deductions.
- “Article 56 TFEU must be interpreted as precluding national legislation under which, as a general rule, non-resident service providers are taxed at source on income received in the form of remuneration for services provided, without allowing them the possibility of deducting business expenses directly connected with those activities, whereas resident service providers do have the possibility to do so.” (Judgment, Point 4 of the Ruling, and para 91) This places non-residents at a disadvantage.
- The potential for a non-resident to pay lower overall tax due to a lower withholding rate does not negate the finding of an unfavourable tax treatment, as “unfavourable tax treatment contrary to a fundamental freedom cannot be regarded as compatible with EU law because of the potential existence of other advantages.” (Judgment, para 86)

C. Double Taxation Conventions:

These conventions interact with national and EU law. While Member States are generally free to classify income for double taxation purposes, this must be “in keeping with the freedoms of movement guaranteed by the FEU Treaty.” (Judgment, para 59)

II. The Cartrans Preda Case: Specific Rulings

The case involved SC Cartrans Preda SRL, a Romanian transport company, challenging tax assessments by the Romanian tax authority concerning VAT exemptions for carriage services and withholding tax on payments to a Danish company (FDE Holding A/S) for VAT recovery services.

A. VAT Exemption for Carriage Services:

Issue: Cartrans claimed a VAT exemption for carriage services (Rotterdam to Cluj-Napoca) arguing costs were included in customs value, evidenced by CMR consignment note and MRN. The tax authority refused due to lack of specific documents.
- CJEU Ruling:Automatic Inclusion (Question 1): The Court ruled that an import transaction recording (e.g., with an MRN) does not automatically or systematically mean transport costs are included in the VAT taxable amount. This requires verification. (Judgment, para 36)
- Formal Proof (Question 2): The Court found Romania’s practice of automatically refusing exemption for lack of specific formal documents to be unlawful if other reliable documents (like the CMR consignment note and transit summary declaration) establish the substantive conditions for exemption, and their authenticity is not doubted. (Judgment, para 52) This aligns with the principles of proportionality and fiscal neutrality.

B. Withholding Tax on Non-Resident Income:

Issue: Cartrans paid FDE Holding for VAT recovery services. Romania classified these as “commission” subject to 4% (under double taxation convention) or 16% withholding tax for non-residents, while no such tax applied to resident providers. Cartrans argued this was a service, not commission, and an obstacle to freedom to provide services.
- CJEU Ruling:Nature of Activity (Question 3): The Court classified the VAT recovery activity as a “supply of services” under Articles 56 and 57 TFEU, irrespective of Romania’s “commission” classification. (Judgment, para 78)
- Restriction on Freedom (Questions 4 & 5): The Court found that requiring withholding tax on non-resident providers, but not on resident ones, constitutes a “restriction on the freedom to provide services.” (Judgment, para 78) This is due to the administrative burden and liability placed on the resident recipient, making cross-border services less attractive.
- Justification: While the “need to ensure the effective collection of tax” can be a legitimate justification, it is for the national court to determine if Romania’s legislation is “appropriate for attaining that objective and does not go beyond what is necessary in order to attain it.” (Judgment, para 78)

C. Deduction of Business Expenses:

Issue: Non-resident service providers were taxed on gross income without expense deductions, while residents could deduct expenses and were taxed on net income, despite a potentially lower withholding rate for non-residents in some cases.
- CJEU Ruling (Question 6): The Court ruled that such national legislation is “precluding national legislation under which, as a general rule, non-resident service providers are taxed at source on income received in the form of remuneration for services provided, without allowing them the possibility of deducting business expenses directly connected with those activities, whereas resident service providers do have the possibility to do so.” (Judgment, Point 4 of the Ruling, and para 91) This is a restriction on Article 56 TFEU, and Romania failed to adequately demonstrate a legitimate public interest justification for this specific differential treatment.

III. Implications and Significance

The Cartrans Preda judgment is significant for:

Clarifying VAT Exemption Requirements: It reinforces that substance over form prevails in VAT exemptions for import-related transport services, limiting Member States’ ability to deny exemptions based purely on formal documentation requirements if substantive conditions are met.
Broad Interpretation of “Services”: It reaffirms the wide scope of “services” under the TFEU, ensuring that economic activities like VAT recovery are covered by fundamental freedoms, irrespective of national tax nomenclature.
Scrutiny of Withholding Tax Regimes: It highlights that national withholding tax regimes for non-residents face strict scrutiny under Article 56 TFEU. While effective tax collection can be a justification, it must always meet proportionality requirements.
Equal Treatment in Expense Deductions: It underscores that Member States generally cannot deny non-resident service providers the ability to deduct business expenses if resident providers are permitted to do so, unless a robust and proportionate public interest justification is provided.
Burden of Proof: The judgment reiterates that the burden of proving a legitimate and proportionate justification for any restriction on fundamental freedoms lies squarely with the Member State imposing the restriction.
Reinforcing EU Fundamental Freedoms: It solidifies the importance of EU fundamental freedoms in direct taxation, even in the absence of full EU-level harmonisation.