I. Executive Summary
This briefing summarizes the key aspects of the European Court of Justice (ECJ) case C-276/24 (KONREO), which addresses the complex interplay between VAT fraud, the refusal of the right to deduct input VAT, and the imposition of joint and several liability on a recipient of goods for VAT unpaid by the supplier. The ECJ’s ruling clarifies the interpretation of Article 205 of the VAT Directive (2006/112/CE) and the principle of proportionality in such contexts. The core takeaway is that national tax authorities can simultaneously refuse a recipient’s VAT deduction right due to fraud involvement and hold them jointly and severally liable for the supplier’s unpaid VAT, provided the recipient knew or should have known about the fraud. This approach is deemed proportionate and necessary to combat fraud and ensure effective VAT collection, even if it limits the recipient’s recourse against the primary debtor, particularly in insolvency scenarios.
II. Main Themes and Key Ideas/Facts
Core Legal Provisions and Principles:
- Article 205 of Directive 2006/112/CE (VAT Directive): This is the primary legal provision interpreted. It allows Member States to “stipulate that a person other than the taxable person may be jointly and severally liable for VAT” in certain situations. The ECJ emphasizes that this article aims to ensure efficient VAT collection.
- Principle of Proportionality: The Czech Supreme Administrative Court (Nejvyšší správní soud) invoked this principle, questioning whether the concurrent application of both measures was proportionate. The ECJ consistently holds that while measures must effectively preserve the Public Treasury’s rights, they “must not go beyond what is necessary to achieve this end.”
- Combating VAT Fraud: This is a “recognized and encouraged” objective by EU legislation concerning the common system of VAT. The principle against abuse of rights prohibits “purely artificial arrangements, devoid of economic reality, carried out for the sole purpose of obtaining a tax advantage.”
Factual Scenario (KONREO v. Odvolací finanční ředitelství):
- Parties: KONREO (insolvency administrator for FAU s.r.o.) vs. Odvolací finanční ředitelství (Czech Appellate Tax Directorate).
- The Transaction: FAU s.r.o. (recipient) purchased fuel from Verami International Company s.r.o. (supplier) from May to October 2013.
- The Fraud: Tax controls revealed “facts of tax fraud in the commercial chain involving Verami and FAU.” Verami failed to remit the collected VAT to the Treasury.
- Concurrent Measures Applied to FAU:Refusal of Right to Deduct VAT: FAU was denied the right to deduct input VAT on the fuel invoices because it “knew or should have known that… it was participating in a VAT fraud scheme.”
- Joint and Several Liability: FAU was simultaneously held liable, as a legal guarantor under Czech law (Article 109, paragraph 2, point b, of the VAT Act), for the VAT that Verami had not paid. This liability was triggered partly because payment was made “in whole or in part by transfer to an account opened with a payment service provider located outside the Czech territory,” combined with FAU’s knowledge/presumed knowledge of the fraud.
- Insolvency: Both Verami and FAU were declared bankrupt, leading to insolvency proceedings that were ongoing at the time of the preliminary ruling request.
KONREO’s Argument:
- KONREO contended that refusing the right to deduct VAT and imposing joint liability should be mutually exclusive.
- It argued that their concurrent application violated the principles of fiscal neutrality and equal treatment, leading to FAU effectively “acquitting the VAT three times on the same operation”: once by paying its supplier, once through the refusal of deduction, and once through the legal guarantee.
ECJ’s Reasoning and Conclusion:
- Distinct and Complementary Objectives: The ECJ decisively rejected KONREO’s argument, stating that the two measures serve “two distinct and complementary objectives”: “to combat tax fraud” and “to ensure effective VAT collection by the Public Treasury from the most appropriate persons in the situation envisaged, especially in a situation of fraud.”
- No Double Taxation/Unjust Enrichment: The Court clarified that applying both measures does not constitute unjust enrichment for the tax administration. The administration “simply takes measures likely to enable it to obtain payment of separate VAT amounts due to it by these two taxable persons.”
- Recipient’s Knowledge is Key: The ability to apply both measures concurrently hinges on the recipient (FAU) knowing or having “had reason to know that, by the transaction in question, it was participating in tax fraud.” In such cases, the administration “was obliged to deny it the right to deduct the input VAT.”
- Recourse Action Irrelevance: The ECJ held that the tax administration’s decision to apply joint liability “cannot depend on the chances of success of the recourse action that the jointly liable party might bring.” This is crucial for effective VAT collection, particularly in insolvency cases where recovery from the primary debtor is unlikely. If it were dependent, it “could be made difficult to the point of undermining effective VAT collection.”
- Non-Discriminatory Treatment: The ECJ highlighted that not being able to hold jointly liable those who were denied VAT deduction due to fraud would mean that “only taxable persons acting in good faith…could be designated…as being jointly and severally liable.” This would “result in bona fide taxable persons being treated less favorably than taxable persons who knew or should have known that they were participating in tax fraud.”
- Final Ruling: The ECJ concluded that “Article 205 of the VAT Directive, read in light of the principle of proportionality, does not oppose a national practice that imposes on the taxable person, recipient of a supply of goods for consideration, a joint and several obligation to pay the VAT due by the supplier of those goods, even though the right to deduct the input VAT has been refused to the recipient of that supply of goods on the grounds that it knew or should have known that it was participating in VAT fraud.”
III. Implications
- Strengthening Anti-Fraud Measures: The ruling significantly bolsters national tax authorities’ ability to combat VAT fraud by allowing them to apply multiple stringent measures against parties involved in fraudulent schemes, especially those with knowledge of the fraud.
- Burden on Taxable Persons: It places a considerable burden on taxable persons to exercise due diligence (“take all measures that can reasonably be required of them”) to ensure they are not inadvertently participating in VAT fraud. Failure to do so can result in substantial financial liabilities, including non-deductibility and direct payment of VAT due by others.
- Limited Recourse in Insolvency: The ruling acknowledges that the jointly liable party’s right of recourse against the primary debtor may be practically ineffective, particularly in insolvency situations, but prioritizes the state’s effective VAT collection over the jointly liable party’s ability to recover.
- Clarification of Proportionality: The ECJ’s interpretation of proportionality in this context prioritizes the legitimate aims of combating fraud and ensuring effective collection, even when it results in a seemingly harsh outcome for a party deemed complicit.
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
