Briefing document & Podcast ECJ VAT C-386/16 (Toridas) – EU VAT Exemption in Chain Transactions

Briefing Document: EU VAT Exemption in Chain Transactions – The Toridas Case

I. Executive Summary

This briefing document provides a detailed review of the main themes and important ideas derived from the Court of Justice of the European Union (CJEU) judgment in Toridas UAB v Valstybinė mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos (Case C‑386/16). The case primarily concerns the interpretation of Article 138(1) of the Council Directive 2006/112/EC (the VAT Directive) regarding the exemption of intra-Community supplies of goods, particularly in “chain transactions” involving multiple successive supplies but only a single intra-Community transport.

The core issue addressed is how to properly classify transactions for VAT purposes when a middleman is involved in successive sales of goods that are transported directly from the first supplier’s Member State to the final customer’s Member State, bypassing the middleman’s Member State of identification. The Court clarified that for a supply to be exempt as an intra-Community supply, the physical transport of goods must be definitively ascribed to only one supply in the chain. Crucially, the timing of the transfer of the right to dispose of the goods as owner is paramount in this determination. Furthermore, the ruling clarified that the middleman’s VAT identification in a different Member State and any processing of goods occurring after the first supply do not alter the classification or exemption conditions of the initial supply.

II. Background of the Toridas Case (C-386/16)

The Toridas case arose from a dispute between Toridas UAB, a Lithuanian company, and the Lithuanian tax authorities concerning the VAT classification of its sales of frozen fish between 2008 and 2010.

• Parties Involved:
  • Toridas UAB: A company established and VAT-identified in Lithuania (the first Member State), which imported frozen fish from Kazakhstan.
  • Megalain OÜ: A company established and VAT-identified in Estonia (the second Member State), which purchased the fish from Toridas (the “first supplies”).
  • Final Purchasers: Taxable persons established and VAT-identified in other EU Member States (Denmark, Germany, Netherlands, Poland) who bought the fish from Megalain (the “second supplies”).
• Transaction Structure:
  • Toridas sold frozen fish to Megalain. Invoices for these “first supplies” stated a zero-rate VAT, classifying them as intra-Community supplies from Lithuania.
  • Megalain immediately resold the fish to final purchasers in other Member States (“second supplies”). Invoices for these second supplies were drawn up exclusive of VAT.
  • Crucially, the goods were transported directly from Lithuania (from warehouses like Kauno žuvis or Plungės šaltis) to the Member States of the final purchasers, without passing through Estonia.
  • Some goods were processed (graded, glazed, packaged) in Lithuania on Megalain’s instructions after the second supplies but before transport to the final purchasers.
• Dispute: The Lithuanian tax inspectorate reclassified Toridas’s “first supplies” as internal supplies taxable at the standard rate, arguing they were not exempt intra-Community supplies. This decision was challenged, leading to a preliminary ruling request from the Supreme Administrative Court of Lithuania to the CJEU.

III. Key Legal Framework (VAT Directive 2006/112/EC)

The Court’s interpretation in Toridas centers on several key articles of the VAT Directive:

• Article 14(1) – “Supply of goods”: Defines supply as “the transfer of the right to dispose of tangible property as owner.”
• Article 20 – “Intra-Community acquisition of goods”: Defines acquisition as “the acquisition of the right to dispose as owner of movable tangible property dispatched or transported…in a Member State other than that in which dispatch or transport of the goods began.”
• Article 33 – Place of supply (derogation): Concerns the place where goods are located when dispatch/transport to the customer ends, especially for distance sales. The Court deemed this less relevant to the direct exemption regime in this case.
• Article 40 – Place of intra-Community acquisition: States the place of acquisition is where dispatch/transport ends. The Court considered this relevant as the corollary to Article 138(1).
• Article 138(1) – Exemption of intra-Community supplies: “Member States shall 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.” This is the central provision for the exemption of supplies.
• Articles 140(a) & 141 – Exemption of intra-Community acquisitions: These articles relate to the exemption of acquisitions, not directly to the supply exemption, and were thus considered less relevant by the Court for the specific questions posed.

IV. Main Themes and Most Important Ideas/Facts

A. Core Conditions for Intra-Community Supply Exemption (Article 138(1))

The Court reiterated its settled case-law on the fundamental conditions for the exemption of an intra-Community supply under Article 138(1):

• Transfer of ownership: “the right to dispose of the goods as owner has been transferred to the person acquiring the goods.”
• Dispatch/Transport to another Member State: “the supplier establishes that those goods have been dispatched or transported to another Member State.”
• Physical Departure: “as a result of that dispatch or transport, they have physically left the territory of the Member State of supply.” (Source: Toridas judgment, para 30; EU VAT Exemption for Intra-Community Supply: A Study Guide, Q2; EU VAT Exemption: The Toridas Case and Chain Transactions, Q2)

The Court emphasized the direct link between an intra-Community supply and its corollary, an intra-Community acquisition, stating that “those two provisions [Article 138(1) and Article 20] must therefore be interpreted in such a way as to confer on them identical meaning and scope.” (Source: Toridas judgment, para 31)

B. Chain Transactions and Attribution of Intra-Community Transport

One of the central issues in Toridas was how to apply the exemption in “chain transactions” where there are “two successive supplies that have given rise to only a single intra-Community transport.” (Source: Toridas judgment, para 34; EU VAT Exemption for Intra-Community Supply: A Study Guide, Q4)

• Single Transport Attribution: The Court’s case-law dictates that “the intra-Community transport can be ascribed to only one of the two supplies, which, therefore, will alone be exempted under Article 138(1) of the VAT Directive.” (Source: Toridas judgment, para 34; EU VAT Exemption for Intra-Community Supply: A Study Guide, Q4)
• Overall Assessment: Determining which supply the transport is ascribed to requires “an overall assessment of all the specific circumstances of the case.” (Source: Toridas judgment, para 35; EU VAT Exemption for Intra-Community Supply: A Study Guide, Q4)
• Crucial Factor: Timing of Second Transfer of Right to Dispose: A key factor in this assessment is “when the second transfer of the right to dispose of the goods as owner, to the person finally acquiring the goods, has occurred.” (Source: Toridas judgment, para 36)
  • If “the second transfer of that right, that is to say, the second supply, has taken place before the intra-Community transport occurs, the intra-Community transport cannot be ascribed to the first supply to the first person acquiring the goods.” (Source: Toridas judgment, para 36)
  • In the Toridas case, the “supply by Megalain to the persons finally acquiring the goods took place before the intra-Community transport.” (Source: Toridas judgment, para 38)
  • Therefore, “only the second supply should be classified as an intra-Community supply and be entitled, where appropriate, to the exemption provided for in Article 138(1) of the VAT Directive.” (Source: Toridas judgment, para 37)

C. Role of the Middleman (Megalain)

Megalain acted as the “middleman” in this chain, purchasing from Toridas and immediately reselling to the final customers.

• Impact on First Supply: The Court concluded that the “first supplies at issue in the main proceedings constitute internal supplies which are not eligible for an exemption from VAT under Article 138(1) of the VAT Directive,” because the intra-Community transport occurred after Megalain’s second supply. (Source: Toridas judgment, para 40)
• VAT Identification Not a Classification Criterion: A significant clarification was made regarding the middleman’s VAT identification. “The fact that the first person acquiring the goods is identified for VAT purposes in a Member State other than that of the place of the first supply or that of the place of the final acquisition is not a criterion for classification of an intra-Community transaction or, in itself, evidence sufficient to show that a transaction is an intra-Community one.” (Source: Toridas judgment, para 44; EU VAT Exemption for Intra-Community Supply: A Study Guide, Q8; EU VAT Exemption: The Toridas Case and Chain Transactions, Q6) This means Megalain being VAT-identified in Estonia did not make the first supply an intra-Community one, as the goods never entered Estonia.

D. Double Taxation Concern

The referring Lithuanian court expressed concern that classifying the first supplies as taxable might lead to double taxation, given Megalain declared its acquisitions in Estonia.

• Court’s Stance: The CJEU acknowledged this concern but stated that “that risk cannot be regarded as capable of justifying exemption of those transactions, given that double taxation can be avoided and fiscal neutrality can be ensured if the VAT Directive is applied correctly.” (Source: Toridas judgment, para 43; EU VAT Exemption for Intra-Community Supply: A Study Guide, Q7; EU VAT Exemption: The Toridas Case and Chain Transactions, Q6) This reinforces the principle of fiscal neutrality, emphasizing correct application of the rules over granting exemption to prevent perceived double taxation.

E. Impact of Goods Processing

A portion of the goods was processed (graded, glazed, and packaged) in Lithuania on Megalain’s instructions after the second supplies but before transportation to the final Member States.

• No Effect on Exemption: The Court held that this processing “has no effect on the conditions for any exemption of the first supply where that processing takes place after the first supply.” (Source: Toridas judgment, para 49; EU VAT Exemption for Intra-Community Supply: A Study Guide, Q10; EU VAT Exemption: The Toridas Case and Chain Transactions, Q8)
• Reasoning: Article 138(1) lists exhaustive substantive conditions for exemption, and “The processing of the goods that have been supplied does not form part of the substantive conditions laid down by that article.” (Source: Toridas judgment, para 47) The processing did not alter the fundamental finding that no intra-Community transport could be ascribed to the first supply.

V. Conclusion

The Toridas judgment provides crucial clarity on the application of VAT exemptions in complex chain transactions within the EU. It firmly establishes that:

1. Single Attribution of Transport: Only one supply in a chain transaction can be ascribed the intra-Community transport and thus qualify for VAT exemption under Article 138(1).
2. Timing of Second Supply is Key: The critical determinant for attributing the transport is whether the second transfer of the right to dispose of the goods occurred before the intra-Community transport commenced. If so, the transport is attributed to the second supply, not the first.
3. Middleman’s VAT ID is Not Decisive: The Member State where a middleman is VAT-identified does not, by itself, determine the intra-Community nature of a supply.
4. Fiscal Neutrality over Perceived Double Taxation: Concerns about double taxation cannot justify an incorrect application of the VAT Directive; proper application should prevent such issues.
5. Post-Supply Processing is Irrelevant: Processing of goods that occurs after the first supply but before intra-Community transport does not affect the VAT exemption status of the initial supply.

This ruling underscores the importance of a holistic assessment of the circumstances, with a particular focus on the sequence of ownership transfer and physical transport, to ensure correct VAT treatment in multi-party cross-border transactions.