Briefing document & Podcast: ECJ C-550/11 (PIGI): VAT Deduction Adjustments for Stolen Goods

Review of EU VAT Directive 2006/112/EC and its application to VAT deduction adjustments in cases of stolen goods, with a focus on the PIGI – Pavleta Dimova ET case (C–550/11).

I. Executive Summary

This briefing paper examines the principles governing Value Added Tax (VAT) deduction adjustments within the European Union, specifically addressing scenarios involving the theft of goods. The core objective of the EU VAT system is to ensure complete neutrality of taxation, allowing businesses to reclaim input VAT on purchases used for taxable transactions. While the general rule under Directive 2006/112/EC (the Directive) suggests no adjustment for “theft of property duly proved,” Member States possess a crucial optional derogation allowing them to require such adjustments. The European Court of Justice (ECJ) ruling in PIGI – Pavleta Dimova ET (ECLI:EU:C:2012:614) clarifies that if a Member State exercises this option, it may mandate VAT deduction adjustments for stolen goods even when the perpetrator is unidentified or unconvicted, and national legislation can use equivalent terms like “shortfall” to implement this.

II. Main Themes and Key Ideas/Facts

A. Fundamental Principles of the VAT Deduction System

Neutrality of Taxation: The overarching goal of the common system of VAT is to “relieve the operator entirely of the burden of the VAT paid or payable in the course of all his economic activities.” This ensures “complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject, in principle, to VAT” (CURIA, para 21; VAT Deduction Adjustments for Stolen Goods, Q1; VAT Deduction Adjustments: A Study Guide, Q1).
Right to Deduction: A “taxable person” (any individual or entity carrying out an economic activity subject to VAT) is entitled to deduct input VAT (VAT paid on purchases) if the goods and services are “used for the purposes of the taxed transactions of a taxable person” (CURIA, Article 168, para 4; VAT Deduction Adjustments for Stolen Goods, Q2; VAT Deduction Adjustments: A Study Guide, Q2). This right arises when the deductible tax becomes chargeable, typically upon delivery of goods.
Decisive Criterion for Deduction: The “actual or intended use of the goods and services concerned” is the “decisive criterion” for determining the extent of the initial VAT deduction and any subsequent adjustments (CURIA, para 23; VAT Deduction Adjustments for Stolen Goods, Q2; VAT Deduction Adjustments: A Study Guide, Q2).

B. VAT Deduction Adjustments

Purpose of Adjustments: Adjustments are an “integral part of the VAT deduction scheme” and are “intended to enhance the precision of deductions so as to ensure the neutrality of VAT” (CURIA, para 24-25; VAT Deduction Adjustments for Stolen Goods, Q3; VAT Deduction Adjustments: A Study Guide, Q3). They establish a “close and direct relationship between the right to deduct input VAT and the use of the goods and services concerned for taxable transactions” (CURIA, para 25; VAT Deduction Adjustments: A Study Guide, Q10).
General Requirement for Adjustment: Adjustments are generally required when “some change occurs in the factors used to determine the amount to be deducted, for example where purchases are cancelled or price reductions are obtained” (CURIA, Article 185(1), para 6; VAT Deduction Adjustments for Stolen Goods, Q3; VAT Deduction Adjustments: A Study Guide, Q3).

C. Specifics of Theft and VAT Deduction Adjustment (Article 185(2) of the Directive)

Theft as a “Change”: Since “property which was stolen can no longer be used by the taxable person for taxable output transactions, theft is such a change which should, in principle, give rise to an adjustment of the input VAT deduction” (CURIA, para 27).
Optional Derogation for Member States:
- Initial Derogation: The first subparagraph of Article 185(2) states that “no adjustment shall be made in the case of … theft of property duly proved or confirmed” (CURIA, Article 185(2), para 6; VAT Deduction Adjustments for Stolen Goods, Q4; VAT Deduction Adjustments: A Study Guide, Q4).
- Member State Flexibility: Crucially, the “second subparagraph of the latter provision, that derogation is made optional” (CURIA, para 28). This means “Member States may require adjustment to be made” (CURIA, Article 185(2), para 6) in cases of theft. This confers “flexibility to decide whether businesses must repay input VAT on stolen goods” (VAT Deduction Adjustments for Stolen Goods, Q4).
No Requirement for Proof of Perpetrator’s Identity/Conviction: If a Member State avails itself of this optional power, “the competent tax authority… was not required to determine whether the theft in question, committed by an unidentified and unconvicted perpetrator, was ‘duly proved’” (CURIA, para 30; VAT Deduction Adjustments for Stolen Goods, Q5; VAT Deduction Adjustments: A Study Guide, Q5). The national legislation can simply provide for an adjustment “irrespective of the particular circumstance surrounding the theft” (CURIA, para 30).
Permissibility of Different Terminology in National Law: Member States are “free to employ, in their domestic tax legislation, terms which are not identical to the enabling provision of the Directive, provided that those terms reflect the objective pursued by the latter” (CURIA, para 32). This includes using terms like “shortfall” to encompass theft (VAT Deduction Adjustments for Stolen Goods, Q6; VAT Deduction Adjustments: A Study Guide, Q6).

D. The PIGI Case (C–550/11) and Bulgarian Law

Background: PIGI – Pavleta Dimova ET, a Bulgarian sole trader, experienced a theft of goods (packaged products and cigarettes) in January 2007. The Bulgarian tax authority (Direktor na Direktsia ‘Obzhalvane I upravlenie na izpalnenieto’ – Varna) ordered PIGI to pay VAT equal to the input tax deduction claimed on the stolen goods, citing a “shortfall” (CURIA, para 12-15). PIGI argued the theft was force majeure and no adjustment should be made.
Bulgarian Law (ZDDS): The Republic of Bulgaria transposed the Directive through the Law on value added tax (Zakon za danak varhu dobavenata stoynost, ZDDS).
- Article 79(3) of the ZDDS states that a taxable person must “calculate and be liable for tax in the amount of the deduction made, where the goods have been destroyed, a shortfall has been established or the goods have been classified as wastage” (CURIA, Article 79(3), para 9).
- Article 80(2) of the ZDDS outlines limitations on adjustments, including where shortfalls are “caused by force majeure” (CURIA, Article 80(2), para 10).
Application in PIGI: The ECJ confirmed that Bulgaria had “availed itself of the power granted to it under the second subparagraph of Article 185(2) of the Directive” (CURIA, para 30).
- The term “shortfall” in Bulgarian law was deemed a “suitable implementation” of the Directive’s provision, as theft “entails a ‘shortfall’ in the property concerned, with the result that it is not possible to use it for taxable output transactions” (CURIA, para 35; VAT Deduction Adjustments for Stolen Goods, Q7).
- The argument of force majeure was not considered to prevent the adjustment in this specific case, as Bulgaria had opted to require adjustments for theft irrespective of such circumstances (CURIA, para 36; VAT Deduction Adjustments for Stolen Goods, Q8, Q9; VAT Deduction Adjustments: A Study Guide, Q9).
ECJ Ruling: The Court ruled that Article 185(2) of the Directive “must be interpreted as not precluding national tax provisions, such as those contained in Articles 79 and 80 of the ZDDS, which require, where a shortfall in the goods subject to VAT has been established, that an adjustment be made to the deduction of that input tax at the time of acquisition of those goods, where the taxable person was the victim of a theft of those goods and the perpetrator has not been identified” (CURIA, para 37, Judgment).

III. Implications and Analysis

Divergent National Approaches: The optional nature of Article 185(2) means that the VAT treatment of stolen goods can vary significantly between Member States. Businesses operating across the EU must be aware of each country’s specific implementation.
Burden on Taxable Persons: In Member States like Bulgaria that exercise the option to require adjustments, businesses bear the financial burden of repaying input VAT on stolen goods, even if the theft is genuinely proven but the perpetrator remains elusive. This places a premium on robust security measures and insurance.
Scope of “Shortfall”: The ECJ’s acceptance of “shortfall” as equivalent to “theft” when it leads to goods being unusable for taxable transactions provides clarity on legislative flexibility but also highlights the broad interpretation national authorities can adopt.
Limited Scope of Force Majeure Exemption for Theft: While Bulgarian law generally allows for force majeure exemptions for shortfalls, the PIGI case indicates that for theft, specifically where the Member State has opted to require adjustments under Article 185(2), the force majeure argument may not negate the obligation to adjust VAT.

IV. Glossary of Key Terms (as per sources)

Adjustment (of VAT deduction): The process of altering an initial VAT deduction amount, either upward or downward, to reflect subsequent changes in the factors that determined the original deduction.
Article 185(2) of Directive 2006/112/EC: A specific provision of the VAT Directive that initially states no adjustment is to be made for “theft of property duly proved,” but importantly, includes a second subparagraph allowing Member States to optionally require such adjustments.
Common System of Value Added Tax (VAT): The harmonised framework for VAT across European Union Member States, established by directives like 2006/112/EC.
Council Directive 2006/112/EC (the Directive): The main EU legislation governing the common system of VAT.
Derogation: An exemption from or relaxation of a rule or law.
Force Majeure: Unforeseeable circumstances that prevent someone from fulfilling a contract or obligation.
Input Tax / Input VAT: The VAT paid by a taxable person on goods and services purchased for the purposes of their economic activity.
Neutrality of Taxation: A fundamental principle of the VAT system aiming to ensure that the tax burden does not fall on businesses, but rather on the final consumer.
Output Tax / Output VAT: The VAT that a taxable person charges on the goods and services they supply to their customers.
PIGI – Pavleta Dimova ET: The claimant in the main proceedings before the European Court of Justice, a sole trader in Bulgaria subject to a VAT adjustment following a theft.
Preliminary Ruling (Article 267 TFEU): A procedure in EU law where national courts can refer questions about the interpretation of EU law or the validity of EU acts to the European Court of Justice.
Shortfall: A deficit or lack of goods, often used in Bulgarian law (ZDDS) to describe a situation where goods are missing, which can include instances of destruction, wastage, or theft.
Taxable Person: Any individual or entity that carries out an economic activity, whatever the purpose or results of that activity, and is subject to VAT.
Taxed Transactions: Economic activities carried out by a taxable person that are subject to VAT.
VAT (Value Added Tax): A consumption tax levied on the value added to goods and services at each stage of production and distribution.
Zakon za danak varhu dobavenata stoynost (ZDDS): The Bulgarian Law on Value Added Tax, which transposed Directive 2006/112/EC into national law and governed the VAT adjustment in the PIGI case.