Briefing document & Podcast: ECJ C-271/06 (Netto Supermarkt) – VAT exemption granted if fraud undetectable with due commercial care

1. Core Issue:

The central question is whether Netto Supermarkt, a German supermarket, should be liable for VAT on goods claimed to be exported outside the EU when the export documentation was forged by the purchasers, and the supermarket, exercising “due commercial care,” could not have detected the fraud. The case revolves around balancing the prevention of VAT evasion with the protection of legitimate business expectations. As noted in the “Netto Supermarkt VAT Exemption: A Study Guide”, the case “explores the balance between preventing tax evasion and protecting legitimate expectations of businesses.”

2. Legal Framework:

Sixth VAT Directive, Article 15(2): This provision addresses VAT exemptions for goods dispatched/transported outside the Community by or on behalf of a non-EU purchaser. It requires Member States to set conditions to prevent evasion, avoidance, or abuse. The Netto Supermarkt VAT Exemption: Due Commercial Care document states, “Article 15(2) of the Sixth VAT Directive concerns the exemption of VAT for the supply of goods dispatched or transported to a destination outside the European Community…Member States have the responsibility to establish conditions for these exemptions, aimed at preventing tax evasion, avoidance, and abuse.”
German Law on Turnover Tax (UStG), Paragraph 6a(4): While not directly applicable to export supplies, Netto Supermarkt argued for the analogous application of this provision, which protects legitimate expectations in intra-Community supplies. It stipulates that if a supply is treated as tax-exempt based on incorrect purchaser statements undetectable by the operator, the supply remains tax-exempt, and the purchaser owes the tax.

3. Key Arguments and Positions:

Finanzamt (German Tax Authority): Initially refused VAT exemption because Netto Supermarkt could not provide adequate proof of actual export. They argued that Netto Supermarkt should have more diligently examined the export documents and prevented the long-lasting fraud. According to the Netto Supermarkt VAT Exemption: A Study Guide, “The Finanzamt argued that Netto Supermarkt should have examined the genuineness of the proofs of export earlier and, by showing proper care, could have prevented the fraud.”
Netto Supermarkt: Argued they exercised “due commercial care” and could not have detected the sophisticated forgery.

4. “Due Commercial Care”:

This is a central concept. The Court emphasized that if a supplier exercises reasonable diligence and caution, taking all reasonably required steps to verify the legitimacy of a transaction, they should not automatically be held liable for VAT if fraudulent documentation is later discovered, which they could not have detected. The Netto Supermarkt VAT Exemption: A Study Guide highlights, “if a supplier exercises it and still cannot detect fraudulent documentation, the Court ruled that the supplier should not automatically be held liable for VAT.”

5. General Principles of EU Law:

Relevant principles include:

Proportionality: Measures to prevent tax evasion must not exceed what is necessary to achieve the objective. Holding a supplier entirely responsible for VAT shortfalls caused by third-party fraud, especially when they acted in good faith and with due care, would be disproportionate. As noted in the original judgement, “whilst it is legitimate for the measures adopted by the Member State to seek to preserve the rights of the public exchequer as effectively as possible, such measures must not go further than is necessary for that purpose”
Legal Certainty: Legal rules should be clear, precise, and predictable, allowing businesses to understand their rights and obligations.
Protection of Legitimate Expectations: Businesses should be able to reasonably rely on the law.

6. Court’s Reasoning and Ruling:

The Court acknowledged that Member States have the power to lay down conditions for VAT exemptions to prevent abuse. However, they must respect general principles of EU law.
The Court distinguished VAT supplier responsibilities from those of operators subject to customs duties, citing structural differences between the systems. The judgement says “…case-law of the Court in the field of customs law – according to which an operator who cannot provide evidence that the conditions necessary for the grant of remission from export or import duties are satisfied must bear the consequences arising from that inability, despite having acted in good faith – cannot be relied on in a situation such as that in the case in the main proceedings…”
The Court ruled that Article 15(2) of the Sixth VAT Directive does not preclude a Member State from granting a VAT exemption even when the conditions are unmet due to forged export proofs, provided the taxable person could not have detected the forgery despite exercising due commercial care. The judgement states, “Article 15(2) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as not precluding a Member State from granting an exemption from value added tax on the supply of goods for export to a destination outside the European Community, where the conditions for such an exemption are not met, but the taxable person was not able to recognise – even by exercising due commercial care – that they were not met, because the export proofs provided by the purchaser had been forged.”

7. Implications:

The ruling offers more certainty for suppliers engaged in cross-border transactions. Businesses should not bear the burden of unforeseeable and undetectable fraud, as long as they have exercised “due commercial care.”

This suggests that businesses should not bear the burden of unforeseeable and undetectable fraud.