Briefing document & Podcast: ECJ VAT C-401/18 (Herst) – Cross-Border Fuel Transactions: Legal Determination of Ownership and Tax Jurisdiction

This document provides a detailed briefing on the Herst s.r.o. case (C‑401/18), focusing on the key themes, important facts, and legal principles involved. The case concerns the VAT treatment of fuel acquisitions by Herst s.r.o., a Czech company, within a chain of transactions involving intra-Community transport under an excise duty suspension arrangement. The document draws upon excerpts from the CJEU judgment and related explanatory materials.

I. Executive Summary

The Herst s.r.o. case clarifies the application of the VAT Directive (2006/112/EC) in the context of intra-Community acquisitions of goods, particularly where there is a chain of transactions with a single transport and an excise duty suspension arrangement. The CJEU emphasizes the importance of determining when the “right to dispose of goods as owner” is transferred, clarifying that this is not solely determined by physical possession or the conditions of excise duty. The Court also ruled against the application of the national legal principle of in dubio mitius if it contradicts the CJEU’s interpretation of EU law, underscoring the primacy of EU law and its uniform application.

II. Key Themes and Important Ideas

Intra-Community Acquisition vs. Supply of Goods: The core issue is differentiating between a domestic supply of goods and an intra-Community acquisition. The latter involves the movement of goods across borders between EU member states, and this distinction determines which state has the right to levy VAT. The Herst case centered on whether Herst’s fuel acquisitions should be considered internal Czech acquisitions or intra-Community acquisitions.
The “Right to Dispose of Goods as Owner”: The CJEU highlights this as the crucial element for determining when an intra-Community acquisition occurs. This right goes beyond physical possession and involves the power to make decisions affecting the legal status of the goods, such as selling or using them. “‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner.” (VAT Directive, Article 14(1)). The fact that the Herst case involved circumstances under which the fuel in question was subject to successive resales only complicated matters further.
Chain Transactions and Single Transport: The case addresses the complexities of VAT treatment when a single transport of goods is linked to multiple sales transactions. Only one transaction in the chain can be considered linked to the transport for VAT purposes. The CJEU has emphasized that, where there are chains of transactions for the sale of goods, a national court is required to undertake “an overall assessment of all the circumstances of the individual case.“
Excise Duty Suspension Arrangement: The arrangement allows the movement of excise goods without immediate payment of excise duties. The referring court questioned whether this affected the transfer of the “right to dispose of goods as owner.” The CJEU clarified that excise duty regulations do not supersede VAT rules. “[Directive 2008/118] in no way affects the conditions for the transfer of the right to dispose of those goods as owner, which is provided for by the VAT Directive.” (CJEU, paragraph 58)
In dubio mitius and the Primacy of EU Law: The Czech court considered applying in dubio mitius, a legal principle to interpret ambiguous laws in favour of the taxpayer. However, the CJEU ruled that national courts cannot apply this principle if it contradicts the CJEU’s interpretation of EU VAT law. “EU law precludes a national court that is confronted with a provision of national tax law…from adopting the interpretation that is most favourable to the taxable person by relying on the constitutional principle of in dubio mitius under national law, even after the Court has held that such an interpretation is incompatible with EU law.” (CJEU, paragraph 60). This is vital for ensuring the consistent application of VAT across the EU.

III. Key Facts of the Herst s.r.o. Case

Herst s.r.o. is a Czech company involved in road transport and fuel filling stations.
Herst transported fuel from other EU Member States (Austria, Germany, Slovakia, and Slovenia) to the Czech Republic.
Herst acted as both the carrier and the final purchaser of the fuel in a chain of purchase and resale transactions.
The fuel was transported under an excise duty suspension arrangement.
Herst argued that it only acquired the right to dispose of the fuel after it was released for free circulation in the Czech Republic, classifying it as an internal acquisition.
Czech tax authorities considered the transactions as intra-Community acquisitions, leading to VAT deduction refusals and penalties for Herst.
The Krajský soud v Praze (Regional Court, Prague) referred questions to the CJEU for a preliminary ruling.

IV. CJEU’s Ruling and Implications

The CJEU addressed the questions posed by the Czech court, providing the following key clarifications:

Transfer of “Right to Dispose as Owner”: A taxable person can acquire the right to dispose of goods as owner even if they are not the legal owner at the time of transport, if they have the power to make decisions affecting the legal status of the goods.
Overall Assessment: When determining which transaction in a chain is linked to a single intra-Community transport, national courts must conduct an overall assessment of all the circumstances. Factors to consider include who initiated the transport, who bore the transport costs, and who benefitted economically from the transport.
Excise Duty Suspension Irrelevant: The fact that goods are transported under an excise duty suspension arrangement is not a decisive factor in determining which supply is linked to the transport for VAT purposes.
In dubio mitius Cannot Contradict EU Law: National courts cannot apply the in dubio mitius principle to interpret national tax law in a way that contradicts the CJEU’s interpretation of EU VAT law.

The ruling emphasizes the importance of a consistent interpretation and application of the VAT Directive across all EU Member States. It provides guidance to national courts for determining the VAT treatment of complex transactions involving chain sales, intra-Community transport, and excise duty regulations. The ruling makes clear that the ultimate determining factor should be whose economic activity the transport is intended to support.

V. Questions for Further Consideration

To what extent does the Herst s.r.o. case provide sufficient clarity for businesses engaged in cross-border trade of excise goods within the EU?
What practical challenges remain for national tax authorities in applying the CJEU’s guidance in similar cases?
How does the CJEU’s emphasis on the “right to dispose of goods as owner” align with or diverge from traditional notions of ownership under national laws?
What impact does this ruling have on the balance between tax revenue collection and the facilitation of intra-Community trade?

See also