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C-624/23

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European Union

Briefing document & Podcast: ECJ VAT C-624/23 (SEM Remont) – Ruling emphasizes strict VAT compliance and supplier registration importance

1 month ago
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7 min read

1. Executive Summary:

The CJEU ruling in the SEM Remont case addresses the complexities of VAT deduction when a supplier fails to register for VAT on time and subsequently issues a report (instead of a corrected invoice) declaring the VAT after a tax inspection. The Court concluded that the VAT Directive does not preclude Member State legislation that denies the recipient of a supply (SEM Remont) the right to deduct VAT in such circumstances. This decision highlights the importance of strict adherence to VAT invoicing requirements and due diligence regarding supplier VAT registration status.

2. Background:

  • Parties:
    • SEM Remont EOOD (Bulgarian company, recipient of services)
    • Gidrostroy – Russia OOD (Russian company, supplier of services)
    • Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ Varna pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite (Bulgarian Tax Authority)
  • Issue: SEM Remont sought to deduct VAT on invoices from Gidrostroy – Russia. Gidrostroy – Russia initially failed to include VAT on the invoices as they had not yet registered in Bulgaria. The Bulgarian tax authority later deemed Gidrostroy – Russia liable for VAT and, after a tax inspection, Gidrostroy – Russia provided a report (not a correcting invoice) declaring the VAT. SEM Remont sought to deduct this VAT but was denied by the Bulgarian Tax Authority.
  • Referring Court: Administrativen sad – Varna (Administrative Court, Varna, Bulgaria) referred questions to the CJEU regarding the interpretation of the VAT Directive and its compatibility with Bulgarian national law.

3. Legal Framework:

The case hinges on the interpretation of key articles of the VAT Directive (Council Directive 2006/112/EC) and the Bulgarian Law on Value Added Tax (ZDDS):

  • VAT Directive:
    • Article 63: Defines when the chargeable event occurs and VAT becomes chargeable.
    • Article 167: Stipulates when the right to deduct VAT arises (“A right of deduction shall arise at the time the deductible tax becomes chargeable.“).
    • Article 168(a): Grants the right to deduct VAT for taxable persons for goods and services used for taxed transactions.
    • Article 178(a): Sets the condition that a taxable person must hold a valid invoice to exercise the right to deduct (“In order to exercise the right of deduction, a taxable person must meet the following conditions: (a) for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Sections 3 to 6 of Chapter 3 of Title XI“).
    • Article 203: “VAT shall be payable by any person who enters the VAT on an invoice.”
    • Article 219: Defines a correcting invoice as a document that amends the initial invoice and unambiguously refers to it. (“Any document or message that amends and refers specifically and unambiguously to the initial invoice shall be treated as an invoice.“)
    • Article 226: Lists the required details on VAT invoices, including VAT identification number, quantity and nature of goods/services, date of supply, taxable amount, VAT rate, and VAT amount payable.
  • ZDDS (Bulgarian Law):Article 71: Conditions for exercising the right to deduct input tax, requiring a tax document with separately stated VAT.
    • Article 96(1): Requires VAT registration for taxable persons exceeding a certain turnover threshold (50,000 BGN or approximately EUR 25,600).
    • Article 102: Deals with cases where a person fails to register on time; the tax authorities will register said person by way of a registration decision, and the person will be deemed to be liable to pay tax on taxable supplies and intra-Community acquisitions.
    • Article 114: Specifies the details required on invoices.
    • Article 116: States that invoices that have been incorrectly drawn up or amended must be cancelled and reissued, and that issued invoices which should show VAT, but do not do so, shall also be regarded as documents which have been incorrectly drawn up.

4. CJEU’s Reasoning and Decision:

The CJEU ruled against SEM Remont, upholding the Bulgarian tax authority’s denial of VAT deduction. The Court’s reasoning can be summarized as follows:

  • Strict Adherence to Invoice Requirements: The Court emphasized that the right to deduct VAT is contingent upon holding a valid invoice that complies with Article 178(a) of the VAT Directive. The initial invoices from Gidrostroy – Russia did not include VAT, and the subsequent report provided by Gidrostroy – Russia during the tax inspection did not meet the criteria of a correcting invoice as defined in Article 219 of the VAT Directive, nor was it provided to SEM Remont. The report did not serve to correct the original invoices, as it was issued to the tax authority rather than to SEM Remont.
  • No Payment of VAT: The Court emphasized that SEM Remont had not actually paid the VAT in question to the supplier. Instead, SEM Remont had provided a loan to EIS – Stroitelna kompania (representative of Gidrostroy – Russia) to cover the VAT liability, and EIS – Stroitelna kompania then used that money to pay Gidrostroy – Russia’s VAT to the Bulgarian state. “It must be held that, in the case in the main proceedings, the VAT was not paid by SEM Remont and was not payable by SEM Remont.”
  • No Obligation to Correct Invoices: The court also determined that national legislation that prevents the correction of an invoice where the supplier provided an invoice without stating tax, and then produced a report stating the VAT and putting itself forward as both the supplier and recipient of the supply, is permissible.
  • VAT Neutrality Principle Not Absolute: While acknowledging the principle of VAT neutrality, the CJEU found that it did not override the need for strict adherence to invoice requirements in this particular case. The court noted that “the VAT Directive and the fundamental principle of neutrality of VAT require the deduction of input VAT to be allowed if the substantive requirements are satisfied, even if the taxable persons have failed to comply with some formal conditions.” However, because SEM Remont had not paid the VAT, and invoices were issued for a transaction carried out at a later stage by the supplier (and therefore not relating to a transaction SEM Remont was a party to), this principle could not be invoked.

The Court concluded that the VAT Directive “must be interpreted as not precluding legislation of a Member State under which the recipient of a supply subject to value added tax (VAT) is denied the right to deduct that tax… where the supplier… has failed to fulfil its obligation… to submit an application for registration for VAT purposes and issued for the recipient invoices not stating VAT, and… issued, during a tax inspection, a report stating that VAT and in which that supplier was put forward as also being the recipient of that supply.”

5. Implications:

  • Supplier Due Diligence: Businesses must conduct thorough due diligence on their suppliers, including verifying their VAT registration status and ensuring their invoices comply with both the VAT Directive and applicable national laws.
  • Importance of Correct Invoicing: The case reinforces the critical importance of issuing and holding valid VAT invoices with all required information. Documents like the “report” in this case are not a substitute for proper VAT invoices (or correcting invoices).
  • Risk of relying on uncorrected invoices: The SEM Remont case highlights the potential risks in relying on anything other than a proper invoice or a correcting invoice to substantiate VAT deduction claims.
  • Potential Stricter Interpretation: The CJEU’s decision may lead to stricter interpretations of VAT deduction rules by national tax authorities across the EU, particularly where formal requirements like proper invoicing are not met.
  • National Law Prevails: The court stated that it is not precluding national legislation that excludes the possibility of correcting an invoice when the supplier failed to register for VAT purposes and issued incorrect invoices.

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