Briefing document & Podcast: ECJ C-83/23 (H GmbH) – No double VAT refund; recipient must claim via supplier insolvency

1. Executive Summary:

The Court of Justice of the European Union (CJEU) ruled in Case C-83/23 that a recipient of a service is not entitled to directly claim a VAT refund from the tax authority of the Member State where they are established if the supplier incorrectly invoiced VAT, paid it to that Member State’s tax authorities, and those authorities have already refunded the VAT to the now-liquidated supplier. The Court emphasizes that requiring the tax authority to refund the VAT twice would place an unreasonable burden on them. The Court also pointed to the possibility of the recipient bringing a civil action against the supplier’s insolvency administrator, which the recipient had not pursued in this case. This decision clarifies the application of the principles of VAT neutrality and effectiveness in situations involving undue VAT invoicing, supplier insolvency, and differing places of supply.

2. Background:

The case originates from a request for a preliminary ruling from the Bundesfinanzhof (Federal Fiscal Court, Germany). The central issue concerns a German company, H GmbH, and its dispute with the Finanzamt M (Tax Office M, Germany) regarding the deduction of input VAT and a refund.

The dispute arose from sale-and-leaseback transactions involving motor boats. E-GmbH, another German company (now in liquidation), sold boats to H GmbH. The boats were located in Italy at the time of sale, but E-GmbH incorrectly invoiced German VAT. H GmbH initially deducted this VAT as input VAT. Subsequently, E-GmbH corrected the invoices by removing the German VAT, and the Tax Office X refunded this VAT to E-GmbH’s insolvency estate. H GmbH, denied the deduction of input VAT in Germany and unable to recover the VAT from E-GmbH due to its insolvency, sought a direct refund from the Tax Office M.

The Bundesfinanzhof referred questions to the CJEU regarding whether H GmbH had a “direct claim” against the German tax administration for the VAT refund, referencing the Reemtsma Cigarettenfabriken (C‑35/05) case law.

3. Key Issues and the Court’s Ruling:

The core issue is whether the recipient of a service (H GmbH) can directly claim a VAT refund from the tax authority when:

The supplier (E-GmbH) incorrectly invoiced and paid VAT in the wrong Member State (Germany).
The service was actually provided in another Member State (Italy).
The recipient is denied an input VAT deduction in their country of domicile because no tax is owed there.
The supplier corrected the invoice.
The recipient cannot recover the VAT from the supplier due to insolvency.
The supplier could register for VAT in the correct Member State (Italy) to issue a correct invoice.
The tax authority refunded the VAT to the insolvent supplier.

The CJEU ruled that the VAT Directive, interpreted in light of the principles of effectiveness and VAT neutrality, does not allow the recipient to directly claim a refund from the tax authority in these circumstances.

4. Reasoning and Key Arguments:

The Court’s reasoning can be summarized as follows:

VAT Neutrality and Deduction: The Court reaffirms the importance of VAT neutrality, stating, “The principle of VAT neutrality, which lies at the heart of the common system of VAT established by EU legislation, is ensured by the right of deduction which is intended to relieve the operator entirely of the burden of the VAT due or paid in respect of all its economic activities.”
Member State Discretion: The Court acknowledges that, absent specific EU provisions, Member States have discretion in setting the conditions for adjusting improperly charged VAT.
Reemtsma Cigarettenfabriken Distinction: The Court distinguishes the present case from the Reemtsma Cigarettenfabriken case law, which established that a direct refund claim might be possible if reimbursement from the supplier is impossible or excessively difficult, especially due to insolvency. The Court explains “In that judgment, as regards the question whether a recipient of services is entitled to request a refund of VAT from the supplier who has invoiced that VAT in error, and who could in turn seek a refund from the tax authority, or whether such a recipient must be able to address its request directly to that authority, the Court held that, in principle, a system in which, first, the supplier who has paid the VAT to the tax authorities in error may seek to be reimbursed and, second, the recipient of the services may bring a civil law action against that supplier for recovery of the sums paid but not due observes the principles of neutrality and effectiveness.”
Double Refund Prevention: The Court emphasizes that requiring the tax authority to refund the VAT to both the supplier (via the insolvency estate) and the recipient would create an undue burden: “If, in the event of VAT unduly invoiced and paid, a tax authority, at the request of the supplier of services, had already refunded the VAT, in accordance with the case-law resulting from the judgment of 15 March 2007, Reemtsma Cigarettenfabriken (C‑35/05, EU:C:2007:167), and also had to refund that VAT to the recipient of the services, the tax authority would be required to refund that VAT twice.”
Supplier’s Right to Refund: The Court reiterates the fundamental right of a supplier who incorrectly invoices and pays VAT to receive a refund. Preventing this would undermine the principle of VAT neutrality.
Order of Priority of Creditors: The Court clarifies that “The case-law arising from that judgment is not intended to call into question the order of priority of creditors in the context of liquidation proceedings.” The Reemtsma case law isn’t meant to circumvent the insolvency process.
Recipient’s Duty to Exhaust Other Remedies: The Court notes that direct refund claims are an exception, available only if recovery from the supplier is impossible or excessively difficult. The Court emphasized “However, if an unreasonable burden is not to be imposed on the tax authority, the tax authority cannot be required to take account of the fact that, in a situation such as that at issue in the main proceedings, the usual refund chain has been seriously disrupted, or even interrupted, by reason of the fact that the supplier was in liquidation, with the result that the VAT which was to be refunded to that supplier by the tax authority would become part of the insolvency estate and would risk not being refunded to the purchaser.”
Recipient Could Have Pursued a Civil Action: The Court highlights that H GmbH could have pursued a civil action against the insolvency administrator to obtain an invoice including Italian VAT, which they did not do. “Therefore, as the referring court noted, in the present case, the applicant in the main proceedings could, in order not to have to bear the cost of the VAT concerned, have brought a civil action against the insolvency administrator responsible for the liquidation of the supplier of the services with a view to having an invoice including Italian VAT drawn up, an action which it has not brought.”

5. Implications:

This ruling reinforces the principle that tax authorities are not required to refund VAT twice. It clarifies that direct refund claims by recipients are a limited exception, not a general right, and that recipients must actively pursue other available remedies, such as civil actions against insolvent suppliers, before seeking a direct refund. It also reinforces the tax authority’s ability to prioritize refunding taxes to the party that remitted them and who is in a liquidation process.