General Court – T-569/25 (X-GmbH) – Judgment – VAT Margin Scheme: Good Faith of the Taxable Dealer Must Be Examined in the Tax Assessment Procedure

On October 14, 2026, the General Court issued its decision in the case T-569/25 (X-GmbH).

Context: Reference for a preliminary ruling – Taxation – Common system of VAT – Margin scheme – Article 314 of Directive 2006/112/EC – Refusal by the national tax authorities to grant a taxable person the right to apply the margin scheme – Good faith – National special procedure – Principle of effectiveness

Summary

Facts: X-GmbH, a German dealer in jewellery and watches, applied the VAT margin scheme to the resale of watches acquired from suppliers whose invoices stated that the margin scheme had been applied. Following an audit, the tax authorities concluded that the suppliers had incorrectly applied the scheme because the watches were new goods and denied X-GmbH the right to use the margin scheme. The taxpayer’s good faith could only be examined in a separate equitable procedure under German law.
Issue: Whether Article 314 of Directive 2006/112/EC, read in light of the principle of effectiveness, allows a Member State to examine a reseller’s good faith only in a separate discretionary equity procedure rather than in the VAT assessment procedure itself.
Question Referred: The Bundesfinanzhof asked whether EU law precludes a national practice under which a reseller’s good faith regarding compliance by its supplier with the conditions of the VAT margin scheme is considered only outside the tax assessment procedure, in a distinct equitable procedure.
Decision: The Court held that Article 314 of the VAT Directive, read in the light of the principle of effectiveness, precludes such a national practice. A reseller’s good faith must be capable of being examined within the tax assessment procedure and cannot be relegated exclusively to a separate discretionary fairness procedure.
Argumentation: Relying primarily on Litdana (C‑624/15), the Court confirmed that a dealer who receives an invoice referring to the margin scheme may rely on that scheme unless the tax authorities prove lack of good faith or failure to take reasonable precautions against VAT fraud. The Court found that the German procedural separation could lead to duplicated litigation costs, lengthy delays, and evidential disadvantages for taxpayers. These procedural burdens made the exercise of rights derived from Article 314 excessively difficult and therefore infringed the EU principle of effectiveness.

Article in the EU VAT Directive

Article 314 in the EU VAT Directive 2006/112/EC

Article 314
The margin scheme shall apply to the supply by a taxable dealer of second-hand goods, works of art, collectors’ items or antiques where those goods have been supplied to him within the Community by one of the following persons:
(a) a non-taxable person;
(b) another taxable person, in so far as the supply of goods by that other taxable person is exempt pursuant to Article 136;
(c) another taxable person, in so far as the supply of goods by that other taxable person is covered by the exemption for small enterprises provided for in Article 284 and involves capital goods;
(d) another taxable dealer, in so far as VAT has been applied to the supply of goods by that other taxable dealer in accordance with this margin scheme.

Facts & background

Company Involved: X-GmbH is a German business that sells jewellery and watches. For the years 2013 and 2014, it applied the VAT margin scheme under Paragraph 25a of the German Turnover Tax Law (UStG), which is meant for second-hand goods, works of art, and collectors’ items.
Nature of Goods: The company purchased watches from suppliers who indicated on their invoices that the margin scheme applied. X-GmbH then resold these watches and calculated VAT using the margin scheme, which taxes only the profit margin—not the full sale price.
Tax Authority’s Position: The German Tax Office later rejected this approach, arguing that the watches were not second-hand goods and that the suppliers had wrongly applied the margin scheme. As a result, X-GmbH was told to pay VAT on the full sale price.
⚖️ Procedural Dispute: X-GmbH claimed it had acted in good faith, relying on the suppliers’ invoices. However, German law only allows good faith to be considered in a separate equitable procedure (under Paragraphs 163 and 227 AO), not during the main tax assessment.
EU Law Conflict: The referring German court questioned whether this separation of procedures violates EU law, specifically Article 314 of Directive 2006/112/EC, which governs the margin scheme. The concern was that this national practice might undermine the principle of effectiveness and the protection of legitimate expectations.

Questions

Having regard to the principle of effectiveness, does Article 314 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax preclude a national practice which takes into account only outside the tax assessment procedure, in the context of a separate equitable procedure, the dealer’s good faith in the satisfaction of the requirements for the right to apply the margin scheme on the part of its supplier, where the supplier has indicated on its invoice that it has applied the margin scheme to the supply made to the dealer?

AG Opinion

None

Decision

Article 314 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2010/45/EU of 13 July 2010, read in the light of the principle of effectiveness, must be interpreted as precluding a national practice which does not take into account the reseller’s good faith as regards compliance, by its supplier, the conditions for the application of the margin scheme in the tax assessment procedure, in the course of which the tax authorities establish the facts of their own motion and take into account all the circumstances material to the case, including those favourable to the parties, but which takes it into account only in the context of a separate procedure in which the tax authorities examine the grounds of fairness invoked by the reseller, exercise its discretion and adopt a separate administrative decision.

ECJ Cases referred to

Flashback on ECJ Cases – C-624/15 (Litdana) – Conditions under which a margin scheme is applicable – VATupdate

Source

Curia

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Detailed Briefing: EU VAT Margin Scheme, Good Faith, and Procedural Effectiveness

Date: October 26, 2023

Subject: Review of recent General Court judgment on the VAT Margin Scheme and the principle of effectiveness, alongside insights from VATupdate.com.

Introduction and Context

This briefing reviews a significant judgment from the General Court concerning the application of the EU VAT Margin Scheme, specifically focusing on the interplay between a reseller’s good faith and national procedural effectiveness. It highlights a ruling that scrutinizes national administrative practices which may impede a taxpayer’s ability to exercise rights derived from EU law. We also note the existence of resources like VATupdate.com, which aim to provide clarity on such complex EU VAT legal developments.

VATupdate.com: A Key Resource for EU VAT Law

The first source introduces VATupdate.com as a crucial platform for professionals dealing with EU VAT law. It is positioned as a central hub for “clear, timely, and expertly curated insights into the latest ECJ, CJEU, and General Court VAT rulings.” The platform targets a broad audience including tax advisors, lawyers, academics, and compliance professionals, offering “concise case summaries, legal analysis, and relevant updates—all in one place.” Its stated purpose is to “Cut through legal jargon and get straight to what matters,” emphasizing its essential role for informed decision-making based on EU VAT case law.

General Court Judgment: VAT Margin Scheme, Good Faith, and Procedural Effectiveness (Case T-569/25)

The core of this briefing is the Judgment of the General Court (Second Chamber) dated 14 October 2026, in Case T-569/25, involving X-GmbH against Finanzamt Y (Germany). This case addresses a preliminary ruling request concerning the interpretation of Article 314 of Council Directive 2006/112/EC (the “VAT Directive”) in light of the principle of effectiveness.

3.1. The EU VAT Margin Scheme

Purpose: Article 313(1) of the VAT Directive establishes a “special system for taxing the profit margin made by the taxable dealer” for the supply of second-hand goods, works of art, collectors’ items, or antiques. This scheme derogates from the general VAT system (Paragraph 26).
Taxable Amount: As per Article 315, the taxable amount is the “profit margin made by the taxable dealer, less the amount of VAT relating to the profit margin itself,” calculated as the difference between the sales price and the purchase price.
Conditions for Application (Article 314): The margin scheme applies when a taxable dealer acquires eligible goods from specific types of suppliers:
A non-taxable person.
Another taxable person whose supply of the goods was exempt (Article 136).
Another taxable person whose supply was covered by the exemption for small enterprises (Articles 282-292) and related to capital goods.
Another taxable dealer who had already applied the margin scheme to their supply.
Underlying Principle: A commonality among these supplier types is that they “were in no way able to deduct the input tax paid on the purchase of those goods and therefore bore that tax in full” (Paragraph 28), ensuring VAT is not repeatedly levied on the full value.

3.2. The Dispute in the Main Proceedings

X-GmbH, a German reseller of jewellery and watches, applied the margin scheme for certain products. Following an inspection, Finanzamt Y concluded that X-GmbH had unduly benefited because its suppliers had wrongly applied the scheme (the products were deemed new, not second-hand). The tax authorities therefore recalculated X-GmbH’s VAT under the normal regime.

The national courts upheld this, stating that German law (Paragraph 25a of the UStG) “did not provide for the protection of the taxpayer’s good faith when examining compliance with the conditions laid down in that paragraph” in the context of the tax assessment procedure (Paragraph 11). Protection of legitimate expectations or good faith, it was held, could only be granted through a separate “equitable procedure” (Paragraphs 163 and 227 of the AO).

X-GmbH appealed, arguing that referring it to this separate equitable procedure for examining its good faith was contrary to the principle of effectiveness of EU law.

3.3. Good Faith and the Burden of Proof in VAT

The General Court reiterated established jurisprudence on good faith in VAT matters:

General Refusal: National authorities must generally refuse the margin scheme if conditions are not met, especially if fraud or abuse is established (Paragraph 30). This applies when a taxable person “knew or should have known that, by the transaction concerned, he was participating in a VAT fraud committed by his supplier or another operator upstream or downstream in the supply chain” (Paragraph 31).
Limits on Tax Authorities: However, tax authorities “cannot generally require of the taxable person wishing to exercise the right to apply the margin scheme, first, that he verify, in particular, that the issuer of the invoice relating to the goods in respect of which the exercise of that right is requested has fulfilled his obligations to declare and pay VAT or has fulfilled other conditions for the application of that scheme, in order to ensure that there are no irregularities or fraud at the level of upstream operators, nor, secondly, that he has documents to that effect” (Paragraph 32).
Good Faith Protection: Crucially, Article 314 of the VAT Directive “precludes national authorities from refusing a taxable person who has received an invoice bearing references to the margin scheme the right to apply that scheme, even if it results from a subsequent check carried out by those authorities that the taxable dealer who supplied the goods had wrongly applied that scheme, unless the competent authorities establish that the taxable person did not act in good faith or did not take all reasonable measures in his power to ensure that the transaction he was carrying out did not lead him to participate in tax fraud” (Paragraph 33, emphasis added).

3.4. Principle of Effectiveness and National Procedural Autonomy

The Court emphasized that, in the absence of specific EU rules, national legal systems define the procedures for applying EU law, subject to two key principles (Paragraph 35):

Principle of Equivalence: National procedures must not be less favorable than those governing similar domestic situations.
Principle of Effectiveness: National procedures must not render the exercise of rights conferred by EU law impossible or excessively difficult.

The referring court specifically questioned the German national practice under the principle of effectiveness.

3.5. General Court’s Assessment of Procedural Disadvantages

The General Court analyzed the procedural disadvantages stemming from the German practice of addressing good faith only in a separate equitable procedure, distinct from the initial tax assessment:

Excessive Costs: The separate procedures can lead to “doubling of the costs” for legal assistance, administrative appeals, and court actions. Litigation values can be double-counted for court fees, and additional costs are incurred for further appeals (Paragraphs 40-43). The Court noted that such costs “may be disproportionate for the taxable person and discourage him from bringing legal proceedings” (Paragraph 44).
Undue Duration: The practice can prolong the total duration of the proceedings “by several years,” significantly delaying judicial protection regarding the right to apply the margin scheme (Paragraph 45). The tax authorities may even wait for a final judgment on the tax assessment before considering good faith in the equitable procedure.
Limited Evidentiary Scope: In the equitable procedure, typically “only the elements presented by the taxable person in support of his request are examined” (Paragraph 47). This may hinder the effective examination of good faith, especially given that the burden is on the authorities to establish bad faith or failure to prevent fraud (Paragraph 46).

3.6. General Court’s Ruling

The General Court concluded that a national practice characterized by these elements (excessive costs, undue delays, limited evidentiary scope) is “likely to render excessively difficult, for the taxable person concerned, the exercise of the right to apply the margin scheme” (Paragraph 48).

Therefore, the Court ruled:

“Article 314 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2010/45/EU of 13 July 2010, read in the light of the principle of effectiveness, must be interpreted as precluding a national practice which does not take into account the reseller’s good faith as regards compliance, by its supplier, the conditions for the application of the margin scheme in the tax assessment procedure, in the course of which the tax authorities establish the facts of their own motion and take into account all the circumstances material to the case, including those favourable to the parties, but which takes it into account only in the context of a separate procedure in which the tax authorities examine the grounds of fairness invoked by the reseller, exercise its discretion and adopt a separate administrative decision.” (Paragraph 50)

Main Themes and Key Takeaways

Protection of Taxpayer’s Good Faith: The judgment strongly reaffirms that a reseller acting in good faith, who relies on an invoice indicating the margin scheme, cannot be denied the scheme even if their supplier erred, unless the tax authorities prove bad faith or participation in fraud.
Principle of Effectiveness: National procedural rules, while autonomous, must not undermine EU-derived rights. Procedures that are excessively costly, lengthy, or have limited evidentiary scope can be deemed ineffective and thus incompatible with EU law.
Integration of Good Faith Assessment: The Court mandates that the assessment of a reseller’s good faith concerning the margin scheme should occur within the primary tax assessment procedure, where all relevant facts and circumstances (including those favorable to the taxpayer) are considered.
Limits on Discretionary Equitable Procedures: Relying solely on separate, discretionary equitable procedures for good faith considerations is problematic if these procedures impose significant burdens on the taxpayer, effectively making the exercise of their EU rights “excessively difficult.”
Burden of Proof: The judgment reinforces that tax authorities bear the burden of proving bad faith or participation in fraud to deny the margin scheme to a reseller who has reasonably relied on their supplier’s indications.

Implications

This ruling has significant implications for national tax administrations within the EU. It requires them to ensure that their procedural frameworks for challenging VAT assessments adequately integrate the principle of taxpayer good faith within the primary assessment process, rather than relegating it to separate, potentially burdensome, or discretionary procedures. Businesses, particularly those dealing in second-hand goods, can find stronger protection against being unduly penalized for supplier errors, provided they act in good faith and take reasonable precautions. This judgment underscores the ongoing vigilance of the EU courts in safeguarding the practical application of EU law across Member States.