The Czech tax authorities lose a landmark case concerning VAT refunds at the EU Court of Justice. A creditor in VAT-taxable commercial transactions within the internal market is thus entitled to have the taxable base for the VAT calculation adjusted, even if the debtor is no longer subject to VAT.
The case concerned a decision made by the Czech tax authorities, Odvolací finanční ředitelství, which partially rejected A-PACK, a Czech VAT-taxable company, from obtaining a VAT refund. A-PACK had requested a refund of EUR 21,000. The background was that A-PACK had a number of unpaid invoices for goods and services that the company had supplied to some customers in the period from 30 October 2008 to 2 February 2009. The invoices included deliveries to the customer, Delpharmea Nutraceuticals, which had subsequently become subject to bankruptcy proceedings and, as a result, had ceased to be subject to VAT.
In the decision, the tax authorities reduced the claimed amount to EUR 1,600. They justified the reduction on the grounds that the Czech VAT rules did not allow VAT refunds with regard to the unpaid invoices for the VAT-taxable transactions relating to Delpharmea Nutraceuticals, as this company had ceased to be subject to VAT in connection with the bankruptcy proceedings.
After first bringing the decision before the Tax Appeals Directorate and then before the Prague City Court, Městský soud v Praze, without success, A-PACK appealed the case to the Supreme Administrative Court of the Czech Republic, Nejvyšší správní soud, where it is now pending. This court was in doubt as to whether it was compatible with EU VAT rules that the Czech VAT rules did not allow VAT refunds in the case in question. It therefore decided to stay the proceedings and refer this question to the EU Court of Justice for a preliminary ruling.
The EU Court of Justice began by establishing the starting point, which is that the tax authorities of the Member States are obliged to reduce the taxable base and thus the amount of VAT that a VAT-taxable company must pay. This applies in all cases where a VAT-taxable company, after carrying out a VAT-taxable transaction with another VAT-taxable company, only obtains part of the consideration for the transaction or does not obtain any consideration at all. This starting point is an expression of a fundamental EU law principle of VAT neutrality. That VAT must be neutral means that the same tax must be paid, regardless of how many stages of trade a product passes through. The tax must ultimately be borne by consumers. This is achieved through deductions and the possibility of having the VAT paid refunded. Against this background, the principle presupposes that the taxable base for the VAT calculation corresponds to the consideration actually received, as VAT would otherwise not be neutral. The tax authorities of the Member States may therefore not collect an amount in VAT that is higher than the amount that the VAT-taxable company has received in consideration.
The EU Court of Justice noted that, according to EU VAT rules, it is however possible for the tax authorities of the Member States to derogate from the starting point in the event of non-payment or only partial payment of the consideration. That is to say, in some cases it may be relevant not to grant a full VAT refund. For example, it may be relevant for the tax authorities of the Member States to counteract the uncertainty that may exist as to whether a non-payment is final. However, such a derogation must be in accordance with the EU law principle of proportionality. The principle implies that a derogation must not go beyond what is necessary. According to the EU Court of Justice, it would go further than necessary if a derogation allows the tax authorities of the Member States to simply exclude VAT refunds in any case where payment has not been made. This would also exclude VAT refunds in cases where there is no doubt that payment will never be made. For example, in a situation where a debtor has ceased to be subject to VAT in connection with bankruptcy proceedings.
The EU Court of Justice then noted that, in the case in question, a derogation such as that laid down in the Czech VAT rules could not be considered justified in counteracting the uncertainty as to whether a non-payment is final. On the contrary, the fact that Delpharmea Nutraceuticals had ceased to be subject to VAT in connection with the bankruptcy proceedings rather substantiated that the non-payment was final. As a result, there was no doubt that there would be no repayment in the situation in question.
Furthermore, the EU Court of Justice noted that the derogation in the Czech VAT rules could also not be justified on the grounds that it was strictly necessary to pursue the objectives of ensuring the correct collection of VAT and avoiding fraud, which are pursued by the EU’s VAT rules. The fact that, in the case in question, any possibility of obtaining a VAT refund was excluded, after which the creditor was ordered to bear an amount of VAT that the VAT-taxable company in question had not received as consideration, exceeded what could be considered strictly necessary to fulfil the objectives of correct collection of VAT and to avoid fraud.
On this basis, the EU Court of Justice then stated that the question asked by the Administrative Court should be answered to the effect that EU VAT rules preclude VAT rules such as the Czech ones, which stipulate that a VAT-taxable company cannot obtain a VAT refund in the event of non-payment or only partial payment from a debtor, if the debtor is no longer subject to VAT. For example, if the debtor is subject to bankruptcy proceedings.
On the basis of the EU Court of Justice’s judgment, it is clear that a creditor in commercial relations in the internal market in the EU, including Danish companies, is entitled to have the taxable base for the VAT that the companies must pay in connection with the implementation of a VAT-taxable transaction with another VAT-taxable company adjusted, if the creditor only obtains part of the consideration for the transaction or does not obtain any consideration at all. Thus, EU law, including EU VAT rules, ensures that companies’ liquidity, profitability and competitiveness are not affected when companies in the internal market enter into transactions with each other. This applies, inter alia, if one of the companies goes bankrupt. The common VAT rules within the EU are thus extremely central to the functioning of the internal market with free movement of goods and services, as VAT may otherwise hinder trade between the Member States.