In December 2014, the ECJ has ruled in the Italmoda case (C-131/13) that EU Member States may refuse, in the context of an intra-Community supply, the benefit of rights granted under EU VAT law if the taxable person is participating, or could have known it is participating, in VAT evasion. The fact that the evasion was carried out in another EU Member State than that in which the benefits of those rights has been sought and that taxable person has complied with the formal requirements laid down by national legislation does not affect a refuse of these rights. Furthermore, it is up to the referring court to ascertain whether national law contains a provision or general principle prohibiting the abuse of rights or are related to tax evasion or tax avoidance and in case national law does not contain such provision/principle, authorities/courts may refuse a benefit derived from the EU VAT Directive (directly).

Facts and ruling

Italmoda is a Dutch company, which traded in shoes but also traded in computer hardware. Purchases were made locally and acquisitions were made from Germany. For the goods purchased in Germany, which were directly transported from Germany to business customers in Italy, Italmoda used its Dutch VAT identification number, but did not declare the transactions in any German or Dutch VAT return. In addition, the Italian business customers did not declare and pay the VAT due, regarding the Intra-Community acquisition.

The Italian Tax Authorities imposed a tax assessment and refused the right to deduct input VAT by the business customers in Italy. Furthermore, the Dutch Tax Authorities imposed tax assessments on Italmoda considering the fact that Italmoda participated actively in VAT evasion which was intended to evade VAT in Italy. As a result, they refused Italmoda the right to apply the exemption pertaining to intra-Community supplies effected in the Netherlands, the right to deduct input VAT and the right to get a VAT refund in respect of the goods originating in Germany.

Based on the facts above, the ECJ answers the following two preliminary questions of the Dutch Supreme Court:

  1. Should the national authorities and courts refuse to apply the benefit of the rights laid down by EU VAT law, on the basis of objective data, if it has been established that there has been VAT evasion in relation to the goods concerned and the taxable person knew or should have known that it was participating  in that VAT evasion.; and
  2. Should the aforementioned benefit of the rights also be refused if the VAT evasion occurred in another EU Member State and the taxable person complied all formal requirements which national statutory provisions impose?

Please be informed that the ECJ did not answer the questions in relation to Turbu.com (C-163/13) and Turbu.com Mobile Phones (C-164/13), because these were inadmissible.

Conclusion

According to the ECJ, EU VAT law must be interpreted that a taxable person may be refused, in the context of an intra-Community supply, to apply the exemption pertaining to an intra-Community supply, the right to VAT deduction or the refund of VAT, when the taxable person knew or should have known that it was participating in evasion of VAT committed in the context of a chain of supplies.1 The ECJ clearly stated that it needs to be determined whether such refusal of benefits can be based national law via a provision or general principle prohibiting the abuse of rights or are related to tax evasion or tax avoidance.  And that in case national law does not contain such provision/principle, authorities/courts may refuse a benefit derived from directly from the EU VAT Directive (or in our view via the EU principle of abuse of law). That consequence must be regarded as being inherent in the VAT system.

The fact that the evasion was carried out in another EU Member State than that in which the benefit of those rights has been sought and that taxable person has complied with the formal requirements laid down by national legislation, is not relevant in this respect.