On 19 July 2012, the Court of Justice of the European Union (CJEU) ruled that the supply of timber by an individual constitutes an economic activity. (case C-263/11 Ainars Redlihs). Such supply is being regarded as exploitation of tangible property, which is intended to generate income on a continuous basis.

In the subject case, an individual owned a private forest in Latvia which was damaged by storms. These storms caused the individual to sell timber in 2005 and 2006. According to the Latvian tax authorities, with these sales of timber, the individual qualified as an entrepreneur for VAT purposes. Since that individual failed to register as such, the tax authorities imposed a penalty of 18 percent on the value of the supplies of the timber. This percentage corresponded to the then applicable VAT rate in Latvia. The individual appealed against the penalty and stated that the sales of timber should not be considered an economic activity since the sales were incidental, non-profitable and only for the compensation of storm damage or force majeure.

The Latvian court asked the CJEU whether the sales of timber should be qualified as an economic activity for VAT purposes and whether the individual should be considered an entrepreneur for VAT purposes. Furthermore, the Latvian Court asked the CJEU whether a penalty of 18 percent for not registering for VAT purposes is compliant with the principle of proportionality.

The CJEU decided that an entrepreneur for VAT purposes is any person who, in any place, independently carries out any economic activity, regardless of the purpose or results of that activity. The first condition, independence, ensures that employed persons cannot qualify as VAT entrepreneur. In this case, there is no employment contract or any similar agreement, and the individual carried out his activities independently. Furthermore, the supplies of timber can be qualified as an economic activity for VAT purposes in case these supplies have been effected for the purpose of obtaining income on a continuous basis. This is an issue of fact and should be assessed by the national court, taking into account all circumstances of the case at hand. In this respect, the national court should determine whether the individual takes active steps in forestry management by mobilizing resources, like a producer or trader. The fact that sales were effected only to compensate damage due to force majeure is not relevant in this respect.

As regards the second question, the CJEU decided that member states may impose appropriate sanctions in order to avoid fraud and ensure the correct levying and collection of VAT. Whether a specific sanction should be considered as appropriate depends on whether such sanction takes into consideration the nature and the degree of seriousness of the infringement. In the case at hand, the penalty of 18 percent intends to penalise the individual for not registering for VAT purposes instead of ensuring the correct levying and collection of VAT. Member states can use other methods to ensure collection of VAT. The situation that the amount of the penalty equals the amount of due VAT could mean that the procedure for determining the penalty amount may go further than is necessary to penalise an individual for not registering for VAT. It is up to the national court to factually determine if such a penalty is appropriate.