ECJ-judgment dated 26 January 2011 (C 218/10) / ADV Allround (Germany)

A German supplier provided services to Italian recipients. The tax place was controversial. The tax office in Hamburg assessed German VAT (tax place in Germany). The supplier paid the VAT and invoiced it to his recipients. The recipients applied for input VAT refunds but were denied by the German Federal Tax Office (BZSt). The BZSt took the view that the supplies were not subject to German VAT (tax place in Italy).

Insolvency and appeal of supplier

As a consequence, the recipients refused to pay VAT to the supplier. The supplier went insolvent and appealed to the lower tax court of Hamburg. The court asked the European Court of Justice (ECJ) if the tax place was in Germany. The ECJ confirmed this. In consequence the supplier indeed owed the VAT to his tax office.

Tax court asks about neutrality principle

Unfortunately the recipients still could not get VAT refunds from the Federal Tax Office as appeals were no longer possible. The tax court of Hamburg realised that it could also not integrate the Federal Tax Office or the recipients in the court proceedings (between the supplier and his tax office) in a way ensuring VAT refunds to the recipients. Based on the tax court of Hamburg's analysis of German tax procedural laws, the laws currently do not provide for such an option. This led the tax court of Hamburg to raise the issue before the ECJ questioning whether the German legal system violated the neutrality principle.

ECJ accepts violation but principally allows contradicting assessments

The ECJ confirmed that the two contradicting VAT assessments (tax place in Germany and in Italy) were not both in line with European law. Only one decision could be correct. But German procedural law overall did not violate European law. It was sufficient that the recipients could have appealed to tax courts in Germany, and the responsible German court could have referred the question about the tax place to the ECJ.

Lessons to learn

For taxpayers it would have been better news if the ECJ ruled that German law must strictly prevent final VAT burdens resulting from contradicting VAT assessments, be it at least by way of a waiver or other means. Instead the ECJ basically allowed contradicting assessments as long as the taxpayer has a fair chance to take legal action.

As a result, taxpayers ought to ensure in such situations that both tax assessments remain "open" until the main appeal is finally assessed. Thus the supplier and recipient keep their options to demand a refund either of the VAT (supplier) or the input VAT (recipient) once the legal controversy has been finally decided. This can be relevant for all kinds of VAT controversies, be it about the tax place, a VAT rate, or a VAT-exemption.

Admittedly, in some cases it may be difficult to keep both procedures open, and have one of them rested until the other one has been decided. For cases where simultaneous legal actions might become too difficult to pursue for the parties (where e.g. an authority refuses to rest an appeal), we would conclude from the ECJ-decision in ADV that the Member State would be obligated to provide neutrality by other means then: (i) e.g. by a prolonged deadline for a national appeal or (ii) by at least granting a "restitutio in integrum" allowing e.g. the recipient to reopen his assessment on the input VAT. A number of more options to provide neutrality may be possible under national laws. The ECJ, however, was not explicit in this regard but merely pointed out that it would be unacceptable if VAT neutrality was extraordinarily difficult to achieve in any Member State.