Belgium - VAT Fraud Penalties are Contrary to EU Law According to ECJ Advocate General

The case of Dranken Van Eetvelde NV vs. The Belgian State, brought before the European Court of Justice, saw the Advocate General (AG) deliver a significant critique of Belgium's handling of VAT fraud penalties.

This is not the first time Belgium has been criticized for its strict penalty policy for VAT fraud, which many consider disproportionate.

Case Background and Possible Implications of AG Criticism

The case of Dranken Van Eetvelde NV (DVE) and its involvement in VAT fraud appeared in public in 2011 when it was determined that false invoices were issued related to the supply of drinks to retail customers in the hospitality industry. Later, these customers sold drinks off the books, meaning that payments were not officially recorded, so no tax was paid.

During the investigation, it was determined that DVE issued invoices for supplies to non-existent customers at the stated addresses and never received the ordered drinks and beer kegs. The actual recipients of the supplies were pub owners, whose identity could not be later on, who sold these supplies without ever reporting the turnover, thus evading VAT and other taxes.

After conducting the investigation, the Belgium Tax Authority held DVE jointly liable for its buyers' unpaid VAT, although DVE correctly reported the VAT on made supplies. This resulted in a 200% fine imposed on wrongdoers for fraudulent activity, tax reassessment, and correction of previously incorrect reclaimed VAT.

The DVE appealed against such a decision, stating that imposed joint liability and a 200% fine is disproportionate, especially when it was not directly involved in VAT fraud committed by third parties. The competent court in Ghent asked the European Court of Justice to assess the facts of the case and make a preliminary ruling on whether Belgium's law contrasts EU law, particularly the EU VAT Directive and the principle of proportionality.

The AG gave his opinion on four preliminary questions, stating that regarding joint liability for VAT obligations,  the EU VAT Directive may require a third party to be jointly liable for the due VAT, but only for correctly proved VAT debt. In this concrete case, the VAT debt was presumed and not properly proved, contrary to the EU VAT Directive.

Furthermore, the  AG stated that a 200% fine is disproportionate and may cause a substantial financial burden to the DVE since it exceeds the amount of the VAT debt.  Combining the initial VAT liability with a 200% penalty results in almost five times the original debt. Therefore, a 200% fine violates the principle of proportionality. 

Conclusion

It remains to be seen what the ECJ's final decision will be. However, with the ongoing criticism of Belgium's approach to dealing with VAT frauds, if the ECJ follows the arguments presented by the AG, taxpayers may see some relief from unfair financial burdens when settling VAT fraud disputes in Belgium.

Furthermore, the AG's questioning of the joint liability application could also reshape how the Belgium Tax Authority and competent courts will solve these cases.

Source: Curia - Case C‑331/23, TaxLive