Determining Taxable Persons in Partnerships: Case C‑796/23 Analysis

Case C‑796/23 between Česká síť, a Czech-based company, and the Czech Appellate Tax Directorate revolves around the application of national VAT rules to a civil law partnership. More precisely, the case examines whether the so-called “designated partner” in a partnership without legal personality can be held liable for VAT on services supplied by other partners, particularly when those other partners dealt directly with their end customers and acted in their own name.

Moreover, the proceedings raised broader questions about the interpretation of EU VAT law, specifically the identification of the taxable person and the allocation of VAT liability among partners in partnerships that are legally independent but economically linked.

Background of the Case 

In 2017, the company worked with three US companies that operated in the Czech Republic through branch offices to provide internet services to end customers. However, each branch office managed its own clients, acted under its own name, and reported its own income. The company’s sole partner signed contracts for these branch offices and included the company's contact details, such as the website and email address, in them. 

Additionally, in 2009 and 2010, the company transferred over 170 customers to these branches at no cost, provided the necessary infrastructure, and purchased the internet connections for the end users. Moreover, all customers accessed the internet through the same point, while the branch offices reported no physical or intangible assets or employee costs in the Czech Republic.

In November 2020, the Pilsen Regional Tax Office issued 12 VAT adjustment notices to the company for 2017. The Tax Office assessed an additional VAT of CZK 30,713 (approximately EUR 1,267) per month, totaling CZK 368,556 (approximately EUR 15,300), and imposed penalties totaling CZK 73,704 (approximately EUR 3,050). 

The main reason for these assessments was the findings of links between the company and the US companies’ Czech branch offices, and concluding that they formed a partnership in which Česká síť was the designated partner. As a result, the company was held liable for VAT not only on its own taxable supplies but also on those made by the branch offices, which were treated as partners in the same partnership.

Both the administrative appeals and the appeal before the Regional Court in Pilsen were dismissed, resulting in Česká síť appealing before the Supreme Administrative Court. Notably, even before reaching out to the Supreme Administrative Court, the company argued that the national VAT rules on partnerships in force at the relevant time were incompatible with the EU VAT Directive. 

As the company underlined, they allowed the Tax Authorities to hold them liable for VAT on the taxable activities of the branch offices solely on the basis that the branch offices were considered part of the same partnership. Given the specifics of the case, the company's arguments, and the Tax Authorities' claims, the Supreme Administrative Court decided to suspend the national proceedings and refer questions to the Court of Justice of the European Union (ECJ) for a preliminary ruling.

Main Questions from Request For Ruling

The Czech Supreme Administrative Court sought clarification on whether a national VAT scheme under which a designated partner of a partnership without legal personality is held liable for VAT on all partnership transactions is compatible with the EU VAT Directive, when another partner actually supplied the services and dealt directly with the end customer.

Additionally, the Court asked whether the answer depends on whether that other partner exceeded the rules on representing the partnership and acted in its own name when dealing with the customer.

Applicable EU VAT Directive Article

In addition to Articles 9(1) and 193, which were directly cited in the Supreme Administrative Court questions, the ECJ highlighted Articles 11 and 287 of the EU VAT Directive as the most relevant ones for settling this case. 

Articles 9 and 11 define who the taxable persons are and allow EU countries, after consulting the VAT Advisory Committee, to treat legally independent persons established within their territory as a single taxable person when they are closely linked financially, economically, and organisationally, while also permitting the adoption of anti-avoidance measures, respectively. 

Additionally, Article 193 establishes a general rule on when VAT is payable, and Article 287 allows EU countries that joined the EU after January 1, 1978, to exempt small taxable persons with turnover below certain thresholds, which in the Czech Republic is EUR 35,000.

Czech Republic National VAT Rules

The ECJ interpreted several key provisions of the Czech VAT Law and those of the Civil Code. Regarding the VAT Law, the most important provisions were Paragraphs 4a(3), 73(7), and 100(4), which were identified as the most relevant.

Importance of the Case for Taxable Persons

The importance of this case lies in its clarification of how VAT liability is determined in partnerships that lack separate legal personality under national law. Additionally, the case illustrates the interaction between national civil and tax law and EU-wide VAT regulation, showing that EU principles on the identification of taxable persons and on legal certainty for third parties must guide the interpretation and application of domestic VAT rules.

Analysis of the Court Findings

The first matter the ECJ addressed in analyzing this case was the interpretation of Article 9 of the EU VAT Directive. Accordingly, the ECJ stated that, under settled case law, the term “any person who” confers a broad scope on the notion of a taxable person, focused on independence in carrying out an economic activity.  Consequently, all persons, natural, legal, public, or private, who objectively meet the criteria in Article 9 must be regarded as taxable persons for VAT purposes.

However, when identifying who qualifies as a taxable person for a particular transaction, it is essential to determine who has independently carried out the economic activity, as this allocation ensures that the person or entity concerned can exercise VAT deduction rights with legal certainty. To determine this, it is necessary to assess whether they carry out an economic activity in their own name, on their own behalf, under their own responsibility, and bear the associated financial risk.

Whether the branch offices at issue were carrying out the economic activity independently or not, the ECJ left it for the Supreme Administrative Court to determine. However, the ECJ provided guidance based on the case file and the written observations submitted.

After carefully considering all the facts and both the national and EU-wide applicable VAT rules, the ECJ and Advocate General noted that it cannot be ruled out that, given the existence of close links, national laws implementing Article 11 could, in principle, allow Česká síť and the branch offices to be treated as a single taxable person. However, for this to apply, the distribution of sales among these four companies must result from a purely artificial arrangement constituting abuse. 

If such abuse were established, the small business exemption would not apply because the combined turnover of the companies would exceed the relevant threshold. Nonetheless, if the abuse is not found, the Supreme Administrative Court could, as set out in the established case law, decide whether Česká síť or the branch offices qualify as taxable persons for VAT purposes under Article 9(1) of the VAT Directive with respect to the services supplied by the branch offices.

More specifically, if it is established that they provided those services independently of Česká síť, acting in their own name, on their own behalf, under their own responsibility, and bearing the associated economic risk, branch offices are to be considered taxable persons.

The ECJ also made one additional critical remark, adding that it is particularly significant that the branch offices, in their dealings with third parties, generally presented themselves without directly identifying the partnership or Česká síť as the contracting party, even though some elements in the contracts could indirectly point to Česká síť. 

Regarding the second question, the ECJ stated that the fact that the branch offices did not act under the partnership’s formal representation rules is irrelevant for establishing whether Česká síť or the branch offices themselves are liable for VAT on the services provided. 

The ECJ also added that, once the Supreme Administrative Court complets its assessment, if it concludes that the branch offices are indeed liable under Articles 9(1) and 193 of the EU VAT Directive, then that provision would prevent the VAT liability from being imposed on Česká síť under national law solely because it is the designated partner of a partnership that includes those branch offices.

Courts Final Decision

Based on all facts, cited case-law, and interpretation, the ECJ ruled that Articles 9(1) and 193 of the EU VAT Directive must be interpreted as precluding national legislation under which a partner in a civil law partnership without legal personality, the so-called “designated partner”, is automatically held liable for VAT on services supplied by the other partners. 

The ECJ added that this applies even when those other partners dealt directly with their end customers and acted in their own name, departing from the civil law rules on representing the partnership, as such national rules cannot override the principles established by the EU VAT Directive regarding who is the taxable person. Regarding the second question of whether the branch offices’ deviation from national civil law rules on representing the partnership affects the determination of VAT liability, the ECJ answered negatively.

Conclusion

Even though the regulators and legislators aim to set and define VAT rules and requirements clearly, the reality is that trade and business agreements and practices are complex, which ultimately affect VAT liability and compliance. The case between Česká síť s. r. o. and Appellate Tax Directorate showcases the importance of assessing who actually carries out economic activity independently, who assumes the associated financial risk, and how this affects the identification of taxable persons for VAT purposes.

Source: Case C‑796/23 - Česká síť s. r. o. v Appellate Tax Directorate, EU VAT Directive