Disappeared Traders and VAT Fraud: Lithuania Court Ruling

In another case before the Supreme Administrative Court of Lithuania, the dispute arose when the VAT tax administrator determined that UAB X and UAB Y had committed VAT fraud and that the applicant knew or should have known that he was participating in transactions related to VAT fraud and the increase of allowable deductions based on VAT invoices issued in the name of UAB X and UAB Y.

The Supreme Administrative Court of Lithuania stated that the court of first instance, in finding that the applicant knew or should have known that his transactions with UAB X and UAB Y were part of a VAT fraud chain, correctly identified the applicable law in the case.

It noted that the case had undoubtedly proven that UAB X and UAB Y had committed VAT fraud – they had acted as "missing traders", i.e. they forged documents (VAT invoices, diesel quality certificates), unidentified persons acted on their behalf, and the VAT declared in the VAT invoices issued to the applicant was not declared and/or paid in the VAT return for the period in question. When assessing whether the applicant knew or had the opportunity to know that he was participating in transactions related to VAT fraud, the evidence must be assessed as a whole and not separately, as is done in the appeal.

The Supreme Administrative Court of Lithuania stated that the case proved that both UAB X and UAB Y were newly established companies with minimal marketing, demonstrating the reality of their activities, assets, a place of business that inspired confidence, practically no real human resources, and activities (trade in diesel fuel) that were not declared as their activities. These circumstances are immediately apparent to an experienced market participant, so the applicant should have been particularly cautious with regard to UAB X and UAB Y before deciding to purchase fuel from new business partners, but, as can be seen from the case file, the appellant did not even establish the identities of the persons representing the suppliers. 

Recognition of Costs and Income Tax

In addition, it should be noted that in fraud cases, the court also points out that Article 11(4) of the Income Tax Act stipulates that expenses on the basis of which costs are recognised may only be based on legally valid documents that must contain all the mandatory accounting document details specified in the legislation governing accounting. In addition to these requirements, the documents supporting the expenses recognised as costs must also contain other additional requirements established by the Government of the Republic of Lithuania or its authorised institutions. 

The Supreme Administrative Court of Lithuania noted that these legal norms are important not only for a specific entity, but also for the tax and economic environment in general, i.e. they ensure that all participants in economic operations fulfil their tax obligations and that illegal activities, such as those in this case, are eliminated ( the trade in contraband or stolen diesel fuel or diesel fuel sold without paying the required taxes, and cannot be ignored by absolutising the principle of the primacy of content over form. 

Furthermore, in this case, company S recorded business transactions in its accounting records that did not take place between the specified economic entities under the specified conditions. Company S also included monetary amounts in its expenses based on accounting documents that had no legal force, i.e. Company S recorded business transactions in its accounting records that did not take place between the specified economic entities under the specified conditions. The circumstances of the case show that Company S does not have accounting documents that would reveal the true content of the disputed economic transactions – the actual participants in the transactions, the persons representing them, the origin of the diesel fuel, etc. In the absence of the actual content, there is no basis for applying the principle of substance over form.