ECJ Case C-180/22: Mensing Ruling on EU VAT Margin Scheme & Taxable Amount

The case between Harry Mensing, a German-based art dealer and gallery operator, and the Hamm Tax Office is curious because it focuses on applying a margin scheme to artwork supplied to him from other EU countries. More specifically, the case relates to whether an EU-wide law excludes the application of national VAT rules and regulations.

This case is not the usual one, which draws attention to it, as it refers to less common issues and questions regarding the application and interpretation of VAT rules and where two separate ECJ rulings were made upon the requests of two different German courts.

Background of the Case 

In 2014, Mr. Mensing received artwork from artists throughout the EU. The artists declared these supplies exempt intra-EU supplies in their respective EU countries, whereas Mr. Mensing paid VAT according to intra-EU acquisition rules.

However, Mr. Mensing requested the Hamm Tax Office (Tax Office) to apply a margin scheme to those supplies, which the Tax Office declined. The reason for such a decision is that the Tax Office underlined that the German Law on Turnover Tax states that the margin scheme could not apply to the supply of goods acquired by the dealer as part of the intra-EU acquisition if the same supply was previously exempt in another EU country as intra-EU supply.

Besides denying the right to subject these supplies to a margin scheme, the Tax Office also made Mr. Mensing liable for an additional VAT.

Mr. Mensing found that the decision made by the Tax Office was based on national legislation that is contrary to EU-wide rules and regulations and brought the case before the Finance Court in Münster, further asking for direct application of Article 3016(1)(b) of the EU VAT Directive.

The Finance Court doubted how to interpret and apply national and EU VAT rules and referred a request for a preliminary ruling to the ECJ. Following the ECJ ruling in case C-264/17, the Finance Court ruled in favor of Mr. Mensing, stating that the taxable amount must be determined according to EU law. Moreover, in its ruling, the Finance Court concluded that, based on provisions from the EU VAT Directive, turnover tax is part of the purchase prices and, therefore, reduces the profit margin under the margin scheme.

However, the Tax Office was not satisfied with such a decision. It appealed the ruling to the German Federal Finance Court (FFC), stating that the turnover tax on intra-EU acquisitions should not reduce the taxable amount. The grounds for such a statement Tax Office found in the Advocate General Szpunar’s (Advocate General) Opinion in C-264/17 Mensing case, which underlined that discrepancy in the EU VAT Directive. 

As the Advocate General stated, the discrepancy refers to the fact that while the EU VAT Directive allows the deduction of import VAT from the selling price for imports from third countries, no equivalent provision exists for intra-EU acquisitions, thus creating a loophole.

The FFC noted that under the national legislation, turnover tax can be considered when determining the taxable amount for a margin scheme through an EU law-consistent interpretation of the Law on Turnover Tax. Nevertheless, the FFC was uncertain whether it, as the final instance court, could interpret this in such a way as to exclude intra-EU acquisition tax from the taxable amount when a taxable person applies the margin scheme under the EU VAT Directive.

Therefore, the FFC paused the court proceeding and referred a request for a preliminary ruling to the ECJ.

Main Questions from Request For Ruling

The FFC referred two questions to the ECJ. The first question was whether the taxable amount should be determined solely under the EU VAT rules. Moreover, if so, does this mean that a provision from national law cannot be interpreted to exclude intra-EU acquisitions tax from the taxable amount?

The second referred question by the FFC asks if the taxable amount under the margin scheme must be determined exclusively based on EU law, should then Article 311 of the EU VAT Directive be interpreted to mean that the tax due on an intra-EU acquisition reduced the profit margin. Additionally, the FFC questioned whether there is an unintended loophole in the EU regulatory framework that can only be addressed by legislative action at the EU level rather than by establishing a rule through a case law.

Applicable EU VAT Directive Article

Recitals 4, 7, and 51 of the EU VAT Directive highlight that the directive aims to harmonize turnover tax rules and regulations across the EU to prevent competition distortions and ensure the free movement of goods and services. 

Additionally, despite differences in VAT rates and exemptions, the Recitals underline that the VAT system should maintain tax neutrality so that similar goods and services are subject to the same tax burden. Furthermore, a special taxation system established for second-hand goods, artwork, antiques, and collectibles prevents double taxation and competitive imbalances among taxable persons.

The relevant articles from the VAT Directive include Article 193, which states that VAT is generally payable by the taxable persons making the supply unless specific exemptions apply. Chapter 4 of the EU VAT Directive outlines special arrangements for second-hand goods, artwork, collectors' items, and antiques, including the margin scheme.

The margin scheme ensures that VAT is only applied to the profit margin rather than the whole selling piece, where the taxable amount is the difference between the selling and the purchase price, with VAT deducted from the profit margin. Under Article 316, taxable dealers may opt into the margin scheme for particular transactions, such as acquiring or importing artwork from their creators. However, EU countries may set detailed rules for its application.

Article 317 confirms that when the taxable dealer wants to apply the margin scheme, the taxable amount is determined following the rules set in Article 315, whereas for imported artwork, the purchase price includes both the taxable amount and VAT paid upon importation.

Germany National VAT Rules

Regarding German national VAT rules, Article 25 of the Law on Turnover Tax is a centerpiece of the dispute. It outlines the margin scheme for taxing the supply of movable tangible property under specific conditions. These conditions include the dealer acquiring the property within the EU as someone who trades goods and the fact that such property was either VAT-exempt or subject to the margin scheme.

Additionally, dealers may opt to apply the margin scheme to imported artwork, antiques, and collectors' items or to artwork purchased from a taxable person who is not a dealer.

The law states that the difference between the selling and purchase prices determines the taxable amount. VAT is not included in the taxable amount, but the purchase price for imported artwork includes import VAT. For taxable domestic acquisitions, the taxable amount includes the supplier's VAT.   

The Article further emphasizes that the margin scheme does not apply if the dealer acquires goods under an intra-EU supply exemption or if the transaction involves a new vehicle. If the margin scheme is applied in another EU country, the intra-EU acquisition is not subject to VAT. Finally, if the margin scheme is applied, other VAT rules, such as distance selling and the exemption for intra-EU supplies provision, cannot apply.

Importance of the Case for Taxable Persons

The case and ruling, originating from the dispute regarding applying the margin scheme for artwork, addressed the compatibility of national and EU-wide VAT regulations. They raised an essential question about treating intra-EU acquisitions under the margin scheme and whether national tax regulations can contrast with the EU Directive when determining the taxable amount for VAT purposes.

The outcome of this case clarifies how VAT is calculated for taxable persons engaged in cross-border transactions involving artwork, second-hand goods, and antiques. The case underlines the need for consistent application of the rules defined under the EU VAT Directive to ensure fair competition and prevent distortions.

Analysis of the Court Findings

The ECJ started examining the case by answering the second question raised by the FFC. The ECJ concluded that RU VAT provisions clarify that when a taxable person, such as an art dealer, opts to use a margin scheme under the EU VAT Directive, the taxable amount is determined based on the profit margin, which is the difference between the selling and purchase prices of the goods. 

Furthermore, the VAT related to the profit margin is excluded from the taxable amount, which means that the VAT is only applied to the profit margin, not the entire selling price.

The ECJ noted that Article 312 of the EU VAT Directive defines the selling and purchase prices for margin scheme transactions. The distinction between them means that VAT paid on intra-EU acquisitions is not considered part of the purchase price when calculating the margin scheme. 

Furthermore, as defined by Article 315, the VAT on the profit margin must be subtracted from the profit margin of the taxable dealer. The VAT refers to the tax the dealer must pay on the sale of the artwork and does not include the tax the dealer paid during the intra-EU acquisitions, which is part of the purchase price. 

From there, it is concluded that only the VAT associated with the actual sale of the artwork is considered when calculating the taxable amount under the margin scheme. Consequently, VAT paid on the initial purchase of an artwork is not considered. Therefore, there is no need to exclude the tax from the taxable amount when applying the margin scheme to the sale.

However, Mr. Mensing and the European Commission argued that a strictly literal interpretation of the VAT Directive's Articles overlooks the provisions' goal and context. The Commission noted that interpreting Article 312 as excluding VAT paid on an intra-EU acquisition from the purchase price could avoid double taxation and competition distortion. Such an interpretation would ensure the aimed fairness, regardless of whether the artwork was acquired domestically, from another EU country, or from a third country.

While the ECJ empathized with the importance of considering the context and objectives of the EU regulations, it added that the interpretation of a provision must respect its clear and precise wording. Thus, the ECJ cannot deviate from the evident meaning of a provision.

From that perspective, the principle of neutrality cannot override the precise wording of the EU VAT Directive and go beyond its specific provisions. Moreover, the ECJ highlighted that any changes or extensions of such kind must be made by the EU legislature, not through case law. 

Courts Final Decision

On the second question raised by the FFC, the ECJ ruled that, based on the precise wording of the EU VAT Directive, it could not deviate from the interpretation that VAT paid by the taxable dealer for an intra-EU acquisition of artwork, which is later supplied under the margin scheme, is considered part of the taxable amount of that supply.

This decision results in artwork purchased by a taxable dealer from another EU country being treated less favorably than artwork purchased within one country or from a third country. More specifically, the VAT on the in-state or import purchases reduces the margin for sales. Although this is less favorable for those engaged in intra-EU transactions, the ECJ could not take any other ground due to the wording of the VAT Directive.

Conclusion

The case of Mr. Mensing versus the Hamm Tax Office illuminated a critical issue concerning applying the VAT margin scheme for artwork for intra-EU acquisitions. In the end, the ECJ ruled that, due to the precise wording of the EU VAT Directive, VAT paid on intra-EU acquisitions forms part of the table amount of the subsequent supply of artwork.

What seemed like a loophole and unfair practice was confirmed as a precisely intended rule not subject to broader interpretations, which could only be changed by legislative action, not case law.

Source: Case C‑180/22 - Hamm Tax Office v Harry Mensing, EU VAT Directive