ECJ Case C-664/21: VAT Exemption, Timely Document Submission & Tax Compliance

ECJ cases involve many real-life situations that are hard to predict with any regulatory framework. In some cases, like case C‑664/21, the reason for a dispute may be that too many entities were involved in the business operations and that, due to a lack of documentation, taxable persons may be liable for additional VAT.

The Nec Plus Ultra Cosmetics AG and the Republic of Slovenia case clarified VAT exemption rules for intra-EU transactions when the goods were stored only in Slovenia and not sold to Slovenian consumers but to consumers in other EU countries.

Background of the Case 

Nec Plus Ultra Cosmetics AG (Nec) is a Swiss-based cosmetics company that, in 2017, made supplies for consumers in Croatia and, on one occasion, for Romanian consumers. The Nec underlined that a Croatian purchaser or third party acting on the purchaser's behalf was responsible for handling cosmetic products stored in a Slovenia warehouse.

Products were transported from other EU countries to the Slovenian warehouse, where those supplies were VAT-exempt, following national VAT regulations.

However, in 2019, the Slovenian Tax Authority reviewed supporting documents on supplies of goods and services made in other EU countries and requested that Nec provide all the relevant documents for these supplies. Nec only submitted invoices and copies of consignment notes for goods transported into Slovenia from other EU countries but could not provide delivery notes and other relevant documents. This was because Nec did not have those documents and was still in the process of obtaining them. 

The issue was that some documents were in the Nec office in Hamburg, Germany, which was closed in 2018. This office handled Croatian deliveries. Nevertheless, Nec submitted the requested documents later.

Based on the documents provided, the Tax Authority issued a report on tax inspection to Nec and demanded that the company pay additional VAT for 2017. The Tax Authority claimed the VAT exemption conditions on the supplies in question were not satisfied.

Nec appealed against the decision, but the Second Instance Tax Authority and later the Administrative Court upheld the conclusions and decision made by the Tax Authority.

In the end, Nec appealed against the decision before the Slovenian Supreme Court, which ultimately referred a request for a preliminary ruling to the ECJ.

Main Questions from Request For Ruling

The Supreme Court's main issue was whether the EU VAT Directive, specifically Articles 131 and 138(1), and the principle of tax neutrality prevent national laws from restricting the submission and collection of new evidence. 

Moreover, can national laws prohibit taxable persons from providing additional proof to meet requirements during the administrative procedure, especially when responding to a tax inspection report before a formal tax notice is issued?

Applicable EU VAT Directive Article

Two articles from the  EU VAT Directive were the most relevant for the case between Nec and the Republic of Slovenia. The first is Article 131, which states that VAT exemptions outlined in Chapters 2 to 9 must be applied under conditions set by each EU country.

The second relevant article from the EU VAT Directive is Article 138(1), which specifies that EU countries must exempt the supply of goods transported to another EU country if the transport is carried out by or on behalf of the seller or buyer. As an additional condition, the receiving party must be another taxable person or a non-taxable legal entity acting in a different EU country from where transport began.

Slovenia National VAT Rules

In this case, several different laws and their respective articles had to be considered: Article 46 of the VAT Law, Articles 140 and 141(1) of the Law on Tax Procedure, Article 238(3) of the Law on General Administrative Procedure, and Article 52 of the Law on Administrative Disputes.

Article 46 is equivalent to Article 131 of the EU VAT Directive and defines what supplies are exempt from VAT payment.

Article 140 of the Law on Tax Procedure defines the tax inspection procedure, relevant deadlines for the Tax Authority and taxable persons, and requirements and deadlines for late submission of required documents. Additionally, 141(1) states that the Tax Authority must issue either a tax assessment notice or decision identifying irregularities that do not affect the amount of tax owed after completing the tax inspection.

Article 238 (3) of the Law on General Administrative Procedure underlines in which cases and under which conditions new evidence and facts may be presented in administrative appeals. Similarly, Article 52 of the Law on Administrative Disputes provides the same information for court actions.

Importance of the Case for Taxable Persons

The dispute between the Nec and the Republic of Slovenia, specifically its Tax Authority, underlines the importance of taxable persons keeping ownership of their supply chain and having complete control over documents relevant to, in this case, VAT exemption.

Additionally, this case shows how important it is to understand national rules and regulations, especially when EU countries have the right to independently regulate certain VAT areas.

When taxable persons depend on their customers to provide necessary documents, it is paramount to monitor VAT compliance closely. Insufficient or inaccurate record-keeping may cause issues during the tax audit, the consequences of which are shown in this ECJ case.

Analysis of the Court Findings

The first that ECJ highlighted in its ruling is that according to its case law on the right to deduct VAT, the VAT system must maintain tax neutrality across all economic activities. In other words, as long as the activities are generally subject to VAT, they should be treated equally, regardless of their purpose or outcome.

Moreover, the right to deduct and refund VAT is integral to the VAT system and, in principle, may not be limited. Under the principle of neutrality, a taxable person is entitled to deduct or receive a refund of input VAT if they meet substantive requirements. This right should not be denied even if the taxable person fails to meet specific formal requirements.

The only reason to deny this right is if failure to meet requirements prevents a taxable person from providing conclusive evidence that the substantive conditions are satisfied.

The ECJ underlined that in the main proceedings of the presented case, the dispute does not refer to the failure to meet formal requirements that would prevent proving the right to VAT exemption, set in Article 138(1) of the EU VAT Directive. Instead, the dispute is when the taxable person, Nec, is allowed to submit supportive documents confirming its claim for the VAT exemption.

The ECJ also added that case law does not prevent EU countries and their national governing bodies from accepting the necessary evidence, such as supporting documents, after making the decision. However, national legislation must comply with two EU regulatory principles. 

The first is equivalence, meaning that national rules cannot be less favorable than those applied to similar domestic cases. The second principle is effectiveness, which means that national rules or measures must not make it practically impossible or excessively difficult to exercise EU rights.

From that perspective, the ECJ concluded that EU countries may deny a VAT exemption if the taxable person fails to provide the required documentation within the given deadlines, as long as the national rules comply with the principles of equivalence and effectiveness.

The ECJ further added that refusing to consider evidence proving that conditions for VAT exemptions on intra-EU supplies are met contrasts the principle of tax neutrality. It cannot be restricted as one of the fundamental principles of the common EU VAT system, and ignoring valid evidence undermines it. Furthermore, Tax Authorities must uphold the principle when denying exemptions early in the tax procedure.

Although Tax Authorities may refuse to consider supportive documents submitted by a taxable person before the tax assessment notice is issued, such a refusal must be justified by specific circumstances. These circumstances may include the absence of a valid reason for the delay or the loss of tax revenue caused by the delay.

Refusing to consider such supporting documents may put taxable persons in a difficult position to exercise their EU law rights and limit their ability to prove that they meet the substantive conditions for a VAT exemption.

This means that national laws that prevent taxable persons from submitting outstanding documents without considering the valid reasons for the delay are inconsistent with the EU principles of proportionality and VAT neutrality.

For this particular case, this means that since the tax inspection report is not the final decision but an interim procedural step meant to inform the taxable person of the findings, supporting documents provided in this early stage should be considered before the final tax assessment is issued.

Courts Final Decision

The ECJ decided that Articles 131 and 138(1) of the EU VAT Directive and the principles of tax neutrality, effectiveness, and proportionality do not prevent national laws from prohibiting the submission of new evidence during the administrative procedure, specifically after the tax inspection stage but before the adoption of a tax assessment notice.

However, for such a national law measure to be valid, it must respect equivalence and effectiveness principles.

In this case, if Slovenian national law respects the said principles, it may stipulate that Slovenian Tax Authorities may deny taking into account new evidence, such as Nec’s supporting documents, submitted after a tax audit and before issuing a VAT or tax assessment notice, if the Supreme Court determines that the principle of equivalence is respected.

Conclusion

In the end, although the Nec provided the documents that supported its claims for the VAT exemption since it did not do it on time, the Tax Authority exercised its right to deny supporting documents submitted late. Moreover, the ECJ ruled that Slovenia had the right to impose such a measure as long as certain fundamental EU VAT principles were met.

This decision highlights the delicate balance between EU-wide VAT rules and national tax procedures. Further, it reaffirms that national legislators must balance procedural discipline with the fundamental rights of taxable persons under EU law, ensuring that legitimate claims are not unfairly rejected due to procedural deadlines.

Source: Case C‑664/21 - Nec Plus Ultra Cosmetics AG vs Republic of Slovenia, EU VAT Directive