ECJ Case C-791/22: Key Differences Between Import VAT and Customs Duties

The ECJ case between the Polish individual and the German Principal Customs Office is a curious example of which rules apply to the place of taxation when goods are imported from third countries to one EU country and then moved and sold in another EU country. In addition, the case differs and clarifies the application of the Customs Code and EU VAT Directive rules.

Background of the Case 

In 2012, a Polish resident, G.A., purchased and imported 43,760 cigarettes with Ukrainian and Belarusian tax stamps but no tax stamp from any EU country. He did not inform the Polish Customs Authority about this importation and transported the cigarettes to Brunswick, Germany, where they were sold to a German buyer.

During this transaction, the G.A. was arrested, and the cigarettes were seized and destroyed on the order of the Principal Customs Office in Brunswick (Customs Office) as unlawfully introduced into the EU's customs territory. In addition, the G.A. was fined EUR 2,006.38 for the import VAT due in Germany.

The G.A. unsuccessfully appealed against this decision and brought the matter to the Finance Court in Hamburg (Finance Court). However, the Finance Court had doubts about where import VAT occurred. While the Customs Office determined that the import VAT occurred in Germany, the Finance Council believed that the place of importation was Poland, the country where the cigarettes entered the economic territory of the EU.

The Finance Court added that for import VAT to be chargeable and collected in Germany, there would have to be a legal fiction about its place of incurrence. This rule from the German Law on Turnover Tax aligns with the provisions of the Customs Code, which allows the customs debt to be deemed incurred in the EU country where the debt was determined if the amount is below EUR 5,000.

However, the Finance Court's conclusion raised whether such a provision is consistent with the EU VAT Directive, prompting uncertainty about its compliance with EU law. From that point of view, the Finance Court was uncertain about the conflict of application of specific provisions from the Customs Code and EU VAT Directive. Therefore, it decided to refer a question for a preliminary ruling to the ECJ.

Main Questions from Request For Ruling

The main question raised before the ECJ was whether applying Article 215(4) of the Customs Code to import VAT under a national provision, meaning Germany, by analogy, violates the EU VAT Directive. More specifically, does that violate Articles 30 and 60 of the EU VAT Directive, which set a regulatory framework for determining the place of importation and taxation for VAT purposes?

In other words, the Finance Council asked ECJ to clarify whether aligning import VAT rules with customs debt provisions under national law conflicts with the requirements set under the EU VAT Directive, thus potentially undermining the EU-harmonized VAT system.

Applicable EU VAT Directive Article

Article 2(1)(d) of the EU VAT Directive, which defines transactions relating to importing goods as subject to VAT, is crucial in this case.

The second relevant article is Article 30, which defines the importation of goods as the entry of goods not in free circulation into the EU. In addition, Article 60 states that the place of importation of goods is the EU country where the goods are located upon entering the EU.

Furthermore, Articles 70 and 71 govern when VAT becomes chargeable for imported goods, which is vital for this case. Under Article 70, VAT is generally due when goods are imported. However, Article 71 provides exemptions to general rules for goods placed under specific customs arrangements, such as transit, temporary importation with exemption, or other similar regimes. Under these circumstances, VAT becomes chargeable only when those arrangements no longer cover goods.

Additionally, if imported goods are subject to customs duties, agricultural levies, or equivalent charges, VAT is chargeable simultaneously with those duties. EU Member States must align the timing of the VAT chargeable events with those that apply to customs duties when goods are not subject to any stated levies or duties.

Apart from provisions from the EU VAT Directive, Articles 202 and 215(4) of the Customs Code are relevant to this case. Under Article 202, a customs debt on importation arises at the precise moment when the subject goods are unlawfully introduced into the EU's customs territory.

Any person who unlawfully introduced the goods, participated in the unlawful introduction while being aware, or reasonably expected to be aware, of their illegality, or acquired or held the unlawfully introduced goods while being aware, or reasonably expected to be aware, of their illegal status at the time of acquisition may be seen as a debtor for customs purposes.

When the Customs Authority of one EU country determines that the customs debt arose under the circumstances described in Article 202 in another EU country and is less than EUR 5,000, the debt is considered to have been incurred in the EU country where the determination was made.

German National VAT Rules 

The only relevant article from German national legislation is Article 21(2) of the Law on Turnover Tax, which states that the governing rules for customs duties will also apply to import VAT, but with necessary adjustments.

Importance of the Case for Taxable Persons

The importance of this case lies in the fact that it clarifies rules surrounding the place of taxation of import VAT on goods, especially those unlawfully imported into the EU. It explains the interconnection of the EU VAT Directive and the Customs Code. It also resolves the conflicts that could arise from applying national rules in situations involving cross-border illegal goods transactions.

Moreover, the case clarifies whether the place of import VAT is tied to the EU country where goods enter the EU's customs territory, as stated in the EU VATDirective, or the EU country where Customs Authorities noticed the incurred customs debts, as allowed under the Customs Code. Understanding this is essential for all taxable persons to determine their VAT liabilities.

In addition, the case highlights when a Customs Authority of one EU country may claim VAT for action originating in another EU country.

Finally, the case between a Polish resident and a German Customs Office underlines the legal and financial risks of non-compliance with EU customs and VAT rules.

Analysis of the Court Findings

After carefully reviewing and citing relevant articles from the EU VAT Directive and Customs Code, the ECJ noted that the referred question raises the question of whether applying customs debt rules under the Customs Code to import VAT conflicts with EU VAT Directive provisions, especially in determining where VAT is incurred.

Moreover, the ECJ stated that to determine the link between customs and VAT legislation, it is necessary to examine the scope of applicability of the customs legislation. From that perspective, ECJ pointed out that, following the wording of the second subparagraph of Article 71(1) of the EU VAT Directive, this article applies only when a chargeable event occurs and VAT becomes chargeable. Furthermore, it does not mention customs legislation concerning the place of importation.

A literal interpretation of this article suggests that the reference to customs legislation only determines when a VAT chargeable event occurred and when VAT is due. However, it does not mention any rule for determining the place of importation, which is regulated by separate provisions.

The ECJ added that since Article 71 belongs to the chapter that defines the chargeable events and changeability of VAT, whereas it is Article 60 of the EU VAT Directive that deals with a place of taxable transactions rules, there is no link between EU VAT Directive and the Customs Code. More precisely, Article 71 does not define rules for determining the place of importation for charging VAT.

Nevertheless, the ECJ acknowledged that, due to the resemblance between import VAT and customs duties, VAT may be required in addition to customs duties for unlawful importation into the EU. In these cases, it is presumed that the goods entered the EU's economic territory and were consumed, which triggered VAT. 

However, that presumption can be disputed if it is proven that, although the customs law of one EU country is violated, the goods were put into circulation in the EU through another EU Country, where they were intended for consumption. In that case, the VAT chargeable event occurs in that other EU country.

In its case analysis, the ECJ considered the principle of territorial application of VAT, under which the revenue from import VAT belongs to the EU country where the final consumption occurs. In contrast, customs duties are allocated to the EU as a whole, regardless of which EU country collects them.

As the ECJ stated, the cigarettes entered the EU in Poland and were likely intended for consumption there. However, as the referring court, the Finance Court must verify this. If the Finance Court verifies this, following the case law, Poland is the country where import VAT is incurred.

If the place of importation were instead determined by applying Article 215(4) of the Customs Code, the VAT revenue would go to the country where the customs debt was determined, which in this case is Germany. However, this would contradict the principle of territorial application of VAT.

Furthermore, if the Finance Court verifies that the cigarettes were intended for consumption in Poland, the German authorities would need to share information about the seizure with the Polish authorities to prevent any potential tax loss in Poland, as EU regulations require.

Courts Final Decision

The ECJ concluded that the rules under the EU VAT Directive, specifically Articles 30, 60, and 71(1), do not allow national legislation to apply Article 215(4) of the Customs Code by analogy in determining where import VAT is incurred. In other words, the place of import VAT must be determined according to the EU VAT Directive and not using provisions that apply to customs duties under the Customs Code.

In this case, the place of import was Poland, meaning that import VAT was due in Poland and not Germany. Additionally, the German national rules the Customs Office applied when deciding were incompatible with the EU VAT Directive. Applying those rules would have prevented Poland from receiving VAT revenue to which it is entitled due to the principle of VAT application.

Conclusion

There are several takeaways from this case. The first is that import VAT and customs duties have different beneficiaries and purposes. While the customs duties belong to the EU irrespective of the EU country that collects it, the revenue from import VAT belongs to the EU country where the final consumption occurred.

The following takeaway underlines how important it is to align national laws with EU VAT legislation to establish and maintain a harmonized EU VAT system and how a misinterpretation or incompatibility between national and EU regulations can lead to inappropriate VAT distribution.

Finally, the case emphasizes the need for cooperation between EU countries to prevent tax losses and ensure proper VAT collection in case of unlawful importation.

Source: Case C‑791/22 - G.A. v. Principal Customs Office, Brunswick, Germany, EU VAT Directive, Council Regulation (EEC) No 2913/92, European Commission