ECJ Ruling: Poland's VAT Exemption for Cross-Border Imports Invalid

The case between a Polish company that provides freight forwarding and customs clearance services and the Polish Tax Authority dives into the applicability of VAT exemptions in cases where the recipient of the imported goods is located in another EU country, that is, not residing in Poland.

More specifically, the case concerns the interpretation of EU VAT law regarding the exemption of small consignments of goods of a non-commercial nature sent by private individuals from non-EU countries to private recipients within the EU, and whether the Polish VAT rules conflict with EU-wide rules.

Background of the Case 

The dispute between the freight forwarding and customs clearance services company, L., and the Polish Tax Authority began with the company's request to the Tax Authority regarding whether the importation into Poland of goods in a consignment between individuals is exempt from VAT under the Polish VAT Law. However, the critical fact of the request was that the consignee, that is, the recipient of imported goods, resides in another EU country.

While the L. considered that the VAT exemption provision applied even though the recipient of the imported goods was located in another EU country, the Tax Authority, and later the Regional Administrative Court, determined that there were no grounds for applying the exemption. The main reason, as stated by both instances, was that the recipient was located in another EU country, not Poland.

L. appealed against the Regional Administrative Court's decision to the Supreme Administrative Court (Supreme Court). The Supreme Court held that, under EU case law, the location where goods enter the EU does not affect their eligibility for VAT exemption and that the VAT exemption should apply regardless of the EU country in which the recipient is located. However, the Supreme Court noted that Polish case law interprets the VAT exemption differently.

As the Supreme Court stated, Poland views VAT rules on imports as tied to the recipients’ residence within the EU, even if the physical import occurs in Poland. Due to the conflict of interpretation between the European Court of Justice (ECJ) and Poland's national case law, the Supreme Court decided to refer a question for a preliminary ruling to the ECJ.

Main Questions from Request For Ruling

The question referred for a preliminary ruling asks whether provisions from the EU regulatory framework, specifically Article 143(1)(b) of Directive 2006/112, Article 1 and recital (3) of Directive 2006/79, and Article 25 of Regulation No 1186/2009, conflicts Article 52(1) of Poland’s VAT law.

The Supreme Court further added that the national VAT law denies VAT exemption for goods imported into Poland when they are part of a consignment sent from a non-EU country by one individual to another individual residing in a different EU country.

Applicable EU VAT Directive Article

The ECJ had to take a broader view to answer the question referred by the Supreme Court. Therefore, the ECJ considered Article 1(1) of the Council Directive 78/1035/EEC on the exemption from taxes of imports of small consignments of goods of a non-commercial character from third, that is non-EU, countries.

This Article, as well as Article 29(1) of the Council Regulation (EEC) No 918/83, states that small consignments of goods sent by private individuals from a non-EU country to private individuals within an EU country are exempt from turnover tax and excise duty upon import.

Directive 2006/79 builds on earlier EU legislation by reaffirming that small non-commercial consignments sent by private individuals from non-EU countries to private individuals within the EU should be exempt from turnover tax and excise duty. Article 1 of the Directive outlines clear conditions that must be met for this exemption to apply.

Additionally, the ECJ highlighted the importance of Article 32, 86(1)(b), 143(1)(b), and 163 of the EU VAT Directive for this case. These articles stated that VAT is applied where the goods enter the EU, not where they are eventually delivered, clarifies that the taxable amount for VAT includes incidental costs, requires EU countries to exempt from VAT the final importation of goods covered by specific directives, such as Directive 2006/79, and define when EU countries must act to prevent double taxation, respectively.

Finally, Regulation No 1186/2009 complements these VAT rules by providing customs relief. As the most relevant for this case, the ECJ outlined Article 25, which provides an exemption for small non-commercial consignments sent by a private person from outside the EU to another private person within the EU from import duties, and Article 133(1) which confirms that the older Regulation No 918/83 is repealed and replaced by this newer regulation.

Poland National VAT Rules

Regarding the Polish VAT Law, Article 52, which is the main article in question, provides a VAT exemption for the importation of goods sent from a non-EU country by a private individual to another private individual residing in Poland, provided that specific conditions are met. The conditions apply only to non-commercial goods, where the recipient does not pay the sender for the goods, and the consignments are sent infrequently.

Importance of the Case for Taxable Persons

Considering that the provision from the Polish national VAT Law differs from the EU rules and regulations, and that it could lead to incompatibility with EU laws, the ECJ's interpretation of EU VAT exemption rules for imported small consignments and how these rules interact with national legislation, the final decision provides clarity on VAT exemptions.

This further impacts the operational consequences for taxable persons that are involved in freight forwarding and customs clearance operations, such as courier companies or customs agents. Notably, depending on the Court's decision, taxable persons who were charged and paid VAT in contravention of EU rules may be eligible to seek refunds or benefit from future VAT exemptions.

Analysis of the Court Findings

From the ECJ's perspective, the central question raised by the Supreme Court is whether EU rules and regulations prevent EU countries from denying VAT exemption on small, non-commercial consignments sent from a non-EU country by one private person to another, simply because the recipient resides in a different EU country from where the goods are imported.

While the Directive 2006/79 applies to small consignments of a non-commercial character sent from outside the EU by private individuals to other private individuals in an EU country, the issue in question is whether this exemption applies only when the recipient lives in the same EU country where the goods enter the EU, or whether it also applies when the goods are imported into one EU country but intended for a private individual in another.

Therefore, the ECJ noted that a broader context and the objectives that the VAT exemption aims to achieve must be considered, rather than focusing solely on the literal wording of the provision.

In its analysis, the ECJ stated that several language versions of this provision, such as Spanish, Danish, German, English, French, Italian, Dutch, Romanian, and Swedish, use either a generic term “Member State” or includes an indefinite article, without specifying that the recipient must reside in the same EU country where the goods are imported. From this linguistic perspective, the law was not meant to restrict the exemption to cases where the recipient is located in the importing EU country, but rather to apply broadly to any EU country.

From a legal context, the ECJ determined that the exact wording was used in earlier legal instruments, including Directive 78/1035 and the initial 1975 proposal for a directive on tax exemptions for small non-commercial imports from non-EU countries. These earlier legal texts consistently used the same broad formulation and were later replaced by Directive 2006/79.

Taking into account this fact, it can be concluded that EU legislature never intended to tie the VAT exemption to a specific destination within the EU, and that the goal was to allow private individuals in any EU country to receive small non-commercial consignments from outside the EU without being subject to import tax, provided the set conditionals are met.

After carefully examining the interconnection between the relevant article and provisions from Directive 2006/79, Regulation No 918/83, and the EU VAT Directive, the ECJ determined that the prime purpose of the VAT exemption, as laid out in the explanatory memorandum to the original Directive, is to simplify and facilitate personal low-value exchanges between private individuals across borders. 

More precisely, the primary objective of this VAT exemption is to facilitate the exchange of goods that often possess sentimental value, have limited economic significance, and are typically already taxed in the country of origin.

Courts Final Decision

Following the wording, that is linguistic analysis of the provision, as well as the broad legal and purposive context, the ECJ concluded that the provision must be understood as prohibiting any national legislation to deny the VAT exemption for small non-commercial consignments sent from outside the EU by private individuals to other private individuals living in a different EU country from where the goods are imported.

In other words, the recipient's place of residence does not limit VAT exemption, and EU countries may not restrict the exemption simply because the recipient resides in a EU country other than the one where the goods are imported.

Conclusion

Ultimately, the ECJ decision suggests that the Polish national VAT rules conflicted with EU-wide rules and regulations. Additionally, the decision highlights the importance of considering a broader context when interpreting EU VAT rules, rather than focusing solely on the literal wording. 

Instead, EU countries should consider not only the linguistic context, but also the objectives and legal context of provisions when implementing EU laws into national legislation. This approach ensures that rules are implemented and applied in a harmonized way, respecting the borderless nature of VAT exemptions within the EU, which should establish seamless cross-border personal exchanges without undue taxation.

Source: Case C‑405/24 - L. s.c. v Director of National Tax Information, Poland, EU VAT Directive, Directive 78/1035/EEC, Regulation (EEC) No 918/83, Directive 2006/79