ECJ Rules Against Germany on VAT Refund Practices – Case C-371/19

Most ECJ cases include an individual or business entities appealing the decision of the EU countries' national Tax Authorities and Courts, which result in a request for a preliminary ruling submitted by the final ruling national courts to the ECJ. 

However, in the present case, the European Commission was the one who brought the legal action against Germany for violating EU rules and regulations by systematically refusing to request the information missing in a VAT refund request of foreign taxable persons, which led to immediate rejection if the missing information were submitted after the initial submission deadline.

Background of the Case 

After receiving a complaint about the practice of the German Tax Authorities regarding how it handled VAT refund requests from taxable persons from other EU countries, the European Commission (Commission) sent in 2016 a formal letter to Germany about its violation of the taxable persons' right of VAT refund.

In its formal letter, the Commission underlined that following the Article 20(1) of Directive 2008/9, EU countries must request additional information from the taxable persons before rejecting VAT refund claim if the information provided is incomplete or insufficient. Moreover, systematically rejecting VAT refund claims due to incomplete information without asking for any clarification contrasts the EU VAT Directive, particularly Articles 170 and 171.

However, in response to the formal letter, Germany denied the allegations. It stated that EU VAT rules and regulations do not oblige EU countries to request missing information, and it was solely the responsibility of the taxable person to provide necessary information when requesting a VAT refund. Additionally, Germany stated that since 2014, it has stopped immediately rejecting VAT refund requests when supporting documents are incomplete or missing.

In its two letters to the Commission, Germany underlined that the national Tax Authorities automatically reject requests only in two cases: when taxable persons were previously reminded of the obligation to provide supporting documents or when the deadline had already expired.

Nevertheless, in its 2018 opinion issued to Germany, the Commission still held that the issue was unresolved. The main reasons behind this conclusion were that, under the principle of fiscal neutrality, the right to deduct or refund VAT arises once substantive conditions are met, even if formal requirements are incomplete, and that any information under code 10, however minimal, makes a VAT refund request valid.

Additionally, the Commission stated that German practice of immediately rejecting incomplete requests without seeking further information violates the principle of VAT neutrality, that taxable persons must have an opportunity to provide additional information if the initial submission was on time, limiting rejection only for late requests.

The final Commissions argument was that Germany's refusal to request additional information damaged the effectiveness of the VAT refund process and violated the principle of protecting legitimate expectations.

The Commission gave Germany two months to correct its practices. Following this deadline, the German Federal Ministry of Finance instructed Tax Authorities to request additional information if VAT refund requests were incomplete or unclear. However, it maintained that once the deadline for submitting a VAT refund request passes, there is no obligation to request missing documents.

Germany refused to change its practice, so the Commission took legal action against it, arguing that such an administrative practice violated Articles 170 and 171 of the EU VAT Directive and Article 5 of Directive 2008/9.

Main Complaints from the Case

Unlike in other ECJ cases, where national courts refer to one or more questions in their request for a preliminary ruling, the Commission made three complaints against Germany regarding its violation of the principle of VAT neutrality, the effectiveness of the right to a VAT refund, and the principle of protecting legitimate expectations.

Applicable EU VAT Directive Article

The main articles in question from the EU VAT Directive are Articles 170 and 171(1), which grant taxable persons not established in the EU country where they purchase goods or services the right to a VAT refund if specific conditions are met and outline the procedure taxable persons must follow.

In addition to these two articles from the EU VAT Directive, Articles 1, 3, 5, 6, 8, 9, 10, 11, 15, 19, and 20 of Directive 2008/9, which lay down detailed rules for the VAT refund in cases where the taxable person is not established in the EU country where the request is made, were considered by the ECJ when deciding on the Commission's complaints against Germany.

Germany National VAT Rules

Article 18(9) of the German Turnover Tax Act, permits the Federal Ministry of Finance, with the approval of the Federal Council, to implement special procedures for refunding input VAT to taxable persons established abroad. 

Article 61 of the Implementing Regulation states that taxable persons from another EU country must submit VAT refund requests electronically through their home country portal. They also must include all required information under Articles 8 and 9(1) of Directive 2008/9.

Furthermore, Article 61 states that a VAT refund request must be submitted within nine months of the calendar year the refund right arose, specifically September 30. If the transactions exceed EUR 1,000 or EUR 250 for fuel purchases, the request must include scanned copies of invoices and import documents.

Importance of the Case for Taxable Persons

The case between the Commission and Germany is of great importance for taxable persons, as it shows how they can address issues when a particular EU country violates their rights under the EU VAT Directive and accompanying Implementing Regulations.

Moreover, the case and its ruling reinforced the right of taxable persons to claim VAT refund when substantive conditions are met, even if formal requirements, such as missing or incomplete information, are not fully satisfied.

Finally, the ruling addresses the automatic or systematic limitation of taxable persons' rights, strengthening legal certainty and ensuring uniform application of VAT refund rules across all EU countries.

Analysis of the Court Findings

After considering Germany's request to dismiss the legal action as partially inadmissible, and the Commission's reply asserts that the ECJ rejects Germany's objections, the ECJ allowed the legal actions and decided to proceed. The ECJ analyzed the first and second complaints regarding the breach of the principle of VAT neutrality and the effectiveness of the right to a VAT refund. 

As stated in the ruling, the Commission argued that refusing to request additional information from taxable persons when their VAT refund requests were incomplete or insufficient after the submission deadline had passed infringes on the principle of VAT neutrality and the effectiveness of the right to a VAT refund under Directive 2008/9.

Moreover, the Commission underlined that the right to deduct or refund VAT is a fundamental principle of the EU VAT system and that, following the ECJ case law, it should be allowed if the substantive conditions are met, even if there are formal errors or omissions. Germany was not compliant with the EU VAT rules and regulations by automatically rejecting incomplete requests without requesting additional documents and information.

Furthermore, the Commission added that under fiscal neutrality and proportionality principles, EU countries must request additional information from taxable persons if there are doubts about whether the conditions for a VAT refund are met.

Germany opposed these arguments, stating that its administrative practices aligned with EU regulations and ECJ case law and further contending that its approach does not undermine Directive 2008/9's effectiveness.

Regarding the claims from both parties, the ECJ emphasized that the right to refund or deduct VAT is a fundamental principle of the EU’s VAT system. The system is designed to fully relieve taxable persons of the VAT burden in their economic activities, thus ensuring tax neutrality regardless of the purpose or outcome of those activities. Moreover, the right to VAT refund in another EU country is equivalent to the right to deduct input VAT in the home country.

Additionally, the ECJ confirmed that, following the principle of VAT neutrality, a refund must be granted if the substantive conditions are met, even if taxpayers fail to meet certain formalities. The ECJ underlined that the key issue in the present case is not whether formal errors prevent proof of eligibility but whether evidence can still be provided if the VAT refund request is submitted on time.

Regarding the third complaint, which concerns Germany's violation of the principle of protecting legitimate expectations, the ECJ stated that this requires both the EU institutions and EU countries to ensure legal certainty and the clear, precise, and foreseeable application of legal rules.

However, the ECJ noted that the Commission did not dispute that Germany provides taxable persons with an acknowledgement of receipt when they submit a VAT refund request, which includes a reminder of the obligation to provide necessary information and documents. Moreover, the Commission did not provide any evidence to prove that Germany changed its administrative practice in a way that retroactively deprives taxable persons of their right to a VAT refund.

Courts Final Decision

The ECJ found that two out of three Commission complaints had grounds and ruled that Germany violated EU VAT rules and regulations by rejecting VAT refund requests that were missing copies of invoices or import documents without first giving taxable persons an opportunity to submit missing information and documents, even after the submission deadline of September 30.

This means that all EU countries, including Germany, must request and allow taxable persons to submit necessary documents, even after the submission due date.

However, due to a lack of evidence, the ECJ rejected the third Commission's complaint that Germany violated the protection of legitimate expectations, stating that Germany did not violate the principle.

Conclusion

Although Germany did not violate the principle of protecting legitimate expectations, the ECJ ruling reinforces legal certainty. It underlines that EU countries must follow specific procedural steps before making a final decision on the request for VAT refund.

Additionally, the case presents the mechanism that the Commission can use to enforce and ensure that all EU countries apply EU-wide rules and regulations in accordance with the letter of the law and without harming the harmonization of the EU VAT system.

Source: Case C‑371/19 - European Commission vs. Federal Republic of Germany, EU VAT Directive, Directive 2008/9