ECJ VAT Ruling on Intra-Community Acquisitions

Even though the EU changes its VAT rules to make cross-border transactions easier and less burdensome, the case between D GmbH, an Austrian limited liability company, and the Austrian Tax Authority reminds us that the businesses operating in cross-border EU markets still face rather tricky, to say the least, rules. The dispute, which escalated to Austria’s Supreme Administrative Court and ultimately to the European Court of Justice (ECJ), underscores how even small errors or assumptions can lead to major VAT consequences across borders.

Background of the Case 

D purchased goods from suppliers established in Austria and arranged for those goods to be transported directly from Austria to customers in other EU countries. Throughout these transactions, D provided its Austrian VAT identification number to the suppliers, who consequently issued invoices including Austrian VAT. As a result, D assumed that the VAT charged on those invoices was deductible as input VAT and that the transactions did not constitute taxable intra-Community acquisitions in Austria.

However, after conducting a tax audit for the period 2011-2015, the Austrian Tax Authority reached a different conclusion. More specifically, the Tax Authority concluded that, because D used its Austrian VAT number when purchasing goods transported to another EU country, the transactions were, in fact, intra-Community acquisitions under EU VAT rules. Consequently, the Tax Authority determined that those acquisitions were taxable in Austria.

Furthermore, the Tax Authority determined that the suppliers should have treated their sales as VAT-exempt intra-Community supplies rather than domestic Austrian transactions. The Tax Authority added that, even if suppliers incorrectly charged Austrian VAT on their invoices, they remained liable for that VAT. Based on those conclusions, the Tax Authority denied D the right to deduct VAT as input tax.

However, D challenged the tax assessments before the Austrian Federal Finance Court, which, in November 2020, upheld the Tax Authority’s position, confirming that the acquisitions were taxable in Austria and that D was not entitled to deduct the incorrectly charged VAT.

Nonetheless, D brought the case before Austria’s Supreme Administrative Court, which annulled the earlier judgment and sent the case back to the Federal Finance Court for reconsideration. The main reason behind such a decision was the Supreme Administrative Court's conclusion that the transactions should not have been taxed in Austria under the national provision implementing the EU VAT Directive.

In 2022, after completing the re-examination procedure and relying on the ECJ judgment in the Dyrektor Izby Skarbowej case concerning the incorrect classification of chain transactions, the Federal Finance Court ruled in favour of D. The Federal Finance Court concluded that D had not carried out intra-Community acquisitions in Austria simply because it used its Austrian VAT number during the transactions.

That led to the Tax Authority's appeal before the Supreme Administrative Court, which, at that point, became uncertain about how key provisions of the VAT Directive should be interpreted. Thus, the Supreme Administrative Court referred a request for a preliminary ruling to the ECJ.

Main Questions from Request For Ruling

The Supreme Administrative Court referred two questions to the ECJ, where with the first one it asked whether EU law prevents Austria from applying its national rule under which an intra-Community acquisition is deemed to take place in the EU country whose VAT identification number was used by the purchaser, unless that purchaser proves that the acquisition was taxed in the EU country where the transport of the goods actually ended. 

Moreover, the Court sought to determine whether this rule remains compatible with EU law when the related intra-Community supply should have been VAT-exempt but created a VAT liability in Austria solely because Austrian VAT was mistakenly stated on the supplier’s invoice.

With the second question, which arises only if the ECJ finds that such national taxation is incompatible with EU law, the Court asked whether correcting the invoice at a later stage, thereby removing the VAT wrongly charged on the exempt intra-Community supply, would subsequently trigger an intra-Community acquisition.

Applicable EU VAT Directive Article

When interpreting the EU VAT Directive in the context of this case, the ECJ noted that Articles 2(1), 20, 40, 41, 138(1), and 203 are the most relevant. While Article 20 defines what constitutes an intra-Community acquisition, Articles 40 and 41 determine the general place of taxation for these acquisitions and introduce exceptions intended to prevent tax avoidance or gaps in taxation, respectively. 

Article 138(1), in the version applicable at the relevant time, complements these rules by providing that supplies of goods transported from one EU country to another are exempt from VAT in the EU country of departure when made to a taxable person established in another EU country. Finally, Article 203 sets a strict liability rule under which any person who states VAT on an invoice is liable to pay that VAT, even if it was charged incorrectly.

Austria National VAT Rules

Regarding Austria's national legislation, the ECJ considered Paragraph 11(12) of the Austrian Law on Turnover Tax and Paragraph 3(8) of the Annex to that Law, as they transpose key rules of the EU VAT Directive into the national legal system and regulate both liability arising from incorrect invoicing and the determination of where intra-Community acquisitions are taxed.

Importance of the Case for Taxable Persons

This case sheds new light on the complexities of EU cross-border transactions within the EU. It shows how using a VAT number from one EU country can raise questions about where an intra-Community acquisition is taxed and how invoicing errors can create unexpected liabilities and affect input tax deductions. 

Since rules on the place of taxation, exemptions for intra-Community supplies, and strict liability for invoiced VAT are all part of the ECJ analysis, taxable persons may benefit from delving deeper into these rules to avoid disputes and unexpected tax consequences.

Analysis of the Court Findings

At the outset of the analysis, the ECJ noted that the EU VAT system operates through a coordinated mechanism that links two elements of the same cross-border transaction: the intra-Community acquisition and the corresponding intra-Community supply. 

When the acquisition is taxed either in the EU country of arrival or, exceptionally, in the EU country of identification, the related supply must be exempt from VAT in the EU country of departure. The provided exemption is essential, as it prevents the same transaction from being taxed twice and thereby safeguards the principle of fiscal neutrality, a fundamental feature of the common VAT system.

Notably, Article 41 serves a dual objective: it ensures that an intra-Community acquisition is not exempt from taxation altogether and prevents double taxation of the same acquisition. From that perspective, the provision functions as a corrective mechanism designed both to secure tax collection and to maintain balance within the VAT system by ensuring that only one EU country ultimately taxes the transaction.

From there, ECJ moved on to examine how Article 203 operates in the specific circumstances, as set out by the Supreme Administrative Court, in which the Tax Authority treated the supplies in question as exempt intra-Community supplies, meaning that no VAT should normally have been charged in Austria. However, despite recognizing the exception, VAT liability was imposed on the suppliers because Austrian VAT was incorrectly stated on the invoices issued for those transactions.

The ECJ recalled that VAT liability arises independently of whether the underlying transaction is actually subject to VAT, meaning that VAT  included on the invoice creates an autonomous tax obligation, even where the transaction itself should have been exempt or non-taxable. 

While Article 203 serves a protective purpose and seeks to eliminate the risk of loss of tax revenue arising from the VAT deduction mechanism, it has its limits. The provision does not apply when the VAT indicated on the invoice is correct because it corresponds to a transaction that is genuinely taxable under other provisions of the EU VAT Directive.

As a result of these findings, the ECJ concluded that Articles 41 and 203 apply independently, each governed by its own conditions and objectives. Article 41 determines the place of taxation for intra-Community acquisitions. Also, it ensures that such acquisitions are not exempt from taxation when a VAT identification number issued by a particular EU country is used. Article 203, on the other hand, addresses the separate situation in which VAT liability arises solely because VAT has been entered on an invoice, even if that tax was charged in error.

Given that these provisions have different purposes, EU rules do not, in principle, prevent their simultaneous application. Additionally, the ECJ found that taxing the intra-Community acquisition in the EU country of identification under Article 41 does not breach the principles of neutrality or proportionality, even where the related intra-Community supply is exempt but gives rise to VAT liability in the same EU country under Article 203 because VAT was wrongly invoiced.

Courts Final Decision

The ECJ, or more precisely the General Court, concludes that EU VAT law does not prevent an EU country from taxing an intra-Community acquisition under specific circumstances, such as those at issue in this case, and confirmed that two separate legal consequences may coexist without infringing EU law. More specifically, the ECJ ruled that a supplier can be liable for incorrectly invoiced VAT, while the buyer’s acquisition can be taxed under the national rules. Regarding the second question, the ECJ did not examine it.

Conclusion

ECJ interpretation and clarification in this case show that VAT in the EU is anything but simple, and how harmful invoice errors can be. By comparing previously settled cases with the case in question, the ECJ also emphasized the importance of having a clear factual situation before concluding whether VAT liability arises, which EU country can tax the transaction, and how principles like neutrality and proportionality must be applied. In essence, every detail in any real-life scenario is vital as it can change how VAT rules apply.

Source: Case T‑638/24 - Tax Authority, Austria v D GmbH, EU VAT Directive, Case C-696/20 - B. v Director of the Tax Chamber in W, Poland