VAT Errors and Insolvent Supplier in Cross-Border Supply: ECJ Case C‑83/23

The ECJ Case C‑83/23 raises an interesting question: when one company succeeds another that has engaged in cross-border transactions involving incorrectly charged VAT, can the successor claim refunds or assert rights under EU VAT law when the original supplier has gone into liquidation?

In addition to raising this question, the case highlights the interaction between VAT neutrality, the right of deduction, and insolvency law. Moreover, it clarifies the limits of a taxable person’s ability to recover VAT directly from national Tax Authorities when the standard refund chain has been disrupted.

Background of the Case 

H succeeded KG, a German limited partnership, whose business consisted of hiring out movable property, including through sale-and-leaseback arrangements. The main dispute in this case concerns six such sale-and-leaseback transactions carried out by KG on behalf of another German company, E-GmbH, in 2007, 2008, 2010, and 2012.

In each transaction, E-GmbH first purchased a new motor boat from an Italian supplier, E-sr. Additionally, each transaction was invoiced as intra-Community supplies and therefore did not include VAT, and E-GmbH paid the full purchase price. Once a motor boat was acquired, E-GmbH entered into a sale-and-leaseback arrangement with KG.

More specifically, the E-GbmH sold a boat to KG at the original net purchase price plus German VAT, and subsequently entered into a 36-month leasing agreement to retain the right to use the boat. E-GmbH issued a sales invoice to KG, included German VAT, declared the VAT in its VAT returns, and paid it to the German Tax Authority. However, none of the invoices specified that the boat was physically located at the time of sale. On the other side, KG deducted the VAT shown on the invoice as input VAT in its own VAT returns.

The German Tax Authority conducted a tax audit and determined that, in 2008, when E-GmbH sold the boats to KG, the boats were not located in Germany but in Italy. Nonetheless, in October 2012, the E-GmbH informed KG that it had wrongly charged German VAT on two invoices issued in April and October 2008 and stated that those invoices would be corrected.

The tax audit was further extended to KG, where the inspectors concluded that the boat transactions constituted supplies without transport. Under the EU VAT Directive and German VAT Law, such supplies are taxable at the place where the goods are located at the time of the sale. Since the boats were in Italy, the supplies were not subject to German tax. 

Moreover, inspectors concluded that the VAT charged by E-GmbH on its invoices was nevertheless payable because the invoices were incorrectly issued. At the same time, inspectors held that KG was not entitled to deduct that VAT as input VAT. The Tax Office M agreed with this assessment and issued a VAT adjustment notice to KG, reducing the amount of input VAT deducted for 2008, the year in which two boat sale invoices were issued. Also, the Tax Office M dismissed KG’s objection to that adjustment notice as unfounded.

In addition to two invoices for the sale of boats from 2008, four more were issued in 2006, 2010, and 2012. The Tax Office M also amended the VAT assessments for the years 2007 and 2010, adjusting the input VAT deductions claimed based on the invoices issued in 2006 and 2010. Regarding the 2012 invoice, KG did not deduct any VAT on the boat sales in its annual VAT return. However, KG had to pay the additional VAT assessed by the Tax Office M for 2007 and 2010.

Notably, in 2014, E-GmbH entered insolvency proceedings, when the court-appointed insolvency administrator responsible for liquidating the company corrected all six invoices for boat supplies by removing the VAT amounts that had been incorrectly shown. The Tax Office X confirmed that corrected invoices were submitted in December 2014 and that a formal request for correction was filed in January 2015. 

The Tax Authority approved the request and refunded the relevant VAT, which was returned to the insolvency estate, while informing the insolvency administrator’s tax representative that the transactions were subject to VAT in Italy. 

Nonetheless, H claimed that the insolvency administrator refused to issue new invoices charging Italian VAT and did not initiate legal proceedings against E-GmbH to obtain them. Subsequently, KG asked the Tax Office M to recalculate the VAT for the years 2007, 2008, 2010, and 2012 on equitable grounds, but the Tax Authority denied the request. 

After the Finance Court in Düsseldorf dismissed H's action, stating, among other things, that H did not have a civil right to recover that VAT from E-GmbH but only had a right to receive an invoice reflecting Italian VAT, H filed an appeal before the Federal Finance Court. Given the specifics of the case, the Federal Finance Court referred two questions to the Court of Justice of the European Union (ECJ).

Main Questions from Request For Ruling

With the first question, the Federal Finance Court sought clarification on whether a domestic service recipient has a direct claim against the national Tax Authority under the principle established by the ECJs judgment in case C‑35/05 when the service provider, also domestic, issues an invoice showing domestic VAT, which the recipient pays, but the service is actually supplied in another EU country.

The second question asks whether the answer to the first one depends on the national Tax Authority having refunded the VAT to the provider based on the corrected invoice, even though the provider did not repay the recipient following insolvency proceedings.

Applicable EU VAT Directive Article

Regarding the EU VAT Directive, the ECJ highlighted the importance of Articles 167, 168(a), 178(a), and 203 in answering the questions raised. Articles 167 and 168(a) define rules for the right of deduction. Additionally, Article 178(a) sets out the formal condition for exercising that right, requiring the taxable person to hold an invoice drawn up in line with the Directive’s invoicing rules. Finally, Article 203 203 establishes that any person who states VAT on an invoice is liable to pay that VAT, irrespective of whether it was correctly charged.

Germany National VAT Rules

For this case, relevant articles from both the German VAT Law and the Fiscal Code were considered and interpreted. Regarding the VAT Law, the main articles for this case were Articles 14(4), 14c(1), and 15, whereas Articles 163 and 227 were the most essential ones from the Fiscal Code.

Importance of the Case for Taxable Persons

Given the specific circumstances, taxable persons may find it difficult to determine to what extent their situation aligns with the case and whether they are entitled to seek a VAT refund under the conditions outlined by the ECJ. However, the ruling provides an interpretation of the limits of direct VAT refund claims, clarifying when the principles of VAT neutrality and effectiveness allow, or do not allow, a taxable person to recover VAT from national Tax Authorities, particularly in situations involving supplier insolvency or prior refunds.

Analysis of the Court Findings

The ECJ considered two questions together, and understood it as asking whether the EU VAT Directive, interpreted in light of the principles of effectiveness and VAT neutrality, allows a service recipient to claim a refund directly from the Tax Authority of the EU country in which it is established. 

In the present case, the ECJ noted that the recipient paid VAT to a supplier who wrongly charged domestic VAT instead of the VAT due in another EU country and remitted that VAT to the national Tax Authorities, who have already refunded it to the supplier, which has since entered liquidation.

The first observation from the ECJ was that the principle of VAT neutrality, which underpins the EU VAT system, is safeguarded by the right of deduction, and that the right is intended to fully relieve taxable persons of the burden of VAT paid or due in the course of their economic activities. Thus, the right ensures that taxation is neutral, regardless of the purpose or outcome of those activities, provided they are, in principle, subject to VAT.

Regarding the rules on correcting VAT that has been wrongly charged on an invoice, the EU VAT Directive does not lay down specific rules, as confirmed by case law. As a result, EU countries must determine the conditions under which such VAT may be adjusted. 

Furthermore, the ECJ held that where reimbursement of wrongly charged VAT is impossible or excessively difficult, particularly in cases where the supplier has become insolvent, the principles of neutrality and effectiveness may require that the service recipient be allowed to seek a refund directly from the tax authorities. Thus, for this to be fulfilled, EU countries must put in place the necessary legal instruments and procedural rules to ensure that the recipient can recover VAT that was unduly invoiced.

Moreover, the ECJ underlined that the case C‑35/05 cannot be applied to the present case due to differences in factual circumstances. Additionally, the ECJ stated that the service provider's liquidation is not decisive in the present situation and does not alter that conclusion.

In situations like the present case, it cannot be excluded that the purchaser may find it impossible or excessively difficult to pursue a civil action against the supplier's court-appointed insolvency administrator to obtain an invoice showing Italian VAT. It may therefore be inclined to seek a refund directly from the Tax Authority. 

Nonetheless, to avoid placing an unreasonable burden on the Tax Authority, it cannot be required to take into account that the standard VAT refund chain has been seriously disrupted or even broken because the supplier has entered liquidation. The VAT refunded by the Tax Authority to the supplier becomes part of the insolvency estate. It may not ultimately be repaid to the purchaser, but that consequence does not justify imposing a second refund obligation on the Tax Authority.

Furthermore, the possibility for a purchaser or service recipient to seek a direct refund of wrongly invoiced and paid VAT from the Tax Authority is an exceptional remedy, available only where recovery of that VAT from the supplier is impossible or excessively difficult, and only where the purchaser or recipient has not failed to make use of other available means of asserting its rights. Notably, in the present case, the supplier was not registered for VAT in the EU country where the VAT is legally due.

Courts Final Decision

Based on all findings and interpretations of applicable EU and national provisions, the ECJ concluded that a service recipient cannot claim a refund of VAT paid to the supplier directly from the Tax Authority of its EU country where that supplier incorrectly charged domestic VAT instead of the VAT due in another EU country, in cases when the Tax Authority has already refunded that VAT to the supplier, which has since entered liquidation.

Conclusion

For H and KG, the decision means that neither the original company nor its successor can claim the VAT paid to E-GmbH once the Tax Office has refunded it to E-GmbH’s insolvency estate. Moreover, the ECJ confirmed that the refund chain must follow statutory procedures, and supplier insolvency does not create a direct claim against the Tax Authority. Ultimately, taxable persons must ensure accurate invoicing, comply with VAT regulations, and manage cross-border transactions carefully.

Source: Case C‑83/23 - H GmbH v Tax Office M, EU VAT Directive, Case C‑35/05 - Reemtsma Cigarettenfabriken GmbH v Ministero delle Finanze