On January 9, 2023, the ECJ issued its Order in the case C-289/22 (A.T.S. 2003 Vagyonvédelmi és Szolgáltató Zrt.).
Context: Reference for a preliminary ruling – Article 99 of the Rules of Procedure – Taxation – Value added tax (VAT) – Directive 2006/112/EC – Articles 167, 168 and 178 – Right to deduct input VAT – Fraud – Proof – Duty of care of the taxable person – Consideration of an infringement of the national provisions governing the supply of services at issue
Articles in the EU VAT Directives
Articles 167, 168(a) and 178(a) of the VAT Directive
Article 167 (Origin and scope of right of deduction)
A right of deduction shall arise at the time the deductible tax becomes chargeable.
Article 168a
1. In the case of immovable property forming part of the business assets of a taxable person and used both for purposes of the taxable person’s business and for his private use or that of his staff, or, more generally, for purposes other than those of his business, VAT on expenditure related to this property shall be deductible in accordance with the principles set out in Articles 167, 168, 169 and 173 only up to the proportion of the property’s use for purposes of the taxable person’s business.
By way of derogation from Article 26, changes in the proportion of use of immovable property referred to in the first subparagraph shall be taken into account in accordance with the principles provided for in Articles 184 to 192 as applied in the respective Member State.
2. Member States may also apply paragraph 1 in relation to VAT on expenditure related to other goods forming part of the business assets as they specify.
Article 178 (Rules governing exercise of the right of deduction)
In order to exercise the right of deduction, a taxable person must meet the following conditions:
(a) for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Sections 3 to 6 of Chapter 3 of Title XI;
(b) for the purposes of deductions pursuant to Article 168(b), in respect of transactions treated as the supply of goods or services, he must comply with the formalities as laid down by each Member State;
(c) for the purposes of deductions pursuant to Article 168(c), in respect of the intra-Community acquisition of goods, he must set out in the VAT return provided for in Article 250 all the information needed for the amount of VAT due on his intra-Community acquisitions of goods to be calculated and he must hold an invoice drawn up in accordance with Sections 3 to 5 of Chapter 3 of Title XI;
(d) for the purposes of deductions pursuant to Article 168(d), in respect of transactions treated as intra-Community acquisitions of goods, he must complete the formalities as laid down by each Member State;
(e) for the purposes of deductions pursuant to Article 168(e), in respect of the importation of goods, he must hold an import document specifying him as consignee or importer, and stating the amount of VAT due or enabling that amount to be calculated;
(f) when required to pay VAT as a customer where Articles 194 to 197 or Article 199 apply, he must comply with the formalities as laid down by each Member State.
Facts
- A.T.S. 2003 provided property-protection and cleaning services during the period from 1 January 2009 to 30 September 2013. Those services were provided by its staff as well as by subcontractors and workers engaged through a temporary-employment agency. The latter subsequently became a subcontractor of A.T.S. 2003 and, to that effect, it too made use of a temporary-employment agency.
- The tax authority found that A.T.S. 2003 owed 141 457 000 forint (HUF) (approximately EUR 345 155) in relation to VAT, personal income tax, social security contributions and other contributions for the period from December 2010 to September 2013. It also imposed a tax penalty on A.T.S. 2003 and applied late-payment surcharges.
- As regards deductible VAT, the tax authority found that A.T.S. 2003 was accused of an offence of tax evasion, after an investigation carried out by the Criminal Cases Directorate of that authority revealed the existence of a fictitious invoicing chain and that the contracted temporary-employment agencies did not carry on any real economic activity and did not meet the conditions laid down in national law for carrying on that activity. In the light of the data and information gathered during the investigation, the tax authority considered that A.T.S. 2003 not only failed to act with due care, but also contributed to establishing a supply chain that had been created artificially by, inter alia, entering into contracts for the supply of staff with agencies that did not have the means necessary to provide the agreed services or that had not carried on any real economic activity. The tax authority decided that, in those circumstances, the invoices issued by those agencies were not authentic.
- Following an action brought against the decision of the tax authority, the Appeals Directorate confirmed that decision in relation to VAT. A.T.S. 2003 then brought an action before the Fővárosi Törvényszék (Budapest High Court, Hungary), the referring court, in which it disputes the allegations made against it and claims, in essence, that it exercised all due care and attention that could reasonably be expected of it in order to ensure that the invoices at issue were not connected with a fraud.
- The referring court, observing that the Court has already interpreted the provisions of Directive 2006/112 in several cases involving Hungary, in particular in those which gave rise to the orders of 3 September 2020, Vikingo Fővállalkozó (C‑610/19, EU:C:2020:673), and of 3 September 2020, Crewprint (C‑611/19, not published, EU:C:2020:674), states that there are discrepancies between the approaches taken by national courts in interpreting and applying EU law and in interpreting decisions of the Court as regards the burden of proof borne by the taxable person and by the tax authority respectively. In the light of those circumstances, the referring court, in order to fulfil its role as a review body in the present case, seeks guidance from the Court on how evidence relied on by the tax authority is to be assessed.
- The referring court states that it is necessary to assess, in the main proceedings, whether the circumstances relied on by the Appeals Directorate, that is to say that the traders acting upstream in the supply chain do not have staff of their own and have not fulfilled their tax obligations, may be regarded as objective evidence justifying the refusal of the right of deduction, even though the Court has already held that such circumstances do not in themselves constitute such objective evidence.
- That court states that it must, in particular, assess whether the tax authority could, on the basis of those same circumstances, find that the invoices were not genuine and, therefore, that there was fraud, since, first, A.T.S. 2003 benefited from the possibility afforded to it by national legislation not to employ staff and to resort to temporary-employment agencies and subcontracting and, secondly, the substantive and formal conditions for the right of deduction were met.
- The referring court asks in particular whether the fact that the tax authority does not recognise either that a contract has been concluded between the taxable person and the issuer of the invoice or that the supply of services that is the subject of that invoice has actually been made, while requiring the taxable person to carry out checks with regard not only to his or her immediate partner, but also to all traders making up the supply chain, relating in particular to the lawfulness of their activity, does not amount to an extension of the duty of care which the taxable person must observe, according to the case-law of the Court, in order to ensure that the transaction relied on as a basis for the right of deduction is not connected with VAT fraud.
- Since it has doubts as to whether the requirement to carry out such checks complies with the principles of fiscal neutrality and proportionality, the referring court asks, more specifically, whether the fact that the taxable person realises that the traders acting upstream in the supply chain have breached the rules concerning the supply of services at issue, without that breach having an impact on that supply, may lead to the conclusion that that taxable person participated in VAT fraud and to that person being refused the right of deduction.
- According to that court, the tax authority’s practice of calling into question the rationality of taxable persons’ commercial decisions, without taking account of their contractual freedom and the specific nature of economic life, is problematic. It doubts, in that regard, whether the exercise of the right of deduction can be regarded as not being consistent with its purpose and, therefore, constituting fraud where the taxable person exercises that right in an arrangement that makes it possible to reduce his or her costs, including those relating to VAT.
- According to the referring court, the question also arises as to whether, given that supply chain fraud is widespread in the field of agency work, the tax authority is required to state in each case the constituent elements of the tax evasion and to prove that it took place.
Questions
Are Articles 167, 168(a) and 178(a) of the VAT Directive to be interpreted as meaning that, if the tax authority finds, in respect of any member of a supply chain, that there has been an infringement of special legislation concerning the services provided under a contract concluded with the taxpayer or under agreements concluded between the members of the chain, or an infringement of any other legislation, such an infringement is sufficient in itself, as an objective circumstance, to establish the existence of tax evasion, even where the activities of the members of the chain are lawful in all respects, or does the tax authority also have to specify in that case what the tax evasion consists of, and by which members of the chain and by means of what action it has been committed? In that context, if such a breach is found, is it necessary for the tax authority to examine the causal link between the breach of the regulatory obligations governing the economic activity and the taxpayer’s right of deduction, so that it is only if such a link is established that it can refuse the taxpayer his or her right to deduct VAT?
Having regard to those articles of the VAT Directive, and the right to a fair trial enshrined as a general principle of law in Article 47 of the Charter of Fundamental Rights of the European Union and the fundamental principles of proportionality and legal certainty, can the taxpayer be required, in the context of his or her general duty of control, to verify whether the previous members of the chain have complied with the obligations laid down by special legislation for carrying out the services invoiced and the conditions to operate lawfully? If that question is answered in the affirmative, is this a continuous obligation for the taxpayer for the duration of the legal relationship or, if appropriate, how often must it be complied with?
Are Articles 167, 168(a) and 178(a) of the VAT Directive to be interpreted as meaning that, if the taxpayer finds that any previous member of the chain has failed to fulfil his or her obligations, a duty arises for the taxpayer not to exercise his or her right to deduct input VAT in such a case, failing which the application of the VAT deduction would be regarded as tax evasion?
Are those articles of the VAT Directive, in light of the principles of legal certainty and fiscal neutrality, to be interpreted as meaning that, when examining and categorising the fraudulent nature of the chain, and also when establishing the relevant facts and assessing the evidence supporting those facts, the tax authority cannot disregard the provisions of the special legislation relating to services invoiced, in particular the rules governing the rights and obligations of the parties?
Is it consistent with the abovementioned articles of the VAT Directive, and with the right to a fair trial enshrined as a general principle of law in Article 47 of the Charter and with the fundamental principle of legal certainty, for the tax authority [to adopt] a practice whereby, as a result of a review of the right of deduction in respect of an economic transaction carried out in the course of supplying services, the actual existence of that economic transaction, documented by invoices, contracts and other accounting records, may be refuted on the basis of the findings made by the inspection authority during the inspection, the statements made during the inspection by the persons inspected and the witness statements made by employees engaged through temporary employment agencies as to what they think of their employment relationship, how they legally define it and who they consider to be the employer?
Is it compatible with the abovementioned articles of the VAT Directive, and also with the right to a fair trial enshrined in Article 47 of the Charter and with the fundamental principle of legal certainty for the tax authority [to adopt] a practice whereby the choice of a taxpayer to carry out his or her economic activity in a way that enables that taxpayer to reduce his or her costs as much as possible is classified as an unlawful exercise of the right and, on that basis, the tax authority exercises its right to reclassify contracts in such a way as to create a contract between parties who were not previously in a contractual relationship?
AG Opinion
None
Order
Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.
On those grounds, the Court (Fifth Chamber) hereby rules:
1. Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax
must be interpreted as precluding a national practice whereby the choice of a taxable person to carry on an economic activity in a way that enables that taxable person to reduce his or her costs is classified as ‘an unlawful exercise of the right’ and, on that ground, that taxable person is refused the right to deduct input value added tax, where it has not been established that there is a wholly artificial arrangement which does not reflect economic reality and is set up with the sole aim or, at the very least, with the essential aim, of obtaining a tax advantage the grant of which would be contrary to the purposes of that directive.
2. Directive 2006/112
must be interpreted as not precluding the tax authority from refusing a taxable person the right to deduct value added tax (VAT) in respect of a supply of services, on the basis of findings resulting from witness statements in the light of which that tax authority called into question the existence of that supply of services or considered that it was connected with VAT fraud, if, in the first case, it is not established by the taxable person that that supply of services has actually been made or if, in the second case, it is established by that tax authority, in accordance with the rules of evidence under national law, that that taxable person committed VAT fraud or knew or ought to have known that the transaction relied on as a basis for the right of deduction was connected with such a fraud.
3. Directive 2006/112
must be interpreted as meaning that
– it precludes the tax authority from refusing a taxable person the right of deduction by considering as sufficient evidence of value added tax (VAT) fraud the fact that the taxable person, or other traders acting upstream in the supply chain, have breached the national rules on the supply of services at issue, without an actual link between that breach and the right to deduct VAT being established;
– such a breach may, however, depending on the factual circumstances of the case, constitute one of a number of indications of such a fraud and evidence which may be taken into account, in an overall assessment of the circumstances, to establish that the taxable person is the perpetrator of or actively participated in that fraud, or to establish that that taxable person knew or ought to have known that the transaction relied on as a basis for the right of deduction was connected with that fraud;
– it is for the tax authority to characterise the elements constituting VAT fraud, to adduce evidence of fraudulent activity and to establish that the taxable person is the perpetrator of or actively participated in that fraud, or knew or ought to have known that the transaction relied on as a basis for the right of deduction was connected with that fraud;
– that requirement does not necessarily involve identifying all the perpetrators of the fraud and their respective actions.
4. Directive 2006/112, read in conjunction with the principle of proportionality,
must be interpreted as meaning that it is not, in principle, for the taxable person wishing to exercise the right to deduct value added tax (VAT) to verify that the supplier or other traders acting upstream in the supply chain have complied with the national rules on the supply of services at issue as well as the other national rules applicable to their activity. However, where there are indications, resulting from the breach of those rules and which are such as to give rise to suspicions on the part of the taxable person, at the time the acquisition is made, of irregularities or of fraud, that taxable person may be required to exercise greater care and to take measures that could reasonably be expected of him or her to ensure that, through that acquisition, he or she is not participating in a transaction connected with VAT fraud.
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