ECJ C-171/23 (UP CAFFE d.o.o) – AG Opinion – Abusive Practices and Small Business Exemptions

On May 16, 2024, the ECJ issued the preliminary questions in the case C-171/23 (UP CAFFE d.o.o).

Context: Reference for a preliminary ruling – Common system of value added tax – Directive 2006/112/EC – Scheme exempting small enterprises – Abuse of VAT law by forming a new company – EU law prohibition of abusive practices in the area of VAT law – Direct applicability versus an assessment of the facts carried out on the basis of the economic viewpoint approach

Article in the EU VAT Directive

Article 19, 28 and 80(1) of the EU VAT Directive 2006/112/EC

Article 19 (Transfer of Going concern)
In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and that the person to whom the goods are transferred is to be treated as the successor to the transferor.
Member States may, in cases where the recipient is not wholly liable to tax, take the measures necessary to prevent distortion of competition. They may also adopt any measures needed to prevent tax evasion or avoidance through the use of this Article.\

Article 28 (Taxabe transaction – Supply of services)
Where a taxable person acting in his own name but on behalf of another person takes part in a supply of services, he shall be deemed to have received and supplied those services himself.

Article 80 (Taxable amount)
1. In order to prevent tax evasion or avoidance, Member States may in any of the following cases take measures to ensure that, in respect of the supply of goods or services involving family or other close personal ties, management, ownership, membership, financial or legal ties as defined by the Member State, the taxable amount is to be the open market value:
(a) where the consideration is lower than the open market value and the recipient of the supply does not have a full right of deduction under Articles 167 to 171 and Articles 173 to 177;
(b) where the consideration is lower than the open market value and the supplier does not have a full right of deduction under Articles 167 to 171 and Articles 173 to 177 and the supply is subject to an exemption under Articles 132, 135, 136, 371, 375, 376, 377, 378(2), 379(2) or Articles 380 to 390c;
(c) where the consideration is higher than the open market value and the supplier does not have a full right of deduction under Articles 167 to 171 and Articles 173 to 177.
For the purposes of the first subparagraph, legal ties may include the relationship between an employer and employee or the employee’s family, or any other closely connected persons.

Facts – Summary

UP CAFFE d.o.o. has brought a legal action against the Republic of Croatia’s Ministry of Finance for dismissing its appeal against a tax decision. The tax decision determined the applicant’s liability for understated value-added tax for a certain period. The decision was based on the results of a special investigation, which found that UP CAFFE d.o.o. was created for aggressive tax planning to avoid inclusion in the VAT scheme. The applicant argued that it was a small taxable person who chose not to be included in the VAT scheme and that the contested decision was unlawful. The defendant did not dispute the applicant’s argument but claimed that actions taken solely for the purpose of obtaining a tax advantage, without any other economic purpose, cannot be considered valid. The defendant referred to the position set out in the judgments of the Court of Justice of 21 February 2006, Halifax and Others, C-255/02, and of 18 December 2014, Schoenimport ‘Italmoda’ Mariano Previti and Others, C-131/13, C-163/13 and C-164/13.

Facts – Detail

The applicant, UP CAFFE d.o.o. in Čakovec […], has brought an action before the referring court for an assessment of the lawfulness of a decision of Republika
Hrvatska, Ministarstvo financija (Republic of Croatia, Ministry of Finance) […] of 24 August 2020 (‘the contested decision’).
The contested decision dismissed the appeal which the applicant had lodged against the tax decision of Republika Hrvatska, Ministarstvo financija, Porezna uprava, Područni ured Čakovec (Republic of Croatia, Ministry of Finance, Tax Administration, Regional Branch, Čakovec) […] of 17 October 2018 (‘the tax decision’), which determined the applicant’s liability for understated value added tax for the period from 1 January 2018 to 31 July 2018 in the amount of the tax base of HRK 552 936.08, on which its VAT liability was calculated, at a rate of 25%, in the amount of HRK 138 234.02, plus interest on the tax arrears up to the date on which the report was drawn up in the amount of HRK 2 425.12. Paragraph II of the operative part of the tax decision specifies how the applicant is to pay the determined amount of the liability and interest. Paragraph III of the operative part of the tax decision requires the applicant to make the appropriate entries in the accounts in such a way as to correct the amount of the tax base after the payment has been made. Paragraph IV of the operative part of the tax decision sets a time limit for implementation of that decision, while Paragraph V contains a warning as to the consequences of failure to comply with it.
The tax decision was adopted on the basis of the results of a special investigation carried out by the defendant, during which it was established that the applicant, as the legal successor to the business of the tied legal predecessor, SS-UGO d.o.o, is a person tied to the latter and that the sole reason for creating the applicant is aggressive [tax] planning to avoid inclusion in the VAT scheme and therefore the newly founded company (the applicant) should be required to pay public taxes in such a way that it is considered that the new company was never founded, that is to say, that the previous company’s business was never interrupted. On the basis of that fact, value added tax was calculated for the applicant and the VAT payable on input transactions in connection with that business was taken into account.
Opposing the defendant’s stated position, which forms the basis for the contested decision, the applicant argues that it is a ‘small taxable person’ which, pursuant to Article 3 of Directive 2006/112, chose not to be included in the value added tax scheme. It further notes that it was only after the expiry of the tax period that it became possible, pursuant to the amendments to Article 49(1)(4) of the Opći porezni zakon (Tax Code), to regard a person carrying on, by virtue of the maintenance of continuity, a business using the same equipment and on the same premises, as a tied person. Since the retroactive effect of legislation is contrary to the Ustav Republike Hrvatske (Constitution of the Republic of Croatia) and the Republic of Croatia in that respect transposed Articles 19, 59 and 80 of the Sixth VAT Directive only on 1 January 2020, the applicant considers that the contested decision is unlawful.
The defendant does not dispute the above circumstances (that the decision in question was adopted in respect of a period when there was no legal basis for doing so), but points out that, under the first indent of Article 2 of the Zakon oporezu na dodanu vrijednost (Law on value added tax) (Narodne novine, No 77/13), the Sixth VAT Directive was transposed into the legal order of the Republic of Croatia, and thus the Republic of Croatia undertook to adopt the acquis of the European Union. On the basis of that fact and of that acquis, the defendant concludes that actions taken solely for the purpose of obtaining a tax advantage, without any other economic purpose, whilst artificially creating conditions for carrying out the activity, cannot be considered valid. It refers to the position set out in the judgments of the Court of Justice of 21 February 2006, Halifax and Others, C-255/02, and of 18 December 2014, Schoenimport ‘Italmoda’ Mariano Previti and Others, C-131/13, C-163/13 and C-164/13, according to which the State may, on the basis of a non-transposed directive, refuse the right to refund of input tax to a person who participates in, or knows that he or she is participating in, an evasion of value added tax.

Questions

Does EU law impose an obligation on the national authorities and courts to determine liability for value added tax (and not to refuse a claim for a refund) where the objective facts of the case indicate that VAT fraud has been committed through the creation of a new company, that is to say, by interrupting the continuity of the previous company’s taxable activity, in the case where the taxable person knew, or ought to have known, that it was participating in such an activity, and where, at the time when the chargeable event occurred, national law did not provide for such a determination of liability?

AG Opinion

The general principle that abusive practices are prohibited does not require the national authorities and courts to ignore – contrary to the principle of legality of taxation – the national exemption for small enterprises enacted pursuant to Article 287 of the VAT Directive if an interpretation of national law in conformity with EU law is not possible and there is no legal basis under the national law for refusing the tax exemption. However, when determining the situation to be taxed, the tax authorities can focus on the economically intended situation and ignore a situation that has been realised solely for the sake of appearances (known as the economic viewpoint approach).

Decision

Summary

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