ECJ C-171/23 (UP CAFFE d.o.o) – Judgment – Formation of a company to exploit VAT exemptions constitutes an abusive practice

On October 4, 2024, the ECJ issued its judgment 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

Summary

In Case C-171/23, the Court addressed the VAT exemption scheme under Directive 2006/112/EC in relation to abusive practices. The case involved UP CAFFE, a Croatian company, and the Croatian Ministry of Finance, which demanded VAT payments from UP CAFFE, suspecting tax planning abuses. The Croatian tax authority claimed UP CAFFE was created to maintain VAT exemptions previously enjoyed by another company, SS-UGO, thereby constituting an abusive practice.

The Court ruled that the formation of a company to exploit VAT exemptions, as laid out in Article 287 of the directive, constitutes an abusive practice if it solely aims to circumvent tax obligations. Such a company cannot benefit from the VAT exemption scheme, even if national law lacks specific provisions against abusive practices.

The Court emphasized that the principle of prohibiting abusive practices applies generally, requiring national authorities and courts to deny VAT benefits if abuse is established. The judgment clarifies that EU law’s anti-abuse principles can be applied even without explicit national legislation, ensuring that VAT exemptions are not misused. The decision aims to uphold the integrity of the VAT system by preventing schemes designed to exploit tax benefits without legitimate economic activity.

Article in the EU VAT Directive

Articles 285 and 287 of the EU VAT Directive

Article 285 of the VAT Directive provides in the first subparagraph thereof:

‘Member States which have not exercised the option under Article 14 of [the Second Council] Directive 67/228/EEC [of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes – Structure and procedures for application of the common system of value added tax (OJ, English Special Edition, Series I Volume 1967, p. 16.)] may exempt taxable persons whose annual turnover is no higher than EUR 5 000 or the equivalent in national currency.’

Article 287 of the VAT Directive:

‘Member States which acceded after 1 January 1978 may exempt taxable persons whose annual turnover is no higher than the equivalent in national currency of the following amounts at the conversion rate on the day of their accession:

…

(19) Croatia: 35 000 [euros].’

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

Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive (EU) 2016/856 of 25 May 2016, read in the light of the principle of the prohibition of abusive practices, must be interpreted as meaning that, where it is established that the formation of a company constitutes an abusive practice intended to maintain the benefit of the value added tax exemption scheme laid down in point 19 of Article 287 of that Directive 2006/112, in respect of an activity previously carried out, under that scheme, by another company, that Directive 2006/112 requires that the company accordingly formed cannot benefit from that scheme, even in the absence of specific provisions laying down the prohibition of such abusive practices in the national legal system.

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