Briefing document & Podcast: ECJ Cases on Recovery of VAT if unduly paid

Analysis of case law of the Court of Justice of the EU regarding the refund of VAT unduly paid, with an emphasis on non-established taxable persons and the tension between formal rules and fundamental principles of EU VAT law.

Purpose: Providing a detailed overview of the main themes, ideas and facts from the sources provided, illustrated with relevant quotes, to paint a clear picture of the current state of affairs regarding the refund of VAT unduly paid in the EU.

Source material:

Judgment of the Court of Justice (Second Chamber) of 15 March 2007 in Case C-35/05, Reemtsma Cigarettenfabriken GmbH v Ministero delle Finanze
Judgment of the Court of Justice of 13 March 2025 in Case C-640/23, Greentech SA
Judgment of the Court of Justice of 7 September 2023 in Case C-453/22, Michael Schütte
Judgment of the Court of Justice of 26 April 2017 in Case C-564/15, Tibor Farkas

Main themes and ideas:

The Primary Liability of the Supplier and the Role of the Eighth VAT Directive:

In principle, the supplier is liable for the payment of VAT to the tax authorities of the Member State in which the service is supplied (Article 21(1) of the Sixth VAT Directive).
The Eighth VAT Directive (on the refund of VAT to taxable persons not established in the country but established in another Member State) is primarily intended for the refund of VAT due on goods or services supplied to them and used for the purposes of taxed transactions.
The Court of Justice ruled in the Reemtsma case (C-35/05) that the Eighth VAT Directive does not provide a basis for the refund of VAT that was not due and was invoiced and paid in error. The key question in Reemtsma was: “Should Articles 2 and 5 of the Eighth VAT Directive be interpreted as meaning that VAT that was not due, but had been wrongly invoiced and paid, could also be recovered by a customer not established in the country?” The answer was negative. The Court stated: “Articles 2 and 5 of Eighth Council Directive 79/1072/EEC … must be interpreted as meaning that value added tax that is not due and has been invoiced in error to the beneficiary of the services and paid to the tax authorities of the Member State where those services were supplied, is not refundable under those provisions.”

The Relationship Between Customer and Supplier in the event of Undue Payment:

If VAT has been wrongly invoiced and paid, the purchaser does not, in principle, have a direct claim for a refund from the tax authorities.
In principle, the customer must contact the supplier with whom he has a private-law relationship in order to recover the VAT unduly paid. The supplier can then try to get it back from the tax authorities.
However, this route can be problematic, for example in the event of bankruptcy of the supplier or the expiry of national limitation periods for invoice correction.

The Need for Immediate Refund in the event of Impossibility or Extreme Difficulty of Recovery from the Supplier:

The Court of Justice has emphasised in subsequent cases, such as Greentech (C-640/23) and Schütte (C-453/22), that the fundamental principles of fiscal neutrality and effectiveness require Member States to provide mechanisms allowing the purchaser to recover the VAT unduly paid directly from the tax authorities if recovery from the supplier becomes impossible or excessively difficult.
In the Greentech case, where reclassification of a transaction led to the expiration of the limitation period for invoice correction, the Court ruled: “However, those principles require that, in such a situation, that taxable person be able to apply directly to the tax authorities for reimbursement.”
The Schütte case concerned a customer who had paid too much VAT but could not recover it from his suppliers because it was time-barred. The Court decided that Mr Schütte had a direct right to a refund from the tax authorities: “Council Directive 2006/112/EC … and the principle of value added tax (VAT) neutrality and the principle of effectiveness must be interpreted as requiring that a receiver of supplies of goods has a direct right to claim from the tax authorities the reimbursement of improperly invoiced VAT paid to his or her suppliers and paid by those suppliers to the public purse…”

The Role of Tax Neutrality and Effectiveness:

The principle of fiscal neutrality means that the VAT system must not unnecessarily burden economic operators.
The principle of effectiveness requires that national procedures must not render impossible or excessively difficult the exercise of rights conferred by EU law.
These principles form the basis for the development of case law which, under certain circumstances, allows a direct claim for reimbursement from the tax authorities by the purchaser.

The Context of the Reverse Charge Scheme (Farkas):

The Farkas case (C-564/15) concerned an incorrectly applied reverse charge scheme. In a reverse charge situation, the customer is in principle responsible for the payment of the VAT.
Although the Court ruled that the buyer can be denied the right to deduct if the VAT was not due, it was also emphasized that the possibility of a direct refund from the tax authority must exist if recovery from the seller becomes impossible, in particular in the event of bankruptcy. The Court stated: “… to the extent that reimbursement of the unduly invoiced value added tax by the seller to the purchaser becomes impossible or excessively difficult, in particular in the case of the insolvency of the seller, those principles require that the purchaser be able to address his application for reimbursement to the tax authority directly.”

Exclusion of Direct Taxes Comparison:

In the Reemtsma case, the Court emphasized that the rules for the refund of unduly paid direct taxes are not relevant for the assessment of the VAT rules. The VAT system has its own logic and principles.

No Absolute Exclusion of Direct Claim:

Although the main rule is that the buyer must turn to the supplier, the later judgments show that the Court recognizes that there are situations in which a direct claim against the tax authorities is necessary to ensure the principles of neutrality and effectiveness.

Implications and conclusions:

The case-law of the Court of Justice on the refund of VAT paid but not due, in particular in situations with non-established taxable persons, shows a development. While the Reemtsma case highlighted the primary responsibility of the supplier and the limitations of the Eighth VAT Directive, later cases such as Greentech and Schütte recognize the need for a more direct route for the buyer to the tax authorities when recovery from the supplier is illusory.

The fundamental principles of fiscal neutrality and effectiveness play a crucial role in this. National regulations should not make the exercise of rights under EU law impossible or excessively difficult. This means that Member States must provide for procedures to ensure that taxable persons can recover the VAT unduly paid, even if the usual route through the supplier fails.

The Farkas case illustrates that these principles also apply in contexts of specific VAT schemes such as reverse charge. Ultimately, the Court’s rulings seek to strike a balance between the formal rules of the VAT Directives and the protection of the rights of taxable persons, while avoiding unnecessary economic burdens resulting from undue VAT payments.