ECJ C-656/19 (Bakati Plus) – Judgment – VAT exemption for ‘personal luggage’ not applicable if goods are resold

On Dec 17, 2020, the ECJ/CJEU issued its decision in the case C-656/19 (Bakati Plus). This is a Hungarian referral asking whether it is compatible with Article 147 of the VAT Directive for a Member State to operate a practice whereby the concept of ‘personal luggage’, established as forming part of the concept of the supply of goods to foreign travellers, which is exempt from VAT, is treated in the same way as both the concept of personal effects used in the Convention concerning Customs Facilities for Touring and the concept of ‘luggage’ defined in Article 1(5) of Commission Delegated Regulation (EU) 2015/2446 supplementing Regulation (EU) No 952/2013 of the European Parliament and of the Council as regards detailed rules concerning certain provisions of the Union Customs Code which deals with the VAT exemption for peronal luggage.

Articles in the EU VAT Directive

Articles 146 and 147 of the Council Directive 2006/112/EC

Article 146
1. Member States shall exempt the following transactions:
…
(b) the supply of goods dispatched or transported to a destination outside the Community by or on behalf of a customer not established within their respective
territory, ….

Article 147
1. Where the supply of goods referred to in point (b) of Article 146(1) relates to goods to be carried in the personal luggage of travellers, the exemption shall apply only if the following conditions are met:
(a) the traveller is not established within the Community;
(b) the goods are transported out of the Community before the end of the third month following that in which the supply takes place;
(c) the total value of the supply, including VAT, is more than EUR 175 or the equivalent in national currency, fixed annually by applying the conversion rate obtaining on the first working day of October with effect from 1 January of the following year.
However, Member States may exempt a supply with a total value of less than the amount specified in point (c) of the first subparagraph.
…

Facts (simplified):

Bakati Plus Kereskedelmi és Szolgáltató Kft (‘Bakati Plus’) is a wholesale supplier of ornamental plants and a non-store retailer of other goods. Since 2015, its annual turnover has increased from 50 million Hungarian forints (‘HUF’) to HUF 1 billion.

During 2016, the year in question, almost all of the business of Bakati Plus consisted in the sale of large quantities of foodstuffs, cosmetics and cleaning products to Serbia, which it supplied to 20 individuals belonging to three families.

The goods were transported by an agent of Bakati Plus from its warehouse to another warehouse which the Serbian buyers had rented in Hungary, close to the border with Serbia.

There, in return for payment of the price in cash, the driver providing the transportation would hand over the goods to the buyers, together with the invoices issued by the representative of Bakati Plus and the VAT refund application forms. The goods were then taken by private car, as traveller’s luggage, to Serbia.

The mechanism for obtaining the exemption from VAT operated as follows:

Bakati Plus would complete the VAT refund application form, which was subsequently endorsed and stamped by the customs office of exit of the goods;
a second copy of the form would be returned to Bakati Plus;
Bakati Plus would refund the tax to the buyers in accordance with the VAT Law; and
Bakati Plus would apply to deduct the amount of the refund in its VAT return.

Bakati Plus knew that its customers were buying the goods in order to resell them on Serbian markets. It was also aware that the involvement of several members of the same family in the transaction served to ensure that the value of each supply did not exceed HUF 1 million, thus making it easier, under Hungarian customs procedure rules, for the goods to be taken across the border from Hungary to Serbia unhindered.

Following a tax inspection, the Nemzeti Adó- és Vámhivatal Csongrád Megyei Adó- és Vámigazgatósága (Tax and Customs Directorate for the province of Csongrád, Hungary; ‘the first-tier tax authority’) found that the purchases made by the three Serbian families from Bakati Plus exceeded the scope of personal needs and family use, had been made for the purposes of resale and, therefore, could not be classified as ‘traveller’s luggage’. It also stated that the company did not qualify for an exemption on any other grounds.

Question

Bakati Plus challenged the decision before the Szegedi Törvényszék (Szeged Court, formerly the Szegedi Közigazgatási és Munkaügyi Bíróság, Hungary), which has referred the following questions to the Court of Justice for a preliminary ruling:

‘1. Is it compatible with Article 147 of Council Directive 2006/112/EC … for a Member State to operate a practice whereby the concept of “personal luggage”, established as forming part of the concept of the supply of goods to foreign travellers, which is exempt from value added tax, is treated in the same way as both the concept of personal effects used in the Convention concerning Customs Facilities for Touring, done at New York on 4 June 1954, and the Additional Protocol thereto, and the concept of “luggage” defined in Article 1(5) of Commission Delegated Regulation (EU) 2015/2446 supplementing Regulation (EU) No 952/2013 of the European Parliament and of the Council as regards detailed rules concerning certain provisions of the Union Customs Code [(7)]?

2. In the event of a negative answer to the previous question, how is the concept of “personal luggage” in Article 147 of the VAT Directive to be defined, given that that directive does not define it? Is the national practice whereby the tax authorities of a Member State take into account only the “normal meaning of terms” compatible with the provisions of Community law?

3. Must Articles 146 and 147 of the VAT Directive be interpreted as meaning that, where a taxable person does not qualify for the exemption for the supply of goods to foreign travellers under Article 147 of that directive, it must be examined, where appropriate, whether the exemption for the supply of goods for export under Article 146 of that directive is applicable, even if the customs procedures laid down in the Union Customs Code and in delegated legislation have not been carried out?

4. If the answer given to the previous question is that, where the exemption for foreign travellers is not applicable, the transaction qualifies for a VAT exemption on the ground that the goods are for export, can the legal transaction be classified as a supply of goods for export that is exempt from VAT contrary to the intention expressed by the customer at the time of placing the order?

5. In the event of an affirmative answer to the third and fourth questions, in a situation such as that in the case at issue, in which the issuer of the invoice knew at the time of supplying the goods that they had been purchased for the purposes of resale but the foreign buyer nonetheless wished to remove them from the territory under the scheme applicable to foreign travellers, with the result that the issuer of the invoice acted in bad faith in issuing the tax refund application form available for that purpose under that scheme, and in refunding the output VAT pursuant to the exemption for foreign travellers, is it compatible with Articles 146 and 147 of the VAT Directive and the EU law principles of fiscal neutrality and proportionality for a Member State to operate a practice whereby the tax authority refuses to refund tax incorrectly declared and paid on supplies of goods to foreign travellers without classifying such transactions as supplies for goods for export and without making a correction to that effect, notwithstanding that it is indisputable that the goods left Hungary as traveller’s luggage?’

See prior newsitem: Link

AG Opinion:

The AG gives the following conclusion:

The concept of “personal luggage of travellers” in Article 147 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax should not be interpreted solely in the light of the normal meaning of terms, but must also take into account the context in which it is used and the objectives pursued by that tax.
The Convention concerning Customs Facilities for Touring, done at New York on 4 June 1954, and the Additional Protocol thereto, and Article 1(5) of Commission Delegated Regulation (EU) 2015/2446 supplementing Regulation (EU) No 952/2013 of the European Parliament and of the Council as regards detailed rules concerning certain provisions of the Union Customs Code do not provide the context for interpreting Article 147 of Directive 2006/112.
The exemption from value added tax for supplies of goods to be transported out of the European Union in the personal luggage of travellers within the meaning of Article 147 of Directive 2006/112 is conditional, among other requirements, on the exports being of a non-commercial character.’

Decision

1. The exemption provided for in Article 147(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax in respect of ‘goods to be carried in the personal luggage of travellers’ must be interpreted as meaning that that exemption does not cover goods which an individual not established within the European Union takes with him or her outside the European Union for commercial purposes with a view to the resale of those goods in a third State.

2. Article 146(1)(b) and Article 147 of Directive 2006/112 must be interpreted as not precluding national case-law under which, where the tax authority finds that the conditions for the value added tax (VAT) exemption for goods to be carried in the personal luggage of travellers have not been satisfied, but that the goods concerned have actually been transported outside the European Union by the purchaser, that authority is required to examine whether the VAT exemption under Article 146(1)(b) may be applied to the supply in question even though the applicable customs formalities have not been completed and even though, at the time of the purchase, the purchaser did not intend to have that exemption applied.

3. Article 146(1)(b) and Article 147 of Directive 2006/112, and the principles of fiscal neutrality and proportionality, must be interpreted as precluding a national practice under which the tax authority automatically denies a taxable person the benefit of the value added tax (VAT) exemption provided for by each of those provisions where it finds that that taxable person has, in bad faith, issued the form on the basis of which the purchaser has made use of the exemption provided for in Article 147, where it is established that the goods concerned have left the territory of the European Union. In such circumstances, the VAT exemption provided for in Article 146(1)(b) must be refused if infringement of a formal requirement has the effect of preventing the production of conclusive evidence that the substantive requirements governing the application of that exemption have been satisfied or if it is established that that taxable person knew or should have known that the transaction in question was involved in fraud jeopardising the functioning of the common system of VAT.

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