Refund of VAT to foreign taxable persons: the Court of Justice of the European Union condemns Germany in two cases

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Refund of VAT to foreign taxable persons: the Court of Justice of the European Union condemns Germany in two cases

22 December 2020

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In two recent cases, the Court of Justice of the European Union (CJEU) has ruled that Germany violated the European VAT law by systematically refusing—for purely formal reasons—to refund German VAT to foreign taxable persons. Beyond the fact pattern of these two cases, VAT taxable persons facing challenges of their VAT deduction right should carefully consider these two rulings. Indeed, the CJEU clearly confirmed that the non-respect of some formal requirements should not entail, in principle, the actual right of deduction of VAT taxable persons.

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EU VAT taxable persons often incur VAT on purchases in Member States where they are not established. This is typically the VAT on costs such as restaurant meals, hotel stays, fuel, transport, seminars, etc. They can obtain a reimbursement of this VAT by filing claims via the website of their national VAT authorities. Council Directive 2008/9 of 12 February 2008 rules the conditions applicable in all Member States to the filing by the taxable person and the treatment by the VAT authorities of these claims.

 

The first decision: The infringement action of the European Commission against Germany[1]

The background

Directive 2008/9 foresees some requirements regarding the filing of the claim. The claim must be filed for 30 September of the year following the one in which the VAT was incurred (i.e., 30 September 2021 for VAT incurred in 2020). The claim must contain some information regarding, among others, the VAT taxable person, the supplier(s), the nature of the cost(s), and the invoice(s). The nature of the costs are to be reported using 10 different boxes (codes): code one for fuel, code two for the hiring of transport, etc., up to code 10 which is labeled “other”. The VAT authorities may ask for additional information and the foreign taxable person must answer within one month.

The German VAT authorities have rejected a number of claims arguing that the claimant did not provide enough details regarding the description of the goods or services when code 10 (“other”) was used. They did not request additional information from the foreign taxable persons as they may do under Directive 2008/9.

The European Commission has considered that Germany has not respected the rules of Directive 2008/9 because they have rejected well-founded claims for purely formal reasons. Therefore, the European Commission has lodged an infringement action with the CJEU against Germany.

The decision

In its decision, the CJEU condemns Germany because the practice of its VAT authorities violates the principles of tax neutrality and practical effectiveness of the EU VAT law.

The CJEU reminds that the principle of tax neutrality aims to relieve VAT taxable persons of the burden of VAT and that this principle is key to the overall VAT system. Consequently, Member States could not limit, in principle, the right of taxable persons to deduct VAT or to receive a reimbursement of the VAT incurred on their costs.

The CJEU also reminds that Member States may not restrict deductions or reimbursements on the basis that the application does not fulfill some formal requirements if the substantive principles of the deduction or the reimbursement are met.

Consequently, the CJEU decides that the practice of the German VAT authorities to systematically refuse the reimbursement of VAT for purely formal reasons and not requesting additional information while the VAT taxable person has a substantive right of the reimbursement of VAT constitutes an infringement of the European VAT law.

 

The second decision: The Y-Gmbh case [2]

On 17 December 2020, the CJEU had to decide in a second case concerning refunds of German VAT to foreign taxable persons.

The background

As mentioned above, the refund claim must contain certain information. This includes the sequential number of the invoice required to enable the VAT authorities to identify the goods or services for which the taxable person requests the VAT refund.

Y-Gmbh, an Austrian company, incurred German VAT on purchases of fuel in Germany. The company introduced a refund claim under Directive 2008/9. The German VAT authorities denied the refund of the VAT attached to some of the invoices because these invoices did not contain a sequential number but another number instead, which was in reference to the invoice. When filing its claim, Y-Gmbh quoted these numbers but the German VAT authorities rejected the claim considering that the foreign taxable person did not properly submit it.

The decision

As in the first case, the CJEU first reminds of the importance of the right of VAT deduction and that formal requirements may not, in principle, entail this right. Then, the CJEU decides that, even if the reference number is not equivalent to the sequential number, it still allows the VAT authorities to identify the goods or services. This implies that the VAT authorities must consider that the taxable person submitted its claim in line with the requirements of Directive 2008/9. Consequently, the VAT authorities must proceed with its assessment. The CJEU precises that, if the VAT authorities find it necessary, they may ask the taxable person to provide the sequential numbers within the one-month deadline laid down by Directive 2008/9.

Taxable persons who have been refused their VAT deduction claims in similar circumstances to these two decisions should consider legal action. Besides these specific situations, these CJEU decisions may also constitute arguments for other disputes with VAT authorities, because they clearly remind that the principle of tax neutrality overrules the non-respect of formal requirements if the taxable person has an actual VAT deduction right.

The Deloitte Luxembourg indirect tax team remains at your disposal to discuss the potential impacts of these questions for your organization.

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[1] C-371/19, Commission v Germany, 18 November 2020.

[2] C-346/19, Bundeszentralamt für Steuern v Y-GmbH, 17 December 2020.

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