Quick fix: chain transactions

On 4 October 2017, the European Commission published some details of its plan for reform of the EU VAT system in respect of cross border trade. In anticipation of the new VAT system that should, according to the proposals, enter into force in 2022, the Commission proposes four quick fixes to provide some simplifications in the current system. This article deals with one of those quick fixes: the simplification for chain transactions.

3 November 2017

Difficulties with chain transactions

A chain transaction is a transaction where party A supplies goods to party B that subsequently supplies those goods to party C that subsequently supplies goods to party D and so forth. The parties can be established and/or VAT registered in different EU Member States. The goods are however transported only once, from party A in one Member State to the last party in the supply chain in another Member State. Only one of the supplies in the chain can be the intracommunity supply. All supplies that take place before that intracommunity supply are local supplies in the Member State of departure. All supplies that follow the intracommunity supply are local supplies in the Member State of arrival.

Because only one supply can be the intracommunity supply the suppliers in the chain will have to define to which of the transaction the transport can be attributed. If the transport is arranged by either the first or the last party in the chain, defining which supply the transport should be attributed is quite simple. If intermediate suppliers arrange the transportation, this is more difficult as they can do this in their capacity of buyer or supplier. If for example party B picks up the goods at the premises of party A it is (pursuant to the CJEU case law in Eurotyre Holding and Toridas) important to determine whether or not the right to dispose of the goods as owner has been transferred to party C before the goods cross the border. If the right to dispose as owner has been transferred before the goods cross the border the B-C transaction is the intracommunity supply. If the right to dispose of the ownership of the goods has been transferred to party C in the Member State of arrival of the goods the A-B transaction is the intracommunity supply.

In Eurotyre Holding there also seems to be a kind of knowledge test for party A. If party A is unaware that party B has transferred the right to dispose of the goods to party C before the goods cross, the border he can still legitimately treat the A-B supply as an intracommunity supply (at least according to the interpretation of the Dutch Supreme Court). This knowledge test is not so explicitly mentioned in the later Toridas case.

Proposed simplification

The proposed simplification provides for an easier and more practical assessment to which supply the transport can be ascribed, in any case for transactions that involve three parties. For longer supply chains it is in my opinion uncertain whether the simplification applies. I will address this in the section ‘some critical note’. I will address a three party transaction only, in this section.

The simplification applies under the conditions that both party A and B are a certified taxable person (CTP). In short this means that they have been qualified as being reliable taxable persons. I refer to my article on CTPs for a more extensive description of the CTP regime. The simplification applies when party B arranges the transport. The transport can be ascribed to the A-B transaction when party B informs party A of the Member State the goods are transported to and B is VAT registered in another Member State than the Member State of departure. If these conditions are not met, e.g. party B does not inform party A to which Member State it transports the goods, the transport is ascribed to the B-C supply and this is being treated as the intracommunity supply.  


The proposed simplification provides the taxable persons with more legal security than the current CJEU case law does. Where in the CJEU case law it is a relevant factor whether or not the right to dispose of the ownership of the goods have been transferred to party C before the goods cross the border, this is irrelevant under the simplification.

What’s more, in a chain transaction it seems that it is possible for the parties involved to more or less determine themselves which transaction is the intracommunity supply, i.e. for example if ascribing the transport to the B-C supply gives the most interesting results party B could decide not to inform party A about the Member State he will transport the goods to. Reasons why it is most interesting to ascribe the transport to one specific link of the supply chain might be multiple, such as making optimal use of existing VAT registrations and avoiding additional registrations, cash flow considerations or if parties want to apply the already existing simplified triangulation rule it is important that the A-B supply is the intracommunity supply.  

Some critical note

Even though the proposed simplification will in my opinion be welcomed by businesses because it provides more legal certainty and options to choose, I believe there is some room for improvement or clarifications.

First and most importantly it is unclear whether or not the simplification is limited to three party transactions only. In practice there are often much longer chains and a simplification will be welcomed in those supply chains as well. There are however more complications in a longer supply chain because a party could pose as another party resulting in two supplies being considered as the intracommunity supply. This could be used by fraudsters. If for example party E arranges the transport it can report to party D that it is picking up the goods at the premises of party A in order to transport them to another Member State and provide party D with its VAT number of another Member State than the Member State of departure. This provides party D with sufficient information to treat its supply as an intracommunity supply. However, when party E goes to party A to pick up the goods it could pose as being sent by party B allowing party A to legitimately treat his supply as the intracommunity supply. Posing as another party however is not common behavior of a CTP. It therefore seems to me that the simplification should also cover longer chain transactions as well.

Another remaining question to me is the situation where party B is both registered in the Member State of departure of the goods and in another Member State. Can party B then choose to use its other Member States VAT number? And can it do so even when it is not established in that latter Member State, but established in the Member State of departure? Some clarification is needed here.

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