Toridas: Exemption intra-Community supply not applicable if goods are not dispatched
On 26 July 2017, the Court of Justice of the European Union (hereafter: “CJEU”) delivered its judgment in the Toridas case (C-386/16) on the application of the zero rate in a cross-border supply chain. The CJEU judgment gives more insight in the application of the exemption (with the right to deduct input VAT) for intra-Community supplies in a cross-border supply chain (zero-rate in the Netherlands).
9 August 2017
The Lithuanian company Toridas imported frozen fish into Lithuania from Kazakhstan, and sold it to Megalain, a company based and VAT registered in Estonia. Megalain agreed to remove the goods from Lithuania to other Member States, and provided proof of dispatch to Toridas within 30 days. In fact, it sold the fish almost immediately to customers in other Member States such as the Netherlands and Denmark, directly from Lithuania. It appears that Toridas was aware of this. Some of the fish was dispatched immediately, other fish was graded, glazed and packaged in Lithuania under the supervision of Megalain before being transported directly to customers in other Member States. On the invoices from Toridas to Megalain the address of the warehouses in Lithuania where Megalain loaded the fish was stated. Toridas treated its supplies as exempt intra-Community supplies.
However, the Lithuanian tax authorities took the view that the supplies to Megalain were domestic supplies and not exempt intra-Community supplies.
No exempt supplies if goods are not dispatched
The CJEU has ruled that, in such circumstances, Toridas was not entitled to qualify its transactions as exempt intra-Community supplies. In reference to its settled case-law, in any cross-border supply chain with two successive supplies, there can only be one supply that is treated as an exempt intra-Community supply, which should lead to intra-Community acquisition for which the customer should account for VAT. Moreover, the application of this exemption for a supply of goods becomes applicable only if:
the right to dispose of the goods as owner has been transferred to the person acquiring the goods, if the supplier establishes that those goods have been dispatched or transported to another Member State and if, as a result of that dispatch or transport, they have physically left the territory of the Member State of supply.
In this case, the supply by Megalain to its customers took place before the intra-Community transport on the very day that the fish was purchased from Toridas. The CJEU decided that a supply of goods by a supplier established in a first Member State cannot be considered as an exempt intra-Community supply where:
prior to entering into that supply, the acquirer of the goods, who is identified for VAT purposes in a second Member State, informs the supplier that the goods will be resold immediately to a customer established in a third Member State, before this acquirer takes them out of the first Member State and transports them to that third party, provided that that second supply has in fact been carried out and the goods have then been transported from the first Member State to the Member State of the customer.
As a result, the supply by Toridas constitutes a domestic supply, taxable at the local VAT rate. This conclusion is not affected by the fact that Megalain, as the middleman, was established and VAT-registered in Estonia.
Additionally, the CJEU judged that the processing of the fish in the course of a supply chain of two successive supplies, carried out by the middleman before the goods are transported to the customers in other Member States does not have an effect on the conditions for VAT exemption of the first supply.
The decision of the CJEU is a reminder that, even though suppliers do not need to transport goods cross-border themselves to apply the exemption for intra-Community supplies, they need to ensure that appropriate VAT controls are in place to qualify their transactions correctly from a VAT perspective. Moreover, the judgment shows that it is a relevant detail when the supplier in a first Member State is timely notified by the first acquirer that the goods will be resold immediately to a customer established in a third Member State, before he takes them out of the first Member State.
The referring court was concerned about the possibility of double taxation. However, the logic of this situation demands that the first acquirer of the goods should operate a VAT registration in the first Member State to apply the exemption for intra-Community supplies. It should, normally speaking, be able to recover VAT charged by the supplier and treat its supplies to other Member States as exempt intra-Community supplies.
Last, but not least we would like to note that in our opinion in the end the CJEU does not say anything about the simplified triangulation rule. The CJEU states as a preliminary remark that it will only provide a judgement on the application of the exemption for inta-Community supplies as such. However, when the transaction between the first two parties (A and B) is a local supply it will not be possible to apply the simplified triangulation rule anyway. This rule requires that the supply between A and B is the intra-Community supply.