Compliance with substantive conditions is essential
In its ruling No. C-580/16 of 19 April 2018, the European Court of Justice gave an interpretation of the VAT Directive provisions regulating the criteria for VAT exemption on triangular transactions
In the Court's view, the non-compliance with the formal requirements for VAT exemption on interim acquisitions in triangular transactions may not necessarily constitute a ground for the denial of the right to exemption. When examining the right to exemption, the content of the triangular transaction and the principle of fiscal neutrality are to be taken into account.
Triangular transactions
Triangular transactions are a type of chain transactions. They are a series of transactions involving the sale and purchase of goods between at least three subjects. The goods are dispatched or transported directly from the first supplier in the chain to the final recipient, with each purchase and sale being treated separately.
A distinction is made between real and quasi triangular transactions. A real triangular transaction is a series of transactions including taxpayers with VAT ID No. from three EU member states. If the requirements for the real triangular transaction are not met, the transaction is regarded as a quasi triangular transaction.
Simplification Rules for Real Triangular Transactions
The VAT Directive (Council Directive 2006/112/EC of 28 November 2006) lays down simplification rules for the VAT taxation of real triangular transactions.
If certain criteria are met, the VAT on triangular transactions is levied only in the member state of the final recipient. This means that the first supply by the supplier from the member state from which the goods are dispatched or transported (Article 46 Item 1 of the Slovene VAT Act (ZDDV-1)) and the first acquisition by the acquirer from the interim member state (Article 48 Item 2 ZDDV-1) are exempted from VAT. Free of VAT is also the second supply provided by the acquirer from the interim member state to the final recipient from the member state of destination.
Despite a number of supplies, a real triangular transaction is taxed only once. VAT is levied and paid by the actual recipient of goods in the member state of destination. According to the simplification rules, the intermediate (acquirer) is not obliged to register for VAT purposes in the member state of the final recipient.
Rules at EU Level
In accordance with Article 40 of the VAT Directive, the place of the intra-Community acquisition of goods shall be deemed to be the place where the dispatch or transport to the person acquiring them ends. The acquisition shall be subject to VAT in the member state of the final recipient of goods if the conditions from Article 42 of the VAT Directive are met:
- the acquirer proves that the acquisition was made for the purposes of a subsequent supply in the territory of the member state of the final recipient;
- the acquirer fulfilled his obligations regarding the submission of a recapitulative statement.
In accordance with Article 141 of the VAT Directive, the acquisition is exempted from VAT if the acquisition of goods is made by a taxpayer who is not established in the interim member state but is identified for VAT purposes there. Furthermore, the goods are to be directly dispatched or transported from a member state other than that in which the acquirer is identified for VAT purposes.
Case Law of the European Court of Justice
Based on a preliminary question, the Court passed a judgement concerning the application of VAT Directive provisions regulating VAT exemptions on acquisitions performed by the intermediate in a series of triangular transactions (Judgement No. C-580/16 of 19 April 2018). In its judgement, the Court took the view that, in examining the compliance with the requirements for VAT exemption, the content of the triangular transaction and not only formal requirements are to be taken into account.
In case the acquirer is registered for VAT purposes as well in the member state of the interim acquisition as well as in the member state from which the goods are directly dispatched or transported, the requirements for VAT exemption in accordance with Article 141 of the VAT Directive are not fulfilled from a strict formal point of view. However, the Court considers that the right to VAT exemption cannot be refused to a taxpayer on the sole ground that, during the acquisition, the taxpayer is resident and identified for VAT purposes in the member state from which the goods are dispatched or transported if he uses the VAT identification number of the member state of acquisition for that specific intra-Community acquisition.
In order to apply the VAT exemption, the acquirer is to provide a proof of taxation in the member state of destination in accordance with Article 42 of the VAT Directive. Obligations concerning recapitulative statements must be regarded as being formal in the Court's view. The non-compliance with such formal conditions shall not in itself constitute a ground for the denial of the right to VAT exemption if the substantive criteria are met. The Court ruled that the tax office of the member state of the interim acquisition is not allowed to refuse the acquirer the right to VAT exemption on the sole ground that he did not submit the recapitulative statement in time.
The Court held that, in examining VAT provisions, the principle of fiscal neutrality is to be taken into account and decisions leading to double taxation are to be avoided.