CJEU rules that the transfer of land in settlement of a tax debt is not subject to VAT

By Laurence Clot, Sophie Dorin


Does the transfer of land to a public authority for the purpose of settling a tax debt constitute a supply of goods for consideration subject to VAT?

  • A supply of goods "for consideration" is subject to VAT. In a decision dated 11 May 2017 (Case C-36/16, Posnania Investment SA), the CJEU focused on the meaning of "for consideration", which requires a legal relationship between the parties entailing "reciprocal performance", and held that the transfer of ownership of land (goods) by a taxable person to a public authority in settlement of a tax debt did not constitute a supply of goods "for consideration" subject to VAT.
  • Indeed, the Court held that the obligation to pay a tax debt is compulsory and unilateral in nature. Thus, the payment of the tax, whether this is paid in money or by means of the transfer of property by the taxpayer, results only in the statutory discharge of its tax debt - such payment was not made in return for any performance by the authority.
  • Although the Court concluded that the transfer of property in lieu of a cash payment in order to discharge a tax debt is not a transaction effected "for consideration" subject to VAT, it also noted that, to ensure neutrality, any VAT previously recovered by the taxpayer in relation to the transferred property would have to be reversed given such non-business use of the property.

Does a taxable person have the right to rely on a supplier's invoice and apply a VAT margin scheme even after it becomes apparent from subsequent checks carried out by the tax authorities that the invoice was incorrect?

  • This case concerned the use of a special VAT margin scheme applying to the resale of second-hand cars. Under the scheme, VAT is charged only on the profit margin made on the resale, not on the total price. For a taxpayer to use the scheme, the second-hand goods must have first been supplied to it by certain categories of suppliers, including another trader applying the same margin scheme.
  • In this case, a Lithuanian taxpayer resold second-hand cars it had bought from a Danish supplier. The invoices from Denmark referred to the margin scheme but also stated that the cars were exempt from VAT and it was then discovered that the margin scheme had not been applied. The issue in the case was whether a Member State could deny a taxpayer the right to apply the margin scheme in circumstances where the taxpayer had received an invoice suggesting that the margin scheme had been applied but where the tax authorities had found out that this was not the case.
  • In its judgment dated 18 May 2017 (Case C-624/15 “Litdana” UAB), the CJEU held that a taxpayer may not be denied the right to use a margin scheme unless it is established by the authorities that the taxable person did not act in good faith or that he did not take every reasonable measure in his power to ensure that the transaction did not result in his participation in tax evasion.
  • The CJEU noted that the taxpayer had carried out several checks in the past in relation to the Danish supplier's application of the margin scheme and could not be expected to systematically verify this for each transaction with that same supplier. The Court also reiterated that it is for the tax authorities to carry out the necessary inspections of traders in order to detect irregularities and VAT fraud.
  • This decision shows the importance of having appropriate evidence to demonstrate that a trader is prudent and cautious when assessing their entitlement to use a margin scheme.

Is import VAT payable in respect of goods destroyed or irretrievably lost while they are placed under a customs transit procedure?

  • In a judgment dated 18 May 2017 (Case C-154/16, “Latvijas Dzelzcels” VAS), the CJEU held that import VAT is not due on goods placed under the external Community transit procedure which have been totally destroyed or irretrievably lost (proven to a satisfactory standard) while under that procedure.
  • Where goods have been placed under an external transit procedure, the obligation to pay import VAT will arise when the goods exit the procedure, as that is when such goods can enter or integrate into the economic network of the EU for consumption. The CJEU confirmed however that this excludes goods which are non-existent or unusable - consequently, to the extent that goods totally destroyed or irretrievably lost while under the transit procedure cannot be integrated into the economic network of the EU, they cannot then be regarded as having exited the transit procedure, nor "imported" and so are not liable to import VAT.
  • This conclusion, which is based on Articles 70 and 71 of the EU's VAT Directive 2006/112/EC, is consistent with earlier European case law (CJEU 29 April 2010, Case C-230/08).