ECJ Case “Sia Kursu Zeme” (C-273/18)
National courts and authorities may refuse the right of deduction, if in the light of objective evidence, that right is being relied on for fraudulent or abusive ends.
But when an abusive practice exists in the sphere of VAT?
Kuršu zeme is a company established in Latvia which in 2012 declared acquisitions of goods from another company established in Latvia, KF Prema, and deducted the input VAT on those transactions.
Those acquisitions had taken place following a chain of successive transactions between several companies. The goods concerned had been sold (based on the invoices) as follows:
The Tax Authorities in Latvia, not having been able to find any logical explanation for that chain of transactions, they found:
1. that the intermediary companies in practice did not do anything in connection with the execution of the acquisitions of goods at issue and,
2. that Kuršu zeme could not fail to be aware of the sham nature of that chain
Consequently, the Tax Authorities corrected the VAT returns issued by Kuršu zeme by including the value of the goods at issue in the value of goods received originating from other Member States. As a result, the amount of VAT payable increased and the input VAT declared by Kuršu zeme was simultaneously reduced by the same amount.
Kuršu zeme argued that:
1. all the formal and substantive requirements for entitlement to the right of deduction had been satisfied,
2. it had no reason to have doubts about KF Prema or the purpose of the transactions
3. it had gained no tax advantage from its transactions with that company.
Then, the Supreme Court of Latvia decided to ask the following question to the Court of Justice for a preliminary ruling:
Question referred to the court:
“Whether Article 168(a) of the Principal EU Vat Directive must be interpreted as meaning that, for the purposes of refusing the right to deduct input VAT, the fact that an acquisition of goods took place at the end of a chain of successive sale transactions between several persons and that the taxable person acquired possession of the goods concerned in the warehouse of a person forming part of that chain, other than the person mentioned as supplier on the invoice, is in itself sufficient to find the existence of an abusive practice on the part of the taxable person or the other persons participating in that chain, or whether it is also necessary to establish in what the undue tax advantage allegedly obtained by that taxable person or those other persons consisted.”
1. The right of taxable persons to deduct the VAT due or already paid on goods acquired and services received as inputs from the VAT which they are liable to pay is a fundamental principle of the common system of VAT established by EU legislation;
2. The right to deduct provided for in Article 167 et seq. of the VAT Directive is an integral part of the VAT scheme and in principle may not be limited.
3. National courts and authorities may refuse the right of deduction, in the light of objective evidence, that that right is being relied on for fraudulent or abusive ends.
4. An abusive practice can be found to exist only if two conditions are satisfied:
the transactions concerned result in the accrual of a tax advantage, the grant of which would be contrary to the purpose of the provisions of the VAT Directive and
it is apparent from a number of objective factors that the essential aim of the transactions concerned is solely to obtain that tax advantage.
“Article 168(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2010/45/EU of 13 July 2010, must be interpreted as meaning that, for the purposes of refusing the right to deduct input value added tax (VAT), the fact that an acquisition of goods took place at the end of a chain of successive sale transactions between several persons and that the taxable person acquired possession of the goods concerned in the warehouse of a person forming part of that chain, other than the person mentioned as supplier on the invoice, is not in itself sufficient to find the existence of an abusive practice on the part of the taxable person or the other persons participating in that chain, the competent tax authority being required to establish the existence of an undue tax advantage obtained by that taxable person or those other persons.”
Partner - Accounting & VAT Department
We are a Law Firm with offices in Cyprus and Malta and a representative office in Shanghai China comprising of more than 80 lawyers, accountants and other professionals who advise, international and local clients.
The Firm has been offering legal and consulting services since 1983 evolving from a traditional law firm to an innovative cutting-edge multidisciplinary law firm combining exceptional expertise in law, tax, vat and accounting.
From its establishment the Firm’s focus has been heavily business oriented and always abreast with the latest global developments and innovations. Drawing from our pool of experienced professionals we provide our clients’ businesses full legal and accounting support on an everyday basis as well as customized solutions in today’s global financial and legal challenges.
We consider ourselves as ‘traditional pioneers’ and our motto is to foresee and anticipate any issues that may potentially impact our clients’ business and to offer effective advice and solutions proactively.
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companies are conducting business, each of which is a separate legal entity.