Refusal of input VAT deduction in case of fraud is not limited to the tax loss – ECJ decision of 24 November 2022, C-596/21

Anyone who knew, or should have known, that their turnover (purchase) was part of a tax evasion scheme is denied the input VAT deduction. The ECJ has stated that this also applies if the input VAT amount exceeds the evaded tax amount. Because an item’s price normally increases along the service chain, this scenario is likely to be rather rare. However, the case in this decision illustrates the ECJ's extremely strict stance on this issue.

Facts of the case and the questions referred

Entrepreneur C wanted to sell Plaintiff A a used car for € 64,705.88 plus € 12,294.12 VAT but did not want to pay the full amount of VAT to the tax office.

He therefore wanted to give the impression that he had sold the car for only € 52,10.84 plus
€ 9,899.16 VAT to Intermediary W, who consequently sold it to A for € 64,705.88 plus € 12,294.12. Entrepreneur C pretended to be Intermediary W vis-à-vis Plaintiff A. Intermediary W agreed to this procedure.

Entrepreneur C issued an invoice to Intermediary W for € 52,10.84 plus € 9,899.16 VAT, and Intermediary W then charged Plaintiff A € 64,705.88 plus € 12,294.12 VAT. Plaintiff A paid the invoice amount to Entrepreneur C; Intermediary W did not receive nor make any payment. Entrepreneur C paid € 9,899.16 to the tax office, but Intermediary W did not report its turnover.

The Nuremberg Fiscal Court, which referred the case to the ECJ, considered this arrangement to be an atypical sales commission so that there was a supply from Entrepreneur C to Intermediary W and a further supply from Intermediary W to Plaintiff A.

The tax court found that the arrangement had only the purpose of reducing the tax on Entrepreneur C's sale, while Intermediary W had no intentions whatsoever of fulfilling his tax obligations. Plaintiff A should have known this. As a result, the tax authorities suffered a tax loss of € 2,394.96 (€ 12,294.12 minus € 9,899.16).

On the one hand, the tax court asked whether Plaintiff A could be denied an input VAT deduction although the first purchaser in the chain (Intermediary W) already knew that Entrepreneur C had evaded VAT when selling the car. Should this be affirmed, the tax court wanted to know whether the input VAT deduction should only be denied in the amount of the tax loss incurred (€ 2,394.96) or in full (€ 9,899.16).


The fact that Intermediary W also already knew of Entrepreneur C's tax evasion was irrelevant to the ECJ. The only decisive factor was that by acquiring the vehicle, Plaintiff A facilitated Entrepreneur C's tax evasion by enabling the sale of the goods.

According to the ECJ, the refusal of the input tax deduction is not limited to merely the amount of the tax loss incurred. The aim of refusing to allow an input VAT deduction is to encourage taxable persons to exercise the diligence that may reasonably be expected and required in any economic transaction to ensure that the transactions they carry out do not lead to their involvement in tax evasion. Limiting the refused deduction to merely the amount of the tax loss will not be sufficient to effectively achieve this objective.

Practical implications

VAT law shows no mercy in cases of fraud and abuse.  Since 1 January 2020, § 25f UStG (German VAT Code) also stipulates by law that the input tax deduction and also certain tax exemptions are denied if the entrepreneur knew or should have known that he was participating in a transaction related to a supply he provided or received in which the supplier or another participant - at a previous or subsequent stage of the transaction - was involved in tax evasion. The key question here is: What should someone have been expected to know? In its letter of 15 June 2020, Germany’s Federal Ministry of Finance (BMF) took a position on this issue and placed high - and in part questionable - demands on entrepreneurs, as we reported here.

The present ruling underscores this strict stance and clarifies that the input VAT deduction in a chain of supplies can also be denied for several participants.  However, to deny the input tax deduction even to the extent that it exceeds the tax loss incurred could overshoot the mark because, after all, this produces additional tax revenue for the tax authorities that they would not have received if the business relations had been conducted in a normal manner. Nevertheless, entrepreneurs are well advised to pay careful attention to anomalies and, if necessary, to integrate appropriate controls into the tax compliance management system.

16 December 2022