No shifting the place of supply due to tax fraud – ECJ judgement C-641/21, 27 October 2022

When it comes to cases of tax evasion or fraud, the VAT Directive knows no mercy: if a trader participates in it, they are denied the tax exemptions and input VAT deduction, because no one is permitted to make fraudulent use of the VAT Directive. But what about cases where the place of supply is in another EU Member State according to the place-of-receipt principle and the recipient is liable for tax? For the supplier to be able to be sanctioned in such a situation, the Austrian Federal Fiscal Court considered suspending the place-of-receipt principle and taxing the supply in the supplier's Member State.

The facts:  Tax evasion with carbon credits

The Austrian enterprise Climate Corporation Emissions Trading GmbH transferred carbon credits to a German GmbH for remuneration. According to the ECJ case law, this was not a supply of goods, but rather a supply of services that was taxable at the recipient's place of business in Germany according to Art. 44 VAT Directive and § 3a para. 2 UStG. Since the Climate Corporation was not established in Germany, the reverse charge procedure applied.

The responsible authorities revealed that the German GmbH was involved as a "missing trader” in a form of tax evasion known as a VAT carousel, which the Climate Corporation either knew about or at least should have known about.

Question referred: Can an exception be made to the place-of-receipt principle?

 The Austrian Federal Finance Court asked whether, in such a situation, the place of supply was, as an exception, at the place of the supplier, i.e. in Austria, contrary to Art. 44 of the VAT Directive.  This question was posed due to the following consideration: if it had been a supply of goods rather than a supply of services, this would have been taxable in Austria, but in principle VAT-exempt as an intra-Community supply. This VAT exemption would have had to be denied due to the party’s participation in a tax evasion scheme so that the Climate Corporation would have had to pay VAT in Austria. However, because the transfer of carbon credits is a service and the place of supply is with the recipient in Germany, there is no possibility of the Climate Corporation being liable for VAT.

ECJ:  Intra-Community supplies/services cannot be treated equally

The ECJ recognised the comparability of intra-Community supplies and intra-Community services in factual terms. Legally, however, the two are regulated fundamentally differently by the VAT Directive:  In the case of an intra-Community supply, the place of supply is in the Member State where the movement of goods begins. The Member State in question could refuse the VAT exemption if the supplier abusively or fraudulently invoked it.  This measure concerned the assertion of a right. In the case of a cross-border service, on the other hand, the place of supply was from the outset not in the Member State of origin, but at the place of receipt.   Changing the place of supply would be contrary to the objectives and the methodology of the VAT Directive and would mean transferring the power of taxation to another Member State without any legal basis.

Intra-Community supplies and intra-Community services should therefore not be treated in the same way in the case of fraud and abuse, i.e. in particular the place of supply should not be shifted to the Member State of origin.

Practical implications

This decision was to be expected, as changing the place of supply would have meant too great an intervention in the VAT Directive system.  The referral of the Austrian Federal Finance Court was probably also motivated by the fact that the tax office had initially classified the transfer of the carbon credits as a supply of goods and was now attempting to legally achieve the same result even if it qualified as a service.

However, the ruling says nothing about the the reverse charge turnover in the country of destination, Germany. The German GmbH becomes the VAT debtor for the turnover of Climate Emissions taxable in Germany, for which it could also claim a right to deduct input VAT in the regular course of events. This input VAT deduction could be denied with the justification that rights under the VAT Directive may not be abused or fraudulently claimed. In Germany, this is explicitly regulated by law in § 25f (1) no. 4 UStG (German VAT Code), and there is also a corresponding regulation in Austria (although not specifically related to the reverse charge procedure).  In Member States where there is no statutory regulation, the refusal of input VAT deduction can be derived directly from the ECJ case law.


Dated: 10 February 2023

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