A Member State may not deny an intra-Community supply exemption only on the basis that the customer is not registered in VIES

On 9 February 2017 the European Court of Justice issued a ruling of undisputable relevance and importance in the context of VAT. While examining the conditions needed to exempt from VAT an intra-Community supply, the Court clearly favours an approach contrary to the unduly formalistic or strict positions adopted by some Member States.

Although this is not the first such ruling from the European Court, the relevance of this specific judgment results from the simplicity of the background facts. Thus, the customer – incidentally, a Spanish company – did not have a VAT identification number valid for intra-Community transactions (although it was registered for internal VAT purposes). The Court has ruled that this fact, in and of its own, should not be sufficient to prevent the supply from being VAT-exempt.

Under the Directive, in order for an intra-Community supply to be considered exempt, certain conditions must be complied with. Firstly, there must be a supply which, in the context of VAT, implies a transfer of the right to dispose of the goods. Additionally, such goods must be dispatched or transported out of the Member State granting the exemption but to a destination within the Community. Finally, the customer must be another taxable person, or a non-taxable legal person acting as such in a Member State other than that in which dispatch or transport of the goods began.

Under some Member States’ transposition of the Directive, among them Spain, this last condition has been converted into a duty for the seller to obtain from the customer a VAT identification number granted by a Member State other than that where the transport or dispatch of goods began. Such VAT number allows the seller to prove that the customer is indeed established in such Member State. This is a fact which the Court has acknowledged on more than one occasion: a VAT identification number provides proof of the tax status of the taxable person and facilitates the tax review of intra-Community transactions (judgements in Mecsek-Gabona, dated 6th of September 2012, and Traum, date 9th of October 2014).

In the present ruling, the European Court of Justice reviewed the compatibility with EU law of national provisions – namely, those adopted by Portugal – whereby the intra-community supply exemption would require the customer to inform the seller of a VAT identification number granted by a Member State other than that where the dispatch or transport began. The facts under dispute relate to the Portuguese branch of a Dutch company, Euro Tyre B.V., which supplied tyres to a Spanish company belonging to the same group, Euro Tyre Distribución de Neumáticos, S.L. (Euro Tyre S.L.). Euro Tyre S.L., which was registered as a taxable person for the purposes of VAT in Spain, did not obtain the status of intra-community operator and, therefore, the corresponding VAT identification number for intra-community transactions until two years later. Euro Tyre B.V., nevertheless, considered its supplies to Euro Tyre S.L. as VAT-exempt intra-Community supplies. The Portuguese Authorities did not share this view and held that such supplies did not meet the conditions for the exemption under local law, since Euro Tyre S.L. was not registered as an intra-community operator in Spain and was not in the VIES system. Euro Tyre B.V. countered that such requirement should be considered at most as a formal requirement resulting from an incorrect transposition of the VAT Directive.

In its judgement, the Court is clear: neither the Directive, nor the Court’s case-law mention, as one of the substantive conditions for an intra-Community supply, the obligation for the purchase to have a VAT identification number, nor the obligation for the purchase to be registered for the purposes of carrying out intra-Community transactions and to be registered in the VIES system. Moreover, such obligations cannot be inferred from the condition that the purchaser must be a taxable person acting as such in a Member State other than that in which the dispatch or transport of the goods began.

Therefore, neither the acquisition by the purchaser of a VAT identification number valid for the purposes of carrying out intra-Community transactions nor the inclusion of that number in VIES constitute substantive conditions for the exemption of VAT of an intra-Community supply. Those a merely formal requirements which cannot undermine the vendor’s entitlement to exemption from VAT where the substantive conditions for an intra-Community supply have been satisfied. The Court also held that the principle of fiscal neutrality requires that an exemption from VAT be allowed if the substantive conditions are satisfied, even if the taxable person has failed to comply with some of the formal requirements.

The Court does qualify the above principles and states that there would be two situations in which the failure to meet a formal requirement may result in the loss of entitlement to an exemption from VAT. Firstly, this would be the case should a taxable person intentionally participate in tax evasion. Thus, it would not be contrary to EU law to require an operator to act in good faith and to take every step which could reasonably be asked of it to satisfy itself that the transaction which it is carrying out does not result in its participation in tax evasion. In the second place, non-compliance with a formal requirement may lead to the refusal of an exemption from VAT if that non-compliance would effectively prevent the production of conclusive evidence that the substantive requirements have been satisfied.

In view of the Court therefore, where there is no sound evidence pointing to the existence of fraud and it is established that the basic conditions for the exemption are fulfilled, EU law precludes tax authorities from a Member State from refusing to exempt an intra-Community supply on the sole ground that, at the time of the supply, the purchase domiciled in the territory of the Member State of destination and who was in possession of a valid identification number for the purposes of VAT in that Member State is neither registered in the VIES system nor comes under a system of taxation on intra-Community acquisitions of goods.

This important ruling should make life easier for taxpayers, often burdened with undue formalities relating to a third party over which they may have no control.