CJEU strictly interprets invoicing requirements for application of simplified triangular transaction rule
The Court of Justice of the European Union (CJEU) issued an important decision on 8 December 2022 on the invoice requirements for applying the simplified triangular transaction (STT) rule, strictly applying the requirements. The CJEU held that for the STT to apply, an invoice from an intermediary in a triangular transaction to the final customer must include a reference that the VAT liability is shifted to the final customer, as well as a reference to an exempt intra-Community transaction. This article looks at the VAT treatment of chain transactions, the application of the STT rule and the court’s decision.
Overview of VAT treatment of chain transactions and the STT rule
A chain transaction involves at least three traders in different EU member states and two successive supplies of the same goods, in which the goods are first sold by A to B and then by B to C and transported directly to the final customer by one of the parties in the chain. Even though there is only one movement of goods, for VAT purposes, each link in the chain constitutes a supply of goods. Only one of the supplies—the supply where the party arranging the transport is involved—qualifies as an intra-Community supply and thus can benefit from the VAT exemption for such supplies. The other supplies are domestic supplies subject to local VAT either in the EU member state of dispatch or the member state where the transport of the goods ends. However, when B (the intermediary) transports the goods, B is involved in two transactions, i.e., A to B and B to C so a question arises as to which transaction qualifies as an intra-Community transaction.
The rules on EU cross-border chain transactions were revised as from 1 January 2020, specifically with respect to the determination of which supply in a chain should be considered the intra-Community supply. The main rule now is that the intra-Community supply is the supply from A to B if certain requirements are met. However, a derogation from the general rule is possible when the intermediary B gives its supplier the VAT ID number issued by the member state from which the goods are dispatched; in this case, the intra-Community supply is the supply from B to C. All supplies before the intra-Community supply are taxable in the country of departure and all supplies following the intra-Community supply are taxable in the country of arrival. In the absence of the STT, if B is not established and registered for VAT purposes in the member state of departure and arrival of the goods, it would have to register for VAT in either member state to fulfill his VAT obligations. The main purpose of the simplification for triangular transactions is to prevent multiple VAT registrations in different EU member states.
By applying the STT (which is optional), a trader acting as the intermediary in a triangular transaction will be deemed not to be making an intra-Community supply in the member state of arrival of the goods and thus eliminates the need for the intermediary to register for VAT purposes in the member state to which the goods are transported. In addition, the chargeability of VAT on the subsequent supply is shifted from the intermediary to the final customer. However, several requirements under the EU VAT directive must be met to apply the STT, including specific language in the invoice that the VAT is reverse charged. By doing so, the final customer, rather than the supplier, will be required to charge VAT and report it on the VAT return.
The CJEU ruled in the Luxury Trust Automobile case that a transaction is taxable as a triangular transaction only if the invoice issued by the intermediary contains the words “reverse charge.” The court upheld the opinion of Advocate General Kokott issued on 14 July 2022.
Facts of the case
The case before the CJEU involved Luxury Trust Automobile GmbH, a company established in Austria and involved as the intermediary in a chain transaction. Luxury Trust purchased luxury cars from supplier A, based in the UK (at the time still an EU member state) and resold the vehicles to C, a company established in the Czech Republic. The vehicles were shipped directly from the UK to the Czech Republic, with Luxury Trust arranging the transport. Luxury Trust issued three invoices that contained the VAT ID numbers (in the respective states of establishment) of each of the parties and stated that it applied the STT rule by including the reference, “exempt intra-Community triangular transaction.” However, Luxury Trust did not include a reference to the reverse charge on the invoice.
Luxury Trust subsequently corrected the invoices to add the required language about the transfer of VAT liability to final customer C but there was no evidence that the new invoice was actually supplied to C. To complicate matters, C was considered a “missing trader” by the Czech tax authorities because even though it was registered in the Czech Republic for VAT purposes during the relevant period, the tax authorities were unable to contact C and C did not declare or pay VAT in the Czech Republic on the supply.
The Austrian tax administration took the position that the STT rule could not be applied because Luxury Trust failed to include the reference to the reverse charge on the invoice. Since Luxury Trust used its Austrian VAT number in the transaction, it was considered to have made an intra-Community acquisition in Austria in the absence of evidence that the acquisition was taxed in the Czech Republic. Luxury Trust was not entitled to deduct input VAT in respect of the acquisition. Luxury Trust appealed the decision of the Austrian tax authorities, which was rejected and the case ultimately was referred to the CJEU.
The CJEU held that for the STT to apply, an invoice from an intermediary in a triangular transaction to the final customer must include a reference that the VAT liability is shifted to the final customer (i.e., that the reverse charge applies), as well as a reference to an exempt intra-Community transaction; a mere reference to the exempt transaction is insufficient. As a result, the issuance of an accurate invoice is a prerequisite for the application of the reverse charge and the STT rule. Since, contrary to the main rule, VAT liability in such cases is transferred from the intermediary to the final customer, it is critical that the end customer is unambiguously clear about its tax obligations.
The court also concluded that the issuance of a new invoice with the required language will not remedy the deficiency and allow the STT rule to apply retroactively; the new invoice will simply be considered the (required) first invoice.
In Luxury Trust, the CJEU took a strict approach to interpreting the invoice requirement, in that it focused on the missing VAT reverse charge reference on the invoices. The question, however, can be asked whether the court would have reached the same conclusion had C properly declared VAT because the substantive requirement that VAT be reverse charged to the customer would have been met.
The decision emphasizes the importance of full compliance with the invoicing requirements when applying the STT rule. In particular, it is important that the intermediary state on the invoice that the VAT is reverse charged; if this notation is not included, the intermediary will have to register in the member state of destination to declare an intra-Community acquisition and a subsequent domestic supply. In addition, the intermediary is required to report an intra-Community acquisition in the EU member state from which it used the VAT ID number in the transaction. Thus, if the scheme is wrongly applied, B runs the risk of an additional tax assessment and penalties.
Affected taxpayers should determine whether their invoices meet all invoice requirements when applying the rule and include both the reference to an exempt intra-Community supply and the reverse charge on relevant invoices.