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The opening of the EU Court of Justice on non-existent transactions in the absence of tax damage


With the judgment C-712/17 (from 8th May 2019) the case law of the EU Court of Justice ("CJ") has taken a significant step forward in favour of the taxpayer regarding the deduction of VAT relating to non-existent transactions and related penalties, in the event that no tax damage is incurred.

The case under examination concerns an Italian company involved with the production and distribution of energy. According to the Inland Revenue, the company had set up a circular mechanism for selling the same quantities of energy in order to allow the group to show larger values in its accounts, mainly in order to access bank financing. The Office has therefore denied the deduction of VAT paid on purchases and imposed a penalty of the same amount, in accordance with current legislation.

The specificity of the case under consideration by the CJ lies in the fact that the transactions, although non-existent, were carried out for non-tax purposes, thus not giving rise to a real tax advantage to the companies in terms of higher deducted VAT. The same quantities of electricity were fictitiously resold at the same price within the group in a circular manner, with the result that the companies, purchasing the same quantity of energy sold, deducted an amount equal to the VAT regularly paid on sales.

The national court asked the CJ to rule on the compatibility of the internal rules which - in the present case - provide, for the same subject, (i) for the non-deductibility of the tax paid on purchases, (ii) for a penalty equal to the amount of that tax deemed to be non-deductible, and (iii) for the payment of the tax on sales transactions mirroring purchases.

The CJ - recalling two fundamental principles contained in Article 203 of the VAT Directive (concerning the payment of VAT for any reason whatsoever indicated on the invoice, even in the case of non-existent transactions), and in Article 168 of the same Directive (concerning the non-deductibility of VAT relating to non-existent transactions):

  • on the purchasing side, has established the conformity with the principles of the VAT Directive of the internal rules denying the deduction of VAT relating to non-existent transactions;
  • on the sales side, reiterated (see judgement C-642/11 - from 13th January 2013) that it is for the Member States to provide for the possibility of correcting the tax unduly shown on the invoice, provided that the person who issued it can prove that he acted in good faith or that he has completely eliminated the risk of loss of tax revenue in good time.

The CJ therefore concluded that:

  1. in the case of non-existent transactions in respect of which there is no actual loss of tax revenue, the Italian legislation (which, on the one hand, excludes the deduction of VAT relating to non-existent transactions and, on the other, requires the same person to pay the VAT indicated on the invoice, which is also attributable to non-existent transactions) would comply with Community principles to the extent that it allowed the recovery (by way of refund) of the tax paid on sales;
  2. the penalty equal to the amount of tax unduly paid on purchases is disproportionate to the objective pursued, since it does not take account of the payment of the same amount on sales transactions. The previous ruling of the CJ C-564/15 (from 26th April 2017) had already considered a tax penalty of 50% of the amount of VAT disproportionate in the absence of loss of revenue and evidence of tax fraud.  The current legal provision provides for a penalty of 90% of the tax unduly deducted that would therefore still be disproportionate
CMS Tax Alert | 03 luglio 2019
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