Abuse of the VAT exemption scheme for taxable persons

The recent judgment of the CJEU in Case C-171/23 addresses the question of whether VAT can be imposed under EU law where the establishment of a new company is considered to be an abuse of an exemption scheme previously enjoyed by another company.
 

The judgment relates to a case where a new company was deliberately set up to take over the economic activities of the original company in order to avoid compulsory VAT registration when the turnover for small businesses exceeded the turnover threshold. Once the original company had exceeded the turnover for compulsory VAT registration and no longer fulfilled the conditions for the application of the VAT exemption scheme, a new company was set up which continued the economic activity of the original company. The original company then ceased its activities. The newly established company again fulfilled all the legal conditions for applying the VAT exemption scheme. These actions were considered by the tax authorities as an abuse of law, as confirmed by the CJEU in this judgment.

According to the settled case-law of the Court of Justice, an abusive VAT practice is defined by the fact that an operation, although formally complying with the conditions laid down in the VAT Directive and the national rules, results in a tax advantage contrary to the objectives of those provisions. If it is apparent from the objective circumstances that the main purpose of the transaction is to obtain a tax advantage, it is an abuse. However, the prohibition of abusive practices does not apply where the transaction can be justified on legitimate grounds other than the mere obtaining of a tax advantage.

In that judgment, the Court of Justice emphasised that the VAT exemption scheme is designed to support small businesses. The aim of the scheme is to reduce their administrative and tax burden. It is intended to strike a balance between limited tax revenue and the efficiency of the tax administration, not to allow tax evasion.

Should abuse be proven, case law establishes that it is necessary to prevent the use of these advantages, as the fight against tax evasion and tax avoidance is one of the fundamental objectives of the VAT Directive.

The Court of Justice has ruled that the VAT Directive, in conjunction with the principle of the prohibition of abusive practices, must be interpreted as meaning that if it is established that the establishment of a company constitutes an abuse of the scheme, that company cannot continue to benefit from the VAT exemption. This applies even if the national legislation does not contain specific provisions prohibiting such abusive practices.

This judgment underlines the principle that rights under EU law cannot be abused to obtain unjustified advantages, while pointing out that one of the main objectives of the VAT Directive is to combat tax evasion and abusive practices.

Author: Anna Barešová