European Court of Justice restricts countries’ discretion in denying VAT numbers


By Alistair M. Nevius, J.D.

The Court of Justice of the European Union (ECJ) ruled on Thursday that Latvia could not refuse to assign a VAT identification number to a company on the ground that the company would not be able to carry out the declared economic activity for which it was requesting the number (Valsts Ieņēmumu Dienests v. Ablessio SIA, No. C-527/11 (E.C.J. 3/14/13)). While the case involves a Latvian company, the ruling concerns EU law and is applicable to all EU member states, and it restricts the ability of countries to refuse to assign a VAT identification number in cases where they suspect the number will be used fraudulently.

VAT fraud in the EU has been estimated by the Bank of Italy to be in the range of €20 billion to €35 billion per year. The use of a legitimate VAT number is key to one method of VAT fraud, called “missing trader” fraud. In this scheme, the fraudster uses a legitimate VAT identification number to purchase goods VAT free. The fraudster then sells those goods to other VAT-registered businesses at VAT-inclusive prices. These businesses pay the VAT to the fraudster who promptly disappears without accounting for the VAT that is due to the tax authorities. To combat this type of fraud, countries have a strong interest in ensuring that only legitimate businesses obtain VAT identification numbers.

Ablessio, a Latvian limited liability company, applied to be entered into the register of persons subject to VAT. The Latvian tax authority, Valsts Ieņēmumu Dienests, refused the request on the grounds that the company did not have the material, technical and financial capacity to carry out its declared economic activity (providing construction services).

The Latvian tax authority relied on the following findings:

  1. Ablessio had no fixed assets and no agreements to lease fixed assets;
  2. Its office had an area of only four square metres;
  3. It was not registered in the register of construction companies;
  4. It had never carried out any economic activities since it was established; and
  5. Its only employee was the (unremunerated) chairman of its board of directors.

The Latvian tax authority apparently suspected that the owner of the company was engaged in obtaining VAT identification numbers for companies that never carried out any real economic activity and transferring the shares of those companies after obtaining the VAT identification numbers so that they could be used fraudulently.

Ablessio sued in the Latvian courts, which ordered the Latvian tax authority to enter the company in the register of persons subject to VAT. The Latvian tax authority appealed to the ECJ to decide the question of whether, under Articles 213, 214 and 273 of EU Council Directive 2006/112/EC, On the Common System of Value Added Tax, in the interests of ensuring the correct collection of VAT and preventing evasion, the tax authority may not refuse to assign a VAT identification number to a company solely on the ground that the company does not have the material, technical and financial resources to carry out the economic activity declared, and that the owner of the shares in that company has already obtained, on various occasions, a VAT identification number for companies that never carried out any real economic activity, and the shares of which were transferred shortly after obtaining the individual number.

The ECJ noted that although Article 214 of Directive 2006/112 lists the categories of persons who must be identified by an individual number, it does not stipulate the conditions that can be placed on the issuing of the VAT identification number. The court conceded that “Member States have a certain discretion when they adopt measures to ensure the identification of taxable persons for the purposes of VAT. However, that discretion cannot be unrestricted.”

The court held that Directive 2006/112, Articles 213 and 214, preclude the tax authority of a member state from refusing to assign a VAT identification number to applicants “solely on the ground that they are not in a position to show that they have at their disposal the material, technical and financial resources to carry out the economic activity declared at the time of submitting their application for registration on the register of taxable persons.” It noted that many legitimate start-up businesses will not be able to meet this criterion.

The court also held that the tax authority cannot refuse to assign a VAT identification number just because the owner of the shares in that company has already obtained, on various occasions, a VAT identification number for companies that “never carried out any real economic activity, and the shares of which were transferred shortly after obtaining the individual number.” It held that the tax authority must first establish, “on the basis of objective factors, that there is sound evidence leading to the suspicion that the VAT identification number assigned will be used fraudulently.”

The ECJ remanded the case to the Latvian court to determine whether the Latvian tax authority has proved the existence of a risk of tax evasion in this case.

Alistair M. Nevius (anevius@aicpa.org) is CGMA Magazine’s editor-in-chief, tax.

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