In the Official Journal of the European Union of September 26, 2022 the truly interesting question that the Finanzgericht Münster (Germany) referred to the Court of Justice of the European Union for a preliminary ruling was published. The question was lodged on July 6, 2022 and regards the case C-453/22, Michael Schütte versus Finanzamt Brilon.
In the circumstances of the main proceedings, do the provisions of Directive 2006/112/EC – in particular the principle of fiscal neutrality and the principle of effectiveness — require that the applicant has a right to claim reimbursement of the value added tax overpaid by him or her to his or her upstream suppliers, including interest, directly from the tax authorities, even though there is still a possibility that the upstream suppliers will at a later point in time take action against the tax authorities on the basis of a correction of the invoices, and the tax authorities may then — possibly — no longer have a right of recourse against the applicant, with the result that there is a risk that those authorities will have to reimburse the same value added tax twice?
It is disputed whether the defendant was right to refuse an application by the applicant for discharge from additional assessments to turnover tax and interest on turnover tax on grounds of equity.
The applicant is a farmer and forester and engages in (inter alia) commercial trade in timber. In the years 2011 to 2013, the applicant purchased timber from its upstream suppliers – with each of whom he had concluded net agreements concerning the net amounts – the respective invoices stating turnover tax at the standard rate of 19%. The applicant sold and delivered the timber to his customers, stating the reduced rate of 7%, which applies to firewood.
The upstream suppliers each declared the transactions and paid the tax to the tax authorities at the rate of 19%. The applicant declared output transactions at the rate of only 7% and in turn deducted input tax in respect of the supplies at the rate of 19%. The applicant paid the resulting tax debt to the tax authorities. There were no indications of the applicant’s imminent insolvency at any time. There is no suspicion of fraud.
Following an audit, the defendant concluded that the applicant’s output transactions were not subject to the reduced rate of tax, but rather to the standard rate of tax. In an action brought against that audit, the referring Chamber confirmed, by judgment, that the applicant’s output transactions were subject to the reduced rate of tax. However, the Chamber also took the view that the applicant’s input transactions were already subject to the reduced rate of tax of 7% and that the applicant could deduct input tax only to that extent because it was only to that extent that tax was lawfully payable. Therefore, the applicant’s deduction of input tax was reduced. The judgment became final (Finanzgericht Münster (Finance Court, Münster), judgment of 2 July 2019, 15 K 2794/17 U, not published).
In implementation of the judgment, the defendant sought to recover the additional turnover tax for the years 2011 to 2013 (2011: EUR; 2012: EUR; 2013: EUR) and fixed the interest on turnover tax for the years 2011 to 2013 (2011: EUR; 2012: EUR; 2013: EUR) by notices of 30 September 2019.
The applicant subsequently contacted his upstream suppliers, requesting that they correct the invoices issued to him and pay him the difference. In respect of all the upstream suppliers, tax assessment was already time-barred with regard to the 2011-2013 assessment periods. All the upstream suppliers invoked the civil-law defence of limitation with regard to the claim asserted by the applicant for correction of the invoices and repayment of the difference. Accordingly, the invoices were not corrected and the applicant also did not receive back from his upstream suppliers the difference in respect of the turnover tax owed. Under national civil law, the applicant has no possibility to enforce his claim against the upstream suppliers due to the limitation defence raised.
Subsequently, the applicant, by letter of 24 October 2019, applied to the defendant for discharge, on grounds of equity in accordance with Paragraphs 163 and 227 of the AO, from the additional turnover tax which it had sought to recover and the interest which it had fixed in respect of the turnover tax (total amounts for 2011: EUR; for 2012: EUR; EUR). In that respect, he made express reference to the case-law of the Court (judgments of 15 March 2007, C-35/05, Reemtsma Cigarettenfabriken, EU:C:2007:167, paragraph 41; of 26 April 2017, C-564/15, Farkas, EU:C:2017:302, paragraph 53; of 11 April 2019, C-691/17, PORR Építési Kft., EU:C:2019:327, paragraph 42; of 10 July 2019, C-273/18, Kuršu zeme, EU:C:2019:588, paragraph 41).
The defendant refused the applications for discharge in accordance with Paragraphs 163 and 227 of the AO by administrative decisions of 3 December 2019 and 16 December 2019. In the grounds for those decisions, the defendant stated, in essence, that the applicant himself was responsible for the situation. Had he acted in accordance with the law, he would not have been permitted to resell the unchanged goods at a different rate of tax.
The defendant rejected the objections directed against those decisions as unfounded in the objection decision of 24 July 2020, whereupon the applicant brought an action.
Recitals of Council Directive 2006/112/EC of 28 November 2006 on the common
system of value added tax (‘the VAT Directive’):
(4) The attainment of the objective of establishing an internal market presupposes the application in Member States of legislation on turnover taxes that does not distort conditions of competition or hinder the free movement of goods and services. It is therefore necessary to achieve such harmonisation of legislation on turnover taxes by means of a system of value added tax (VAT), such as will eliminate, as far as possible, factors which may distort conditions of competition, whether at national or Community level.
(5) A VAT system achieves the highest degree of simplicity and of neutrality when the tax is levied in as general a manner as possible and when its scope covers all stages of production and distribution, as well as the supply of services. It is therefore in the interests of the internal market and of Member States to adopt a common system which also applies to the retail trade.
(7) The common system of VAT should, even if rates and exemptions are not fully harmonised, result in neutrality in competition, such that within the territory of each Member State similar goods and services bear the same tax burden, whatever the length of the production and distribution chain.
Article 167 of the VAT Directive:
A right of deduction shall arise at the time the deductible tax becomes chargeable.
Article 168 of the VAT Directive:
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;
Article 178 of the VAT Directive:
In order to exercise the right of deduction, a taxable person must meet the
(a) for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Sections 3 to 6 of Chapter 3 of Title XI;
Article 203 of the VAT Directive:
VAT shall be payable by any person who enters the VAT on an invoice.
National law/administrative provisions
Paragraph 14 of the Umsatzsteuergesetz (Law on turnover tax; ‘the UStG’)
(4) An invoice must contain the following details:
8. the applicable rate of tax and the amount of tax due on the consideration or, in the case of an exemption, an indication that the supply of goods or services is subject to an exemption;
Paragraph 14c of the UStG
(1) If a trader has, in an invoice for a supply of goods or services, stated separately a higher amount of tax than is payable under this Law in respect of the transaction concerned (incorrectly stated tax), he or she shall also be liable to pay the additional amount. If he or she adjusts the amount of tax vis-à-vis the recipient of the supply, Paragraph 17(1) shall apply by analogy.
Paragraph 15 of the UStG
(1) A trader may deduct the following as input tax:
1. the tax lawfully payable on goods and services provided to his or her business by another trader. Deduction of the input tax is subject to the condition that the trader holds an invoice drawn up in accordance with Paragraphs 14 and 14a.
Paragraph 163 of the AO
(1) Taxes may be set at a lower amount and individual bases of taxation which increase the tax may be ignored in assessing the tax where the levy of the tax would be inequitable in the circumstances of the individual case.
Paragraph 227 of the AO
The tax authorities may waive, in whole or in part, claims arising from a liability to tax where it would be unfair to pursue them in the circumstances of the particular case; on the same conditions, amounts which have already been paid may be reimbursed or set off.
Paragraph 233a of the AO:
(1) If the assessment of the (…) turnover tax (…) results in a difference within the meaning of subparagraph 3, that difference shall be subject to interest (…).
(2) The accrual of interest shall commence 15 months after the end of the calendar year during which the tax liability arose. (…) It shall cease at the end of the day on which the tax assessment becomes effective. (…)
(3) The calculation of the interest shall be based on the tax assessed, reduced by the deductible amounts to be offset, (…) and by the advance payments assessed up to the point at which interest began to accrue (differential amount). (…)
The tax authorities take the following administrative view (see the following excerpts from the letter of the Bundesministerium der Finanzen (Federal Ministry of Finance; ‘the BMF’) of 12 April 2022, III C 2 – S 7358/20/10001:004, with emphasis added by the referring Chamber):
 Equitable relief always takes the form of a decision that takes into account and weighs up the special circumstances of the individual case, whereby, with regard to the direct claim, the following particularities must be observed in addition to the tax legislation (see Anwendungserlass zur Abgabenordnung (Decree on the application of the AO; ‘the AEAO’) concerning Paragraph 163). Any contributory negligence on the part of the recipient of the supply in the drawing up of the incorrect invoice must be taken into account in the decision on equitable relief.
 As a general rule, the recipient of a supply must first assert his or her claim for reimbursement of incorrectly invoiced and unduly paid turnover tax against the supplier under civil law. The direct claim can therefore be brought only in the alternative to the tax adjustment procedure under Paragraph 14c(1) of the UStG. As a general rule, it can be assumed that reimbursement by the supplier is impossible or excessively difficult from the outset only where an application for insolvency proceedings in respect of the supplier’s assets has already been refused by reason of insufficiency of assets. The mere insolvency of the supplier within the meaning of the Insolvenzordnung (Insolvency Code; ‘the InsO’) is not sufficient in that regard. (…)
 No decision can be taken on a direct claim which has been asserted as long as it is still legally possible for the supplier to take action against the tax authorities on the basis of an adjustment of the amount of tax in accordance with the second and third sentences of Paragraph 14c(1) of the UStG. Therefore, in insolvency proceedings, for example, a decision on the direct claim can generally be taken only after the insolvency proceedings have been concluded. This is because, by virtue of the insolvency proceedings, the debtor (in this case the supplier) remains liable to pay the tax. He or she merely loses the right to dispose of and administer his or her assets, but retains legal ownership and is legally entitled to reimbursement in the event of an adjustment.
 The direct claim against the tax authorities is accessory to the claim of the recipient of the supply against his contracting partner (the supplier) in such a way that a direct claim against the tax authorities is excluded if the claim of the recipient of the supply against the supplier can no longer be enforced because it is time-barred under civil law (for example under Paragraph 195 of the Bürgerliches Gesetzbuch (Civil Code; ‘the BGB’)).
Proceedings for the Finanzgericht Münster
The present Chamber stays the action […] and refers the question set out in the operative part of the present order to the Court for a preliminary ruling pursuant to the second paragraph of Article 267 TFEU.
The decision in the present case depends on the answer to the question referred. If the Court were to rule that, even in the circumstances of the main proceedings, the applicant may bring a direct claim against the tax authorities for reimbursement of the tax retrospectively demanded and the interest, the action would have to be upheld. If the Court were to hold that such a direct claim is not possible, the action would have to be dismissed.
The question referred is based on the following considerations of the present Chamber.
According to the case-law of the Court, the principle of the fiscal neutrality of VAT constitutes a fundamental principle of the harmonised VAT system. The principle of fiscal neutrality manifests itself in the systematic determination that VAT ultimately seeks only to tax private consumption and that the supplier, as a taxable person, simply acts as a tax collector for the State (see judgment of the Court of 21 February 2008, C-271/06, Netto Supermarkt, EU:C:2008:105, paragraph 21). The principle of fiscal neutrality implies that the burden of value added tax must fundamentally remain neutral for the supplier, that is to say it must not become a factor which influences competition (see judgment of the Court of 21 March 2000, C-110/98, Gabalfrisa and Others, EU:C:2000:145, paragraphs 44 and 45).
The principle of effectiveness, which must also be observed, implies that national procedural rules must not be framed so as to render virtually impossible or excessively difficult the exercise of rights guaranteed under EU law (judgment of the Court of 26 April 2018, C-81/17, Zabrus Siret, EU:C:2018:283, paragraph 38).
The Court takes the view that, since the VAT Directive does not contain any provisions relating to the adjustment of value added tax which has been improperly invoiced, it is for the Member States to lay down the conditions in which the improperly invoiced tax may be adjusted. In that respect, the Court has already expressly approved a mechanism under which – as in Germany – the supplier is granted a right to seek reimbursement from the tax authorities and the recipient of the supply is referred to the civil courts for the purpose of asserting his or her right to repayment of the VAT unduly paid (judgment of the Court of 15 March 2007, C-35/05, Reemtsma Cigarettenfabriken, EU:C:2007:167, paragraphs 38 and 39).
However, in accordance with the case-law of the Court, in exceptional cases –having due regard to the principle of effectiveness – the recipient of the supply has a direct right of reimbursement against the tax authorities if reimbursement of the VAT becomes impossible or excessively difficult (judgment of the Court of 15 March 2007, C-35/05, Reemtsma Cigarettenfabriken, EU:C:2007:167, paragraph 41). To that end, Member States must provide for the instruments and the detailed procedural rules necessary to enable the recipient of the supply to recover unduly invoiced VAT (judgment of the Court of 15 March 2007, C-35/05, Reemtsma Cigarettenfabriken, EU:C:2007:167, paragraph 41).
The Court confirmed those principles on several occasions in its subsequent caselaw (see, to that effect, judgments of 26 April 2017, C-564/15, Farkas, EU:C:2017:302, paragraph 53; of 11 April 2019, C-691/17, PORR Építési Kft., EU:C:2019:327, paragraph 42; of 10 July 2019, C-273/18, Kuršu zeme, EU:C:2019:588, paragraph 41).
The case-law of the German finance courts has followed the case-law of the Court. The Bundesfinanzhof (Federal Finance Court) considers that the right granted to the Member States to determine the procedure is guaranteed by the possibility afforded under German law of a decision by the tax authorities in the equity procedure as provided for in Paragraphs 163 and 227 of the AO. In so far as the tax authorities enjoy a margin of discretion under those provisions, which can in principle be reviewed by the courts only to a limited extent, that margin of discretion is reduced to zero if the requirements for a direct claim against the tax authority under the case-law of the Court (‘Reemtsma claim’) are met (BFH, judgment of 30 June 2015, VII R 30/14, paragraph 27).
In view of the circumstances in the main proceedings, the referring Chamber has doubts concerning the conditions and legal consequences of the direct claim of the recipient of the supply against the tax authorities as developed by the Court.
As far as can be seen, there was always an inability to pay (for example insolvency or economic incapacity) on the part of the issuer of the invoice in the cases ruled on by the Court (see judgments of the Court of 15 March 2007, C-35/05, Reemtsma Cigarettenfabriken, EU:C:2007:167, paragraph 41; of 26 April 2017, C-564/15, Farkas, EU:C:2017:302, paragraph 54; of 11 April 2019, C-691/17, PORR Építési Kft., EU:C:2019:327, paragraph 43; of 10 July 2019, C-273/18, Kuršu zeme, EU:C:2019:588, paragraph 41), whereby the Court has only ever cited an inability to pay on the part of the issuer of the invoice as an example of impossibility or excessive difficulty, but has not made the latter conditional on the former.
In the main proceedings, however, the upstream suppliers are not unable to pay. They invoke the defence of limitation under civil law against the applicant and are not prepared to correct the invoices and repay the applicant the amount of VAT which he overpaid. Due to the legal effects of the defence of limitation raised, the applicant has no possibility under civil law to enforce his claims against the upstream suppliers either presently or in the future.
If the Court were to conclude that, in those circumstances, it must be assumed that it would be impossible or excessively difficult, within the meaning of its case-law, for the applicant to obtain reimbursement of the VAT from the upstream suppliers and that the conditions for a direct claim against the tax authority are met, the applicant would obtain the reimbursement directly from the tax authorities.
Nevertheless, the upstream suppliers continue to have, for an unlimited period of time, the possibility to adjust invoices in accordance with the first and second sentences of Paragraph 14c(1) of the UStG. In other words, the upstream suppliers could still correct the invoices at a later point in time and then claim back the overpaid amount from their tax authorities, as invoice corrections under national law (second sentence of Paragraph 14c(1) of the UStG, in conjunction with Paragraph 17 thereof) trigger the reimbursement of VAT vis-à-vis the tax authorities in the tax period of the correction. The tax authorities, for their part, would then have to approach the applicant again and demand repayment from him of the amount reimbursed. If the applicant is then – for example as a result of insolvency that has occurred in the meantime or for other reasons – unable to repay it, the tax authorities would have reimbursed the VAT twice.
The referring Chamber takes the view that the applicant can have a direct claim against the tax authorities only if it is established that the latter cannot be obliged vis-à-vis the upstream suppliers to reimburse the same VAT a second time. The referring Chamber takes the view that the applicant should have taken precautions to secure its claims against its upstream suppliers under civil law, for example by obtaining a waiver of the defence of limitation from the upstream suppliers in due time. In its more recent case-law, the Court also appears to proceed on the assumption that the recipient of a supply must seek an accurate invoice with VAT stated separately within the limitation period under civil law and, without such an invoice, cannot assert a claim for input tax deduction against the tax authorities (judgment of the Court of 13 January 2022, C-156/20, Zipvit, EU:C:2022:2, paragraph 41; see also in that respect the Opinion of Advocate General Kokott of 8 July 2021, C-156/20, Zipvit, EU:C:2021:558, point 110).
To date, that restrictive interpretation cannot be inferred from the case-law of the Court with regard to the direct claim.
Should the Court’s answer to the question referred be that the applicant is entitled to a direct claim against the tax authorities, the referring Chamber takes the view that such a claim covers only the VAT paid to the upstream suppliers, but not also the interest accruing from the amendment of the original tax assessment on an independent legal basis (Paragraph 233a of the AO). This is because the interest was accrued in respect of a period prior to the first assertion of the direct claim against the tax authorities.
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