Court of Justice of the European Union

CJEU decision in Climate Corporation Emissions Trading GmbH (C-641/21) – carbon emission trading MTIC fraud and place of supply rules

The taxpayer, an Austrian company, sold greenhouse gas emission allowances to a German company. 

In line with settled case law, the transfer was considered a supply of services, which, in principle, should have been subject to VAT in the country of the recipient i.e., in Germany.

The Austrian tax authorities established that the German buyer was a ‘missing trader’ and that the taxpayer knew, or should have known, that the carbon allowances sold were to be used for the purpose of evading VAT.

As observed by the Austrian court referring the case to the CJEU, in a similar situation, a taxpayer selling goods shipped to another Member State could be denied the normally applicable VAT exemption, making them liable to remit the corresponding amount of VAT to their domestic authorities. 

The Austrian court therefore sought to clarify whether, by analogy, a similar outcome were to be reached, meaning that a supply of services, in circumstances such as those in the referred case, should be deemed taxable in the country of the provider. 

For the Court, unlike the exemption mechanisms, the place of supply rules resulted in the allocation of fiscal competence between Member States and ignoring those rules could result in transferring tax revenue to a Member State other than that of final consumption.

The Court held therefore that “the place of supply of services cannot be altered in disregard of the clear wording of the VAT Directive on the ground that the transaction at issue is vitiated by VAT evasion”. In other words, a supply of service to another taxable person is deemed to be located in the country of the recipient, regardless of the fraudulent intent of that recipient, and regardless of whether the supplier, knew or ought to have known that they were participating in tax evasion.

DLA Piper comment: The place of supplies of services cannot be altered by fraud, even if the person making the supply knew or should have known about that fraud. The case focuses on maintaining the integrity of the place of the supply rules irrespective of any intention to evade tax by one of the parties to the transaction. This judgment was not indicative of the Court taking  a lenient approach towards taxpayers involved in a chain of transactions tainted by tax evasion, rather the judgment of the CJEU was based on States’ sovereignty when it comes to tax collection.

CJEU decision in GE Aircraft Engine Services Ltd (C-607/20) – Award of retail vouchers free of charge to staff of the taxable person’s business as part of an employee recognition and reward scheme

A UK company, member of the General Electric (“GE”) Group, set up a recognition program for high-performing employees. Under that reward scheme, certain employees were given a retail voucher that they could use on a website, which contained a list of designated retailers.

The question referred to the CJEU was to determine whether giving a retail voucher to an employee in the context of a performance awarding program was to be considered as a supply made for the employer’s private use, or for that of their staff or, more generally, for purposes other than those of their business, and should, as result, be seen as subject to VAT.

The fact that employees were not guaranteed to obtain a voucher was, for the Court, an indication that they could not be considered for their private use.

The CJEU further observed that the aim of the program was to drive and improve employees’ performance, therefore the profitability of the business. Since the reward program was in place in order to improve sales, it was carried out for business purposes. The fact that employees gained an advantage was found to be incidental by the Court.

In conclusion, the CJEU held that offering retail vouchers to employees in the framework of a reward scheme could not be seen as a supply that falls within the scope of VAT.

DLA Piper comment: Businesses making free supplies of goods or services are generally seen as making deemed supplies falling within the scope of VAT as a way to adjust the input VAT incurred in relation to those supplies and also to avoid distortion of competition. However, such supplies are not to be regarded as made for private use if it can be demonstrated that they are made predominantly for improving results. Businesses generally charging VAT on deemed supplies  may therefore want to review their policy if they can demonstrate that those gifts are driven by the desire to impact business performance, taking into account all the circumstances. In this case the retailers  were accounting for VAT on the supplies of the goods , so fiscal neutrality was not prejudiced.