In its judgment delivered on 12 january 2006, the ECJ has taken part for protection of innocent party to the so called VAT “carousel fraud”.

The cases were brought to the ECJ by three companies who had purchased computer components from a dealer in United Kingdom who absconded without paying the VAT. They resold the goods to a customer in another member state without charging VAT. Although they claimed that their transactions were valid, the tax authorities denied them a deduction for the input tax paid to the fraudulent suppliers. The tax authorities claimed namely that the transactions were part of a series designed to defraud and were therefore without business substance.

The ECJ decided in favour of the traders and held that in a supply chain, each transaction must be considered on its merits as a separate economic activity. The right of a taxable person to deduct VAT cannot be affected by the fact that, without that person knowing or having any means of knowing, another transaction in the chain is vitiated by fraud.

Read joined cases C-354/03, C-355/03 & C-484/03.

On 23 December 2005 the European Commission published a Communication that aims at resolving the tax obstacles that small and medium enterprises face when they are doing business across borders in the internal market.

The European Commission refers Sweden to the European Court of Justice for the reason that under Swedish law, capital gains from home sales can only benefit a tax relief if the sold home is located in Sweden and if the sales profits are reinvested in a replacement residence in Sweden. The commission believes this constitutes a discrimination of the EC Treaty rules, including the rules concerning the free movement of persons. Read more.

On 29th of October a first Council Regulation, laying down implementing measures for Directive 77/388/EEC on the common system of value added tax, based on article 29 bis of the Sixth VAT Directive is published. The aim of this Regulation is to ensure a more uniform application of value added tax systems in the member state and by this way guarantee a proper functioning of the internal market.
The regulation merely confirms earlier decisions of the VAT Committee. However since a regulation is binding and directly applicable in all member states, uniformity of application will be much better ensured by a Regulation than it is by means of decisions of the VAT Committee.
This Regulation lays down measures for the implementation of 11 articles of the Sixth VAT Directive more precise the articles 4, 6, 9, 11, 13, 15, 18, 26b, 26c, 28a and 28b of Directive 77/388/EEC, and of Annex L thereto.
The regulation explains interpretations concerning taxable persons and taxable transactions, the place of taxable transactions, taxable amount, exemptions, the special measures for electronic services, the definition of transport means, intracommunity supplies and acquisitions. Read more.

On 13 December the ECJ has rendered its judgment in C-446/03 Marks & Spencer. The court’s decision has been eagerly awaited by tax authorities and governments in all European Member States, as well as group companies themselves.

The ECJ has declared that the British tax regime governing groups of companies is incompliant with the freedom of establishment stated in Article 43 of the EC Treaty. However, the rules are principally justified by reason of public interest.

Facts of the case
Marks & Spencer is a department store group with a parent company resident in United Kingdom and several foreign subsidiaries. Subsidiaries in Germany, Belgium and France suffered losses during several years. This led eventually to decision to divest the business activities in these countries. The parent company made claims for group relief in respect of losses incurred by EU subsidiaries in question. These claims were however rejected on the ground that that the group relief regime does not apply to foreign subsidiaries. The case was referred to ECJ for a preliminary ruling whether the tax legislation in question was compliant with the fundamental freedoms of the EC Treaty.

The judgment
The findings of the ECJ are that the United Kingdom legislation constitutes a restriction on freedom of establishment guaranteed in article 43 of the EC Treaty. In effect, the rules apply different treatment for tax purposes to losses incurred by a resident subsidiary and losses incurred by a non-resident subsidiary. They therefore discourage undertakings from setting up subsidiaries in other Member States.

The ECJ finds however that the legislation can principally be justified by overriding reasons of public interest. Yet the provisions go beyond what is necessary to attain the objectives pursued in situation where i) the losses of the foreign subsidiary cannot be taken into the account by the state of residence for the accounting period concerned by the claim and also for previous periods and ii) there is no effective possibility to take to account the losses during future periods. Read the full text.

On 12 December 2005 the councel of the European Union agreed to extend the minimum standard VAT rate of 15% until the end of 2010. In this respect, a directive is adopted. Read more.

Advocate General Tizanno has recently rendered his opinion in case C-292/04 Meilicke. The case concerns German tax legislation limiting the availability of tax credits on dividends distributed by companies established in Germany. Tax rules in question are similar to the tax rules examined by the ECJ in case C-319/02 Manninen.

The Advocate General found that the legislation in question hindered German tax residents from investing in companies registered in other Member States. The legislation also made it more difficult for such companies to raise capital in Germany. Consequently the Advocate General concluded that the German rules constituted a restriction on the free movement of capital as stated in Article 56 of the EC Treaty. However, unlike the ECJ statements made in Manninen, the Advocate General proposed that the impact of the judgment should be time-limited.

According to Advocate General the limitation in time may be imposed under certain conditions. There must be a risk of serious economic repercussions. There must also be objective, significant uncertainty as to the scope of the Community provisions. The retroactive effect is suggested to be limited to June 2000 when the ECJ delivered its decision in case C-35/98 Verkooijen. Read the full text of the opinion.

Ministers will continue their discussion concerning the achievment of a political agreement on reduced VAT rates. The final aim is to find a balance between those Member States pressing for more national flexibility in this area and those that wish to restrict the scope of reduced rates across the EU. read the official press release.

The European Commission adopted two proposals to modernise the EU Customs Code and to introduce an electronic, paper-free customs environment in the EU. These proposal have as aim to increase the competitiveness of companies doing business in Europe, to reduce compliance costs and to improve EU security. read the press release.

In this case the ECJ dismissed the application of the commission whereby the commission complained that the French Republic has brought into force a reduced rate of VAT for standing charges for energy networks and a standard rate for the consumption of energy, in breach of Article 12(3)(a) and (b) of the Sixth Directive.

The application essentially raised three issues.

First, the Commission harboured doubts as to the classification of standing charges for the supply of electricity and natural gas delivered by public networks as supplies of natural gas and electricity within the meaning of Article 12(3)(b) of the Sixth Directive. It wondered whether standing charges ought not to be classified instead as consideration for a specific service representative of fixed costs which is distinct from the supply of energy.
Second, according to the Commission, even if a supply is involved, the same rate must apply to the standing charge and to any other consumption of electricity, in accordance with the principle of neutrality.
Third, in adopting the contested provision, the French Republic is said to have infringed the procedure laid down by Article 12(3)(b) of the Sixth Directive.

In this case the Court ruled that article 9(2)(e) of Sixth Council Directive 77/388/EEC of 17 May 1977 must be interpreted as applying to advertising services supplied indirectly to the advertiser and invoiced to an intermediate customer who in turn invoices them to the advertiser. The fact that the advertiser does not produce goods or services in the price of which the cost of the advertising services may be included is not relevant for the purpose of determining the place where the services are supplied to the intermediate customer.

The European Court of Justice judged in this case that the grant, by the owner of premises to an owner of a cigarette vending machine, of the right to install the machine, and to operate and maintain it in the premises for a period of two years, in a place nominated by the owner of the premises, in return for a percentage of the gross profits on the sales of cigarettes and other tobacco goods in the premises, but with no rights of possession or control being granted to the owner of the machine other than those expressly set out in the agreement between the parties, does not amount to a letting of immovable property within the meaning of article 13B(b) of the Sixth Council Directive (77/388/EEC) of 17 May 1977

In this judgment the European Court of Justice declared that article 26(2) of Sixth Council Directive 77/388/EEC must be interpreted as meaning that the total amount to be paid by the traveller within the meaning of that provision includes the additional amount that a travel agent, acting as intermediary on behalf of a tour operator, must, in circumstances such as those described in the order for reference, pay to the tour operator on top of the price paid by the traveller and which corresponds in amount to the discount given by the travel agent to the traveller on the price of the holiday stated in the tour operator’s brochure.

The European Court of Justice answered in this case to two preliminary questions. To the first question the Court declared that a business which purchases debts, assuming the risk of the debtors’ default, and which, in return, invoices its clients in respect of commission pursues an economic activity for the purposes of Articles 2 and 4 of of the Sixth Council Directive (77/388/EEC) of 17 May 1977 , so that it has the status of taxable person and thus enjoys the right to deduct tax under Article 17 of the Sixth Directive (77/388/EEC).
To the second preliminary question the Court answered that an economic activity by which a business purchases debts, assuming the risk of the debtors’ default, and, in return, invoices its clients in respect of commission, constitutes debt collection and factoring within the meaning of the final clause of Article 13B(d)(3) of the Sixth Directive (77/388) and is therefore excluded from the exemption laid down by that provision

The European Court of Justice decided in this case that a partnership which admits a partner in consideration of payment of a contribution in cash does not effect towards that person a supply of services for consideration within the meaning of Article 2(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment

Advocate General Kokott delivered on 10 November 2005 her Opinion in the case C-245/04 (EMAG Handel Ederabove) dealing with the place of supply in ‘triangular operations’. In such transactions several undertakings from two or more Member States successively conclude contracts for the purchase of the same goods which are then performed by means of a single transfer of goods from the first supplier to the last customer. The advocate General concluded:
(1) When several undertakings enter into arrangements for the supply of the same goods and those arrangements are implemented by way of a single movement of goods, only one of the successive supplies is to be treated as an exempted intra-Community supply; in this case the intra-Community supply is that supply which corresponds to intra-Community acquisition within the meaning of Article 28a(1)(a) of the Sixth Directive.
(2) The place where dispatch begins within the meaning of Article 8(1)(a) of the Sixth Directive does not determine whether, within the context of such a chain transaction, a supply is to be treated as an exempted intra-Community supply.
(3) In a situation such as that which forms the subject of the main proceedings, the place from which the goods are actually dispatched is not to be treated as the place of a supply that follows upon an intra-Community acquisition. On the contrary, the place of supply is situated in the Member State of intra-Community acquisition.
(4) In determining who in such chain transactions effects the intra-Community acquisition, in the absence of other indications, it is of decisive importance to establish who transported the goods or on whose behalf they were transported and who possessed the right of disposal of the goods during transport. Read the full opinion.

The VAT administration has claimed the VAT due on an invalid contract but refuses the contracting party who is a VAT taxable person, to deduct the VAT paid on the transaction. The taxpayer argues on the one hand that the contract can not be considered as invalid on his behalf because he was not aware of the illegitimate purposes of his opponent and on the other hand that the principle of neutrality is violated by refusing him the right to deduct VAT paid on the transaction.
The Belgian Supreme Court has referred two preliminary questions to the European Court of Justice. Read the case.

On 8 November the EU Council of Economic and Financial Affairs held an exchange of views on modifications to EU rules on reduced rates of VAT applied by the Member States. The current provisions that allow a reduced VAT rate for labour-intensive services will expire on 31 December 2005. European Commissioner for Taxation & Customs Union László Kovács asked for a compromise. read Council press release.

The European Commission on 10 November adopted a proposal for a Code of Conduct that would standardise the documentation that multinationals must provide to tax authorities on their pricing of cross-border intra-group transactions. This proposal would reduce significantly the tax complications that companies face when trading with associated enterprises in other Member States.
The Code would be a political commitment and would not affect Member States’ rights and obligations or the respective spheres of competence of the Member States and the EU. Full text of the proposal.

The European Court of Justice has on 10 November rendered its judgement in the so called West Single Packs case (C-197/04). The court has declared that Germany has failed to fulfil its obligation under two EC directives, by applying a special tax rate for fine-cut tobacco for self-rolled cigarettes to rolls of tobacco, the latter sold under the name West Single Packs. Read full case.