Identification of taxable persons for VAT purposes

Justine Bielik | Published on 25 Apr 2013



On the 14th March the Court of Justice delivered an interesting judgment (C-527/11) regarding tax authorities’ refusal of assigning VAT number.

1.       Facts

The claimant, Latvian company, applied to be entered on the register of taxable persons subject to VAT. The Latvian tax authorities refused, claiming that the company did not have the material, technical and financial capacity to carry out the declared economic activity, namely providing construction services. This conclusion was drawn after an investigation which showed that, among others, the company had no fixed assets, it had not carried out any actual commercial activities and the company’s only employee was the apparently unremunerated chairman of the board of directors. In the subsequent procedural steps, the administrative courts agreed with the claimant and upheld that it provided the information concerning its capacity to carry out said activity and, moreover, Lithuanian VAT law does not authorize the tax authorities to assess whether a person who wishes to be entered in the register is capable of carrying out an economic activity.

2.       Questions addressed to the Court of Justice

As a result of an appeal brought by the tax authorities, the national court addressed the following questions to the Court of Justice :

“1. Is Directive 2006/112 to be interpreted as prohibiting refusal of the individual registration number that identifies a taxable person, on the basis that the holder of the taxable person’s shares previously obtained on various occasions an individual number for other undertakings which did not carry out any real economic activity, and the shares of which were transferred by the holder to other persons immediately after obtaining the individual number?

2. Is Article 214, in conjunction with Article 273, of Directive [2006/112] to be interpreted as permitting the tax authority, before assigning the individual number, to verify the capacity of the taxable person to carry out the activity that is subject to tax, where this verification is intended to ensure correct collection of the tax and prevent tax evasion?”

3.       Argumentation

The most important findings, highlighted in the Court's decision, focus on the existence and the scope of discretional power vested on the tax authorities regarding assigning a VAT number. The Court pointed out that Article 213 of VAT Directive gives to the Member States “a certain discretion when they adopt measures to ensure the identification of taxable persons for the purposes of VAT”. However, this discretion is limited by the legitimate grounds. Well established case law confirms that “any person with the intention, as confirmed by objective elements, of independently starting an economic activity, and who incurs the initial investment expenditure for those purposes must be regarded as a taxable person” (among others, case C-280/10 Polski Trawertyn).

Going further, the Court held that “Directive 2006/112, and particularly 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”.  

Nevertheless, since Member States are allowed to protect their financial interests and prevent tax evasion, avoidance and abuse, they can take up measures that are necessary to prevent the misuse of VAT numbers. However, these measures cannot go beyond what’s necessary for the collection of tax and prevention tax evasion. The Court pointed out that “in order to be considered proportionate to the objective of preventing evasion, a refusal to identify a taxable person by an individual number must be based on sound evidence giving objective grounds for considering that it is probable that the VAT identification number assigned to that taxable person will be used fraudulently. Such a decision must be based on an overall assessment of all the circumstances of the case and of the evidence gathered when checking the information provided by the undertaking concerned”. Applying these conditions to the facts of the case, the Court concluded that the lack of resources to carry out declared economic activity does not itself demonstrate the intention to commit tax evasion (although, they should be taken into account among other circumstances).

4.       Judgment

The final response of the Court was as follows:

“Articles 213, 214 and 273 of Council Directive 2006/112 EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the tax authority of a Member State may not refuse to assign a value added tax identification number to a company solely on the ground that, in the opinion of that authority, the company does not have at its disposal 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, such an identification number for companies which never carried out any real economic activity, and the shares of which were transferred immediately after obtaining the individual number, where the tax authority concerned has not established, on the basis of objective factors, that there is sound evidence leading to the suspicion that the value added tax identification number assigned will be used fraudulently. It is for the referring court to assess whether that tax authority provided serious evidence of the existence of a risk of tax evasion in the case in the main proceedings”.

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