BFH acknowledges chain supply in the case of fractional transport - BFH decision XI R 1/20 dated 22 November 2023

Facts of the case and legal issues

In 2012, the plaintiff sold goods to A-GmbH, which it resold to the Kazakh company K-Ltd. In accordance with its agreement with A-GmbH, the plaintiff commissioned freight forwarder X to transport the goods to a warehouse in the Netherlands. The tax court had been unable to determine exactly which of the parties involved had carried out or commissioned the transport from the Netherlands to Kazakhstan, but only A-GmbH or K-Ltd. could be considered.

In accordance with the terms of delivery, the risk of accidental loss of the goods was transferred to both A-GmbH and K-Ltd. in Germany.

Due to the shared transport responsibility, the plaintiff thought there was no chain supply but rather two separate supplies to be assessed.  The plaintiff assumed that she had carried out a VAT-exempt intra-Community supply from Germany to the Netherlands.  The tax office and the tax court, on the other hand, were of the opinion that there was indeed a chain supply, but that the moving supply was to be allocated to the supply by A-GmbH to K-Ltd.  As a non-moving supply preceding the moving supply, the plaintiff's supply was therefore VAT taxable without exemption in Germany.

In addition, there were also questions as to suitable evidence for the transfer of the power of disposal and the possibly necessary involvement of other parties in a chain supply in the legal proceedings, but these should not be considered here.

BFH: Chain supply

In accordance with the ("old") law applicable until 31 December 2019, the Senate first addresses the fact that it is irrelevant which of the parties involved arranged the transport when determining whether this is the moving supply in a chain supply. This is contrary to the view of the tax authorities in sec. 3.14 para. 7 sentence 1 of the administrative guidelines to the German VAT Code. The BFH argues that the opinion of the tax authorities is inconsistent with ECJ case law, which is based on whether the transfer of the power of disposal to the second purchaser still took place in Germany. According to the terms of delivery, the power to dispose of the goods had been transferred to both A-GmbH and K-Ltd. while still in Germany. Accordingly, only the supply from A-GmbH to K-Ltd. could be considered the moving supply.  The fact that it could not be clarified whether A-GmbH or K-Ltd. had arranged the transport from the Netherlands to Kazakhstan was therefore irrelevant.  The plaintiff's supply to A-GmbH was therefore a non-moving supply that preceded the movable supply and was therefore VAT taxable in Germany.

However, this is surprising and perhaps also relevant for the ("new") law applicable since 1 January 2020: The storage in the Netherlands only results in a harmless short interruption of the commenced transport, which does not prevent a chain supply.

Practical implications

This decision concerns two questions: can a chain supply also be assumed if two parties share the transport (fractional transport), and how should the moving supply be allocated in this case?

As far as the question of fractional transport is concerned, the decision comes as a surprise. On 17 June 2020 (7 K 7214/17), the Berlin-Brandenburg tax court had already ruled on a case with fractional transport and affirmed a chain supply. In that case, however, the first and last entrepreneur in the chain had shared the transport, and the tax court emphasised that it would have been contrary to a chain supply if the middle entrepreneur had taken over the transport. In the present case, it was not possible to clarify whether the plaintiff had shared the transport with the intermediary A-GmbH or with the end customer K-Ltd, however, the BFH considered this to be irrelevant. Before the decision of the Berlin-Brandenburg tax court, the VAT world had more or less unanimously assumed that the definition of a chain supply in section 3 para. 6a sentence 1 UStG excludes cases of fractional transport because a chain supply requires the goods to be delivered directly from the first supplier to the last buyer. This is also the view of the tax authorities in sec. 3.14 para. 4 UStAE. According to this BFH decision, a chain supply in the case of fractional transport must be considered even more seriously than according to the aforementioned tax court judgement. This makes it more difficult for entrepreneurs because a chain supply can no longer be automatically ruled out in the case of fractional transport. Rather, the reason for the interruption must be considered and whether this interruption is short - a vague term. A non-application decree, i.e. an order to the tax authorities not to apply the decision beyond the decided case, seems likely.

Regarding the question of the allocation of the moving supply in a chain supply: The BFH has already issued similar decisions in the past, and since then there has been disagreement between the court and the tax authorities.  Since then, those who want to be on the safe side have organised chain supplies in such a way that both legal opinions (allocation according to the cause of transport vs. allocation according to the power of disposal) produce the same result.

Whether the Federal Fiscal Court would decide a case in the same way again after the Quick Fixes came into force on 1 January 2020 seems questionable, as § 3 (6a) of the German VAT Code explicitly stipulates that the moving supply in a chain supply must always be allocated according to the cause of transport. However, Art. 36a of the VAT Directive only stipulates this for transport by an intermediary; the regulation for cases of transport by the first or last trader in the chain was only introduced in Germany in response to the changes required by the Quick Fixes but was not stipulated by the Quick Fixes.  One can therefore not eliminate the possibility that the Federal Fiscal Court will also judge future chain supplies with transport by the first or last trader according to the power of disposal and consider § 3 (6a) of the German VAT Act to be incompatible with ECJ case law.  This remains to be seen.

Autorin

Nadia Schulte
Tel.: +49 211 83 99 330