Triangular transactions without transfer of the VAT liability finally fail: BFH ruling XI R 35/22 of 17 July 2024

Facts of the case

The plaintiff (and later defendant before the BFH) purchased machines from various EU Member States and sold them to customers who were also based in different Member States. The machines were transported directly from the manufacturers to the plaintiff's customers, either on behalf of the manufacturers or the plaintiff. A dispute arose with the tax office regarding cases in which the movement of goods began and ended in an EU Member State other than Germany and these two Member States were different. In these cases, the plaintiff used his German VAT-ID and the other two parties used the VAT-ID of the country of departure/destination of the goods. The plaintiff treated these supplies as intra-Community supplies in Germany and at the same time declared intra-Community acquisitions with input VAT deduction in Germany.

However, the tax audit revealed that the plaintiff should have paid VAT on local supplies and intra-Community acquisitions in the country of destination, as the moving supplies in these chain transactions were to be allocated to the manufacturer's supplies to the plaintiff. As long as he did not prove the taxation of the intra-Community acquisitions in the country of destination, he would also have to pay VAT on intra-Community acquisitions in Germany in accordance with § 3d sentence 2 UStG (the provision in the German VAT Code stating that VAT for an additional acquisition must be paid in then Member State of the VAT ID used), albeit without input VAT deduction.

The plaintiff then argued that the conditions for an intra-Community triangular transaction were met, meaning that, as an intermediate trader, it did not owe any VAT, neither in Germany due to the German VAT ID used, nor in the country of destination, because the intra-Community acquisition was deemed to be taxed and the VAT for the local supply was owed by the customer. The plaintiff also issued corrected invoices with references to triangulation.

The regional fiscal court had accepted the retroactive effect of the invoice correction, but the tax office challenged this on appeal. The tax office applied to the BFH not to assume a case of § 3d sentence 2 UStG, but to accept the invoice corrections retroactively to the date of the first invoice issue and, alternatively, to waive the tax for the sake of equity.

BFH decision

The BFH ruled that the requirements for an intra-Community triangular transaction were not met, thereby agreeing with the ECJ decision Luxury Trust (C-247/21 of 8 December 2022, which we reported here). An intra-Community triangular transaction requires, among other things, that the first customer issues an invoice to the last customer within the meaning of § 14a para. 7 UStG. This provision requires that the invoice refers to the existence of the intra-Community triangular transaction and the tax liability of the last customer. However, this reference was missing in the original invoices. The corrected invoices had no retroactive effect.

It is true that invoice corrections can have retroactive effect under certain conditions. However, this only applies in the case of formal defects; material requirements must be met. However, the fact that the recipient is designated as the tax debtor by the intermediate trader in the invoice is a material prerequisite for the taxation fiction of the intra-Community triangular transaction. The subsequent fulfilment of a material condition by means of a new invoice is therefore not an invoice correction, but the first issue of the required invoice, and this cannot have retroactive effect.

It is true that, instead of the plaintiff, the customers, misled by the original invoice reference to an intra-Community supply, had declared intra-Community acquisitions in the destination country, so that there may be no need for the "punitive acquisition taxation" of § 3d para. 2 UStG. However, the clear wording of the legal provision and the corresponding Art. 41 para. 1 and 42 of the VAT Directive do not provide for such an exception.

The tax court would have to make the requested equitable decision in the second instance.

Classification

"Get it right the first time, that's the main thing. Get it right the next time, that's not the same thing." This line from a Billy Joel song is a good mnemonic for intra-Community triangular transactions, because the invoice must contain all the necessary information in the first attempt. There is no second chance. It is also important to emphasise once again what was not the main focus in this case, but must be observed at the latest since Luxury Trust: The reference to the existence of the triangular transaction is not sufficient; the transfer of the tax liability to the purchaser must be a mandatory addition. The triangular transaction is not automatic, but an option that is exercised by this transfer of the tax liability.

It seems unlikely that the tax court will waive the tax on equitable grounds in the second instance, because this approach would undermine the clear case law of the ECJ in the Luxury Trust judgement (which was not yet available at the time of the tax court's judgement).

Now that the Federal Fiscal Court has clearly recognised the line taken by the ECJ, the tax authorities can no longer be expected to be generous when it comes to missing or incomplete invoice information in triangular transactions. The correction effort is considerable: The claimant, for example, has to register in the relevant Member States and declare the intra-Community acquisitions and the subsequent supplies there – which can vary in difficulty depending on the Member State. Only then can he document that the "penalty acquisition tax" of § 3d sentence 2 UStG does not apply.

On the same day, the BFH decided another case along these lines: XI R 34/22.