European Court of Justice Denies Trust Protection in Chain Transactions

Brussels. The European Court of Justice (ECJ) has determined that businesses cannot claim trust protection concerning VAT in chain transactions if they lack knowledge of the underlying sale to a subsequent buyer. This ruling addresses ambiguities in the EU's internal VAT system and could result in substantial financial penalties for involved companies.

In a specific case, a German company (D) sold products to an Austrian company (Ö1), which in turn resold them to another Austrian company (Ö2) without D's knowledge. The initial seller, D, treated the transaction as an intra-Community supply due to its unawareness of the onward sale. The final buyer, Ö2, was subsequently denied the right to deduct input VAT when it emerged that the chain transaction had not been handled correctly.

The Court emphasized that the decisive factor is which of the two supplies within the chain constitutes the actual "moving supply." The ruling underscores that the effective control over the supply and the transfer of economic ownership are crucial for the correct VAT treatment. A company's ignorance of a resale does not absolve it from the responsibility to ascertain the true nature of the supply chain.

Situations where chain transactions are not identified or handled appropriately can lead to significant costs for businesses, such as interest penalties or the loss of deductible VAT. The Court noted that although Ö2 was denied the deduction, they retained the possibility to legally claim the paid VAT back from their supplier, Ö1.

The decision highlights the necessity for companies to meticulously investigate their supply chains and potentially collaborate with their contractual partners. The European Commission is currently planning to introduce more unified rules for handling chain transactions within the EU, which could reduce future uncertainties.