New Court of Justice judgment on VAT.
On the 29 June 2017, the Court of Justice of the European Union (CJEU) issued a judgment in case C-288/16 L.Č. The case referred to VAT rate applicable in Latvia on supply of transport and ancillary services connected with exportation of goods from Latvia to Belarus. The services were rendered for a consignor supplying goods from Riga port to Belarus by ‘ATEK’ SIA – a Latvian international freight forwarder who assigned part of the services to his Latvian subcontractor – L.Č. According to the contract, L.Č. was responsible in particular for: driving the vehicles (trucks were owned by ATEK), car repairs and refueling, customs formalities, surveillance of the goods, transfer of goods to the consignee, loading and unloading.
0% VAT on export subcontractors in EU?
After the services have been accomplished, L.Č. issued an invoice to ATEK and applied 0% VAT rate considering that it had supplied services connected with transit. Latvian tax authorities challenged the L.Č.’s right to apply 0% VAT and decided that standard VAT rate was due. In particular the Latvian tax authorities claimed that in lack of any legal connection between L.Č. and the consignor or a consignee of goods, L.Č.’ services cannot benefit from the 0% VAT rate.
L.Č. appealed against the decisions and in the course of the following court proceedings, the Latvian Supreme Court (the Augstākā tiesa) decided to refer a question for a preliminary ruling to the Court of Justice of the European Union. The Latvian Supreme Court asked the CJEU whether article 146 (1) (e) of the VAT Directive [Directive 112/2006/EEC] establishing the VAT exemption for services directly connected with exportation or importation of goods is applicable only where there is a direct legal connection between the service provider and the consignee or the consignor of the goods?
The CJEU agreed with the Latvian tax authorities and ruled that in the given circumstances VAT exemption provided in article 146(1)(e) of the VAT Directive cannot be applied. The Court stated that VAT exemption laid down in herein article applies only to services directly connected to export or import of goods meaning that the exempt services must not only contribute to the actual performance of exportation or importation but they should also be supplied directly to exporter, importer or consignee of the goods. Application of the VAT exemption also to services performed by L.Č. who had no legal relationship with neither of these entities but who was in fact rendering the services to the freight forwarder (ATEK) would mean a broad interpretation of the exemption which is unlawful in the light of the settled CJEU case law.
What that means for your company?
Depending on the wording of the relevant local VAT regulations, the CJEU ruling may result in change of tax authorities’ practice with regards to VAT taxation of services connected with the export or import of goods – not only in Latvia but also in other Member States. In particular, such services rendered by subcontractors not having direct contractual relationship with exporter, importer or consignee may become taxable according to a standard VAT rate. However, before changing the VAT rate applied on such services, regulations and practice in particular Member State should be verified in detail.