Limitations on the Reemtsma principle

The CJEU has recognised significant restrictions on the operation of the Reemtsma principle by which a recipient of a supply may seek recovery of VAT overpaid from the tax authorities where it is impossible or excessively difficult to do so from the supplier: H v Finanzamt M (Case C-83/23). In particular, the CJEU has held that a tax authority will not be required to refund input VAT to a recipient where it has already refunded the overpaid output VAT to the supplier. In those circumstances, the normal chain of civil refund actions should apply and it is not the role of the Reemtmsa principle to affect the order of priority of creditors in a liquidation or require the tax authorities to refund the VAT twice.

Background

This case concerns the levying of VAT by a supplier of boats, who later went insolvent. The supplier, a German entity, had charged German VAT to H, however, following an inspection, it became clear that the boats had actually been located in Italy at the relevant time such that Italian VAT should have been levied. As a result, the German tax authorities denied H a VAT deduction for the VAT it had paid to the supplier. In the meantime, the supplier had gone insolvent and the administrator had amended the relevant invoices and had recovered the VAT it had incorrectly paid from the tax authorities. However, H was unable to recover the VAT it had paid to the supplier following its insolvency. Accordingly, H sought recovery of the overpaid VAT from the German tax authorities pursuant to the Reemtsma principle. The German tax authorities refused and H brought an action in the German courts.

CJEU decision

The Court noted that the case bore some similarities to the HUMDA case, where the CJEU confirmed that the Reemtsma principle applied equally to situations in which the VAT overcharged was due to an incorrect application of the place of supply rules. And the Court reiterated the Reemtsma principle, that where a VAT refund becomes impossible or excessively difficult, in particular in the case of the insolvency of the supplier, the principles of VAT neutrality and effectiveness require a Member State to provide for the possibility for the recipient to recover VAT which has been incorrectly invoiced and paid, directly from the tax authorities.

However, the Court considered that the fact that the tax authorities had already refunded the VAT to the supplier in this case meant that the Reemtsma principle no longer applied. The Court noted that if the tax authorities were required to refund the incorrectly charged VAT to H, then they would have been required to refund the VAT twice.

The Court noted that it is a fundamental principle that where a supplier has incorrectly paid VAT, that VAT must be refunded to the supplier by the tax authorities. The fact that the supplier had become insolvent and entered liquidation was not relevant. The tax authorities cannot be required to take into account the fact that the usual refund chain (to supplier and then from supplier to recipient) has been disrupted by insolvency, with the result that the VAT refunded to the supplier becomes part of the insolvency estate with the risk that the recipient does not obtain a refund. The Reemtsma principle is “not intended to call into question the order of priority of creditors in the context of liquidation proceedings”.

The Court also rejected the argument that the German tax authorities should have checked whether the administrators had declared the Italian VAT due or that the fact that the failure of the administrators to account for Italian VAT in the circumstances might amount to VAT fraud in Italy was relevant.

However, the Court did suggest that H could have brought an action against the administrator with a view to receiving an invoice including Italian VAT issued to it and that the administrator could have registered for VAT in Italy and provided a relevant tax identification number so as to enable H to deduct the input VAT paid in Italy. (Though quite where the Italian tax authorities would lie in the priority of creditors and, in the absence of that, whether the Italian tax authorities would entertain a claim for VAT paid over in Germany appear to be highly questionable!)

Comment

The decision of the Court places a significant restriction on the scope of the Reemtsma principle. In HUMDA it was intimated that the right to a refund may not have been recognised if the recipient had not been fully taxable and here the right has been shown to be dependent on the tax authorities not being (essentially) out of pocket. As such, the principle appears to be more akin to an equitable principle of restitution, depending on the equity of the scenario and an element of unjust enrichment on the part of the tax authorities at the expense of the recipient of the supply. That did not exist in the circumstances of this case and so the German tax authorities were entitled to reject the claim.