Summary
In the case of H GmbH v Finanzamt M (Case C-83/23), the European Court of Justice (ECJ) ruled that when one party in a transaction (either the supplier or the buyer) receives a VAT refund from the tax authorities, the other party is not entitled to claim the same refund. This situation arose after the supplier issued an invoice applying VAT in the wrong country, leading the tax office to refund the VAT to the supplier’s insolvency estate. Consequently, the buyer’s claim for a VAT refund was denied to avoid double reimbursement.
This case emphasizes the importance of applying the correct VAT, especially in cross-border transactions. A thorough pre-accounting process helps ensure that invoices are verified for proper VAT jurisdiction before entering the accounting system. By catching errors early, businesses can avoid complications. If discrepancies are found, requesting corrected invoices promptly is key to securing potential VAT refunds.
Background
The case involved two German companies, E-GmbH and H GmbH, in a sale-and-leaseback transaction involving motorboats purchased from an Italian supplier (E-sr).
The boats were located in Italy at the time of sale, meaning Italian VAT should have been applied, as EU VAT rules dictate that the place of supply determines which country’s VAT applies.
However, E-GmbH incorrectly issued invoices with German VAT instead of Italian VAT. H GmbH paid the German VAT to E-GmbH, and E-GmbH passed this VAT on to the German tax authorities (Finanzamt M). Later, when the error was discovered, E-GmbH corrected the invoices but had already entered insolvency.
H GmbH tried to claim a VAT refund directly from the tax authorities, arguing that the VAT had been incorrectly invoiced. However, the German tax authorities had already refunded the VAT to E-GmbH’s insolvency estate, leaving H GmbH without the possibility to recover the VAT directly.
E-GmbH (the supplier) issued an incorrect invoice to H GmbH (the buyer), charging German VAT instead of Italian VAT, as the goods (motorboats) were located in Italy at the time of the sale.
H GmbH paid the VAT to E-GmbH based on this incorrect invoice.
E-GmbH then paid the collected VAT to the German Tax Office (Finanzamt M) before entering insolvency.
After E-GmbH became insolvent, the German Tax Office refunded the VAT to E-GmbH’s insolvency estate.
H GmbH, upon realizing the VAT error, submitted a request to the German Tax Office to claim a refund for the VAT it had paid.
The tax office denied H GmbH’s refund request to avoid double reimbursement, as the VAT had already been refunded to the supplier’s insolvency estate.
Key Points of the Judgment:
No Direct Claim from Tax Authorities If VAT is Refunded to Supplier
H GmbH, the recipient of a service, paid VAT incorrectly invoiced by its supplier, E-GmbH, but could not deduct this VAT as the service was provided in another Member State (Italy). When E-GmbH went into insolvency, H GmbH attempted to claim a direct VAT refund from the German tax authorities, as the supplier had already been refunded by the authorities. The CJEU ruled that H GmbH cannot claim a refund from the tax authorities, as the VAT had already been refunded to the supplier’s insolvency estate. This avoids the risk of double refunds.
First-Come, First-Serve Principle
The judgment effectively establishes a “first-come, first-serve” principle, meaning that either the supplier or recipient can claim a refund from the tax authorities, but not both. Once one party has received the VAT refund, the other party loses the right to claim it directly from the tax authorities.
Supplier Insolvency Does Not Alter VAT Refund Rules
The Court emphasized that the supplier’s insolvency does not grant the recipient an automatic right to claim the VAT from the tax authorities. If the recipient does not assert its rights to receive an invoice reflecting the correct VAT (in this case, Italian VAT), it cannot expect the tax authorities to refund the VAT.
Constructive Trust in English Law
The ruling hints that in some jurisdictions, such as England, it might be possible for the supplier to hold any VAT refunds on a constructive trust for the recipient. However, this was not applicable in this EU case.
Reemtsma Claim
A Reemtsma claim (the name comes from the Reemtsma Cigarettenfabriken case decided by the Court of Justice of the European Union) refers to a legal right that allows the recipient of a service or goods to directly request a refund of VAT from the tax authorities if recovery from the supplier becomes impossible or excessively difficult (e.g., due to insolvency). However, the CJEU clarified that this is not applicable when the VAT has already been refunded to the supplier by the authorities.
Recipient Responsibility
The Court also emphasized the responsibility of the recipient to take reasonable steps, such as seeking the correct invoice from the supplier (in this case, with Italian VAT), before resorting to a Reemtsma claim. The recipient cannot neglect this step and still claim VAT directly from tax authorities.
Practical Implications for Businesses:
Invoices with Correct VAT:
Recipients should always ensure they receive invoices with the correct VAT to avoid complications. If errors are identified, they must seek corrected invoices without delay.
Timely Claims Matter:
Businesses must act promptly to claim VAT refunds, as the first party to do so (whether the supplier or recipient) is entitled to keep it.
Supplier Insolvency:
In the event of supplier insolvency, the recipient cannot bypass normal VAT refund procedures by claiming directly from the tax authorities.
Potential Legal Routes:
In jurisdictions such as England, recipients may explore alternative legal routes, such as constructive trust claims, though these are not applicable EU-wide.
Conclusion
This ruling highlights the importance of correct VAT invoicing and clarifies the procedures and limitations of VAT refund claims, particularly in insolvency situations.
Having strong pre-accounting processes in place helps businesses verify the accuracy of invoices, including the correct VAT jurisdiction, before they are processed. This proactive approach can reduce the risk of errors and potential financial losses.
VAT refunds typically operate on a first-come, first-served basis, meaning that once the tax authorities refund VAT to one party (either the supplier or buyer), the other party has limited options to claim it. Ensuring accuracy through pre-accounting is essential to avoid complications and secure rightful refunds.
