If you are not registered, you need to pay VAT – even if the transaction is subject to reverse charge.

(DGRFP Bucureşti, C-146/21, judgment, 30.06.2022)

A Romanian entity VB was the owner of a forested land. It was used by her to sale of standing timber. During the tax audit the authorities concluded that VB had exceeded special upper limit for exemption for small businesses but she had not registered for VAT purposes and had not paid VAT resulting from the sale. Consequently, tax authorities assessed the tax liability.

At the same time, Romanian VAT legislation (according to implementing decision introducing special derogation) provided that a reverse charge mechanism applied to standing timber. However, this mechanism applied only if the supplier and the buyer were registered for VAT purposes.

The Court was obliged to answer the question of whether the application of the reverse charge mechanism may be made conditional on the supplier’s registration for VAT purposes.

The Court agreed with the tax authorities’ view. It held that:

• The Implementing Decision allowed Romania to introduce a reverse charge mechanism.
• Neither the VAT Directive nor the Implementing Decision clearly prohibits the introduction of conditions for the application of the reverse charge mechanism. So Romania, in principle, can introduce such conditions – provided that it does not oppose the principle of neutrality.
• This approach is supported by the content of Article 199.2 of the VAT Directive. This provision allows defining the categories of suppliers and buyers to which the reverse charge applies.
• Second, reverse charge is an exception to the rule. And the registration requirement limits this exception.
• Third, this approach does not contradict the case law of the Court. This case law says that a taxpayer has the right to deduct input tax regardless of whether he has fulfilled the registration requirement. Here, in turn, the right to deduct is not compromised.
• Fourth, the principle of neutrality also requires equal treatment. A difference in treatment is justified if the purpose of the difference „relates to a legally permitted aim (…) and it is proportionate to the aim pursued.” The purpose of regulation is legal certainty and legal clarity. By requiring registration, the buyer of goods has a „more accessible criterion for knowing” about his tax obligations. Without this criterion, the buyer does not know whether or not he should apply the reverse charge.
• The registration requirement is provided for directly by the VAT Directive (Article 214) and the right to deduct is not called into question here. As long as these conditions are met, the registration condition seems proportionate to its purpose.