VAT fraud if you pay to an insolvent knowing that he will not pay VAT to the budget?

HA.EN., C-227/21, opinion, 5.05.2022

The bank granted a loan to the borrower.

The Lithuanian company acquired from the bank all claims against the borrower resulting from the loan. It confirmed that it had familiarized itself with the borrower’s economic and financial situation and confirmed that it was aware of the borrower’s insolvency.

Subsequently, after an unsuccessful auction of the borrower’s assets, the company purchased the property from the borrower. The borrower issued a VAT invoice for this with VAT shown. The company deducted the VAT and the borrower (the seller of the real estate) reported the VAT as output VAT. However, he did not pay it to the budget. Shortly thereafter, it obtained the status of a company under bankruptcy proceedings.

The tax authority held that the company in this situation had no right to deduct the input tax because it knew (or should have known) that the supplier would not pay the VAT on the transaction to the tax authorities.

The Advocate General Kokott disagreed with the tax authorities. She stated that:

• The sale of real estate in enforcement proceedings by a company in order to pay its creditors cannot be considered VAT fraud. Therefore, it cannot be considered that the buyer knew he was participating in VAT fraud.
• Such a transaction is also not an abuse of rights.
• In this case, however, there is a doubt as to whether the buyer was actually charged the amount of tax.