Court of Justice validates Belgium’s joint liability and heavy fines for VAT Fraud

Dec 13
The Court of Justice of the European Union has delivered a judgment in the case Dranken Van Eetvelde NV v. Belgian State (C-331/23) concerning the Belgian practice of holding taxpayers jointly liable for the unpaid VAT of their customers.
 
Additionally, the court addressed whether hefty fines (up to 200%) are compatible with Union law.

The final judgment significantly diverges from the earlier conclusion of the Advocate General (AG), who had expressed severe criticism of the Belgian approach. While the AG deemed this extensive joint liability and the associated heavy fines as disproportionate and contrary to fundamental European principles, the Court now rules that the Belgian regulation does not conflict with Union law, provided certain safeguards are respected.
Background

According to Belgian VAT legislation (Article 51bis, §4 of the VAT Code), a taxpayer can be held jointly liable for the VAT debts of a third party, if they knew or should have known, that the VAT would not be paid by that third party. This provision is intended to combat VAT fraud and tax evasion.

In the case of Dranken Van Eetvelde NV, a VAT fraud that surfaced in 2011 was at issue. False invoices were created for the delivery of beverages, including beer kegs, to customers, primarily horeca establishments. These horeca establishments subsequently sold the beverages "off the books", meaning these sales were not recorded. This allowed the involved horeca establishments to conceal their profits and evade taxes.

The fraud investigation revealed that Dranken Van Eetvelde NV had issued invoices for deliveries to customers who were unknown at the provided addresses or who had never received the ordered goods. In reality, the beverages were delivered to taxable customers, such as café operators, but their identities could not be traced back. These customers sold the beverages without declaring their revenue to the tax authorities, enabling them to evade VAT and taxes.

Despite the fact that Dranken Van Eetvelde NV correctly declared the VAT for the deliveries it had made, the Belgian tax authorities still held the company jointly liable for the unpaid VAT of its customers. This resulted in a tax reassessment and a fine of 200%, based on the joint liability for the customers' VAT debts and the correction of previously erroneously reclaimed VAT amounts.

Dranken Van Eetvelde NV appealed this decision, arguing that the imposed joint liability and fine were disproportionate, as the company was not directly involved in the fraud perpetrated by its customers. The court in Ghent referred the case to the Court of Justice of the European Union to assess whether the Belgian regulation complies with European law, particularly the VAT Directive and the principle of proportionality.

Preliminary Questions

The European Court was ultimately presented with the following questions:

  1. Principle of Proportionality: Is it justified to hold a taxpayer jointly liable without considering their actual involvement in the fraud?
  2. Principle of Neutrality: Does the regulation violate the principle of neutrality by holding a taxpayer liable for the VAT owed by another party without considering the possibility of VAT deduction?
  3. Ne bis in idem Principle: Does the EU Charter permit a person to be sanctioned both administratively and criminally for acts that can be considered a single continuous offense?
  4. Cumulative Sanctions: May a person be punished twice for the same acts without clear rules regarding the proportionality of the imposed sanctions?

In summary, this case revolves around whether the Belgian regulation for joint liability in VAT fraud and the imposed hefty fines are compatible with European law, particularly the VAT Directive and fundamental EU principles such as the principle of proportionality, the principle of neutrality, and the ne bis in idem principle.

Court's Decision

The core of this case concerns the interpretation of Article 205 of the VAT Directive, especially in light of the principle of proportionality. The question is whether a Member State – to ensure the collection of VAT – can hold every party in a fraud chain liable for the full VAT debt without considering if that party played only a minor role.

1. Joint Liability and Proportionality

The Court begins its analysis with Article 205 in conjunction with Articles 193 to 200 and 202 to 204 of the VAT Directive. These articles typically determine who is required to pay VAT, while Article 205 grants Member States the ability to also hold other parties jointly liable. This instrument is specifically intended to combat fraud and protect the treasury in complex and opaque transaction chains.

The Court emphasizes that Member States must consider fundamental principles such as proportionality when applying Article 205. Measures against fraud must be strictly necessary and must not exceed what is required. Crucially, joint liability must not result in "faultless" liability. In other words, a taxpayer must have the opportunity to demonstrate that they did not know or should not have known about the fraud. If they can prove that they have taken all reasonable precautions, they should not be held fully liable.

As long as taxpayers can provide counter-evidence, holding someone jointly liable for the full VAT amount does not violate the principle of proportionality. The joint nature of liability means that a party can be held fully liable without the court always needing to consider the precise role or contribution of that party.

Furthermore, the party being held liable must always retain the possibility to seek civil recourse against the actual fraudster.

This significantly diverges from the AG's judgment. The AG asserted that Article 205 only permits Member States to hold a third party jointly liable for actual established VAT debts, not for presumed or unknown debts. In this case, liability was based on presumed VAT debts, which the AG deemed contrary to Article 205. Additionally, the AG argued that the Belgian regulation inadequately considers individual involvement. However, the Court rules that the ability to provide counter-evidence offers sufficient protection, allowing joint liability to be invoked as long as the taxpayer is given a fair chance to demonstrate their good faith.

2. Principle of Neutrality

Typically, an entrepreneur has the right to deduct VAT paid at earlier stages, ultimately paying VAT only on their own value added. However, what can the jointly liable person exercise regarding the deduction rights of the original debtor?

The Court is clear: in a fraudulent context, the right to deduction lapses. If the "normal" debtor was aware of the fraud, there is no longer a right to deduction. And if there is no deduction right for the fraudster, that right cannot be transferred to the jointly liable party. Moreover, the other taxpayer in this situation is held jointly liable precisely because they knew or should have known about the fraud.

This is again a very different argument from the AG. The AG was concerned that the principle of neutrality would be breached because the combination of the original VAT debt and the imposed fine could lead to an almost fivefold levy. This would occur because the taxpayer is first held liable for the VAT on the invoice, then receives a fine of 200%, and may lose their right to VAT deduction due to involvement in the fraud. Consequently, the total amount owed could escalate to nearly five times the original debt. The Advocate General argued that this is disproportionate, especially since the actual damage to the treasury likely only concerns the value added (the difference between the purchase and sale price) and not the full VAT amount on the false invoices.

3. Ne bis in idem Principle

The "ne bis in idem" principle stipulates that no one may be punished twice for exactly the same facts. In this case, there was criminal prosecution for fraud in certain years and an administrative sanction for fraud in another year. The Court clarifies that to consider it the same facts, the circumstances, time, and place must be identical. Here, the fraud occurred in different tax years, constituting separate factual complexes. This means that one can be criminally punished for one year and administratively punished for another year without violating the ne bis in idem principle. The facts are not identical but merely comparable.

4. Cumulative Sanctions

The answer to the third question made it unnecessary to address the fourth question separately. The Court emphasized that the accumulation of sanctions in this case does not constitute a breach of Union law, as the sanctions pertain to different facts and tax years.

Commentary

The Court affirms that Member States have broad powers to act strictly against VAT fraud. It is legitimate to hold parties, other than the primary debtor, jointly liable for the full VAT, provided there are sufficient procedural safeguards. Importantly, the liable party must be able to demonstrate that they did not know or should not have known about their participation in a fraudulent chain, which is essential for the principle of proportionality.

The Court emphasizes that the principle of neutrality is not breached when the right to VAT deduction lapses in a fraudulent context. Deliberate fraudsters cannot claim deduction rights, nor can jointly liable parties.

The AG criticized the Belgian approach as too strict, warning that combining joint liability, the forfeiture of VAT deduction, and imposing heavy fines (up to 200%) could lead to excessive sanctions. The Court does not follow this reasoning and concludes that Member States may harshly tackle VAT fraud, provided proportionality and procedural safeguards are respected. For taxpayers, this means they must take reasonable precautions to avoid fraud and be aware of the heavy burden of proof.

This case involves a matter of fraud that must be addressed rigorously. However, considering the substantial volume of international correspondence we received following the conclusion by Ms. Kokott, the question arises whether Belgium succeeds in maintaining a positive image by imposing such exceptionally severe penalties.