When goods leave the EU, they automatically lose their status as Union goods. Upon reimportation, they are treated as non-Union goods, meaning customs formalities must be completed again, and import duties and VAT may be due.
However, legislation provides a relief for "returning goods" – goods that return in unchanged condition – which allows both import duties and VAT to be avoided.
However, legislation provides a relief for "returning goods" – goods that return in unchanged condition – which allows both import duties and VAT to be avoided.
But how far does this relief extend? Can VAT still be imposed if not all customs formalities have been met, even if the goods meet the substantive conditions? This is the central question in case C-125/24 (Palmstråle), in which Advocate General Kokott presented her opinion on March 6, 2025. She analyzes the interplay between the Union Customs Code (UCC) and the VAT Directive (2006/112/EC), critically examining the relationship between the customs regime for returning goods and the VAT exemption on importation.
1. The facts in brief
A horse owner exported two horses to Norway for competitions. Upon returning to Sweden, she passed the customs post without completing the usual formalities. Later, she was stopped by customs and received a VAT assessment.
According to the customs authority, the import VAT exemption could not be applied because no correct customs declaration had been made.
According to the customs authority, the import VAT exemption could not be applied because no correct customs declaration had been made.
Notably, no import duties were owed, and the substantive conditions for the customs relief for returned goods were met: the horses returned in unchanged condition within the required period and remained the property of the same person. However, customs refused the import VAT exemption simply because the required customs formalities (i.e., the declaration requesting exemption) were missing.
2. Preliminary question
The central question in this case is whether the VAT exemption for "returning goods" (Article 143(1)(e), VAT Directive) is strictly dependent on complying with customs formalities and the formal requirement that a customs exemption under Article 203 UCC is granted. In other words, is it sufficient that the goods meet the conditions for customs exemption substantively, or must all formal requirements – such as the presentation obligation and customs declaration– be fully met to apply the VAT exemption?
The Högsta förvaltningsdomstol (the highest administrative court of Sweden) referred the following preliminary ruling question to the Court:
"Must Article 143(1)(e) of the VAT Directive and Articles 86(6) and 203 of the Union Customs Code be interpreted as meaning that both the substantive and procedural conditions laid down in Article 203 must be fulfilled in order for relief from import duty – and thus exemption from VAT – to be granted on re-importation, where a customs debt under Article 79 of the Union Customs Code has been incurred through non-compliance with the presentation obligation laid down in Article 139(1) of the Union Customs Code?"
3. Opinion of AG Kokott
3.1. Interpretation of Article 143(1)(e) of the VAT Directive
Linguistic and systematic analysis
AG Kokott begins her argument with a linguistic and systematic comparison of Articles 143(1)(e) and (f) of the VAT Directive. She points out that while Article 143(1)(f) explicitly states that the exemption "applies" to certain goods, Article 143(1)(e) refers only to goods "eligible for exemption from import duties." According to her, this implies that the VAT exemption on reimportation is not necessarily dependent on a formal customs decision and can be interpreted more broadly.
This linguistic difference is supported by a historical argument. The exemption already existed under the Sixth Directive, a period when there was no harmonized EU customs law. At that time, VAT exemption could not have been linked to national customs rules, which varied by member state. For Kokott, this is an indication that the exemption should not strictly depend on compliance with customs formalities today.
Purpose and justification of the exemption
AG Kokott then makes a fundamental distinction between the objectives of customs law and VAT law. Customs law primarily serves to protect the internal market from competition from third countries, which explains why import duties are levied on goods entering from outside the EU. For returning goods, this need no longer exists: they were already in the EU and do not pose a new competition threat. Therefore, Article 203(1) UCC provides an exemption from import duties for returning goods.
VAT on importation serves a different function. Since VAT is a consumption tax, it is levied when goods enter the economic cycle. For reimported goods, however, there is no economic value added or consumption. Article 143(1)(e) of the VAT Directive recognizes this and therefore grants an exemption from VAT on importation.
Relationship between customs law and VAT law
AG Kokott emphasizes that a breach of customs formalities should not automatically lead to the loss of the VAT exemption. Customs and VAT rules are distinct and do not need to operate in parallel. While a customs debt may result from a formal violation, such as failing to submit a customs declaration, this does not automatically create an import VAT debt.
She refers to the Court's earlier case law, acknowledging the connection between customs duties and VAT, but notes that this connection is not absolute. For instance, Article 71(1) of the VAT Directive ties the timing of VAT assessment to the customs debt, but does not establish a direct link to the location of taxation.
Furthermore, Kokott highlights a key difference between customs law and VAT law: customs law is formal and rigid, while VAT law is more flexible and grounded in economic reality. A simple procedural error in customs law may create a customs debt, whereas in VAT law, a taxable event must occur—namely, the goods must enter economic circulation and be available for consumption.
Practical considerations and inconsistencies
AG Kokott observes that VAT on importation and import duties are often collected together in practice. However, this administrative convenience should not be a reason to automatically make VAT dependent on customs procedures. She also points out an inconsistency: in some cases, a breach of customs formalities does not lead to a customs debt, for example, because the import duty rate is 0%. Yet, in the same situation, VAT could still be levied solely due to a procedural error. This would mean that the formally stricter customs law would be more lenient than VAT law, which is legally illogical.
Provisional conclusion
The core of Kokott's conclusion is clear: the VAT exemption should not be denied solely based on a procedural error in customs regulations. As long as the goods substantively meet the conditions for returning goods, the exemption cannot be denied simply because customs formalities were not fully complied with. In short, fiscal logic must prevail over administrative pitfalls.
3.2. Article 86(6) UCC as an "Escape" Provision
Should the Court rule otherwise and make the VAT exemption dependent on compliance with customs formalities, then Article 86(6) UCC could come into play as a safety net. This provision allows a customs exemption despite a procedural error, provided no fraud is involved. In that case, the VAT exemption would remain in place, provided no fraudulent conduct is found.
However, AG Kokott warns that applying Article 86(6) UCC within VAT law could be problematic. This provision contains subjective elements, such as distinguishing between good faith and fraud, while the VAT Directive generally uses objective tax rules. There is a risk that VAT would depend on the assessment of intentions, which is not in line with the VAT system.
However, AG Kokott warns that applying Article 86(6) UCC within VAT law could be problematic. This provision contains subjective elements, such as distinguishing between good faith and fraud, while the VAT Directive generally uses objective tax rules. There is a risk that VAT would depend on the assessment of intentions, which is not in line with the VAT system.
Nevertheless, AG Kokott offers guidelines for interpreting fraud under Article 86(6) UCC. Not only deliberate fraud but also gross negligence can be considered fraud. If an importer knew or should have known they were violating customs obligations, they could lose their exemption. For professional market participants, it can be assumed they are aware of customs rules. However, if there is force majeure or a situation where no reasonable alternative action was possible, this could change the situation.
Finally, AG Kokott concludes that if the Court finds that compliance with customs rules is required for the VAT exemption, the national court must determine whether there was fraud or gross negligence. Only in that case would the VAT exemption be denied.
4. Commentary
Belgian VAT law also provides an exemption for returning goods—a logical provision, why should VAT be paid on goods that return unchanged?
However, the Belgian approach, like that of other member states, links this exemption to customs law. Article 40, §1, 2°, a) of the Belgian VAT Code and Royal Decree No. 7 explicitly link the VAT exemption to the customs exemption. The question, however, remains whether this strict linkage is sustainable. AG Kokott emphasizes that VAT and customs duties serve different purposes: the VAT system focuses on consumption and economic reality, while customs law is highly formalized. Should the absence of a customs declaration result in the imposition of VAT, even if the goods substantively meet the conditions for exemption?
The question now is how the Court will rule. If it adopts the AG’s opinion, it would represent a significant step forward, as a VAT exemption entirely dependent on compliance with customs formalities carries considerable risks. In our view, businesses should not face VAT solely due to administrative shortcomings in customs procedures.
To be continued—hopefully with a reality check on excessive bureaucracy!