Is zero rating EU supplies possible without proper transport documentation?

Who this will interest: businesses that trade goods in the EU.

Key point(s): In the EU, zero rating intra-community supplies of goods is possible even if not all required documentation is available as long as it is clear the goods have been shipped from one EU Member State to another.

Essentia’s take: This is an important ruling that follows a similar one a few months ago concerning exports. The decision clearly states that the application of the zero rate cannot be disallowed purely on formal requirements and as long as the goods have been shipped  from one EU country to another the zero rating should be applied. Disallowing the zero rate can only be done in cases where the evidence that the goods have been shipped is not sufficient or the case involves fraud.

Action points: Zero rating of EU supplies will still be based on having documentation that shows the goods have left, however zero rating should not be restricted to cases where only particular documents are available. Companies should therefore ensure they collect and retain evidence of the removal of the goods.

The case in detail

The case (C-639/24 – FLO VENEER) is a referral from the Administrative Court in Zagreb (Croatia) to the CJEU. Flo Veneer is a business established and VAT registered in Croatia that sells oak logs. The business had sold logs to a customer in Slovenia in 2020 and zero rated the supply as an intra-community supply of goods.

During an audit the Croatian Tax Authorities (CTA) took the view that the documentation provided by Flo Veneer was insufficient to prove the goods had been shipped to Slovenia. This included written statements from the acquirer, invoices, certificates of dispatch of the goods and consignment notes (CMRs).

The CTA did not challenge the fact that the goods had actually been shipped to Slovenia, instead they took the view that the documentation was insufficient to prove this.

Flo Veneer challenged the CTA’s assessment in court which ultimately ended up being referred to the CJEU.

Some context around the issue at hand

The dispute essentially concerned whether the zero rate should be applied based on the available documentation (which seemed to be insufficient) or on the fact that the goods had in fact been shipped to Slovenia.

This has always been a contentious issue in VAT as sometimes the documentation available to the supplier may not be complete or lack key information. The tax authorities on the other hand may have access to other types of information and resources and could therefore potentially determine with certainty whether the goods have in fact been shipped. Therefore, there is a tension between the supplier’s ability to prove the goods have been shipped and Tax Authority’s ability to gather the required information from other sources.

Historically the Tax Authorities have insisted it should be up to the supplier to prove the goods have been shipped. This has been reflected in EU legislation via the so called “Quick Fixes package” in 2020, which stated having appropriate documentation is a substantive condition. In other words as of 2020 the balance of power had shifted in the favour of the Tax Authorities as this requirement had been designated to be of a substantive nature i.e. no appropriate documentation, no zero rating.

Decision of the Court

The CJEU decided in favour of Flo Veneer and stated that as long as there was no doubt that the goods had in fact been shipped from Croatia to Slovenia the zero rate should be applied. The Court made two important points:

1. The EU’s VAT legislation (Article 45a of Implementing Regulation No 282/2011) indeed requires appropriate documentation to be available to support the zero rate, however it does not set an exhaustive list of the evidence. This requirement has been introduced in order to facilitate the application of the zero rate via a presumption, not to restrict it.
2. The provision of EU law that states a zero rate can be applied on EU sales is article 138 of the EU VAT Directive. However, it does not restrict the application of the zero rate only to those cases where the vendor is in possession of specific evidence.

Main Takeaway

The main takeaway from this case is that the Tax Authorities should not restrict the application of the zero rate for lack of evidence by the supplier as long as other evidence (even if it is not in the hands of the supplier) indicates the goods have indeed been shipped to another EU Member State.

The decision is in line with previous CJEU case law, some as recent as a few months ago (please see a similar decision in relation to zero rating exports here) which essentially states that unless there is an indication of fraud, formal requirements cannot undermine the seller’s entitlement to zero rating as long as the substantive conditions for an intra-Community supply are satisfied.

What does it mean to businesses

During audits emphasis is placed on having particular types of documentation (e.g. there is a preference for CMRs for land based transport) in order to apply the zero rate. This decision can tip the balance in favour of the tax payer as it clearly outlines that the list of documents mentioned in the legislation is not prescriptive and the tax authorities should not restrict the application of the zero rate purely based on particular documents not being available.

The decision does not mean all challenges from the tax authorities on this matter will be unsuccessful, therefore businesses should ensure they gather as much evidence as possible and check whether their VAT compliance procedures are robust.