Feb
The application of the triangulation simplification in a chain with four parties
Who this will interest: businesses trading in the EU
Key point(s): the triangulation simplification is not invalidated by the existence of a fourth party in a chain of supplies in certain circumstances.
Essentia’s take: An interesting challenge to the old dogma that “there can’t be four parties in a triangulation”, but care is needed in applying it: the taxpayer won due to very specific circumstances and the old dogma remains true in the vast bulk of cases.
Action points: Businesses trading in the EU and using the triangulation simplification should review their supply chains and ensure the conditions to apply the triangulation are met. Otherwise they will open themselves to challenges from the tax authorities. More generally it is advisable companies trading in the EU undertake due diligence concerning their suppliers and customers to avoid being caught in VAT fraud.
In detail
The Court of Justice of the European Union (“CJEU” or “the Court”) has recently published its decision in an interesting case concerning the application of the triangulation simplification in a supply chain with four parties (T‑646/24).
The case revolves around a company called MS KLJUČAROVCI, d.o.o. (‘MS’) established and VAT registered in Slovenia that sold rapeseed oil, rapeseed presscakes and soya seeds. In 2015 and 2016 several sales were made to businesses established and VAT registered in Denmark. The goods were acquired from a supplier in Germany and transported directly to customer in Denmark, with MS being in charge of the transport.
The invoices raised by MS mentioned the reverse charge was applicable by the customer.
MS considered the conditions for applying the triangulation simplification had been met and reported the transactions as such in its Slovenian VAT returns and EC Sales Lists.
The Slovenian Tax Authorities requested information concerning the transactions from their Danish counterparties. The Danish Tax Authorities reported that the Danish businesses were missing traders and in fact sold the goods to other customers in Denmark and not taken physical possession of the goods, instead the goods had been handed by MS directly to a fourth party called ANC Group
The Slovenian Tax Authorities considered the triangulation simplification should have not been applied in this case given that the goods had not been handed to the third party in the chain. Slovenian VAT was assessed on the sale made by the Slovenian business. Input VAT recovery was not allowed due to MS participating in fraudulent transactions.
After several appeals through the Slovenian administrative and court system the case was referred to the CJEU. The Court was essentially asked if the triangulation simplification can still be applied in the circumstances described above.
The Court’s decision
The main issues the CJEU had to discuss were:
- Whether handing over the goods to the fourth party in the chain meant that the triangulation conditions were still met;
- If knowing that the goods were supplied onward to the fourth party in the chain was relevant to the application of the triangulation;
- If Slovenian VAT was due on the transaction with a block on the recovery of input VAT.
The CJEU decided in favour of the Slovenian business stating that the triangulation simplification can be extended to include four parties in the given circumstances.
The Court explained that the concept of “supply of goods” does not refer to the transfer of ownership in accordance with national law. Instead the concept covers the transfer of the power to dispose of the goods as if the recipient were the owner of the property. This transfer of power does not require taking physical possession of the goods. Therefore, according to the Court, the goods not having been handed over to the third party in the chain should not be an issue for the purpose of applying the triangulation. Following the same logic the fact that the transport does not end at the premises of the third party but instead ends at the final recipient’s premises does not invalidate the application of the triangulation.
Furthermore, the CJEU concluded that MS knowing that the goods were delivered to the last party in the chain instead of its client should not have an impact on the application of the triangulation.
On the last question, the Court concluded that Member States were allowed to refuse the right of deduction to taxable persons if it is established that that person acquiring the goods knew or should have known they were participating in VAT fraud in the context of a chain of supplies.
What does it mean to businesses
The decision of the Court confirms that for the purpose of applying the triangulation it is important that the substantive conditions are met. This is a positive development for tax payers as the rules for applying the triangulation are quite strict.
The ruling also upholds previous case law stating that tax authorities are well within their right to restrict VAT recovery and assess VAT where they consider the taxable person knew or should have known they were participating in VAT fraud.
It should also be mentioned that despite the decision, the triangulation simplification does not apply to transactions involving four parties. Instead, the decision states that having a fourth party in the chain does not invalidate the application of the triangulation for the first three parties in circumstances such as those in the case.