CJEU on VAT treatment of Czech ‘society’ without legal personality

The Advocate General of the Court of Justice of the European Union (CJEU) has issued an opinion in case C-796/23 Česká síť s.r.o. In her opinion on the matter, she addressed the issue of determining the taxable person who performed the supply and is liable to pay value added tax in the context of the business activities of four legal entities.

Česká síť s.r.o. cooperated with several US-based corporations operating in the Czech Republic through their branches. All of them provided internet connection services to end customers, each acting in its own name and with its own customer portfolio.

The executive director / statutory representative of Česká síť s.r.o. was also the head of the branch offices of all three US companies. He was thus the sole person effectively managing all four entities operating in the Czech Republic.

The tax administrator concluded that pursuant to Section 2716 of the Civil Code, a ‘society’ (previously an ‘association without legal personality’) de facto existed whose members were Česká síť s.r.o. and the three branches. According to the tax administrator, Česká síť s.r.o., as the designated partner was responsible for paying VAT for the entire ‘society’. Since the total revenue of all four entities exceeded the threshold for VAT registration, the ‘society’ (i.e., the association made up of all four entities) was assessed additional output VAT.

Česká síť s.r.o. challenged the tax administrator’s decision, and the dispute reached the Supreme Administrative Court. The latter referred the following questions to the CJEU for a preliminary ruling:

• Is a situation in which, pursuant to special national value added tax arrangements for ‘societies’ (associations of persons that do not have legal personality), a ‘designated partner’ is liable for the payment of the VAT for the entire society, despite the fact that another partner had dealt with the end customer in relation to the supply of services, compatible with VAT Directive 2006/112/EC?
• Does the compatibility of the situation with Directive 2006/112/EC depend on whether the other partner had overstepped the rules of representing the society and dealt in his, her or its own name with the end customer?
   

The Advocate General states that if the main objective of the cooperation between the three US companies and Česká síť s.r.o. was to remain below the turnover threshold for mandatory VAT registration, this could be considered an abusive arrangement. In such a case, according to the Advocate General, Česká síť s.r.o. could be assessed additional VAT if it were considered the main organiser of the arrangement.

According to the Advocate General, the key factor in determining the person liable for tax (taxable person) is to ask who acted on their own behalf and at their own risk. In the case under consideration where the individual entities acted in their own name, at their own risk and on their own behalf, each must be considered separately as a separate taxable person. According to the Advocate General, a ‘society’ under the Civil Code cannot be considered a taxable person if no one acted on its behalf externally.

We will continue to monitor this case and provide an update as soon as the CJEU rules on the matter.