SAC on proving delivery to another member state and on abuse of right

The abuse of right concept has been recently quoted mainly in connection with the adoption of the tax package. According to the amended Tax Procedure Code that defines it, the abuse of right concept applies to transactions whose predominant purpose (not the principal one, as implied by current case law) is to obtain a tax benefit contrary to the meaning and purpose of tax legislation. What stance has the SAC taken?

In its judgement 5 Afs 314/2016-55, the Supreme Administrative Court (SAC) expressed its opinion on the abuse of right concept in the case of a VAT exempt supply to another member state, mainly as regards the correct use of the term ‘abuse of right’.

In the case in question, a Czech taxpayer supplied ultralight airplanes to Denmark on a VAT-exempt basis. In Denmark, the Danish business partner immediately sold the airplanes to a Czech end customer, applying a zero VAT rate. In a tax inspection, the taxpayer was unable to prove the entitlement to exemption, and VAT was additionally assessed on these transactions.

The tax authority, and subsequently also the Regional Court of Justice in Prague, concluded that the taxpayer failed to bear the burden of proof and had not sufficiently proven the entitlement to a  VAT exemption of an intra-community supply of goods. At the same time, in their opinion, the taxpayer committed an abuse of right, as the main purpose of the transaction was to obtain a tax benefit, i.e. to avoid paying VAT.

The SAC disagreed with this opinion, arguing that these two conclusion excluded each other. If the abuse of right concept is to be applied, the right to the exemption must first originate – meaning that the conditions for the tax exemption stipulated by law must be met. Where such conditions have not been met, there may be no abuse of right. According to the SAC, an abuse of right should not be identified with the mere failure to meet the conditions stipulated by law.

The SAC concluded in its judgement that an abuse of right only occurs where all conditions required by law for a certain action have been formally met, and where, at the same time, the result of the action is contrary to the meaning and purpose of the legislation. Based on this, the SAC vacated the regional court’s judgement and returned the case for further proceedings.

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