The issue of VAT exemption upon re-importation regularly raises practical difficulties for operators. When temporarily exported goods are reintroduced into the European Union, the exemption provided for by the VAT Directive is subject to compliance with customs conditions. But what happens when the operator commits a simple formal breach, without fraud or intent to conceal? This is precisely what the Court of Justice of the European Union (CJEU) had to decide in a recent case concerning the re-importation of competition horses into Sweden.
Facts of the case
AA Palmstråle is a Swedish company that transports horses for international competitions. In 2020, it exported two horses to Norway to compete in equestrian events. Upon their return, the staff crossed the border without presenting the horses at the customs post or filing a declaration. Swedish customs intercepted the vehicle after the border post. Customs did not claim customs duties but demanded payment of import VAT on the grounds that the VAT exemption could not be applied due to failure to comply with customs formalities.
Preliminary question
The Swedish court asked the Court of Justice of the EU (“CJEU”) whether, in order to benefit from the VAT exemption on re-importation provided for in Article 143(e) of Directive 2006/112/EC, it was imperative that all the substantive and formal conditions for exemption from customs duties be met. In other words, does a simple failure to comply with procedural requirements (failure to present the goods to customs, failure to declare) preclude VAT exemption, even when the substantive conditions are met and no fraud is involved?
European legal context for VAT exemption on imports:
- Directive 2006/112/EC (VAT Directive): Article 143(1)(a) provides that “re-importations of goods in the same condition in which they were exported, by the person who exported them, and which benefit from a customs exemption”. Thus, the latter exempts from VAT the re-importation of goods by the person who initially exported them, provided that they benefit from a customs exemption in accordance with the applicable customs rules.
- Article 203 of the Union Customs Code (“UCC”): The article exempts returned goods (goods reimported in the same condition) from customs duties, provided that material conditions (identity of goods, same exporter, maximum period of three years) and procedural conditions (customs declaration and request for exemption) are met.
- Article 79 of the UCC: A customs debt is incurred in the event of non-compliance with the obligations to present or declare goods to the customs authorities.
- Article 86, paragraph 6, of the UCC: In the event of a customs debt resulting from a formal breach, the exemption from customs duties may be maintained if no fraudulent intent is established.
Thus, Union law tends to favour compliance with material conditions and the good faith of the operator.
CJEU decision on VAT exemption
The CJEU ruled that failure to comply with formal obligations (failure to present and declare to customs) does not prevent the benefit of the VAT exemption on re-importation provided for by Article 143(e) of the VAT Directive, provided that the material conditions are met and no fraud is committed. Only attempted fraud or fraudulent tactics justify the refusal of the exemption. Consequently, a bona fide procedural error does not result in the loss of the right to VAT exemption.
Conclusion
This judgment confirms the principle that substantive conditions take precedence over formal conditions in the context of VAT exemption on re-importation. It illustrates the CJEU’s desire to protect the coherence between customs law and VAT law, by ensuring that simple administrative errors in good faith do not deprive the operator of a legitimate tax advantage.
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