Why reference to “reverse charge” matters in triangular transactions

In a recent case, the Court of Justice of the European Union has ruled, in principle, that meeting (or failing to meet) the content requirements for invoices can affect the tax treatment of the transaction to which a given invoice relates.

On 8 December 2022, the Court delivered its judgement in Case C-247/21 Luxury Trust Automobil GmbH, which is of special relevance for companies using triangular simplification (typically involving operators A, B and C), so it is important that the companies concerned review their current business processes and the documents supporting them.

Background and the consequences of the Court’s decision

Triangular simplification means that on the one hand the intra-Community acquisition of goods by an intermediary (company B) in the Member State of destination (the country in which company C is registered for VAT) will be exempt from VAT; on the other hand, company C will be liable to pay VAT on the domestic supply it received from company B, under the reverse charge mechanism. This simplification effectively allows the intermediary (B) to avoid VAT registration in the Member State of destination; consequently, it will not have to charge local VAT on its supply to the end customer (C). 

However, a condition for the applicability of the above simplification – which is examined in detail by the Court in the case mentioned above – is that company C undertakes to pay the tax instead of company B. This reverse charge is also conditional, among others, on the content of the invoice issued by company B to company C complying with the rules laid down in the relevant Directive, according to which, where the reverse charge mechanism is applied, the invoice must contain the words “reverse charge.” 

In its decision, the Court considered this formal requirement, i.e. including the words “reverse charge,” to be of such importance that their presence or omission, together with other substantive conditions, essentially determines the applicability of triangular simplification. It can be inferred from the judgement that in the absence of these words in the invoice issued by company B, the triangular simplification cannot be applied, and the end customer (C) cannot be treated as the person liable to pay VAT. In this case, the actual “beneficiary” of the simplification, company B, will become liable to register for VAT and, as a result of its supply to company C, to pay VAT in the Member State of company C. In addition, if company B fails to register in the Member State of company C, company B may also be liable to tax on the transaction in its own Member State. 

The Court also held that the omission, on an invoice, of the words “reverse charge” may not subsequently be corrected, so this condition for the applicability of the triangular simplification cannot be met after the fact. 

Impact of the decision and further questions

In contrast to previous practice, the Court’s decision in the present case places a very strong emphasis on the mandatory content of invoices in triangular transactions. In practice, an administrative error may impose on companies a tax liability of such magnitude that the parties have an inherent intention to avoid and that may affect business decision-making. 

Considering the above, companies involved in triangular transactions should consider whether their invoicing practices are fully compliant with the Directive’s provisions, as non-compliance may give rise to unexpected tax liabilities and there is no possibility of subsequent correction.

The judgement can also be interpreted retroactively, so in addition to adjusting their future invoicing practices, the companies concerned should also review their past triangular transactions to exclude risks.

The question also arises as to whether, in addition to triangular simplification, this interpretation could also affect the treatment of other reverse-charge transactions. Moreover, it may also be advisable to consider whether, and to what extent, this Court decision affects or contradicts the previous EU case law on invoicing and invoice correction – i.e. that the objective characteristics of transactions should be taken into account when taxing them, even in the absence of formal conformity of invoices (for example, formal shortcomings in invoicing can be corrected subsequently and do not preclude the application of substantive law).

Should you have any questions in relation to the above, please contact:

Gábor Farkas
Partner
Email: gabor.farkas@pwc.com

Bálint Szilágyi
Senior Manager
Email: balint.szilagyi@pwc.com