Header Tax Data Science
13 juli 2020

Indirect Tax alert: Distance Sales regime (ENG)

Potential widening of the scope of VAT Distance Sales rules – CJEU 18 June 2020, C-276/18 (KrakVet Marek Batko). This recent case could mean that more e-commerce falls within the VAT Distance Sales regime.


KrakVet Marek Batko (“KrakVet”) is established and VAT registered in Poland. KrakVet sells pet food through its website to private consumers in Hungary, in which country it has no office or warehouse. KrakVet did not contract to provide delivery of the products. Instead it provided information on its website enabling the Hungarian consumers to enter into a contract with a recommended Polish transporter (“KBGT”) without KrakVet being part of that contract. The consumers were also free to choose another carrier.

KrakVet obtained a ruling from the Polish tax authorities that the VAT Distance Sales rules were not applicable and, as a result, Polish VAT (at 8%) was due on its supplies. The Hungarian tax authorities however concluded after a tax audit that the sales were subject to the Distances Sales regime and Hungarian VAT (at 27%) should be due.

Different VAT treatment

Poland and Hungary have treated the same transactions differently for VAT purposes. The European Court of Justice (CJEU) considered that Member States are not precluded from being able to, unilaterally, subject transactions to a different VAT treatment, even though the transactions have already been taxed in another Member State. Member States do not have the obligation to cooperate in order to reach a common VAT treatment. Correct application of Directive 2006/112 (EU VAT Directive) makes it possible to avoid double taxation and to ensure fiscal neutrality, however the CJEU has the power to interpret the EU VAT Directive in case two Member States insist in a different qualification.

Distance Sales

The main question is whether the supply of goods by KrakVet to the Hungarian consumers falls within the scope of the Distance Sales rules in order to determine the place of supply, in which the transport of the goods is crucially important.

According to Article 32 of Directive 2006/112 (EU VAT Directive), the place of supply of goods in case goods are dispatched or transported by the supplier, or by the customer, or by a third person shall be the place where the goods are located at the time when dispatch or transport of the goods to the customer begins. However, on the basis of Article 33 the place of supply shall be deemed to be the place where the goods are located at the time when dispatch or transport of the goods to the customer ends, when goods will be dispatched or transported by or on behalf of the supplier between Member States. Article 34 establishes the well-known Distance Sales thresholds for the application of Article 33.

Given the above, the Distance Sales rules are only applicable if the goods are dispatched or transported ‘by or on behalf of the supplier’. The CJEU points out that, in order to determine a dispatch or supply by or on behalf of the supplier within the meaning of Article 33, the economic and commercial realities forms a fundamental criterion. The CJEU ruled in this respect that “a supply of goods falls within the scope of Article 33 of Directive 2006/112 where the role of the supplier is predominant in terms of initiating and organising the essential stages of the dispatch or transport of the goods.”

The CJEU provided various factors that could indicate such predominant involvement:

  • The significance of delivering the goods to consumers in the light of commercial practices that is characteristic for the activities of the supplier: when selling goods to consumers residing in another Member State than the supplier, it can be regarded that also the delivery constitutes an essential part. Also website extensions (such as www.zoofast.hu) and available languages can be relevant.
  • The choices relating to the methods of dispatch or transport of the goods and whether they can be attributed to the supplier or the customer: it may be important to assess whether consumers can merely acquiesce to the choices made by the supplier or not.
  • The economic operator that bears the burden of risk in relation to the dispatch and supply of the goods: it could be considered that the party responsible for damage compensation during the dispatch or transport in fact bears the risk.
  • The payment arrangements relating both to the supply of the goods and to their dispatch or transport: the fact that the acquisition of those goods and their dispatch or transport are the subject of a single financial transaction, must be regarded as indicative of the significant involvement of the supplier in the delivery of those goods.

Hence, the CJEU ruled that goods must be regarded as dispatched or transported ‘by or on behalf of the supplier’ where the role of that supplier is predominant in terms of initiating the dispatch or transport of those goods, as well as organising the essential stages of it. The CJEU considers it possible that KrakVet played such predominant role, however it is for the referring court to ascertain.

Abuse of law

It might be the case that KrakVet tried to structure its sales in order to pay the lower VAT rate of 8% in Poland. The question is whether such set-up constitutes an abuse of the law. From a VAT perspective, it is settled case law that an abusive practice can be found to exist only if two conditions are satisfied:

  • A tax advantage is granted contrary to the purpose of the provision(s); and
  • The essential aim of the transactions concerned is solely to obtain that tax advantage.

In this context, KrakVet is free to choose structures which they consider to be most appropriate for their economic activities and for the purpose of limiting their tax burdens. As no evidence exists that KBGT did not carry out a genuine economic activity, the CJEU considers that the transactions cannot be classified as abusive.

New VAT rules for e-commerce 2021

Under the new VAT rules for e-commerce that were due to enter into force on 1st January 2021 (currently postponed to 1st July 2021 due to the Corona virus), the thresholds of the Distance Sales regime will be abolished. As a result, the supplier will have to pay VAT in the Member State of the consumer from the first distance sale, unless a simplification for small entrepreneurs applies. To alleviate the need for multiple VAT registrations across the EU, a “One Stop Shop” registration can be applied to declare and pay the VAT to the Member State where the VAT is due.

Also the scope of the Distance Sales regime of Article 33 will be extended under the 2021 VAT rules for e-commerce. The distance sales scheme will not only be applicable in cases where the goods are dispatched or transported by or on behalf of the supplier, but also when the supplier “intervenes indirectly in the transport or dispatch of the goods” (see paragraph 55 and 56 of the KrakVet-case). These new rules aim to prevent avoidance of the application of the Distance Sales rules by letting the private consumers conclude a transport agreement directly with the transporter, while the supplier is actually involved in arranging that agreement. Also in the view of the European Commission avoidance of the application of the Distance Sales rules by splitting the sales and transport contracts should be prevented.

To do

  • Suppliers selling goods to private consumers within the EU should review whether their sales could be impacted. This is particularly important for suppliers who act similar to KrakVet, as they could now fall within the Distance Sales regime.
  • Arrangements with marketplaces and the use of warehousing or fulfilment centers in secondary countries should also be reviewed, as these have the potential to create complex VAT situations. Although the One Stop Shop will be introduced in 2021, this judgement is still important for current and prior years.
  • The 2021 VAT rules for e-commerce will result in significant changes to the VAT treatment of sales by remote sellers. E-commerce businesses should therefore take preparatory actions to determine the impact on their business and to plan for any changes.
  • Current tax rulings should be reviewed, as they could be nullified if the same transaction is qualified differently by another EU country.