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CJEU confirms strict approach to abuse of turnover for VAT registration

On 4 October 2024, the CJEU issued its judgment in case C-171/23 concerning abusive VAT practices. The judgment deals with a case where a new company was established to continue the economic activity (restaurant business) of the previous company and to benefit from the VAT exemption scheme originally applied to the previous company.

The Court recognised that the creation of a new company may constitute an abusive practice if its main purpose is to obtain a tax advantage contrary to the objective of the VAT exemption scheme. The scheme is intended to promote small businesses and reduce administrative burdens, not to allow tax evasion.

The Court ruled that, should it be determined that the formation of a company constitutes an abusive practice, the newly formed company would not be eligible for the VAT exemption scheme. This holds true even if the national law does not specifically prohibit such practices.

The national authorities and courts must refuse to grant the VAT exemption and ensure that the tax is correctly collected.

This judgment emphasises the principle that rights under EU law cannot be abused to obtain undue advantage and that combating tax fraud and abuse is a key objective of the VAT Directive.

When setting up a new company or expanding the economic activity of another company, together with the use of the small business exemption, the tax consequences will always need to be carefully considered and ensure that they are in line with the objectives of the VAT Directive and EU law. 

Authors:

David Kužela

Ivana Krylová