‘Cityland’ EOOD v Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’

Contents

Judgment of the Court (Tenth Chamber)3 April 2025^note(Reference for a preliminary ruling — Common system of value added tax — Directive 2006/112/EC — Persistent failure to comply with tax obligations — Removal of the taxable person from the value added tax (VAT) identification register — Principle of proportionality)In Case C‑164/24,REQUEST for a preliminary ruling under Article 267 TFEU from the Administrativen sad Veliko Tarnovo (Administrative Court, Veliko Tarnovo, Bulgaria), made by decision of 20 February 2024, received at the Court on 1 March 2024, in the proceedings‘Cityland’ EOODvDirektor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ – Veliko Tarnovo,THE COURT (Tenth Chamber),composed of D. Gratsias, President of the Chamber, M.L. Arastey Sahún (Rapporteur), President of the Fifth Chamber, and B. Smulders, Judge,Advocate General: J. Kokott,Registrar: A. Calot Escobar,having regard to the written procedure,after considering the observations submitted on behalf of:– ‘Cityland’ EOOD, by B. Velev, advokat,– the Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ – Veliko Tarnovo, by B.M. Nikolov,– the European Commission, by P. Carlin and D. Drambozova, acting as Agents,having decided, after hearing the Advocate General, to proceed to judgment without an Opinion,gives the following

Judgment

1This request for a preliminary ruling concerns the interpretation of Articles 213 and 273 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1), as amended by Council Directive (EU) 2017/2455 of 5 December 2017 (OJ 2017 L 348, p. 7) (‘the VAT Directive’).

2The request has been made in proceedings between ‘Cityland’ EOOD and the Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ – Veliko Tarnovo (Director of the ‘Appeals and Tax and Social Security Practice’ Directorate of Veliko Tarnovo, Bulgaria) (‘the Direktor’) concerning the removal of Cityland from the value added tax (VAT) register.

Legal context

European Union law

3Article 2(1) of the VAT Directive sets out the transactions that are to be subject to VAT.

4The first subparagraph of Article 213(1) of that directive provides:‘Every taxable person shall state when his activity as a taxable person commences, changes or ceases.’

5Article 214(1) of that directive provides:‘Member States shall take the measures necessary to ensure that the following persons are identified by means of an individual number:…’

6Article 273 of that directive is worded as follows:‘Member States may impose other obligations which they deem necessary to ensure the correct collection of VAT and to prevent evasion, subject to the requirement of equal treatment as between domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.The option under the first paragraph may not be relied upon in order to impose additional invoicing obligations over and above those laid down in Chapter 3.’

7Title XII of the VAT Directive includes Chapter 6, which contains Section 2, entitled ‘Special scheme for services supplied by taxable persons not established within the [European] Community’, which includes Articles 362 and 363 of that directive.

8Article 362 of that directive states:‘The Member State of identification shall allocate to the taxable person not established within the Community an individual VAT identification number for the application of this special scheme and shall notify him of that number by electronic means. …’

9Article 363 of that directive is worded as follows:‘The Member State of identification shall delete the taxable person not established within the Community from the identification register in the following cases:…(d) if he persistently fails to comply with the rules relating to this special scheme.’

10That Chapter 6 includes Section 4, entitled ‘Special scheme for distance sales of goods imported from third territories or third countries’, which includes Articles 369q and 369r of the VAT Directive.

11Article 369q of that directive provides:1. The Member State of identification shall allocate to the taxable person making use of this special scheme an individual VAT identification number for the application of this special scheme and shall notify him of that number by electronic means.…4. The VAT identification number allocated under paragraphs 1, 2 and 3 shall be used only for the purposes of this special scheme.’

12Article 369r of that directive provides:1.The Member State of identification shall delete the taxable person not making use of an intermediary from the identification register in the following cases:…(d) if [the taxable person] persistently fails to comply with the rules relating to this special scheme.’

Bulgarian law

13Article 106 of the Zakon za danaka varhu dobavenata stoynost (Law on value added tax, DV No 63 of 4 August 2006), in the version applicable to the dispute in the main proceedings (‘the ZDDS’), states:(1) For the purposes of this Law, termination of registration (removal from the register) is a procedure under which, after being removed from the register, a person is not entitled to charge [VAT] or to deduct input tax, save where this Law provides otherwise.(2)Registration shall be terminated:1. at the instigation of the registered person, provided that there is a reason for the – mandatory or voluntary – removal from the register;2. at the instigation of the tax authority:(a) where it has found there to be a reason for the mandatory removal from the register;(b) in the case referred to in Article 176.’

14Article 176 of the ZDDS provides:‘The competent tax authority may refuse to register a person or may terminate the registration of a person who:…3. persistently fails to comply with his, her or its obligations under this Law;…’

15Paragraph 1 of the Supplementary Provisions of the ZDDS provides:‘For the purposes of this Law:…42. “Persistent infringements” means infringements committed within one year of the entry into force of the decision imposing an administrative penalty by which the person was penalised for the repeated commission of an offence of the same nature.…’

The dispute in the main proceedings and the questions referred for a preliminary ruling

16Cityland is a company governed by Bulgarian law that operated in the construction field until 2019.

17In 2022, that company was the subject of a tax inspection following which the organ po prihodite pri Teritorialna direktsia na Natsionalnata agentsia za prihodite Veliko Tarnovo (tax authority within the directorate for the Veliko Tarnovo division of the National Revenue Agency, Bulgaria), by decision of 27 September 2022, removed that company from the VAT register, in accordance with Article 176(3) of the ZDDS.

18That tax authority found that that company had persistently failed to comply with its obligations under the ZDDS, by failing to pay the VAT declared and due, for a total of five tax periods, between 1 September 2013 and 30 June 2018.

19By a decision of 19 December 2022, the Direktor upheld the decision of 27 September 2022.

20In the Direktor’s decision, it was found that the unpaid VAT debts of Cityland amounted to 4 144.59 leva (BGN) for the tax period of September 2013, BGN 0.46 for the tax period of May 2017, BGN 365.50 for the tax period of March 2018, BGN 49.66 for the tax period of April 2018 and BGN 27 506.73 for the tax period of June 2018.

21In the course of the procedure which led to the adoption of that decision, Cityland claimed that the VAT at issue, which had been declared but had not been paid, related to invoices issued to ‘Terem Ivaylo’ EOOD, which were the subject of legal proceedings on account of the failure by ‘Terem Ivaylo’ EOOD to pay the VAT set out in those invoices. Following a challenge by Cityland to the findings made by the first-instance tax authority, the Direktor found that the VAT at issue that was due had been paid on 27 October 2022, with only interest in the amount of BGN 6 264.02 remaining to be paid.

22Cityland brought an action before the Administrativen sad Veliko Tarnovo (Administrative Court, Veliko Tarnovo, Bulgaria), which is the referring court, against the decision of 19 December 2022. That court has doubts as to whether the Bulgarian legislation providing for the possibility to remove a company from the VAT register is compatible with EU law, in so far as the VAT Directive does not provide for the option of excluding a taxable person from the VAT system.

23According to the referring court, the Bulgarian legislation does not establish an obligation, for the competent tax authorities, to examine fully the conduct of a taxable person in order to conclude that there is a risk to tax revenue and a likelihood of tax fraud. On the contrary, the mere finding of three formal infringements of the VAT rules, in particular the late submission of a tax return, the late payment of VAT or the late issue of a VAT invoice, is sufficient to exclude such a taxable person from the VAT system.

24The referring court states that, in the present case, the competent tax authorities established the persistent nature of the infringements committed by Cityland by taking into account a continuous period of almost 10 years and failures to comply with obligations relating to insignificant amounts of unpaid VAT such as, concerning 2017, an amount of BGN 0.46.

25In those circumstances, the Administrativen sad Veliko Tarnovo (Administrative Court, Veliko Tarnovo) decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:(1) Are Article 106(2)(2)(b) and Article 176(3) of [the ZDDS] contrary to [the first subparagraph of] Article 213(1) of [the VAT Directive]?(2) If the first question is answered in the affirmative, does [the first subparagraph of] Article 213(1) of [the VAT Directive] have direct effect?(3) If the first question is answered in the negative, do [the first subparagraph of] Article 213(1) and Article 273 of [the VAT Directive], as well as the principles of legal certainty and proportionality, permit exclusion from the VAT system in the event of formal infringements of the law, without account being taken of the time of commission of the offence, the type of offence, the other conduct of the person and the existence of other subjective circumstances, such as commercial litigation for failure to pay the tax due on time?(4) If the first question is answered in the negative, do [the first subparagraph of] Article 213(1) and Article 273 of [the VAT Directive] and the principle of proportionality permit exclusion from the VAT system at the same time as the imposition of interest for failure to pay declared tax on time, without the revenue authority being required to analyse the type and nature of the company’s activity, its conduct as a taxable person and the severity of each of the proposed measures?’

Consideration of the questions referred

26By its questions, which it is appropriate to examine together, the referring court asks, in essence, whether the first subparagraph of Article 213(1) and Article 273 of the VAT Directive and the principles of legal certainty and proportionality must be interpreted as precluding national legislation which, as interpreted by the tax authorities and the national courts, provides for the possibility for the competent tax authority to remove a taxable person from the VAT register on the ground of a failure to comply with VAT obligations on that taxable person’s part, without that tax authority analysing the nature of the infringements committed and the conduct of the taxable person at issue.

27In order to answer these questions, it must be recalled that, pursuant to the first subparagraph of Article 213(1) of the VAT Directive, every taxable person is obliged to state when his, her or its activity as a taxable person commences, changes or ceases. Article 214(1) of that directive requires Member States to take the measures necessary to ensure that taxable persons are identified by means of an individual number.

28The essential aim of identifying taxable persons, as provided for under Article 214 of that directive, is to ensure that the VAT system operates properly. In that regard, the Court has already held that the allocation of a VAT identification number provides proof of the tax status of the taxable person for the purposes of applying VAT and simplifies the inspection of taxable persons with a view to ensuring the correct collection of the tax (judgment of 14 March 2013, Ablessio, C‑527/11, EU:C:2013:168, paragraphs 18 and 19 and the case-law cited).

29The VAT identification number is an important piece of evidence of the operations carried out. Indeed, the VAT Directive requires, in a number of provisions relating, in particular, to invoicing, declarations and summary statements, that this identification number of the taxable person or the recipient of the goods or services be referred to in those documents (judgment of 14 March 2013, Ablessio, C‑527/11, EU:C:2013:168, paragraph 20).

30The Court has held that, first, it follows from Articles 213 and 214 of the VAT Directive that Member States have a certain discretion when they adopt measures to ensure the identification of taxable persons for the purposes of VAT and, second, that discretion cannot be unrestricted. Although it is possible for a Member State to refuse to assign an individual number to a taxable person, it cannot do so without legitimate grounds (see, to that effect, judgments of 14 March 2013, Ablessio, C‑527/11, EU:C:2013:168, paragraphs 22 and 23, and of 18 November 2021, Promexor Trade, C‑358/20, EU:C:2021:936, paragraph 41).

31As regards, on the other hand, the adoption of measures to remove VAT identification numbers previously allocated, it must be specified that the VAT Directive does not contain any provisions generally authorising Member States to provide, in their national legislation, for removal from the VAT register.

32It is true that Articles 363 and 369r of the VAT Directive provide for cases in which the Member State is to remove a taxable person from the identification register provided for under the special scheme for services supplied by taxable persons not established within the European Union, or under the special scheme for distance sales of goods imported from third territories or third countries. That removal is to take place, in particular, where the taxable person persistently fails to comply with the rules relating to the special scheme at issue. However, such a removal from the VAT register does not relate to the VAT identification number allocated pursuant to Article 214 of that directive, but only to the identification number allocated to the taxable person for the purposes of those special schemes, as is clear from Article 362 and Article 369q of that directive.

33That said, first, Article 17(1)(c) and Article 23 of Council Regulation (EU) No 904/2010 of 7 October 2010 on administrative cooperation and combating fraud in the field of value added tax (OJ 2010 L 268, p. 1) refer to VAT identification numbers issued which have become invalid, and in particular to numbers being removed from the register where the persons have declared false data in order to obtain VAT identification or have failed to communicate changes to their data.

34Second, in accordance with the settled case-law of the Court, it follows from Articles 2 and 273 of the VAT Directive, read in conjunction with Article 4(3) TEU, that Member States are required to take all legislative and administrative measures appropriate for ensuring collection of all the VAT due on their territory and for preventing fraud (judgments of 2 May 2018, Scialdone, C‑574/15, EU:C:2018:295, paragraph 26, and of 17 May 2023, Cezam, C‑418/22, EU:C:2023:418, paragraph 26).

35In addition, according to similarly settled case-law of the Court, Member States have a legitimate interest in taking appropriate steps to protect their financial interests, and the prevention of tax evasion, avoidance and abuse is an objective recognised and encouraged by the VAT Directive (judgment of 14 March 2013, Ablessio, C‑527/11, EU:C:2013:168, paragraph 28 and the case-law cited).

36In the light of the provisions and case-law referred to in paragraphs 30 to 35 above, it must be considered that, in the exercise of their discretion concerning the adoption of measures which seek to ensure the correct collection of the tax and to prevent fraud, Member States may, where appropriate, provide for the removal of a taxable person from the VAT register.

37In so far as it is apparent from the documents before the Court that the national legislation at issue in the main proceedings, which provides for the removal of a taxable person from the VAT register, is designed as a penalty imposed on that taxable person for the repeated failure to comply with its VAT obligations, it must be borne in mind that, in the absence of harmonisation of EU legislation in the field of the penalties applicable in cases of non-compliance with the conditions laid down by arrangements established under such legislation, Member States have the power to choose the penalties which seem to them to be appropriate (judgment of 17 May 2023, Cezam, C‑418/22, EU:C:2023:418, paragraph 27 and the case-law cited).

38They must, however, exercise that power, first, in accordance with EU law and its general principles, and, consequently, in accordance with the principles of proportionality and fiscal neutrality (judgment of 17 May 2023, Cezam, C‑418/22, EU:C:2023:418, paragraph 27 and the case-law cited). In order to assess whether a penalty is consistent with the principle of proportionality, account must be taken of, inter alia, the nature and the degree of seriousness of the infringement which that penalty seeks to sanction, and of the means of establishing the amount of that penalty (judgment of 11 April 2024, Legafact, C‑122/23, EU:C:2024:293, paragraph 42 and the case-law cited).

39Second, when exercising those powers, the Member States must ensure compliance with the requirements pertaining to the right to good administration, reflecting a general principle of EU law, which is applicable in a tax inspection procedure (see, to that effect, judgment of 16 May 2024, Slovenské Energetické Strojárne, C‑746/22, EU:C:2024:403, paragraph 50).

40It should also be borne in mind that, when choosing the penalties, Member States are required to comply with the principle of effectiveness, which requires effective and dissuasive penalties to be established to counter infringements of harmonised VAT rules and to protect the financial interests of the European Union (judgment of 11 April 2024, Legafact, C‑122/23, EU:C:2024:293, paragraph 43 and the case-law cited).

41Removal from the VAT register provided for by national legislation vis-à-vis taxable persons who fail to comply with their obligations in respect of that tax, without analysing the nature of the infringements committed, cannot be regarded as a penalty which complies with the principles and the requirements referred to in paragraphs 38 to 40 above.

42In view of the significant role, recalled in paragraphs 28 and 29 above, played by the VAT identification number as regards proof of the tax status of the taxable person and of the fact that transactions were actually carried out, purchasers of goods and recipients of services supplied by a taxable person who has been removed from the VAT register and therefore does not have a valid identification number for VAT purposes will not, in particular, be certain as to whether they would be able to demonstrate their entitlement to deduct the input VAT paid on that supply of goods or of services.

43In those circumstances, such potential purchasers of goods and recipients of services could be discouraged from entering into transactions with a taxable person who has been removed from the VAT register.

44That negative practical consequence of the removal from the VAT register means that the taxable person may be led to cease activity and thus resembles a temporary or permanent prohibition on pursuing that activity. It follows that, if the removal from the VAT register were to be perceived as a penalty for the repeated failure by the taxable person to comply with VAT obligations, that would be a particularly severe penalty.

45In accordance with the case-law referred to in paragraph 38 above, such a penalty cannot be regarded as consistent with the principle of proportionality, in so far as it is imposed without examining the nature and the degree of seriousness of the infringements committed by the taxable person in order to determine whether such a severe penalty is warranted or whether another, less severe penalty is sufficient in the circumstances that led to the imposition of such a penalty.

46Legislation which allows the tax authorities to remove a taxable person from the VAT register without providing for an obligation on the part of those authorities to examine fully the conduct of that taxable person in order to assess whether there is a risk to tax revenue and a likelihood of VAT fraud goes beyond what is necessary for ensuring the collection of all the VAT and combating VAT fraud.

47Without such a full examination of the conduct of the taxable person at issue, it is impossible to ascertain exactly the nature and the extent of any tax fraud committed by that taxable person and, consequently, to assess whether the removal of that taxable person from the VAT register constitutes an appropriate penalty for ensuring the collection of all the VAT and combating VAT fraud.

48In addition, as regards the requirements pertaining to the right to good administration, referred to in paragraph 39 above, the Court has held that administrative authorities such as the national tax authority must, when carrying out their inspection duties, conduct a diligent and impartial examination of all the relevant matters so that they can be sure that, when they adopt a decision, they have at their disposal the most complete and reliable information possible for that purpose (judgment of 16 May 2024, Slovenské Energetické Strojárne, C‑746/22, EU:C:2024:403, paragraph 50 and the case-law cited).

49Lastly, it must be borne in mind that, according to the case-law of the Court, the principle of legal certainty requires the tax position of the taxable person, having regard to his or her or its rights and obligations vis-à-vis the tax authority, not to be open to challenge indefinitely (judgment of 5 December 2024, Modexel, C‑680/23, EU:C:2024:1000, paragraph 34 and the case-law cited).

50It is apparent from paragraph 42 above that a penalty consisting in the removal of a taxable person from the VAT register, without formally prohibiting the exercise, by that taxable person, of the activity subject to VAT, in respect of which that taxable person registered therein, is liable to lead to the tax situation both of that taxable person and of purchasers of goods and recipients of services supplied by that taxable person being constantly and repeatedly called into question. Therefore, such a penalty also cannot be regarded as consistent with the principle of legal certainty.

51In the light of all the foregoing considerations, the answer to the questions referred for a preliminary ruling is that the first subparagraph of Article 213(1) and Article 273 of the VAT Directive and the principles of legal certainty and proportionality must be interpreted as precluding national legislation which, as interpreted by the tax authorities and the national courts, provides for the possibility for the competent tax authority to remove a taxable person from the VAT register on the ground of a failure to comply with VAT obligations on that taxable person’s part, without that tax authority analysing the nature of the infringements committed and the conduct of the taxable person at issue.

Costs

52Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the referring court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

On those grounds, the Court (Tenth Chamber) hereby rules: The first subparagraph of Article 213(1) and Article 273 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive (EU) 2017/2455 of 5 December 2017, and the principles of legal certainty and of proportionalitymust be interpreted as precluding national legislation which, as interpreted by the tax authorities and the national courts, provides for the possibility for the competent tax authority to remove a taxable person from the value added tax (VAT) register on the ground of a failure to comply with VAT obligations on that taxable person’s part, without that tax authority analysing the nature of the infringements committed and the conduct of the taxable person at issue.