Direct claim: ECJ judgement "Michael Schütte" of 7 September 2023, C-453/22

If the recipient of the supply cannot recover unduly paid VAT from the supplier, a direct claim against the tax office may be possible under certain circumstances, based on the ECJ's "Reemtsma" case law. Following a referral by the Münster Regional Tax Court, the ECJ has now dealt with further detailed questions - with a positive result for those affected.

The facts: VAT invoiced too high, claim for repayment time-barred

A forester had purchased wood from various suppliers to resell it as firewood. The purchase invoices showed a 19 % VAT, which the forester claimed as input VAT. A tax audit was followed by court proceedings before the Münster Regional Tax Court, with the result that these purchase invoices should only have shown a 7 % VAT. The forester's input VAT deduction was reduced accordingly, and the tax office claimed VAT on the difference plus interest.

The forester sought a refund of the overpaid VAT from his suppliers; however, they refused, claiming that the time limit had expired according to civil law.

Thereupon, the forester applied to the tax office for remission of the VAT claim and interest for reasons of equity according to sections 163 and 227 AO (General Fiscal Code) - known as a direct claim or Reemtsma claim. The tax office rejected the application for remission and argued that the forester himself was responsible for the situation as he had failed to suspend the statute of limitations by filing a lawsuit against the suppliers or by agreeing to waive the defence of limitation.

The Münster Regional Tax Court then referred the case to the ECJ.

Questions referred and the ECJ decision

The ECJ first clarified that a direct claim is possible if obtaining reimbursement from the supplier is impossible or excessively difficult, and that the case of insolvency decided so far is only one of several conceivable cases of application. Accordingly, a direct claim could also be considered if the supplier raised the defence of limitation. The prerequisite is that the person concerned cannot be accused of fraud, abuse, or negligence - at least that is what the operative provisions of the judgement say. Elsewhere, however, the ECJ states that refusing to issue a refund would even be unreasonable if the taxpayer had demonstrably acted negligently. What this means with regard to the forester failing to take steps to suspend the statute of limitations is not entirely clear. The ECJ does not explicitly clarify whether this is to be considered negligent conduct and whether this negligence precludes the direct claim. However, the fact that the ECJ does not order the Münster Regional Tax Court, as the referring court, to examine if any negligence had occurred can probably be understood to mean that the failure to suspend the limitation period is irrelevant here.

The Münster Regional Tax Court also wanted to know whether the recipient of the supply can assert a direct claim as long as the supplier can still correct the incorrect VAT statement in the invoice pursuant to § 14c para. 1 in conjunction with § 17 UStG (German VAT Code). In this case, there is a risk of the tax office being called upon twice - on the one hand to correct the basis of assessment under § 14c (1) in conjunction with § 17 UStG and then refund the excess VAT paid and, on the other hand, by the direct claim. This question is particularly interesting as the BMF (Federal Ministry of Finance) had ruled out a direct claim for this case in its letter of 12 April 2022 (as we reported here). However, this means that the direct claim largely comes to nothing, because the supplier has an unlimited amount of time in which to make the correction according to § 17 UStG. The ECJ hereby ruled that a double claim against the tax office is impossible because if the supplier has raised the defence of limitation, he has clearly indicated that he has no interest in making the correction. Applying to the tax office for a refund would then only serve to obtain a tax advantage that is contrary to the provisions of neutrality and would be a misuse.

The Münster Regional Tax Court had also asked whether the forester should also be relieved of the interest assessed in addition to the tax within the framework of the direct claim. The court had doubts about this because this interest had accrued for a period before the direct claim was asserted. However, the ECJ responded to the question affirmatively. It also pointed out that the forester is entitled to interest if the tax office does not repay the wrongly levied amount within a reasonable period of time.

Practical implications

It is a great relief that those affected can assert a direct claim as a result of this ruling, even if the supplier still has the option of changing the invoice. The BMF letter of 12 April 2022, which excluded this, is no longer tenable and must be amended. This results in a significantly larger scope of application for the direct claim.

Clarifying that there are other situations besides the insolvency of the supplier in which requesting a reimbursement would be considered excessively difficult is a welcome step.

Unfortunately, the court's statement on the question of whether a direct claim can also be asserted if the recipient of the supply has not actively suspended the statute of limitations for the repayment claim against the service provider was not as clear as hoped. To be on the safe side, those affected are well advised to suspend the statute of limitations by filing a lawsuit against the supplier if the supplier does not waive the defence of the statute of limitations. If this was neglected, the present ruling nevertheless provides a basis for arguing that the neglect is harmless - contrary to the direct claim restriction outlined in the BMF letter of 12 April 2022.

Dated: 27 September 2023