Should tax authorities take deductible VAT into account when imposing proportional fines?

Today, the European Court of Justice (ECJ C-418/22, Cezam) delivered its judgement on the compatibility of proportional (percentage-based) fines in Belgium with EU law principles.

The case examined if proportional fines could be levied for underpaid VAT without requiring tax authorities to consider deductible VAT. This article presents a short analysis of the verdict.


The case concerns a taxpayer who failed to submit periodic VAT returns over an extended period of time. The Belgian Administration imposed fines in proportion to the amount of unpaid VAT, without considering deductible VAT. The penalties were calculated as 20% of the turnover, according to Article 70, Paragraph 1 of the VAT code, and Part V of Table G in the Annex to RD no. 41.

The taxpayer disputes these fines, referring to the general principles of EU law. It is argued that the penalties should be calculated on the net amount of the tax and thus taking into account deductible VAT in the relevant period. In this regard, the taxpayer relies on the judgments of July 9, 2015, Salomie and Oltean (C-183/14, EU:C:2015:454), and May 8, 2019, EN.SA. (C-712/17, EU:C:2019:374), and argues, in particular, that the principle of proportionality requires Member States not to apply a fine equal to the deductible VAT, to the extent that such a fine would deprive it of the right to deduct its content.

Preliminary question

The Belgian court sought guidance from the European Court of Justice, inquiring whether the Belgian system of proportional fines aligns with the principles of EU law. Specifically, the court questioned whether relevant EU provisions, along with the principles of proportionality and neutrality, prohibit a system that levies fines on the basis of the gross VAT amount, without considering the deduction of input VAT.

Judgment of the Court

The Court begins by underlining that Member States are obligated to implement suitable measures to ensure the collection of due VAT and to combat fraud. While the choice of penalties is within the jurisdiction of the Member States, they must adhere to Union law and general principles, particularly the principles of proportionality and fiscal neutrality.

The principle of proportionality mandates that penalties should not exceed what is necessary to achieve the goals of tax collection and fraud prevention. In evaluating the proportionality of a penalty, factors such as the nature and severity of the infringement, as well as the method of determining the penalty amount, must be considered. Although it is up to the referring court to assess if the fines in this case are proportionate, the Court indicates that the violations for which CEZAM is being penalized were both persistent and intentional. Indeed, CEZAM failed to declare or pay the due VAT over an extended period of time, despite various interventions by the Belgian Administration.

The Court notes that CEZAM's case is not comparable to previous court rulings that CEZAM relies on. The specific circumstances and violations in this case differ from those in earlier judgments, and therefore the same principles are not applicable.

Regarding the principle of fiscal neutrality, the Court states that this principle requires that input tax is deducted if the substantive conditions are met, even if certain formal requirements have not been complied with. However, the case file does not indicate that the fines or the national regulation in this case undermine the right to deduct input tax.

There are no indications that the taxpayer cannot rely on this right, according to the court.

In conclusion, the Court rules that Article 273 of Directive 2006/112 and the principles of proportionality and fiscal neutrality do not oppose a national regulation in which non-compliance with the obligation to submit and pay VAT is punished with a flat-rate fine of 20% of the VAT amount that would have been due before the deduction of deductible VAT. However, the referring court must still verify the proportionality of the imposed fines.


In the absence of EU law harmonization on penalty policies, the authority to impose penalties falls within the competence of the Member States. However, despite the lack of harmonization, Member States must exercise their power in compliance with EU law. Therefore, their freedom is not unlimited, but this ruling demonstrates that Member States retain significant discretion.

Traditionally, tax authorities treat the obligation to remit VAT and the right to deduct VAT separately. The remittance is viewed as an obligation, while the deduction is a right that can only be exercised if the necessary conditions are met. Based on the Cezam ruling, it can be concluded that proportional penalties can be imposed in cases of underpaid VAT without considering deductible VAT.

Does this grant tax authorities permission to impose a proportional fine on every taxpayer for non-compliance with VAT obligations? In our opinion, absolutely not! This case involved a taxpayer who failed to file returns despite repeated requests. Therefore, an appropriate penalty is justified here.

It is important to remember that the Court upheld the principle that sanctions should not exceed what is necessary to ensure proper VAT collection. In determining the sanction, the severity of the offense should be taken into account. Especially when there is no risk of VAT revenue loss (as in the case of reverse charge), the question arises whether the standard policy of imposing 20% penalties is warranted.

Nonetheless, this case serves as a valuable reminder that penalties for non-compliance with VAT regulation can be substantial, particularly when calculated as a percentage of the transaction. Indeed, every business transaction (purchase or sale) carries a potential VAT risk, and with proportional penalties (i.e., based on a percentage of the transaction), these risks can accumulate rapidly.