VAT exemption on reimportation: breach of customs formalities does not prevent VAT exemption as long as there is no fraudulent intent or deception involved

Jun 13
When goods leave the EU, they automatically lose their status as Union goods. Upon reimportation, they are treated as non-Union goods, meaning customs formalities must be completed again, and import duties and VAT may be due.

However, legislation provides a relief for "returning goods" – goods that return in unchanged condition – which allows both import duties and VAT to be avoided.
But how far does this exemption go? Can VAT still be imposed if not all customs formalities are fulfilled, even when the substantive conditions are met? This question was at the heart of case C-125/24 (Palmstråle), in which the Court of Justice of the European Union recently issued an important ruling.

In this case, the interaction between the Union Customs Code (UCC) and the VAT Directive (2006/112/EC) is examined, critically assessing the relationship between the customs scheme for returning goods and the VAT exemption upon importation.
The facts in brief
A horse owner exported two horses to Norway for competitions. Upon returning to Sweden, she passed the customs post without completing the usual formalities. Later, she was stopped by customs and received a VAT assessment. According to the customs authority, the import VAT exemption could not be applied because no correct customs declaration had been made.

Notably, no import duties were owed, and the substantive conditions for the customs relief for returned goods were met: the horses returned in unchanged condition within the required period and remained the property of the same person. However, customs refused the import VAT exemption simply because the required customs formalities (i.e., the declaration requesting exemption) were missing.

Preliminary question

The central question in this case is whether the VAT exemption for "returning goods" (Article 143(1)(e), VAT Directive) is strictly dependent on complying with customs formalities and the formal requirement that a customs exemption under Article 203 UCC is granted. In other words, is it sufficient that the goods meet the conditions for customs exemption substantively, or must all formal requirements – such as the presentation obligation and customs declaration– be fully met to apply the VAT exemption?

The Högsta förvaltningsdomstol (the highest administrative court of Sweden) referred the following preliminary ruling question to the Court:
"Must Article 143(1)(e) of the VAT Directive and Articles 86(6) and 203 of the Union Customs Code be interpreted as meaning that both the substantive and procedural conditions laid down in Article 203 must be fulfilled in order for relief from import duty – and thus exemption from VAT – to be granted on re-importation, where a customs debt under Article 79 of the Union Customs Code has been incurred through non-compliance with the presentation obligation laid down in Article 139(1) of the Union Customs Code?"

Opinion of AG Kokott

A-G Kokott argued that the VAT exemption on re-importation should not be strictly dependent on compliance with customs rules. She pointed out the linguistic difference between Article 143(1)(e) and (f) of the VAT Directive and stated that the exemption could be interpreted more broadly, independent of formal customs procedures. According to the AG, this was supported by the historical context, as the exemption existed before harmonized customs rules were in place.

Kokott thus made a distinction between customs law and VAT law. She argued that a breach of customs formalities should not automatically result in the loss of the VAT exemption, as customs and VAT rules are autonomous.

If the Court were to rule that customs formalities are essential for the VAT exemption, Kokott suggested that Article 86(6) of the Customs Union Code could serve as a safety net, but warned that this could be problematic within VAT law due to the subjective assessment of fraud.

Final ruling of the Court

The Court states that the VAT exemption for the re-importation of goods, as stated in Article 143(1)(e) of the VAT Directive, is dependent on both the material and formal conditions set out in the Customs Code for the exemption from import duties. Article 203 of the Customs Code stipulates that non-Union goods that re-enter the EU within three years of export and in the same condition as when they were exported can, at the request of the interested party, be exempt from import duties.

According to the Court, the VAT exemption is indeed linked to compliance with certain formal obligations, such as presenting the goods to customs and submitting a declaration for free circulation. However, the Court allows some flexibility: it clarifies that non-compliance with these obligations does not automatically lead to the refusal of the VAT exemption, as long as there is no fraud involved.

The Court states that administrative errors resulting from negligence may be accepted, as long as these errors are not intentional or deceptive. Therefore, the Court concludes that the VAT exemption cannot be denied due to non-compliance with formal requirements, such as the declaration of goods to customs or the submission of the customs declaration, unless it can be proven that deception is involved. In other words, for a taxpayer acting in good faith who has not correctly completed the administrative formalities, the VAT exemption may still apply.

Commentary

The Court of Justice's approach differs slightly from that of Advocate General Kokott. Kokott argued for a more flexible interpretation of the VAT exemption on reimportation, independent of the formal customs procedures. She proposed that the VAT exemption should take precedence over administrative formalities, as its primary purpose is to prevent double taxation.

However, the Court opted for a stricter approach, ruling that the VAT exemption remains conditional on both the material and formal requirements set out in customs legislation. Nonetheless, the Court emphasized that the exemption should not be automatically denied in cases of administrative errors, as long as the taxpayer acts in good faith and there is no fraud or intent to deceive.

In practice, this means that mistakes, such as failing to declare goods to customs, do not immediately trigger VAT liability upon reimportation, provided the taxpayer acts in good faith. This offers some flexibility for administrative errors but also places the responsibility on the taxpayer to properly comply with customs formalities.

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