Are authorities allowed to impose penalties on underpaid VAT without considering the deduction position?

Are authorities allowed to impose percentage based penalties when sanctioning underpaid VAT on sales; without considering the deductible VAT amounts on purchases?

The European Court of Justice (ECJ C-418/22 Cezam) received a new referral from a Belgian court and will soon get the opportunity to address this question!


The case concerned a taxpayer who failed to submit periodic VAT returns since June 2013. The Belgian tax authorities issued an assessment in which the following amounts were claimed.

In respect of 2013:
•    VAT payable: EUR 278 880.50;
•    Penalties: EUR 265 940;
•    Late payment interest calculated (0,8% per month) up to 20 March 2016: EUR 58 007.04.
In respect of 2014 and 2015:
•    VAT payable: EUR 1 430 991.16;
•    Penalties: EUR 923 650.00;
•    Late payment interest (0,8% per month) calculated up to 20 January 2017: EUR 137 375.04.
As regards the period 2017:
•    VAT payable : EUR 88 610.36;
•    Penalties : EUR 14 290;
•    Late payment interest calculated (0,8% per month) up to 20 December 2017: EUR 4 962.16.

The Belgian authorities claimed penalties amounting to 20% of the gross amount of VAT and hence not taking into account any deductible VAT (legal basis: article 70(1) of the VAT Code and Royal Decree No 41 part V of Table G in the annex to Royal Decree No 41).

The taxpayer challenged the penalties referring to general principles of EU law and argued that the penalties should be calculated on the net amounts of VAT; meaning the deduction of the input VAT paid should also be considered when calculating the penalties.

Relevant EU framework

In the absence of harmonization of EU legislation on penalty regimes, the power to impose penalties falls within the competence of Member States; they have the freedom to qualify, quantify, scale and impose the penalties they find appropriate.
However, despite the lack of harmonization, Member States must exercise their power in accordance with EU law. Their freedom is hence not unlimited.
In this respect, the EU court of justice has o.a. set the following limits for EU Member States:

•    Penalties must not go further than what is necessary to ensure the correct collection of VAT;
•    Penalties and sanctions must be consistent with the principle of VAT neutrality and proportionality (this also means that the nature and the degree of seriousness of the infringement must be considered when imposing sanctions);
•    Penalties must not be disproportionate to the gravity of the incident, especially when there is no loss of VAT revenue.

 EN.SA. case

 In the case at hand, the taxpayer made an explicit reference to the EN.SA. case. This case was about fictious transactions where the Italian authorities on the one hand, excluded the deduction of VAT relating to non-existent transactions and, on the other, also required payment from that taxpayer for VAT invoiced on these non-existent transactions.

The Court of Justice ruled that a penalty equal to the full amount of input VAT improperly deducted without taking account the fact that the same amount of output VAT had been duly paid and that the Treasury had not, as a result, lost any tax revenue, constitutes a penalty that is disproportionate to the objective which it pursues (judgment of 8 May 2019, EN.SA. (C-712/17, EU:C:2019:374, paragraphs 39 and 42).

The taxpayer infered from that judgment that:
•    The tax liability of the taxable person is always composed of the tax owed from the outputs minus the deductible tax in respect of the inputs from the same tax period.
•    As regards the same tax year, output transactions are inseparable from input transactions.
•    The principle of proportionality requires that the Member States should not impose penalties of an amount equal to the deductible VAT, otherwise the deduction of VAT would no longer serve any purpose and would be meaningless.
•    Consideration must be given to the question of whether the risk of loss of tax revenue has been eliminated..


The Belgian court (Court of First Instance of Luxembourg, Belgium) wonders whether the Belgian system of (proportionate) penalties complies with the above principles of EU law.
Before settling this dispute, it therefore decided to consult the Court of Justice. In this respect, the referring courts asked whether, when calculating a tax penalty, the EU provisions (more specifically: Articles 62(2), 63, 167, 206, 250 and 273 of the VAT Directive, together with the principles of proportionality and neutrality) imply that the tax authority should use the net amount of VAT due, after input VAT is considered, rather than the gross amount of VAT?