Lately, we have been seeing more and more cases of incorrectly assessed transactions and unfortunately, in connection to that, cases of additional value added tax including large penalties in the area of international trade of goods. Our previous article focused on delivery of goods to another member state, acquisition of goods and exportation. Today, we will look at chain transactions and trilateral transactions.

Chain transactions

So-called chain transactions are an issue of their own and present several challenges concerning the VAT. These are cases where there are at least two (or more) persons who can act as an owner throughout the duration of transportation of goods. These structures are favoured especially in business. At the beginning of such a chain, the first supplier has primary interest in delivery, the final customer at the end of the chain has interest in acquisition. The company (or companies) in the middle perform the role of a mediator without whom the transaction between the supplier and final customer could not happen for whatever reason (e.g.: the position on the market, contracts, legal obligations etc.). If a transaction of this nature takes place entirely within the territory of one single state, there are no specific consequences. However, the situation becomes interesting if the transport begins with the initial supplier in one state and ends with the final customer in another member state of the EU.

In a situation like this, intracommunity exemption from tax on delivery of goods must have occurred, however, it is necessary to consider each individual case carefully and in connection to its specific circumstances in order to determine which transaction in the chain is eligible for the exemption. The judgment of the Court of Justice of the European Union C-245/04 EMAG already confirmed that if a delivery of goods is connected with only one dispatch or transport, the transportation of goods can be assigned to only one transaction from a chain of transactions and therefore, only this transaction can be exempt from VAT upon delivery. A very specific (yet not unique) situation is presented in cases where transportation is provided by the middle person in a tripartite chain; this way the mediator participates in both transactions in the chain. The European Court of Justice has dealt with this situation in its following judgment C-430/09 Euro Tyre Holding BV which provides a guide as to how the exemption from VAT on intracommunity transactions should be dealt with.

In practice, there are various ways to set up the agreed conditions, including invoicing the costs of transportation to a different company in the chain than the one which is in fact in charge of the transport. The real-life situation can often be quite unclear and many times it is because there are no contracts and documents due to the fact that many transactions are done on the basis of orders and confirmations via email. Significant risk comes with situations where (for logistics or business or other reasons) the previously agreed conditions of the trade are changed last minute and this information is not forwarded to the relevant employees in accounting or tax departments. Incorrect application of VAT can bring quite negative effects and although the VAT application itself can many times be corrected, there still quite often will be some penalties from the tax administration.

Trilateral transactions

Trilateral transactions are a specific type of chain transactions and when it comes to VAT they present some simplifications. A trilateral transaction is a transaction between three persons registered to tax in three different member states the object of which is delivery of goods between these three persons in such a way where the goods are dispatched or delivered directly from the state of the supplier to the state of the customer. As opposed to chain transactions we have mentioned above, trilateral transactions have a big advantage because if all the conditions are met, there is no obligation for the mediator to register in neither the state of the supplier, nor the customer.

These transactions are used a lot in practice. Nonetheless, one can observe a number of mistakes connected to this in practice, too.

In order to be able to make use of a trilateral transaction, the following conditions must be met.

One of these is that the mediator cannot be registered in the state of the customer. In practice, we repeatedly see cases in which this condition has been met at the beginning of the contractual relationship but the mediator has for reasons connected to their business in the state of the customer registered for tax there and has not informed the supplier or customer about this fact. In this case it is not possible to make use of the trilateral transaction system anymore.

The above mentioned condition is well known to the public. In our experience, there is another obligation which is often not met. For a trilateral transaction must include a mediator who purchases the goods from the supplier in the customer’s member state with the intention to deliver the goods to the customer in this member state. In order for the mediator to be able to purchase the goods from the supplier in the state of the customer, the supplier must, in other words, deliver the goods there. Delivery of goods by the supplier and the purchase of it by the customer must be understood as linked in a way that basically characterizes intracommunity transaction between the supplier and the customer. In other words, it is precisely in the first part of the trilateral transaction that must be assessed as a transaction which can be assigned with delivery or dispatch of goods. Unfortunately, we have met with more cases of Czech taxpayers in the position of the initial supplier delivering goods to the mediator in their own warehouse in the Czech Republic under EXW or FCA conditions and under the same conditions the mediator supplied the customer, who was in charge of the transport, with the goods. That means that the transfer of right to handle the goods as the owner happened between all the parties already on the premises of the supplier in the Czech Republic. It is not possible to apply the simplification for trilateral transaction under these conditions. In our opinion, the principles of the above mentioned judgments of the European Court of Justice must be applied to the area of trilateral transaction as well.

These principles should be observed not only with transactions within the European Union but also with cases of chain transactions with the final destination in a non-member state.

This article aims to bring attention to some of the common mistakes which we are unfortunately seeing in practice and which can bring very negative effects. The illustrative cases show that in order to reach a good result as a company it is not enough, from a business viewpoint, to merely have a good contract because incorrectly set conditions can bring down the predicted profitability of the transaction. That is why we believe that close cooperation of employees in business and in tax or accounting departments is essential. Because a lot of our experience shows that the actual business transaction can often differ from the original intentions provided for in the contractual documentation over the course of time, we suggest that you verify the correctness of the conditions set and of the most often conducted transactions of your company.

Milan Kolář