Services consisting in the transport of goods to countries outside the European Union, which are not supplied directly to the consignor or the consignee of such goods, but to their contractual counterparty, are not exempt from VAT or covered with a VAT rate of 0% – so adjudicated the Court of Justice of the European Union in its judgment of 29 June 2017 in the case of ‘L.Č.’ IK v Valsts ieņēmumu dienests (C-288/16).

The case concerned the transport of goods from Latvia to Belarus under the external transit procedure. ‘Atek’ SIA, which was obligated to ensure that transport, assigned its effective performance to its contractual counterparty, ‘L.Č.’ IK. The transport was carried out with vehicles belonging to ‘Atek’ SIA and leased to ‘L.Č.’ IK, which was responsible for driving the vehicles, repairs, refuelling, customs formalities at border points, surveillance of the goods, transferring the goods to the consignee and the necessary loading and unloading tasks. ‘L.Č.’ IK, considering that it had supplied services connected with transit, applied a VAT rate of 0% to those services. The Latvian tax authority did not agree with such classification of the services, claiming that in the absence of a legal connection with the consignor or the consignee of the transported goods, those services could not be equated with the services of a carrier or a freight forwarder, and since ‘L.Č.’ IK did not hold the requisite licence, it could not be regarded as a carrier, and consequently it was not entitled to apply a VAT rate of 0% to the discussed services.

Doubts of the court requesting for a preliminary ruling were raised by Article 146(1)(e) of Directive 2006/112/WE concerning whether the resultant exemption is applicable only when there is a direct legal relation, namely a mutual contractual relation between the service provider and the consignee or the consignor of the goods.

The above Directive provision stipulates that Member States shall exempt the supply of services, including transport and ancillary transactions, but excluding the supply of services exempted in accordance with Articles 132 and 135, where these are directly connected with the exportation or importation of goods covered by Article 61 and Article 157(1)(a) (so, among others, covered by the external transport procedure as in the case at hand).

CJEU recalled that Article 146 of Directive concerns  the exemption of exports outside the European Union from VAT – every export and equivalent transaction should be exempt from VAT in order to ensure that the relevant transaction is taxed only in the place of consumption. So discussed Article 146(1)(e) is to ensure the exemption of transport services directly connected with export from VAT. What is of key significance in the present case, in the opinion of the CJEU the existence of a direct connection entails not only that, by their subject matter, the supply of services in question contributes to the actual performance of an importation or exportation transaction, but also that those services are supplied directly to, as the case may be, the exporter, the importer or the consignee of the goods. The supply to the exporter’s contractual counterparty does not entitle the entity to apply a preferential VAT rate.

It should be noted that the provision of Directive 2006/112/WE under discussion is reflected in Article 83(1)(21) of the VAT Act, pursuant to which the 0% rate of the tax shall be applied to services directly connected with the exportation of goods:

a) concerning exported goods, consisting in their packing, carriage to the place where combination consignments are formed, storage, transhipment, weighing, controlling and supervising transport safety,

b) provided under brokerage, agency, mandate and intermediation contracts relating to exported goods.

And according to Article 83(2) of the VAT Act, the rate of 0% shall be applied when a taxable person keeps documentation which unequivocally shows that those activities were performed with the conditions described in that provision fulfilled.

At the same time, pursuant to Article 83(1)(19) of the VAT Act, the rate of 0% shall be applied also to services consisting in performing activities directly connected with organisation of exportation of goods, especially making out of forwarding documents, bills of lading and settling customs formalities.

The interpretation of the provisions made by the CJEU seems thus to be more restrictive than the position which was taken by the Polish tax authorities in individual binding rulings issued in relation to Article 81(1)(21). For example, in a binding ruling of 9 September 2014, case ref. no. ITPP3/443-291/14/MD, the Director of the Fiscal Chamber in Łódź found that a company involved in packing and fixing of goods in containers for a forwarding company was entitled to apply a VAT rate of 0%, although it was not a party to the exportation procedure. In the opinion of the tax authority, its actions were directed (in physical respect) directly at the exported goods, which together with the relevant documentation was a sufficient condition for applying the rate of 0%.

Barbara Otrzonsek, tax consultant, ATA Finance