Poland: VAT penalty of 20% held incompatible with EU law (CJEU judgment)

A CJEU judgment concerning VAT penalty of 20% held incompatible with EU law

A CJEU judgment concerning VAT penalty of 20% held incompatible with EU law

The Court of Justice of the European Union (CJEU) issued a judgment holding that the Polish regulations that allow for penalties or sanctions to be imposed at a rate of 20% in the form of an additional value added tax (VAT) liability were incompatible with EU law.

According to CJEU, imposing a 20% penalty on a real estate purchaser that erroneously reported a transaction as taxable and deducted input tax (whereas the transaction should have been entirely exempt from tax) was not consistent with the provisions of the VAT Directive and the resulting principle of proportionality.

The case is: Grupa Warzywna Sp. z o.o. v. Dyrektor Izby Administracji Skarbowej we Wrocławiu, C-935/19 (15 April 2021)


A Polish company purchased a developed property, occupied for more than two years. The deed included a declaration that the sales price of the buildings was the gross amount (including VAT). The purchase was additionally documented by an invoice issued by the seller that showed, inter alia, the amount of VAT due.

The purchasing company paid the tax, qualifying it as input tax due and then included this amount as deductible input tax in the submitted return. As a result, the return showed an excess of input tax over output tax, that was to be refunded to the company.

On audit, the tax authority found that the transaction concerning the supply of the property would have been entirely exempt from tax and that the parties to the transaction had failed to submit a declaration that they had opted to waive the exemption. Consequently, the tax authority established that the company was not entitled to deduct the input tax resulting from the tax-exempt supply of property.

The company thus submitted an amended tax return that took into account the irregularities found during the tax audit. Despite the amended return, the tax authority decided to assess an additional tax liability corresponding to 20% of the amount of the overstated VAT refund.

Request for a preliminary ruling

The company filed an administrative appeal and then filed a subsequent judicial action. At issue was whether penalties in the form of an additional tax liability were appropriate when no tax revenue was lost; whether this treatment was compatible with the principle of proportionality and VAT neutrality; and whether the imposition of such additional liabilities actually served to prevent tax fraud or was merely an additional fiscal measure.

The regional administrative court in Wrocław filed a request with the CJEU for a preliminary ruling concerning the compatibility with EU law of the imposition of an additional VAT liability.

CJEU’s judgment

The CJEU acknowledged that under the VAT Directive, EU Member States could adopt provisions necessary to attain the objectives for the correct levy and collection of tax and to prevent fraud. Moreover, the EU Member States are allowed to choose the penalties or sanctions that they find to be appropriate.

However, the CJEU observed that such penalties must not go beyond what is necessary to attain the objectives of the correct levy and collection of tax and to prevent fraud. Thus, in order to assess whether a penalty is consistent with the principle of proportionality, there must be consideration of the nature and degree of the infringement which the penalty seeks to sanction, and of the means of establishing the amount of the penalty.

In this matter, the CJEU found the 20% penalty was primarily intended to be preventive in nature (to convince taxable persons that it is in their interest to complete their tax returns in an accurate and diligent manner and when an error is found, to make necessary corrections so as to achieve the objective of the correct collection of VAT). Still, a penalty imposed at a rate of 20% of the overstated VAT (to be refunded) does not take into account the taxable person’s intention and thus makes no distinction between whether the understatement of the tax was due to error, with no indications of a fraud and no reduction of tax liability, and instances when there are no such special circumstances. Therefore, the automatic imposition of an additional tax liability does not allow the tax authorities to adjust the penalty to reflect particular circumstances and to determine that the penalty assessment does not go beyond what is necessary to attain the objectives of ensuring the correct collection of the tax and preventing tax fraud.

The CJEU concluded that the EU VAT regulations must be interpreted as precluding national rules that impose a 20% penalty on a taxpayer that incorrectly classified a VAT-exempt transaction as a transaction subject to that tax, given there were no indications of fraud or reduction of the state revenue.

KPMG observation

The judgment may allow taxpayers to seek refunds of VAT penalties imposed by tax authorities.

Read an April 2021 report [PDF 310 KB] prepared by the KPMG member firm in Poland

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