Court decision clarifies: VAT treatment of a transaction depends on its economic substance
Decision of the Tallinn Circuit Court in administrative case No 3-22-1672 concerning the VAT levied on invoices for construction work carried out in Finland
A company had declared in its VAT return the provision of construction services in Finland as subject to the zero rate of VAT. The Estonian Tax and Customs Board (MTA) found that this was in fact a supply of goods (foundation blocks) and that, under the Value-Added Tax Act, such a transaction constitutes a taxable intra-Community distance sale of goods.
The Circuit Court agreed with the reasoning of the Tallinn Administrative Court’s decision and with the MTA’s position, finding that the transaction indeed constituted an intra-Community distance sale of goods, the place of supply of which was Estonia, and which was subject to the 20% VAT rate applicable in Estonia in 2021. The courts agreed with the MTA’s view that the fact that the sale took place under a construction works contract does not make the sale of goods a supply of services. Furthermore, where there is no separate sales contract for the sale of building materials, this does not give the right to treat the sale of goods related to the provision of a service, for tax purposes (within the meaning of clause 10(4)1) of the Value-Added Tax Act), as a supply of a service. Therefore, the company should have declared the transaction as an intra-Community distance sale and paid VAT on it at the rate of 20%.
In addition, the Circuit Court found that several of the invoices on which the company based its input VAT deduction did not meet the requirements for an invoice as a source document and that these were not merely minor formal errors. The information on the invoices was so general that it was not possible to identify the specific goods or services for which they had been issued. As a result, it was not possible to verify whether the transactions had been genuine.
There are a number of particularities in the provision of construction services abroad compared with domestic transactions, including when goods are purchased in Estonia for the provision of services abroad. In addition, there are particularities in the VAT treatment of transactions where the buyer or contracting entity is a private individual. Taxation is based primarily on the economic substance of transactions. Accordingly, a transaction carried out under a construction works contract does not necessarily constitute a supply of services if its substance is a supply of goods. Under such a contract, tax liability arises in Estonia if the construction site is located abroad and the contracting entity is a private individual.
