Czech Republic: Taxpayer entitled to deduct VAT on supply within fraudulent transactions chain

A Supreme Administrative Court decision concerning VAT on supply within fraudulent transactions chain

A decision concerning VAT on supply within fraudulent transactions chain

The Supreme Administrative Court (SAC) recently held (case no. 5 Afs 55/2020) that a taxpayer was entitled to deduct value added tax (VAT) on a supply provided within a fraudulent chain of transactions.


The taxpayer purchased electronics from other EU member states and stored them in the Czech Republic. The taxpayer then sold the same electronics to shelf companies that did not declare or pay output VAT. The tax authority denied the taxpayer the right to deduct VAT on the supply of electronics on the grounds that the taxpayer knew, or could have known, that the supplier would not pay output VAT because of tax fraud.

The Municipal Court in Prague determined that there were objective circumstances that would have made the taxpayer aware of the illegal activity and the taxpayer did not take reasonable steps to detect or prevent the tax fraud. The lower court determined that the taxpayer deviated from common practice, had not complied with its own business terms and conditions, and would or could have known of their involvement in a fraud. In particular, the lower court focused on the taxpayer’s insufficient control of IMEI numbers of the phones which helps to detect the unreliable origin of the device including any link to illegal activity, the absence of contracts between the contracting parties, and the issuance of tax documents before accepting the order. The taxpayer appealed the lower court’s holding to the SAC.

The SAC agreed with the tax authority that in combination, the evidence may create the impression of the existence of tax fraud, but it also held that separately, the individual parts of the case could be explained. According to the SAC, merely revealing the structure and pointing out the business practices and the fact that tax was not paid in a part of the supply chain does not a priori constitute the taxpayer’s involvement in tax fraud. The SAC found that the taxpayer's manner of trading outside the official distribution network, as well as not reviewing their business partners or concluding written contracts, was legal and legitimate. The SAC also rejected the tax authority's claim that the transactions had no economic purpose, proving that the average margin on the fast-moving trades was around 2%.

Read a December 2022 report prepared by the KPMG member firm in the Czech Republic


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