German VAT treatment of chain supplies – Status quo and outlook

A chain supply is defined as consecutive supplies of goods between three or more different parties but with only one physical movement of goods. With regards to cross-border chain supplies one of the major challenges is to determine which supply within the chain might benefit from a VAT exemption for intra-Community or export supplies – especially in cases where the middle party transports or dispatches the goods.

This perspective has led to legal uncertainty for many businesses involved in such transactions where goods are shipped from an EU member state to Germany or vice versa.

According to the German fiscal authorities, the allocation of the movement of goods depends on which party arranges for the transportation, that is, performs the transport or engages the freight forwarder.

The VAT exemption for intra-Community or export supplies can only be applied to the "moved" supply whereas the remaining "unmoved" supply is deemed to be a domestic supply either in the country of origin or in the country of destination (under the special place of supply rules).

If the first supplier (A) arranges for the transport, the goods' movement is ascribed to the first supply carried out by A to the first customer (B) and thus, this supply may generally benefit from a VAT exemption for cross-border supplies.

In cases where the last customer in the chain (C) is responsible for the transport, the movement is attributed to the second supply, that is, the supply conducted by B to its customer C might potentially be treated as a VAT-exempt cross-border transaction.

With respect to chain supplies where the middle party (B) arranges for the transportation of the goods German VAT law states that generally the first supply is deemed to be the "moved" supply, while the second supply should be treated as domestic supply in the destination country. Nevertheless, according to the German Administrative Guidelines, if B uses a VAT-ID-number of the country of origin and also bears the risk and expenses for the transportation, the second supply can be regarded as the "moved" supply.

In the EMAG case (06.04.2006, C-45/04) the ECJ ruled that, in a chain supply the transportation can only be linked to one of the supplies, which might then benefit from a cross-border VAT exemption. However, the court has not provided any criteria for determining to which supply the transport should be linked.

This issue was addressed by the ECJ in the Euro Tyre case (16.12.2010 C-430/09), where it was decided that the VAT qualification of chain supplies in general depends on "an overall assessment of all specific circumstances".

Where B obtains the power of disposal over the goods in the country of dispatch and expresses its intention to transport these goods to another member state, the cross-border transport should – in the view of the ECJ – be linked to the first supply if (1) B uses a VAT-ID-number issued by the member state of destination and (2) if the relevant transport conditions regulate that the power of disposal is transferred to C in the destination country. If however, B sells the goods to C while they are still located in the country of departure and B informs A of this sale, A does not perform an intra-Community supply but a taxable domestic supply in the country of departure.

Thus, according to the ECJ the most important driver of the allocation of the goods' movement in a chain supply is the provision of information on the transaction between B and A. As a consequence it would be in B's power to allocate the transport to either of the supplies, depending on whether he informs A about the subsequent sale.

In the VSTR case (27.09.2012, C-587/10) the ECJ confirmed, that the allocation of the goods' movement depends on that point in time when the right to dispose of the goods has been transferred to the final recipient. If the power of disposal changes before the cross-border movement of the goods, the first supply cannot benefit from a corresponding VAT exemption.

In the aftermath of the VSTR case the German Federal Finance Court publicised its subsequent decision on May 28 2013 (XI R 11/09). It states that a full evaluation of all particular circumstances of the individual case is decisive. It should be relevant when party C receives the power of disposal over the goods. If C already had the power to dispose before the cross-border movement, A does not carry out a zero-rated cross-border supply. It should however not be decisive whether B informs A about reselling the goods before they had been handed over. This view contradicts an earlier judgment from the German Federal Finance Court of August 11 2011 (V R 3/10) where it followed the ECJ ruling in the Euro Tyre case and decided that such information should be a decisive criterion for linking the transportation to one of the supplies.

Based on the ECJ judgments it can be concluded that the location of the respective transfer of "the power to dispose as owner" is crucial for ascertaining the VAT consequences of an intra-Community chain supply. In its recent decision of 2013 the German Federal Finance Court generally followed this approach.

However, it remains uncertain which position the German Federal Finance Court will finally take regarding the impact of B informing A about the resale of the goods. In contrast to the view held by the ECJ, the German tax authorities consider which of the parties arranges for the transportation of goods (that is, subcontracts a freight forwarder and so on) to be decisive. Thus, the German Administrative Guidelines do not comply with the judgment of the ECJ and in principle require amendment.

An expert group at the level of the German tax authorities is defining ECJ-compliant rules to be incorporated into the German VAT Guidelines. It remains to be seen which ruling this expert group will follow and, thus, will be applied by the German tax authorities as the decisive criteria for allocating the transport within a chain supply in the future.

Johan De Spiegeleer Deloitte