Even the small business exemption can be refused if the business was established for abusive purposes
C‑171/23. – UP CAFFE d.o.o. | The prohibition of abuse of rights concerning the EU VAT system must apply even in the absence of specific national regulations.
In this case, a Croatian company carried on a restaurant business under the exemption for small enterprises. Once it no longer met the criteria for this exemption, it “transferred” its operations to a newly established company and continued its activities under the same conditions, at the same location, with the same employees and suppliers. The newly formed company opted for the exemption for small enterprises because it fulfilled the requirements established by Croatian law.
However, the Croatian tax authority refused to allow the new company to operate as an exempt entity on account of an abuse of rights and imposed a VAT payment obligation on it. The question referred to the ECJ concerned whether Member State authorities and courts could impose a VAT payment obligation (and not only deny the right to deduct VAT) in cases where the taxpayer’s fraudulent and abusive behavior is evidenced by objective circumstances.
The judgment affirms that one of the fundamental principles of the EU VAT system is the prohibition of abuse of rights, which must apply generally, even if there are no explicit rules regarding this in the respective Member State. Therefore, if it is established in the case that the primary purpose of the taxpayer’s reorganization was to obtain an unjustified tax advantage, the tax authority may intervene by denying the application of the exemption rules to the taxpayer. The ECJ also noted that if restoring legality can be achieved by treating the taxpayer as a VAT-registered entity, the right to deduct input VAT must also be assessed according to general rules.
