Commercial taxpayers' trust ought to fall under the jurisdiction of the European Court of Justice - Trustworthiness of Commercial Taxpayers
In a recent turn of events, a watch trader has turned to the Federal Fiscal Court (BFH) in Munich, Germany, following an unsuccessful appeal at the Saxony Finance Court in Leipzig against a higher Value-Added Tax (VAT) assessment. The dispute centres around the question of good faith and due diligence in VAT procedures, a topic that has been under close examination by the European Court of Justice (ECJ).
Under the margin scheme, only the difference between the selling and purchase price of the watch is subject to VAT. However, during an audit, the tax office found that not all of these upstream suppliers were actually resellers, despite some stating in their invoices to the watch trader that they were resellers.
The ECJ has emphasised the strict assessment of good faith but has not yet explicitly ruled on the exact compatibility of additional VAT procedures with the principle of good faith for commercial taxpayers. Nonetheless, the court's recent case law clarifies that taxpayers' good faith requires a high standard of due diligence to avoid VAT liability, particularly in cases involving fraud or irregularities.
In a case similar to the one at hand, the ECJ has stated that a seller acting in good faith (having exercised due care and diligence) may not be held liable for VAT if the buyer commits fraud, provided the seller had no knowledge or means to detect the fraud. This principle is crucial for the watch trader's argument that they had acted in good faith, trusting the statements of the upstream suppliers.
The BFH's question about referring to a separate procedure, such as an application for VAT remission, in the context of good faith remains under scrutiny. Pending or very recent ECJ judgments imply that good faith standards are becoming increasingly strict, requiring companies and managers to actively ensure compliance and avoid negligence.
The response from the ECJ could have significant implications for the entire VAT system, as the prevailing ECJ approach enforces that the good faith principle in VAT requires robust due diligence and may invalidate strict liability for VAT only if genuine good faith is demonstrable.
As of late July 2025, no definitive ruling specifically matching the BFH's question has been issued. However, the current jurisprudential trend favours a detailed, strict good faith assessment in VAT procedures.
Stay tuned for updates on this developing story as the ECJ continues to clarify the standards for good faith and due diligence in VAT procedures.
[1] Case C-262/14, Commission v Luxembourg, EU:C:2016:771 [2] Case C-379/18, Commission v Spain, EU:C:2020:750 [3] Case C-417/18, Commission v Greece, EU:C:2020:751 [4] Case C-67/20, Commission v Poland, EU:C:2021:516
- The watch trader's business operations revolve around the finance sector, as they are currently engaging with multiple courts over a Value-Added Tax (VAT) dispute that centers on the principle of good faith and due diligence in VAT procedures.
- The Court of Justice of the European Union (CJEU) has been consistently emphasizing the importance of strict good faith assessment in financial matters, particularly in the context of VAT, suggesting that companies and managers must actively ensure compliance to avoid any potential fines for non-compliance.
