On December 13, 2016 on the website of the Court of Justice of the European Union (CJEU) the opinion of Advocate General Campos Sánchez-Bordona in Case C‑571/15, Wallenborn Transports SA versus  Hauptzollamt Gießen (ECLI:EU:C:2016:944) was published.

The Hessisches Finanzgericht (Finance Court, Hesse) is referring a question which combines both theoretical interest and practical importance. In essence, it seeks to ascertain what the legal effects on import value added tax (VAT) might be of the fact that German law considers certain free zones to be ‘foreign territory’. Specifically, the referring court is asking whether, in general, the entry of goods into one of these free zones means that they have not entered the territory of the European Union and that, as a result, import VAT has not become due.

 

The dispute has arisen because a taxpayer is contesting the import VAT which the German authorities have claimed at the same time as the customs duties due under Article 203(1) of the Community Customs Code (Herafter: the CCC), in other words, as a result of the goods having been unlawfully removed from customs supervision when the relevant customs procedure (transit) had not ended correctly. As the chargeable event in respect of the customs debt occurred in a free zone (the port of Hamburg), which the national legislation does not regard as being ‘territory of the country’ for the purposes of VAT, the referring court is asking whether the goods were imported or not and, consequently, whether import VAT has become due.

 

Facts and questions referred

·   On 11 June 2009, textiles that had entered the customs territory of the European Union the previous day at Frankfurt am Main airport and been presented to customs were declared and released for the external Community transit procedure. The transit procedure was to be completed by 17 June 2009.

 

·   The consignee of the goods was a company based in the free port (free zone) of Hamburg. The carrier of the goods, which had been duly sealed, was Wallenborn Transports (‘Wallenborn’).

 

·   However, the goods never reached the customs office of destination. Investigations during the enquiry procedure established that they were unloaded at the consignee’s premises within the free port of Hamburg on 11 June 2009, the seal having been broken, and sent by sea on 16 June to Finland, from whence they were then re-exported to Russia.

 

·   On 2 September 2010, the Hauptzollamt Gießen (Customs Office, Gießen) issued a notice of assessment of customs duty and import VAT both to the principal as authorised consignor and to Wallenborn as carrier.

 

·   Payment, however, was only sought from Wallenborn, since the Customs Office took the view that the principal had demonstrated that the consignment and the accompanying document had been duly handed over, whereas Wallenborn had failed to end the transit procedure. The recipient of the goods informed the Customs Office that, on accepting the consignment, it had assumed that the goods had been given customs clearance; it also stated that the transit accompanying document had not been provided.

 

·   Having unsuccessfully contested the VAT assessment using administrative procedures, Wallenborn then brought an action in the Hessisches Finanzgericht (Finance Court, Hesse). It argued that the customs debt was incurred when the lorry was unloaded, once the seal had been removed in the free port, but that the free port, as a free zone, does not constitute part of the territory of the country and that therefore there was no transaction liable to VAT.

 

·   Under those circumstances, the Hessisches Finanzgericht (Finance Court, Hesse) referred the following questions to the Court of Justice for a preliminary ruling on 6 November 2015:

‘Question 1:

Is the VAT rule of a Member State which states that free zones of control type I (free ports) do not form part of the territory of the country one of the situations referred to in Article 156 as specified in the first paragraph of Article 61 and in the first subparagraph of Article 71(1) of [the VAT Directive]?

 

If this question is answered in the affirmative:

 

Question 2:

Where goods are subject to customs duties, does the chargeable event also occur and VAT also become chargeable in accordance with the second subparagraph of Article 71(1) of [the VAT Directive] when the chargeable event in respect of those duties occurs and those duties become chargeable, if the chargeable event in respect of those duties and the chargeability of those duties occurs within a free zone of control type I and the VAT legislation of the Member State to which the free zone belongs provides that free zones of control type I (free ports) do not form part of the territory of the country?

 

If Question 2 is answered in the negative:

 

Question 3:

Where goods transported under the external transit procedure without that procedure ending in a free zone of control type I are removed from customs supervision in the free zone so that a customs debt is incurred in respect of the goods under Article 203(1) of the [CCC], does the chargeable event occur and VAT become chargeable in respect of goods at the same time in accordance with another chargeable event, namely under Article 204(1)(a) of the [CCC], because, prior to the act by means of which the goods were removed from customs supervision, the goods were not presented to customs at one of the customs offices competent in respect of the free zone situated within the territory of the country and the transit procedure was not ended there?’

 

Conclusion

The Advocate General proposes that the Court should reply as follows to the questions referred for a preliminary ruling:

‘1.  The first paragraph of Article 61 and the first subparagraph of Article 71(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Directive 2007/75/EC, must be interpreted as meaning that:

(a)  the reference to “the arrangements or situations referred to” in Article 156 of the directive includes free zones in the sense of possible zones for the importation of goods into the territory of the European Union; and

(b) when a customs debt under Article 203(1) of the Community Customs Code is incurred due to the removal from customs supervision of goods in a free zone, this gives rise to the chargeable event and import VAT becoming chargeable if it is reasonable to presume that the goods were able to enter the economic network of the Union, which is a matter for the national court to determine.

 

2.   Where a customs debt has been incurred under Article 203 of the Community Customs Code and it has been established that, due to the circumstances of the case, VAT is not chargeable, Article 204 of the Community Customs Code cannot be applied in order to give rise to a VAT charge.’

 

Procedure before the Court of Justice and submissions of the parties

·   Wallenborn, the Greek Government and the Commission have submitted written observations but none of those parties requested a hearing.

 

·   Wallenborn submits that the first two questions should be answered in the affirmative and proposes, in the alternative, that question 3 should be answered in the negative.

 

·   Wallenborn argues that Article 204 of the CCC applies only in exceptional situations where the conditions for the application of Article 203 of the CCC are not met. Where, as in the circumstances of the main proceedings, the customs seal is removed and the goods are unloaded and not presented at customs, this constitutes an exceptional situation which does not result in Article 204 of the CCC being brought into play.

 

·   The Greek Government proposes that the first question be answered in the negative. It argues that under Article 166 of the CCC, non-Community goods in free zones are considered, for the purpose of import duties and commercial policy measures, as not being on EU customs territory. It follows from this that those zones cannot be regarded as ‘third territory’ as they are subject to all the same national and EU customs regulations as the rest of the customs territory of the relevant Member State. It notes that under Articles 5 and 6 of the VAT Directive, free zones are not excluded from the scope of that directive.

 

·   The Greek Government argues in the alternative, with respect to questions 2 and 3, that Articles 61 and 71 of the VAT Directive refer to the provisions of the CCC which relate to the incurrence of a customs debt. From this it infers that, in the present case, the customs debt, and consequently the VAT debt, would have arisen at the moment when the obligations under the transit procedure in which the goods had been placed were not observed.

 

·   It submits that the incurrence of the customs debt should be viewed in the light of Article 204 of the CCC, which would mean that, given the insignificance of the irregularity on a practical level, no customs debt or VAT debt would have been incurred, provided that the conditions set out in Article 859 of the implementing regulation have been met.

 

·   The Commission maintains, as a preliminary point, that the constitutive parts of import VAT must be examined separately from the question of whether or not there is a customs debt, given the differences between the two taxes in terms of their purpose and concept. In the circumstances of the case, there would be a customs debt under Article 203 of the CCC since the goods were removed from customs supervision as a result of the seal being broken.

 

·   On question 1, the Commission argues that Article 61 and Article 71(1) of the VAT Directive do not relate to the conditions for the application of Article 156 of the directive, but merely to the situations and customs arrangements referred to in that article. Since Article 156(1)(b) of the VAT Directive specifically mentions free zones and warehouses, the ‘situations referred to in Article 156’ include situations relating to such zones and warehouses, for the purposes of Articles 61 and 71 of the VAT Directive.

 

·   On question 2, the Commission observes that, according to the first subparagraph of Article 71(1) of the VAT Directive, the chargeable event only occurs and import VAT only becomes chargeable when the goods are removed from a customs arrangement or one of the situations referred to in Article 156 of the VAT Directive. In the present case, the removal of the goods from customs supervision, due to the breaking of the seal, would have resulted in a customs debt under Article 203 of the CCC being incurred and would have meant that the goods were no longer covered by the transit procedure, thus fulfilling the requirements for an importation under Article 70 and the first subparagraph of Article 71(1) of the VAT Directive. However, as the removal took place outside the fiscal territory of Germany, no importation within the meaning of Article 61 of the directive would have taken place.

 

·   Regarding question 3, the Commission contends that Article 204 of the CCC is applicable only if Article 203 of the CCC is not, in other words, if the goods have not been removed from customs supervision. It cites the principle that only one customs debt can be incurred, so that any subsequent acts or omissions involving the goods in relation to which the debt was incurred do not, in principle, give rise to a further debt of the same type.

 

·   The Commission reiterates that import VAT and customs duties must be considered separately, with the result that neither Article 203 nor Article 204 of the CCC will automatically lead to a VAT debt being incurred.

 

From the assessment as made by the Advocate General

 

Question 1

·   I would like to start my examination of question 1 by restating the words of the referring court: ‘Is the VAT rule of a Member State which states that free zones of control type I (free ports) do not form part of the territory of the country one of the situations referred to in Article 156 as specified in the first paragraph of Article 61 and in the first subparagraph of Article 71(1) of [the VAT Directive]?’

 

·   The Hessisches Finanzgericht (Finance Court, Hesse) does not directly ask whether the fact that goods are located in a free zone means that they are in one of the ‘arrangements or situations’ referred to in Article 156 of the VAT Directive and mentioned in Articles 61 and 71 of that directive. Its doubt does not concern free zones as defined in Article 166 of the CCC, but rather those which German law considers to be ‘foreign territory’ for VAT purposes (Paragraph 1(2) of the UStG). It is not, therefore, free zones as customs territories that are at issue, but free zones as areas where goods are not liable to import VAT upon entry.

 

·   In the circumstances of the case, I think that the distinction made by the referring court is an artificial one. Article 61 of the VAT Directive provides, as far as is relevant for the present purposes, that goods must be deemed to have been imported in the place where they cease to be covered by an arrangement or situation referred to in Article 156 of the directive. Article 71(1) of the VAT Directive provides that the chargeable event shall occur and VAT shall become chargeable only when the goods cease to be covered by those arrangements or situations.

 

·   The arrangements or situations referred to in Article 156 of the VAT Directive include ‘1. … (b) the supply of goods which are intended to be placed in a free zone or in a free warehouse’. This implies that, under Article 61 of the VAT Directive, such goods are not considered to have been imported until they leave the free zone, at which point the chargeable event will occur and import VAT will become chargeable (Article 71(1) of the VAT Directive).

 

·   Thus, under both EU law and German law, free zones are simultaneously ‘external to the Union’ and ‘foreign territory’, so that ‘the supply of goods which are intended to be placed in [them]’ does not constitute an importation and, consequently, VAT does not become due.

 

·   Admittedly, Article 156 of the VAT Directive is of relevance to ‘the supply of goods which are intended to be placed in a free zone or in a free warehouse’ in that these are transactions that the Member States may exempt from VAT. The referring court infers from this that the article is assuming the existence of an importation in every case, since a chargeable event can only be exempted if it is, in principle, liable to the relevant tax. This gives rise to a degree of contradiction with Paragraph 1(2) of the UStG, which, by designating free zones as ‘foreign territory’, immediately excludes even the possibility of an importation. That is why the Hessisches Finanzgericht (Finance Court, Hesse) harbours doubts as to whether the German free zones can be equated with the free zones under Articles 61 and 71 of the VAT Directive.

 

·   I think that they can. In referring to Article 156, Articles 61 and 71 of the VAT Directive are not referring to a tax exemption, but to a provision which names a number of ‘arrangements or situations’. Although they are arrangements or situations which, in the context of Article 156 of the directive, are relevant to a potential tax exemption, they are mentioned in Articles 61 and 71 for a very different reason (which is related to the purpose of the legislation), namely determining the place and time at which the importation will be deemed to have taken place and VAT will become due.

 

·   Consequently, the only aspect of Article 156 of the VAT Directive which is relevant for the purposes of Articles 61 and 71 of the directive, is the reference to ‘the supply of goods which are intended to be placed in a free zone or in a free warehouse’. In terms of those two articles, supplies of this kind, which have a very specific destination, amount to a factual situation which, when it ceases to exist, results in import VAT becoming due and chargeable.

 

·   I therefore take the view that question 1 should be answered in the affirmative. The free zones to which the UStG refers can only be those mentioned in Article 156 of the VAT Directive and referred to in the first paragraph of Article 61 and in the first subparagraph of Article 71(1) of that directive. For VAT purposes, German law and EU law treat free zones as ‘external zones’, meaning that, under certain circumstances, goods stored there are considered to have been imported into the territory of the European Union only once they are removed from the free zone and enter the territory of a Member State.

 

·   In short, to reword the question, I am of the view that the reference in the first paragraph of Article 61 and the first subparagraph of Article 71(1) of the VAT Directive to ‘the arrangements or situations referred to’ in Article 156 of the directive includes free zones in the sense of possible zones for the importation of goods into the territory of the European Union.

 

Question 2

·   Having answered the previous question in the affirmative, I am required to examine question 2, by which the referring court essentially seeks to establish whether, if customs duties become due within a free zone, import VAT is also due on goods which have not left the free zone.

 

·   The view of the Hessisches Finanzgericht (Finance Court, Hesse) is that, since in this case the goods have been removed from customs supervision, a customs debt has been incurred under Article 203(1) of the CCC. However, as the removal occurred within a free zone, we cannot speak in terms of an importation of goods and it would not therefore be appropriate to claim import VAT.

 

·   As I have already stated, free zones may be ‘external’ to the European Union as far as both VAT and customs duties are concerned, provided that the conditions set out in Article 166 of the CCC are met (for the present purposes, if the goods are not placed under a customs procedure).

 

·   The goods brought into the free port of Hamburg were placed under the external transit procedure so that, even though they were in a free zone, as the referring court has stated, ‘the requirements in respect of the fiction that, for the purpose of import duties, non-Community goods in a free zone are considered as not being on Community customs territory …, were not met’.

 

·   Having entered the customs territory of the European Union, the goods in question could therefore give rise to a customs debt. To be more precise, the relevant debt would be under Article 203(1) of the CCC, arising from the unlawful removal of the goods from customs supervision, evidenced by the seal being broken when it should not have been and the transit procedure being brought to an end as a result.

 

·   It is common ground between the parties that, in the circumstances of the case, the customs debt under Article 203(1) of the CCC was correct; the dispute relates solely to the question of whether import VAT can also be charged. Matters relating to payment of the former levy (the customs debt) are therefore beyond the scope of the debate.

 

·   The ending of the transit procedure in which the goods had been placed would, under Articles 61 and 71 of the VAT Directive, have meant that they should have been deemed imported in the place where they ceased to be covered by that procedure and VAT would have been due accordingly. What happens, however, where the territory of the Member State in which the goods cease to be covered by the transit procedure is a free zone, which, under Articles 61 and 71 of the VAT Directive, is a place which goods must leave in order to be considered imported?

 

·   Under these conditions, where, as I have already mentioned, it is not disputed that a customs debt has been incurred, has a second tax consequence been triggered, namely that VAT becomes due? In principle, this could be the case if: (a) ceasing to be covered by the transit procedure were, of itself, sufficient for the goods to be deemed imported; or (b) the customs debt under Article 203 of the CCC having been incurred, this automatically were to mean that VAT became payable, even if the goods could not be considered to have been imported (because they still have the status of goods located in a free zone).

 

·   I think that the first option can be ruled out, because under Articles 61 and 71 of the VAT Directive the various arrangements and situations which give rise to an importation of the relevant goods when the goods cease to be covered by them are treated as alternatives and not as mutually exclusive. It is, moreover, possible for such arrangements or situations to occur successively: Article 170(2)(a) of the CCC, for example, refers to the entry into a free zone of goods which have been placed under a customs procedure ‘which is discharged when they enter a free zone or free warehouse’.

 

·   It could, however, be argued that it is only possible for such arrangements or situations to occur successively if, in moving from one procedure to another, the first is properly extinguished. In the present case, the irregular manner in which the external transit procedure was brought to an end would prevent the goods from being treated, for VAT purposes, as goods placed in a free zone and would mean that they should therefore be treated as imported goods. However, to adopt this approach would be to distort the nature of VAT and turn it from a tax on consumption to a means of controlling unlawful conduct.

 

·   It seems to me that the same reasoning (which concerns respecting the nature and purpose of VAT) also excludes the second of the above options, according to which VAT is automatically due when customs duties are due, based on a literal interpretation of the second subparagraph of Article 71(1) of the VAT Directive.

 

·   As I noted in my Opinion in Joined Cases Eurogate Distribution and DHL Hub Leipzig, according to the case-law of the Court of Justice, ‘import VAT and customs duties display comparable essential features since they arise from the fact of importation of goods into the European Union and the subsequent distribution of those goods through the economic channels of the Member States’ and that parallel nature is ‘confirmed by the fact that the second subparagraph of Article 71(1) of the VAT directive authorises Member States to link the chargeable event and the date on which the VAT on importation becomes chargeable with those laid down for customs duties’.

 

·   However, as I noted in that Opinion, ‘comparable does not mean identical, which is why the Court proposed that the incurrence of the customs debt and VAT should be examined separately. It has to be that way because the two are different in nature and that difference is accentuated when the customs debt was not in fact incurred as a result of the entry of goods into the customs territory under a regular arrangement but rather as a result of failure to fulfil certain conditions or obligations.’

 

·   The decisive factor as far as the chargeable event for import VAT is concerned is that the goods on which it is charged should be able to form part of the economic network of the European Union and, consequently, be consumed at a later stage. The Court of Justice has confirmed this in its judgment of 2 June 2016,Eurogate Distribution and DHL Hub Leipzig: ‘in addition to the customs debt, there may also be a requirement to pay VAT where, based on the particular unlawful conduct which gave rise to the customs debt, it can be presumed that the goods entered the economic network of the Union and, consequently, that they may have undergone consumption, that is, the act on which VAT is levied’.

 

·   It is certainly true that, as I argued in my Opinion in Eurogate Distribution and DHL Hub Leipzig, one of the situations in which that presumption may reasonably be applied ‘is the case provided for in Article 202(1)(a) of the CCC (unlawful introduction into the customs territory of goods liable to import duties) and Article 203(1) of the CCC (unlawful removal from customs supervision of goods liable to import duties)’, which, in terms of the second option, is the situation which concerns us here.

 

·   Even so, the presumption is not a conclusive but rather a rebuttable one and, as such, may be dislodged in the light of facts established in court. To be more specific, although it may be presumed that goods not located in a free zone had entered the economic network, the presumption would be weaker if it were established that they had been located in one, had not undergone any other transactions there, had been removed to another Member State and had then been re-exported.

 

·   This is what seems to have happened in this case. According to the referring court, the seal on the goods was removed when the goods were unloaded in the free port of Hamburg on 11 June 2009. On 15 June they were placed in a container and loaded onto a ship which left the free port of Hamburg the following day. The Hessisches Finanzgericht (Finance Court, Hesse) states that during the whole of this period, ‘there is no distribution through the economic channels of the Member State to whose territory the free zone belongs because, after their removal from customs supervision, the goods initially remained in the free zone and were neither released for consumption nor consumed or used there, which, in certain circumstances, would have had to have been treated as transactions carried out within the territory of the country under Paragraph 1(3) UStG.’

 

·   Even had the question of the goods being located in a free zone been, hypothetically speaking, irrelevant as far as the reference to Article 156 in Articles 61 and 71 of the VAT Directive is concerned, the fact is that, given the very particular factual circumstances in this case, the goods could not have been used or consumed in the territory of the European Union.

 

·   In the abstract, if Article 156 of the VAT Directive were irrelevant, this would mean that, for the purposes of Articles 61 and 71 of that directive, the goods in question would be considered to have been ‘imported’ once the transit procedure had ended. Taking that approach, the second subparagraph of Article 71(1) of the VAT Directive would be applicable. It is my understanding, however, that this can only be the case where importation entails the goods having access to the economic network of the European Union, which it normally does. Where, by contrast, it can be incontrovertibly established by an unambiguous judicial finding that there was no possibility of access to that economic network, then that ‘importation’ does not constitute a legal act which triggers the obligation to pay VAT.

 

·   It is, therefore, my view that Articles 61 and 71 of the VAT Directive must be interpreted as meaning that when a customs debt under Article 203(1) of the CCC is incurred due to the removal from customs supervision of goods in a free zone, this gives rise to the chargeable event and import VAT becoming chargeable if it is reasonable to presume that the goods were able to enter the economic network of the European Union, which is a matter for the national court to determine.

 

Question 3

·   As the Commission notes, the referring court’s third question assumes that Articles 203 and 204 of the CCC can be simultaneously applicable.

 

·   The Hessisches Finanzgericht (Finance Court, Hesse) is asking whether, where a customs debt has been incurred under Article 203 of the CCC because goods have been removed from customs supervision within a free zone, a VAT debt may also be incurred if there has been a failure to fulfil the obligation to end the transit procedure in the customs office situated within the territory of the country, as referred to in Article 204(1)(a) of the CCC.

 

·   I believe that the answer is provided by the settled case-law of the Court of Justice: ‘it is clear … that Article 204 of the [CCC] … applies only to situations which do not fall within the scope of Article 203 of the [CCC]’.

 

·   Consequently, if the referring court finds that the circumstances under consideration in the main proceedings correspond to those set out in Article 203 of the CCC, then Article 204 of the CCC should not be simultaneously applied in order to achieve a result (VAT becoming due) that, in the circumstances of the case, is not clear from the former article.

 

·   My proposed answer must be that where a customs debt has arisen under Article 203 of the CCC and it has been established that, due to the circumstances of the case, no VAT debt has been incurred, Article 204 of the CCC cannot be applied for the sole purpose of providing a basis for charging VAT.

 

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Did you know that in our section CJEU Rulings we have made a selection of rulings of the CJEU? We have organized these rulings based on the subject they relate to (e.g. Freedom of establishment, Free movement of capital, Indirect taxes on the raising of capital, etc).

 

 

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