Poland – C-895/19 – neutrality and proportionality principles

On March 18th, the Court of Justice of the European Union issued a judgment concerning the compliance with the VAT Directive of Polish regulations which, in certain situations, impose recognition of output and input VAT under ICA and importation of services in settlements for other periods, which in practice leads to ICA and importation of services losing their neutrality status for the taxpayer. Such settlement is connected with the necessity of paying irrecoverable penalty interest on tax arrears.

In the judgment C-895/19  the Court indicated that the Polish provisions of the VAT Act are not compliant with the VAT Directive.

The impact of this judgment is crucial for major multinational, handling their operations in Poland. Based on this judgment Polish taxpayers may start their proceedings in order to obtain the refund of the overpaid penalty interest.

Legal background:

  • The VAT system of the EU is based on the so-called “neutrality” and “proportionality” principles which make the VAT being neutral to a business entities (taxpayers) and effectively charging the consumption (i.e. the final stage of a supply chain);
  • In a regular course of business VAT is being effectively charged (output VAT) and then recovered by the business as a result of purchases made in course of business activity (input VAT);
  • With respect to purchases from other EU Member States, the intra-Community acquisition (ICA; in case of goods) and importation of services (in case of services) is being declared to the tax office;
  • While reporting ICA or importation of services, EU taxpayers are allowed to simultaneously report input and output VAT, which makes these transactions neutral for the taxpayer;
  • On January 1st, 2017 the Polish Ministry of Finance implemented a provision (Article 86 par. 10b and 10i) which – in the lack of the invoice from the supplier – precludes a right to treat the ICA and importation of services as transactions neutral from the VAT perspective;
  • Polish purchasers of foreign goods or services are obliged to report (and pay) the output VAT related to their purchases and the right to recover the input VAT is granted at the moment of invoice receipt. This in fact leads to bearing the cost of the VAT by the taxpayer.

Impact on Polish taxpayers:

  • Many times, Polish taxpayers receive invoices for imports of services or ICA after many months and sometimes years;
  • In this case, considering the legislation in force in Poland, the taxpayer has to report importation of services and ICA retrospectively (which results from deferred reception of the invoice). The Output VAT should have been paid at the moment the services were provided, which leads the taxpayer to the necessity to pay the underpaid VAT along with the penalty interest for historically performed transactions. The input VAT is being recovered in the month when the taxpayer received the invoice for the services. The penalty interest is not recoverable;

Current practice of Polish tax authorities:

  • Currently provisions demanding taxpayers to split the moment of reporting input and output VAT are in force in Poland. They are applied by tax authorities along with penalty interest;
  • Additionally, in case the taxpayer does not report the transaction by his own and it is identified by the tax office in an audit, additional VAT sanction of 20-30% of the VAT amount is being charged.

Doubts about the compliance with EU law:

  • Since 2017, when provisions came into force, there has been a strong debate whether these provisions are compliant with the EU Directive and the VAT proportionality and neutrality principle;
  • With respect to ICA, we are aware of several judgments of Regional Administrative Courts (e.g. III SA/Wa 2044/18 and III SA/Wa 141/19– Regional Administrative Court of Warsaw), where the courts referred directly to the VAT Directive as binding in Poland, that the provisions are not compliant with the VAT Directive and thus, they should not be binding;
  • Furthermore, in the recently published draft amendments to the VAT Act, the Ministry of Finance proposed modifying the provisions in such a way as to allow the settlement of output and input VAT on the import of services in the same settlement period. The explanatory notes to the draft points out that the principle according to which a taxpayer in certain specific circumstances has no right to deduct input VAT in the same settlement period in which he is obliged to declare output VAT, gives rise to a number of doubts as to its consistency with EU law, in particular with the principle of VAT neutrality.

CJEU judgment:

  • On 18 March 2021, the CJEU decided, that the above described regulations are not in compliance with the VAT Directive and – as a result – taxpayers are entitled to deduct output VAT and input VAT on ICA in the same VAT return – regardless of the circumstances;
  • The Court indicated that Member States are not allowed to introduce measures that have been introduced in Poland with at the beginning of 2017;
  • We believe the same treatment should be applied to importation of services.


  • Polish tax law is clear, forcing temporal non-neutrality of VAT for local taxpayers (i.) purchasing services from foreign suppliers and (ii.) receiving invoices documenting these purchases with delays in service completion date;
  • In our view, based on this judgment, it is possible to develop a strong argumentation to confirm the position, that will result in the (i.) lack of the obligation to pay penalty interest in situations mentioned in the previous tiret and (ii.) the possibility to get the refund of interest settled historically;
  • For the above reason, in case you are planning to attempt to recover amounts of interest already paid and to be safely able not to settle them in the future, then you should start the respective process as soon as possible;
  • Upon your request, we are ready to provide you with the comprehensive assistance aimed at recovering the penalty interest already paid as result of being in line with the respective domestic rules.

For further information or in case of any questions please contact Robert Jaszczuk, robert.jaszczuk@pwc.com or Tomasz Kassel, tomasz.kassel@pwc.com or Jakub Matusiak, jakub.matusiak@pwc.com.

Image source: http://unsplash.com

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