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Your contact person for this topic:
Thomas Hermie
Tax lawyer
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Further publications on this topic:
- New VAT exemption for small businesses in Belgium and the EU from 2025
- Status of VAT modernization and e-invoicing
- VAT Belgium 2025: New VAT rules for businesses
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More on this topic:
- VAT
Do tax authorities need to take deductible VAT into account when imposing proportional fines? In its judgment (ECJ C-418/22, Cezam), the European Court of Justice addressed the compatibility of the proportional (percentage-based) fines commonly imposed in Belgium with the principles of EU law.
The request for a preliminary ruling concerned whether proportional fines may be imposed for the underpayment of VAT without the tax authorities considering the deductible VAT. This ruling was highly anticipated, as it could have significant implications for current tax practice in Belgium.
As specialists in international tax law, Euregio Law & Tax regularly deals with complex issues of this nature. Below, we outline the ECJ’s judgment and discuss its practical relevance for VAT practice in Belgium and across the European Union.
Facts of the case
The case concerned a taxable person in Belgium who had failed to submit regular VAT returns over an extended period. Without taking deductible VAT into account, the Belgian tax authorities imposed fines based on the amount of unpaid VAT. Under the applicable Belgian VAT legislation, these fines were set at 20% of turnover.
The taxable person subsequently challenged the penalties, relying on fundamental principles of EU law. It was argued that, in order for deductible VAT relating to the relevant period to be taken into account, the penalties should be calculated solely on the net amount of tax due. This position was supported by earlier ECJ rulings in Salomie and Oltean (C-183/14, 9 July 2023) and EN.SA (C-712/17, 8 May 2019), with the applicant arguing in particular that imposing fines on deductible VAT infringes the principle of proportionality.
Question referred for a preliminary ruling
The Belgian court with jurisdiction over the case referred the matter to the European Court of Justice for guidance on whether the Belgian system of proportional fines is compatible with EU law. The key issue for the ECJ was whether the applicable EU rules, read in light of the principles of proportionality and neutrality, preclude a system in which fines are calculated on the basis of the gross amount of VAT, without taking into account the deduction of input VAT.
Decision of the ECJ
In its decision, the ECJ held that sanctions must not go beyond what is necessary to achieve the objectives of tax collection and the prevention of fraud, while respecting the principle of proportionality.
According to the Court, both the nature and the seriousness of the infringement, as well as the method used to calculate the penalty, must be taken into account when assessing proportionality in individual cases. In the present case, the ECJ found that the infringements for which the taxable person was penalised were persistent and intentional. The taxable person had repeatedly failed to declare or pay the VAT due over an extended period, despite numerous interventions by the Belgian tax authorities.
The ECJ rejected the argument that the facts of this case were comparable to those in earlier ECJ rulings, noting that the specific circumstances and infringements differed from those in previous judgments. As a result, the same principles and conclusions could not automatically be applied.
Furthermore, the Court reiterated that the principle of fiscal neutrality requires the deduction of input VAT, provided the substantive conditions are met, irrespective of whether the formal requirements have been fulfilled. However, in order to fully assess compliance with this principle, the ECJ noted that it lacked sufficient information on how national legislation or penalties might affect the right to deduct input VAT in this case.
In conclusion, the Court found no indication that the taxable person was unable to rely on that right and held that Article 273 of Directive 2006/112, together with the principles of proportionality and fiscal neutrality, does not preclude such national legislation. Consequently, a failure to comply with the obligation to declare and pay VAT may be sanctioned by a flat-rate fine of 20% of the VAT amount, calculated before deduction of deductible VAT.
Despite the ECJ’s ruling, it now falls to the competent Belgian court to assess whether the penalty imposed is appropriate in the specific circumstances of the case.
Our assessment
However, member states must exercise this power in compliance with EU law. This both limits the flexibility available to national authorities and illustrates the remaining room for manoeuvre within which they may operate.
In practice, the obligation to pay VAT and the right to deduct input VAT are generally treated differently by tax authorities. The right to deduct VAT is regarded as a right that may only be exercised once the relevant conditions are met, whereas the obligation to pay VAT is considered a duty. In light of the Cezam decision, it can now be concluded that appropriate penalties may be imposed in cases of VAT underpayment without taking deductible VAT into account.
At the same time, it must always be borne in mind that the ECJ confirmed in its judgment that fines must not exceed what is necessary to ensure the correct collection of VAT, in accordance with the principle of proportionality. The seriousness of the infringement must therefore be taken into account when determining the level of the penalty.
This raises the question of whether the standard imposition of a 20% penalty in Belgium is justified, particularly in situations where there is no risk of VAT revenue loss, such as under the reverse charge mechanism.
This case once again demonstrates that penalties for non-compliance with VAT rules can be severe, especially when calculated as a percentage of turnover. Every business transaction, whether a purchase or a sale, carries a potential VAT risk. With proportional penalties – i.e. penalties calculated as a percentage of turnover or VAT liability – the amounts can quickly accumulate and have a significant economic impact on a business.
Do you have a question or concern?
If you have any questions about VAT in Belgium, please contact Thomas Hermie. Thomas Hermie is our VAT expert and specialises in advising foreign companies in Belgium.
