Belastingfraude. Naheffingsaanslagen wegens niet voldoen aan voorwaarden voor belastingvrijstelling. Engel-criteria. Geen strafrechtelijke sanctie. Geen schending van artikel 7 EVRM.

The respondent Government submitted that the supplementary tax assessments did not constitute a ‘penalty’ within the meaning of Article 7 of the Convention and that this provision was therefore inapplicable.

Relying on the criteria from the case of Engel (cited above) the Government noted that, as a matter of domestic law, the measure complained of was one that qualified as an administrative measure and had been taken in implementation of the Turnover Tax Act — not under criminal law. Intra-Community supplies were taxed at the zero rate only if the relevant conditions were met; if it was found that this had not been the case, the appropriate tax that had to be paid was levied through supplementary tax assessments. The refusal of a benefit under the Sixth Directive was merely the consequence of the finding that the objective conditions required for obtaining the advantage sought had not been met (the Government referred to paragraph 57 of the CJEU's preliminary ruling — see paragraph 32 above).

As regards the nature of the measure, the Government submitted that the tax provisions at question were not aimed at all citizens or taxable persons; rather, they applied only to a specific target group — namely, enterprises wishing to qualify for the zero VAT rate in respect of an intra-Community transaction. In addition, the Government, relying on Société Oxygène Plus v. France ((dec.), no. 76959/11, § 49, 17 May 2016), argued that the measure complained of was not ‘punitive’ in nature as it was not intended to deter reoffending; rather, it served to redress a situation in which the specific requirements for applying the zero rate and VAT deduction had not been met, resulting in too little tax being paid.

As to the severity of the measure, the Government noted (with reference to Société Oxygène Plus (ibid., § 50) that the amounts of additional tax levied were not in themselves decisive and submitted that, although the amounts in the present case were considerable, they were based on a standard calculation of the tax owed. The impugned measure's nature and severity thus did not indicate that it constituted a punitive sanction.

As regards the applicability of Article 7 of the Convention, the applicants, relying on the Engel criteria, submitted that the supplementary tax assessments issued on them had constituted a ‘penalty’ for the purposes of that provision.

In that connection, they submitted that the tax fraud committed, for which blame was imputed to them, had been criminal in nature; indeed, prosecutions had in fact been brought against two actual fraudsters in Italy. From this it followed that the supplementary tax assessments issued had amounted to ‘penalties’.

The applicants further submitted that the legal rule created by the CJEU in respect of the present case (see paragraphs 32–34 above) was not aimed at any specific category of persons, but at all citizens in their capacity as taxpayers subject to VAT.

As regards the nature of the supplementary tax assessments, the applicants argued that they had not been restorative in nature; rather they had been punitive in nature and intended to serve as a deterrent. In that connection they noted that it was not the case that tax had been levied that would normally have been due in any case. They further noted that while the CJEU had presented the issue as merely constituting a consequence of the failure to satisfy the conditions governing the right to a VAT deduction or exemption, it remained the case that the denial of that right had been by its nature subjective and dependent on the finding of guilt (which constituted an important characteristic of a penalty). Moreover, the application of the rule set out by the CJEU in its ruling in the present case had led to more tax being levied than would otherwise have been owed had the fraud not occurred. This too demonstrated that the purpose of the refusal of VAT rights had not been solely compensatory but had rather been intended to serve as a deterrent and had been punitive in nature.

Lastly, the applicants noted that the potential consequences in the event of failure to pay were severe: deprivation of liberty in the form of coercive imprisonment (lijfsdwang) might be ordered; moreover, given the fact that the sums that might be demanded were based on turnover, those sums were, in theory at least, limitless.

The Government of the Czech Republic took the view that Article 7 was not applicable. They submitted that since the criteria for the applicability of Article 7 were the same as those for the applicability of Article 6 under its criminal head, no ‘punitive penalty’ or surcharge had been imposed. The matters complained of therefore fell squarely within the ambit of tax law and, for the purposes of the Convention, found their justification in the second paragraph of Article 1 of Protocol No. 1.

The Italian Government submitted that Article 7 was not applicable. Echoing the ruling of the CJEU, they argued that the refusal to grant to a taxable person a benefit under the Sixth Directive was merely the consequence of the finding that the objective conditions required for obtaining that benefit had not been satisfied. The aim of such a refusal was neither deterrent nor punitive in nature; rather, it was to rectify a situation in which too little tax had been paid. As regards the degree of severity, the measure complained of had not entailed the deprivation of freedom or of a right but had rather regulated the consequences of non-compliance with VAT tax rules. The present case concerned a purely tax-related matter; the only peculiarity of the case was that the right to deduct VAT had been refused not only to the actual perpetrator of the fraud in question but also to a ‘transferor’, who had knowingly participated in the fraud.

The Spanish Government submitted that the measure complained of did not fall within the scope of Article 7. They pointed to the need to ensure the effectiveness of the VAT system by countering fraud. Referring to the ruling of the CJEU — and specifically to the principle that a right could not be based on fraudulent or abusive acts — they submitted that a refusal to grant an exemption or deduction in respect of a transaction that was based on a fraudulent or abusive act was merely a consequence inherent in the VAT system itself.

Referring to Article 1 of Protocol No. 1, they further argued that the measure in question had been aimed at securing the payment of taxes — a field in which the Contracting State enjoyed a wide margin of appreciation. It had not been disproportionate, given that the requirements of the community prevailed over the expectations of a taxable person who had known, or should have known, that they were participating in fraud.

Lastly, they submitted that the measure in question had not been imposed following a criminal conviction, and nor was it in any way associated with a procedure that could have a repressive or punitive effect. It was classified as an administrative measure in domestic law, not as a criminal sanction. Neither, by its very nature, did it constitute a criminal sanction. The disputed measure had been aimed at restoring a state of legality by correctly applying the laws relating to the payment of VAT; that was all the more important given the fact that the VAT system required that the taxation system be harmonised between different jurisdictions.

As to the seriousness of the measure, they argued that the refusal to grant the exemption or deduction sought had not been prompted by the applicants' turnover, but solely by the levels of liability for VAT involved in the intra-Community operation (specifically, the levels of tax liability pertaining to intra-Community transactions in which blatant anomalies had been detected). The potential consequences were therefore not unlimited, as the applicants had argued.

As regards the applicability of Article 7 of the Convention, the European Commission submitted that the measure in question had not followed a conviction for a criminal offence. The refusal of a benefit under the Sixth Directive had merely been a consequence of the finding that the objective conditions required for obtaining the advantage sought under that directive as regards that right had in fact not been satisfied. As to the severity of the measure, the refusal to grant a deduction, exemption or refund in respect of VAT had not constituted a surcharge or a fine but had merely reflected the fact that no rights had been acquired.

CFE Tax Advisers Europe — an umbrella association of national tax institutes, associations and tax advisers in Europe — submitted that the measure in question constituted a ‘penalty’ within the meaning of Article 7 of the Convention.

CFE argued that the CJEU's ruling in respect of the present case — namely, that a trader selling goods to another EU member State would lose both the entitlement to recover input tax paid to their supplier and the VAT exemption on the sale of goods to their customer — was clearly incompatible with the neutrality of the VAT system and constituted a double penalty. This was particularly harsh on traders who had not actually been aware of any fraud. Traders might find that the authorities refused their right to deduct the VAT on their purchase, or they might in practice be unable to recover the VAT from their customer. If the trader's customer turned out to be the fraudster, the trader would be unlikely to recover any VAT at all.

CFE further noted that if the fraud happened in a different member State (as in the present case), then the double penalty outlined in the previous paragraph would not compensate the member State enforcing the claims for any loss suffered. Instead, it would benefit a member State that suffered no loss; the latter member State would thus realise a windfall. The member State might, moreover, refuse the right to deduct VAT from other traders in the supply chain who were within its jurisdiction, thus magnifying its windfall from the fraud.

The combination of these ‘penalties’ was, in the submission of CFE Tax Advisers Europe, disproportionate. The ‘penalties’ punished traders who were at fault — either because they had had actual knowledge of fraud or because they ought to have been aware of fraud. It deprived those traders of rights they would have had under the literal wording of the legislation in the Netherlands.

The Court notes at the outset that, while the applicants complained that the supplementary tax assessments breached Article 7 of the Convention (see paragraph 62 above), the Government disputed the applicability of that provision in the present case. It is therefore for the Court to examine first whether the issuing of the supplementary tax assessments constituted a ‘penalty’ within the meaning of that provision.

The Court reiterates that the concept of a ‘penalty’ in Article 7 of the Convention, like that of ‘criminal charge’ in Article 6 § 1 of the Convention, has an autonomous meaning. To render the protection offered by this Article effective, the Court must remain free to go behind appearances and assess for itself whether a particular measure amounts in substance to a ‘penalty’ within the meaning of this provision (see G.I.E.M. S.R.L. and Others v. Italy [GC], nos. 1828/06, 34163/07 and 19029/11, § 210, 28 June 2018; Welch v. the United Kingdom, 9 February 1995, § 27, Series A no. 307-A; and Jamil v. France, 8 June 1995, § 30, Series A no. 317-B).

The wording of Article 7 § 1, second sentence, of the Convention indicates that the starting-point in any assessment of the existence of a ‘penalty’ is whether the measure in question is imposed following a decision that a person is guilty of a criminal offence. However, other factors may also be taken into account as relevant in this connection, namely the nature and purpose of the measure in question; its characterisation under national law; the procedures involved in the making and implementation of the measure; and its severity (see G.I.E.M. S.R.L. and Others, cited above, § 211; Welch, cited above, § 28; Jamil, cited above, § 31; Kafkaris v. Cyprus [GC], no. 21906/04, § 142, ECHR 2008; M. v. Germany, no. 19359/04, § 120, ECHR 2009; Del Río Prada v. Spain [GC], no. 42750/09, § 82, ECHR 2013; and Société Oxygène Plus, cited above § 47). However, the severity of the measure is not decisive in itself, since many non-criminal measures of a preventive nature may have a substantial impact on the person concerned (Welch, cited above, § 32; Société Oxygène Plus, cited above, § 50; and Van der Velden v. the Netherlands (dec.), no. 29514/05, ECHR 2006 XV).

The criteria for ‘penalty’ are thus directly transposed from the three Engel criteria identified by the Court to determine whether proceedings are ‘criminal’ within the meaning of Article 6 of the Convention: the classification of the offence at the domestic level, the nature of the offence, and the nature and severity of the penalty that may be imposed (Engel and Others, cited above, §§ 82-83). The Court has already had occasion to consider that if the facts do not fall within the scope of ‘criminal matters’ within the meaning of Article 6 of the Convention, they can no longer be classified as a ‘penalty’ within the meaning of Article 7 (see, for example, Bowler International Unit v. France, no. 1946/06, § 67, 23 July 2009).

In the present case, the Court notes, first of all, that the supplementary tax assessments complained of did not follow a ruling that the applicants were guilty of a criminal offence. Likewise, these tax assessments were not issued pursuant to a statutory provision threatening punishment for wrongdoing; they were characterised under national law as administrative measures based on tax law and were reviewed by courts with jurisdiction in matters of taxation. However, this is only one of the factors to be taken into account in determining whether a measure amounts to a penalty. The Court will therefore turn to the other above-mentioned criteria.

As regards the nature of the measures at issue, which constitutes a factor of greater importance, the Court reiterates that it has had regard to the group of persons at whom the rule infringed was directed, the type and nature of the interests protected and the existence of a deterrent and punitive purpose (see, for instance, Saquetti Iglesias v. Spain, no. 50514/13, § 25, 30 June 2020). In this connection the Court notes and considers the following.

The impugned measures do not concern the imposition of tax fines or surcharges but the obligation to pay reassessed VAT liabilities. The supplementary tax assessments were issued on the grounds that Italmoda had not complied with the conditions for applying the exemption from, or deduction or refund of VAT for intra-Community supplies. The VAT-system for such intra-Community supplies is regulated by the Sixth Directive (see paragraphs 56–57 above). The Court agrees with the Government (see paragraph 65 above) that the supplementary tax assessments were the result of a tax regime that applied only to a target group — namely, taxable persons wishing to benefit from this VAT-system.

Further, the Court has emphasised in several cases the need to prevent and curb any fraudulent abuses of this VAT-system and, ultimately, to preserve the financial stability of that system in the public interest (see, mutatis mutandis, ‘Bulves’ AD v. Bulgaria, no. 3991/03, § 65, 22 January 2009; Atev v. Bulgaria (dec.), no. 39689/05, § 27, 18 March 2014; and Formela v. Poland (dec.), no. 31651/08, § 121, 5 February 2019). More generally, Court has held that the prevention of tax evasion falls within the notion of public interest (Hentrich v. France, 22 September 1994, § 39, Series A no. 296-A), and so does securing payment of a tax debt (Rustamkhanli v. Azerbaijan, no. 24460/16, § 58, 4 July 2024).

The Court notes that in its judgment of 4 November 2016 the Court of Appeal established that some of Italmoda's partners (and thus Italmoda itself) had actual or constructive knowledge of the fraud, and that they had either set it up or helped to carry it out (see paragraph 42 above). Such knowledge of and participation in VAT fraud cannot be reconciled with allowing the applicants to successfully claim their entitlement to the VAT rights in question (see also Société Oxygène Plus, cited above, § 49). In that connection the Court also notes that the CJEU held that a refusal of VAT rights is an expression of the principle that rules laid down by EU law cannot be relied on in pursuit of abusive or fraudulent ends and must be regarded as a consequence of the finding that the objective conditions required for obtaining those VAT rights have, in fact, not been satisfied (see paragraph 32 above). Moreover, it cannot be maintained that Italmoda was found liable for the tax obligations of persons or entities outside its power and in relation to which they had no means of monitoring or securing compliance (compare and contrast ‘Bulves’ AD, cited above, §§ 54, 57 and 69-71; Business Support Centre v. Bulgaria, no. 6689/03, § 24, 18 March 2010; and Atev, cited above, § 31, all within the context of Article 1 of Protocol No. 1).

On the basis of these considerations, the Court finds that the supplementary tax assessments, which were issued to collect tax in respect of which Italmoda turned out to be under an obligation to pay, did not pursue a punitive aim; they were issued on the mere grounds that Italmoda had not complied with the conditions for applying the exemption from, or deduction or refund of VAT for intra-Community supplies (see also Société Oxygène Plus, cited above, § 49).

As regards the degree of the severity of the measures, the Court notes that it has previously held that payment of sums limited to the amount of the tax reassessment were not of a criminal nature (Mieg de Boofzheim v. France (dec.), no. 52938/99, ECHR 2002-X; and Poniatowski v. France (dec.), no. 29494/08, 6 October 2009). The Court further notes that although the amounts of the supplementary tax issued on Italmoda were considerable, they were based on a standard calculation of the tax owed. In the light of the foregoing, the Court considers that the severity of the impugned measures does not render them ‘criminal’ in the autonomous sense in which that term is applied by the Convention.

Having regard to the above considerations, the Court finds that the proceedings at hand do not fall within the scope of ‘criminal matters’ within the meaning of Article 6 of the Convention (see Nazarev and Others v. Bulgaria (dec.), nos. 26553/05, 25912/09, 40107/09 and 12509/10, 18 March 2014; and Formela, cited above, § 128) and that, for the same reasons, the supplementary tax assessments issued on Italmoda cannot be considered as amounting to a ‘penalty’ within the meaning of Article 7 of the Convention. It follows that the application is incompatible ratione materiae with the provisions of the Convention within the meaning of Article 35 § 3 (a) and must be rejected in accordance with Article 35 § 4.

For these reasons, the Court, unanimously,

Declares the application inadmissible.