Tax Obligations and the Consequences of Incorrect Invoicing in the Reverse-Charge Mechanism

Introduction

Foreign companies generating revenue in Austria must comply with the country’s tax regulations. Particularly, the reverse-charge mechanism and the appointment of a fiscal representative in Austria are crucial to avoiding tax pitfalls. Incorrect invoicing can lead to severe consequences, as demonstrated by a ruling of the European Court of Justice (ECJ).

On April 26, 2017, the ECJ ruled in case C-564/15 (Tibor Farkas) on the tax consequences of an incorrect VAT statement on an invoice under the reverse-charge mechanism. This judgment highlights the importance of correctly applying the reverse-charge system and the potential consequences of errors.

What is the Reverse-Charge Mechanism?

The reverse-charge mechanism is a VAT regulation that shifts the tax liability from the supplier to the recipient of the service or goods. This mechanism is primarily used for cross-border transactions and specific domestic transactions.

However, if a company incorrectly issues an invoice with VAT, even though the reverse-charge mechanism applies, it can face serious tax consequences—both for the issuer and the recipient of the invoice.

ECJ Judgment C-564/15 (Tibor Farkas) – Overview

Case Background

The case concerned a Hungarian entrepreneur, Tibor Farkas, who purchased a mobile hangar in a forced auction. Under Hungarian law, this transaction was subject to the reverse-charge mechanism, meaning the buyer (Farkas) should have been responsible for paying the VAT.

However, the seller issued an invoice with VAT and paid it to the tax authorities. Farkas paid the full invoice amount (including VAT) and subsequently claimed an input VAT deduction.

The Hungarian tax authorities denied the input VAT deduction, arguing that the VAT was incorrectly stated on the invoice and therefore could not be deducted. Additionally, they imposed a 50% penalty on the incorrectly charged VAT amount.

Key Takeaways from the ECJ Ruling

The ECJ ruled that:

1. Input VAT deduction is not allowed if the VAT was incorrectly charged on an invoice.
2. The recipient has the right to claim a refund from the seller for incorrectly paid VAT.
3. If recovering the VAT from the seller is impossible or excessively difficult (e.g., due to insolvency), member states must provide a mechanism for a direct refund from the tax authorities.
4. Imposing a 50% penalty on incorrectly charged VAT can be disproportionate, especially if no tax loss occurred and no fraud was involved.

This ruling confirms that while tax authorities can enforce compliance with the reverse-charge mechanism, they should not impose excessive penalties when there is no actual loss to the state budget.

What Does the Judgment Mean for Businesses?

1. Impact on Foreign Companies in Austria

Foreign businesses operating in Austria must:

• Ensure that the reverse-charge mechanism is correctly applied.
• Avoid issuing invoices with VAT when the reverse-charge mechanism applies.
• Check whether incorrectly paid VAT can be recovered from the seller or directly from the tax authorities.
• Consider appointing a fiscal representative in Austria to prevent tax errors and penalties.

2. Consequences for Input VAT Deduction

Businesses that incorrectly receive an invoice with VAT and claim an input VAT deduction risk:

• Denial of the VAT deduction by Austrian tax authorities.
• Tax reassessments and penalties for incorrect VAT claims.
• Complicated VAT recovery procedures if the seller is no longer able to refund the amount.

Why a Fiscal Representative in Austria is Important

A fiscal representative in Austria can assist foreign businesses in avoiding tax errors and ensuring the correct application of the reverse-charge mechanism.

Benefits of a Fiscal Representative:

✔ Proper VAT registration and tax filings with Austrian authorities.
✔ Invoice verification and correction to prevent tax penalties.
✔ Assistance in reclaiming incorrectly paid VAT.
✔ Avoidance of fines through proactive tax planning.

Conclusion

The ECJ ruling C-564/15 (Tibor Farkas) demonstrates how incorrect invoicing can have serious tax consequences. Foreign companies doing business in Austria must ensure they fully understand and comply with VAT regulations.

Appointing a fiscal representative in Austria can help mitigate tax risks and prevent unnecessary penalties. Companies that familiarize themselves with Austrian tax rules early on can benefit from smoother operations and long-term tax compliance.