EU Court of Justice rules Polands split payment fraud regime is proportionate to compact VAT fraud
In 2019, Poland introduced a split payment bank account requirement in sensitive fraud-prone sectors. This required customers to remit the VAT element of their payments into dedicated VAT bank accounts of their vendors. These accounts have limited features; essentially may only be used by the vendor to settle their VAT liabilities.
The European Court of Justice was asked to determine if this was reasonable, and ruled on 12 September that it was proportionate and highlighted the use of a high transaction threshold.
Poland was required to seek a derogation from the European Commission for its split payment rules.
ECJ backs Polands fraud measures
The EU Court of Justice has ruled this week that Polish tax authorities may restrict insolvency administrators’ access to VAT accounts established under the split payment mechanism, as this limitation is deemed a proportionate measure to combat VAT fraud. In its judgment of Syndyk Masy Upadłości A v. Poland (C-709/22) on September 12, 2024, the Court evaluated whether Poland’s implementation of the split payment mechanism aligns with Council Directive 2006/112/EC (the VAT Directive) and the EU’s principle of proportionality, especially regarding the prioritization of tax creditors.
The Court held that the mechanism complies with the VAT Directive and serves as a proportionate measure to mitigate VAT fraud, as it applies solely to electronic bank transfers exceeding a specified monetary threshold. Pursuant to Article 395(1) of the VAT Directive, EU member states are permitted to introduce derogatory measures that simplify VAT collection or prevent tax evasion and avoidance.
Introduced in 2019, Poland’s split payment mechanism mandates that net payments for goods and services be directed to a supplier’s general account, while the VAT portion is deposited into a dedicated VAT account. This specialized account may be used only for predefined purposes, such as satisfying VAT liabilities or other tax obligations. The European Commission granted Poland authorization to implement this derogation from standard VAT Directive provisions.
In a case from June 2021, an insolvency administrator requested the transfer of funds from a VAT account to the estate of a taxable person in insolvency proceedings that began in January 2019. However, the tax authorities denied this request, citing outstanding VAT and income tax liabilities greater than the requested amount. The administrator’s appeal was rejected by the appellate authority, leading the Regional Administrative Court in Poland to seek a preliminary ruling from the Court of Justice in November 2022.
The Court, in agreement with Advocate General Juliane Kokott’s April 11 opinion, emphasized that while the split payment mechanism restricts the use of funds in VAT accounts, it does not completely block them. Taxable persons may utilize these funds for VAT payments to suppliers or to settle other VAT-related liabilities, thus ensuring the measure’s proportionality and compatibility with EU law.
