The cumulative sealing of a commercial establishment and the imposition of a financial penalty by the tax authorities for failure to issue a receipt by an individual/legal entity registered under the Value Added Tax Act (VATA) is inadmissible under European Union (EU) law. This was decided by the Court of Justice of the European Union (CJEU) in its decision of May 2023.
The decision of the CJEU reverses the application of VAT in the sanctioning of the failure to issue a cash register receipt and opens up the possibility for defence in a number of cases.
The facts of the case
A Bulgarian company trades with goods and for this purpose manages business premises in Bulgaria. The Bulgarian tax authorities make an inspection at the site and find that the company did not register the sale of a pack of cigarettes worth BGN 5.20 (the tax equals BGN 1.00) and did not issue a cash register receipt for this sale. In this way, the company violated Art. 118, para. 1 of the VATA.
The tax authorities impose on the company a compulsory administrative measure of sealing of the business premises for a period of 14 days on the basis of Art. 186 of the VATA. Preliminary implementation of the sealing measure is provided – to protect state interests, i.e. those of the state budget. A few months later, the company was imposed a financial penalty under Art. 185 of the VATA.
The company appealed the sealing measure before the administrative court, claiming that it is disproportionate in view of the insignificant value of the sale in question and that for the company this is the first violation of Art. 118, para. 1 of the VATA.
2. Considerations of the administrative court
- In case of violation of Art. 118, para. 1 of the VATA, a financial penalty is imposed (under Art. 185 of the VATA) and a compulsory measure of sealing the business premises for up to 30 days (Art. 186 of the VATA). Both measures are criminal in nature within the meaning of Art. 50 of the Charter of Fundamental Rights of the European Union (Charter). The Supreme Administrative Court also accepts that the sealing of business premises has a punitive nature. It turns out that two sanctions are imposed for one violation.
- The imposition of a financial penalty and the sealing of business premises for up to 30 days are two separate proceedings. The financial penalty is appealed before a district court, and the measure of sealing business premises – before an administrative court. In addition, there is no mechanism in the Bulgarian national legal system to ensure observance of the requirement for proportionality of the sanction in relation to the seriousness of the offence committed.
3. The administrative court suspends the proceedings on the company’s appeal against the measure of sealing the object and sends an inquiry to the CJEU.
The Administrative Court refers to:
- The right of Member States, under certain conditions, to impose other obligations that they consider necessary to ensure the correct collection of VAT and prevent tax evasion – according to Directive 2006/112/EC (the Directive);
- The right of an individual/legal entity not to be sanctioned twice for the same act – according to the Charter;
- The possibility to limit rights, but only if necessary, in compliance with the principle of proportionality and in accordance with goals of common interest recognized by the European Union (EU) or the need to protect the rights and freedoms of other people – according to the Charter;
- The requirement for proportionality of the sanction in relation to the seriousness of the offence committed – according to the Charter;
- The right of anyone whose rights and freedoms guaranteed by EU law have been violated to effective legal remedies before a court.
Further to the above, the administrative court addresses questions to the CJEU regarding the two measures (financial penalty and sealing of business premises for up to 30 days), in the following sense:
- Can the proceedings for the two measures against the same individual/legal entity be cumulated for one offence, consisting in failure to register and account for the sale of a good by issuing a document for the sale? And if so, can the two proceedings be cumulated, given that the Bulgarian national legal system does not establish an obligation for the competent authorities and for the courts to monitor for the effective application of the principle of proportionality in view of the overall weight of the cumulated measures compared to the weight of the particular violation?
- Doesn’t the possibility both the measures to be imposed for one non-issuance of a cash register receipt by one individual/legal entity contradict the principle of proportionality of the sanction in relation to the seriousness of the offence committed?
4. The responses of the CJEU
The Directive and the Charter do not allow for a national legal regulation, according to which, a financial penalty and a measure involving sealing of business premises may be imposed on a taxpayer for one and the same offence relating to a tax obligation at the end of separate and autonomous procedures. Those measures are to be appealed before different courts and the national legal system does not ensure coordination of the procedures. That disadvantage does not enable the additional burden associated with the cumulation of those measures to be reduced to what is strictly necessary and does not ensure that the severity of all penalties imposed complies with the seriousness of the offence concerned.
Namely:
- The right according to the Charter not to sanction an individual/legal entity twice for the same offence applies in cases of administrative sanctions related to More particularly, it is prohibited to cumulate both proceduresfor the same act and against the same individual/legal enity, i.e. to cumulate the one for seeking responsibility and the one about sanctions that have a criminal law nature.
- The particular case falls within the scope of the prohibition above – for unregistered and unreported sale of cigarettes, a company is sanctioned twice with two separate and independent proceedings. The cumulation of these sanctions violates the Charter.
- Both measures imposed on the company have a criminal law nature in the sense of the Charter, because they pursue goals for prevention and sanctioning of offences related The sealing measure pursues both a preventive and a repressive purpose, despite the statement of the Bulgarian government that the purpose is only preventive.
- Each of the mentioned measures has a high degree of severity. Sealing for a period that can last up to 30 days is particularly heavy for a sole trader who has only one business site to operate and receive The financial penalty is heavy both as a minimum amount (it cannot be less than BGN 500.00) and compared to the severity of the offence (VAT in the amount of BGN 1.00).
- Such cumulation should in principle be subject to limitly defined conditions, so that the right under the Charter is guaranteed. The automatic cumulation violates the right under the Charter. And according to the Bulgarian VAT, the cumulation is automatic, because in the event of committing of one offence, the tax authority is obliged to systematically apply both the measures.
- The principle of proportionality requires that the cumulation of procedures for seeking responsibility and imposing of sanctions does not exceed the limits of what is appropriate and necessary to achieve the legitimate legal Where there is a choice between several appropriate measures, the measure which creates the least restrictions should be applied and the inconvenience caused by it should not be disproportionate to the goals.
- In this case, the sanctions are clear, predictable and able to achieve their goals. However, the Bulgarian national legal system does not allow the tax authorities not to apply or stop the application of one or both measures. It does not allow the tax authorities to make an overall consideration of the proportionality of the cumulative sanctions.
- Regardless of the fact that the Bulgarian VAT allows the sealing measure to be terminated prematurely with the voluntary payment of the financial penalty, nothing obliges the tax authority to impose this sanction while the sealing lasts. In this case, the financial penalty was imposed on the Bulgarian company several months after the execution of the sealing, and in fact the company did not have the opportunity to request the termination of the sealing due to payment of the financial penalty.
- The imposition of the measures is subject to appeal before various courts. The national legal system does not provide for a procedure ensuring the necessary coordination between these appeals or between these courts, and that each court must make an independent consideration of the proportionality of the measures.
- In this case, each of the measures imposed on the Bulgarian company is in itself heavy. Therefore, the cumulative effect of these measures may exceed the severity of the offence committed and contradict the requirements of the principle of proportionality.
