Carriers and logistics providers: subcontracting transport for import and export and VAT risks

VAT Exemption on Transport Services for Imports and Exports: Discover the VAT Risks for Carriers and Logistics Providers Following the L.Č. IK Ruling.

VAT Exemption on Transport Services for Export or Import

Article 146(1)(e) of Directive 2006/112/EC provides for a VAT exemption on transport related to export or import.

Article 146(1)(e): “The supply of services, including transport and ancillary operations (…), when directly connected to the export or import of goods.”

Article 144 of Directive 2006/112/EC imposes an additional condition for the exemption of services related to imports.

Article 144: “Member States shall exempt the supply of services relating to the importation of goods, the value of which is included in the taxable amount [of the VAT due on importation].

The VAT exemption for transport services related to export has been transposed into Article 262-I 1° of the French General Tax Code (CGI) and for transport services related to import into Article 262-II-14° of the CGI.

French carriers and logistics providers are affected by this exemption for their transport services related to exports and imports.

Export transport services refer to transport departing from France or another Member State of the European Union and destined for a country outside the European Union.

Import transport services refer to transport departing from a country outside the European Union and arriving in France or another Member State of the European Union.

In VAT terms, the following are considered non-EU countries:

– A country that is not one of the 27 Member States of the European Union.

– A French territory with a special status (Overseas Departments and Territories: Mayotte, French Guiana, Guadeloupe, Martinique, Réunion).

– A territory with special status belonging to another EU Member State (e.g., Ceuta or Melilla in Spain, Helgoland Island or the territory of Büsingen in Germany).

For more information on national territories with special status, consult the European Commission’s page on this topic here.

Subcontracting of Export Transport Services and VAT Exemption: Insights from the L.Č. IK Case Law

In the transport and logistics sector, it is common for a company to subcontract all or part of the service it invoices to its client. A company may, therefore, enter into a contract with a client stipulating that it will handle export transport, while subcontracting this service to a third-party carrier.

In a case dated June 29, 2017, the Court of Justice of the European Union (CJEU) challenged the application of the VAT exemption in a scenario involving export services.

Summary of the L.Č. IK Case of June 29, 2017

The Latvian company ATEK agreed to provide transport services for goods from Latvia to Belarus for its client.

ATEK subcontracted services related to the export transport to another Latvian company, L.Č.

Believing it qualified as an export service exempt from VAT, L.Č invoiced its services to ATEK without VAT.

During a tax audit, the tax authorities denied the application of the VAT exemption for export transport, arguing that L.Č was not providing its services directly to the sender or recipient of the transported goods.

Preliminary Question Referred to the CJEU

The Latvian Supreme Court referred a question to the CJEU, seeking an interpretation of Article 146 of Directive 2006/112/EC. Specifically, it asked whether the exemption provided in this article applies only if the services are supplied directly to the sender or recipient of the goods.

Interpretation by the CJEU

The CJEU confirmed that Article 146 of Directive 2006/112/EC (which provides for VAT exemption for services directly related to exports) must be interpreted to mean that the existence of a direct link requires not only that the services, by their nature, contribute to the effective execution of an export or import operation, but also that these services are provided directly, as applicable, to the exporter, importer, or recipient of the goods covered by this provision.

Thus, the CJEU imposes two cumulative conditions for the application of VAT exemption on transport services for imports or exports:

• A connection between the transport service and the import or export of goods.
• The requirement that the service is directly provided to the exporter, importer, or recipient of the goods.

In practice, in cases of subcontracting or chain subcontracting, the VAT exemption may only apply to the transaction between the main carrier and the exporter, importer, or recipient of the goods.

Although the CJEU ruled on a case involving subcontracted export services with varied services, its conclusions appear broad enough to also cover simple transport services, whether for import or export.

Belgium (Circular 2021/C/96) and Germany (BMF Letter of 27.09.2021) have taken positions on the application of this case law, but limited to transport services carried out for export.

France has not yet taken an official position on this issue, which nevertheless appears unavoidable given the general nature of the CJEU ruling.

Regarding import transport, the requirement that the value of the service be included in the taxable base for VAT due on importation also seems to limit the exemption to services directly provided to the importer, recipient, or sender. This requirement was confirmed by the CJEU in the SC Cartrans Preda SRL Case C-461/21 of September 7, 2023.

Consequences for Carriers and Logistics Providers

In a scenario where a carrier and/or logistics provider responsible for an export/import transport service for a client subcontracts the service to a third-party carrier, the implications of this case law are as follows:

Billing Between the Subcontractor Carrier and the Principal Carrier/Logistics Provider

Subcontractor carriers do participate in export and/or import operations. However, they do not meet the second condition, as they do not provide the service directly to the importer, exporter, or recipient of the goods.

As a result, the VAT exemption cannot apply. The transaction is therefore subject to VAT in France if both the carrier and the subcontractor are established in France.

Note: Although it is not possible to benefit from the VAT exemption on import or export transport services in such cases, it may be possible to qualify for an exemption on other grounds. For example:

– Exemption for certain services provided for the direct needs of aircraft cargo (Article 262.II.4° of the CGI).

– Exemption for services related to vessels (Article 262.II.2° of the CGI).

Billing Between the Principal Carrier and/or Logistics Provider and the Final Client

The carrier and/or logistics provider that invoices an export or import transport service directly to the exporter, importer, or recipient of the goods, as applicable, can apply the VAT exemption on their sales invoice.

The carrier can issue an invoice without VAT to the final client, even if both the carrier/logistics provider and the client are established in France.

VAT Risks for Carriers/Logistics Providers in Case of a Tax Audit

In the event of a tax audit, a subcontractor invoicing an import/export transport service without VAT to a principal carrier established in France risks having the VAT exemption rejected. The subcontractor would then be required to pay the VAT owed, along with penalties and late payment interest.

If the client is established in another Member State, the service is taxable in the country where the client has established the seat of their economic activity (Article 259 A of the CGI). The invoice must, in any case, be issued without VAT under the general reverse charge mechanism provided by Article 196 of Directive 2006/112/EC. It is then up to the client to determine whether the service is exempt or not and to account for any VAT due accordingly in their country.

Exempt services in the client’s country should not be reported in the Exchange of Services Declaration.

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