CJEU, judgment of 6 July 2006 — Joined Cases C-439/04 and C-440/04, Kittel and Recolta Recycling, ECLI:EU:C:2006:446 · Full text (PDF)
The case
Two Belgian disputes reached the Cour de cassation together. Computime traded in computer components; the tax authority considered that it had knowingly participated in a VAT carousel involving partly fictitious supplies and refused the input VAT deduction (paras 10 et seq.); Mr Kittel pursued the proceedings as the company’s liquidator (para 13). Recolta Recycling SPRL had bought sixteen luxury cars from an intermediary and sold them on free of VAT; the seller never remitted the VAT Recolta had paid, and the transactions formed part of a carousel scheme of which, on the findings of the lower courts, Recolta knew nothing (paras 14–17). Under Belgian civil law the sale contracts were incurably void for unlawful cause; the Cour de cassation asked whether that nullity also deprives a purchaser acting in good faith of the right to deduct — and whether the answer changes where both contracting parties knew of the evasion (paras 20–28).
The court’s reasoning
The Court builds on the objective concept of a taxable transaction developed in Optigen: the notions of supply and economic activity are objective in nature and apply irrespective of the purpose or results of the transactions (para 41). A trader’s right to deduct is therefore unaffected by the fact that another transaction in the chain — earlier or later — is vitiated by VAT fraud, provided the trader neither knew nor could have known of it (paras 45 et seq.). Whether the VAT due on earlier or later sales was actually paid to the exchequer is irrelevant to the right of deduction (para 49), and the principle of fiscal neutrality prohibits any general distinction between lawful and unlawful transactions (para 50). Nullity of the contract under civil law accordingly cannot cost the good-faith purchaser his deduction — regardless of whether the nullity results from VAT evasion or from other fraud (paras 52, 60).
For the defence, the judgment’s protective proposition is central: “traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT” (para 51).
At the same time, the judgment creates the doctrine’s enforcement side. A taxable person who himself commits evasion does not even satisfy the objective criteria of a supply and an economic activity (para 53); combating fraud is an objective recognised and encouraged by the Directive (para 54). Beyond that, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with VAT evasion must, for the purposes of the Sixth Directive, “be regarded as a participant in that fraud” — irrespective of whether he profits from the resale (para 56); he aids the perpetrators and becomes their accomplice (para 57). Where that is established on the basis of objective factors, the national court must refuse the deduction (paras 59, 61).
Where the judgment sits in the case-law
Kittel/Recolta extends the protective line of CJEU, judgment of 12 January 2006 — Joined Cases C-354/03, C-355/03 and C-484/03, Optigen and Others, to its counterpart: from the objective transaction concept that shields the honest trader, the Court derives the subjective disqualification of the purchaser acting in bad faith; the yardstick of reasonable precautions is taken from CJEU, judgment of 11 May 2006 — C-384/04, Federation of Technological Industries (para 51). Everything since rests on this foundation: CJEU, judgment of 21 June 2012 — Joined Cases C-80/11 and C-142/11, Mahagében and Dávid, settles the burden of proof and the limits of verification duties; CJEU, judgment of 18 December 2014 — C-131/13 and Others, Italmoda, extends refusal to exemption and refund; CJEU, judgment of 1 December 2022 — C-512/21, Aquila Part Prod Com, and CJEU, judgment of 11 January 2024 — C-537/22, Global Ink Trade, tighten the evidential demands on the authority. The German legislature codified the Kittel doctrine in Section 25f of the VAT Act with effect from 2020; in the United Kingdom the same case-law underpins HMRC’s Kittel assessments.
Academic commentary
German commentary treats the Kittel principles as the EU-law yardstick for refusing input VAT deduction (Kraeusel, in: Reiß/Kraeusel/Langer, UStG, § 15 Rz. 690 et seq.) and as the core of the German codification in Section 25f (Heidner, in: Bunjes, UStG, 24th ed. 2025, § 25f Rn. 9). Reiß mounts a fundamental critique of the cumulative burdens the refusal doctrine produces along supply chains (Reiß, UR 2020, 408 (415 et seq.)); Spilker argues for a narrow application of the German implementing provision, reduced in conformity with EU law (Spilker, UR 2023, 589 (590)).
Three levels — kept strictly apart
Operative holding: Article 17 of the Sixth Directive precludes a national rule under which nullity of the sale contract deprives a taxable person of the right to deduct where he neither knew nor could have known that the transaction was connected with fraud (para 60). Conversely, where it is ascertained on objective factors that the taxable person knew or should have known that his purchase formed part of a transaction connected with VAT evasion, the national court must refuse the deduction (para 61). Administrative practice: In Germany the doctrine is now codified in Section 25f of the VAT Act; the tax administration applies it under sec. 25f.1 of the VAT Application Decree (UStAE, Federal Ministry of Finance circular of 15 June 2022 — III C 5 - S 7429-b/21/10003 :001, Federal Tax Gazette I 2022, 1001), which acknowledges that the burden of establishing knowledge or constructive knowledge lies with the tax authority. Our conclusion for the defence: In our assessment, para 51 is the honest trader’s true counter-right: documented, transaction-dated checks move the dispute from an atmosphere of suspicion onto the plane of evidence — where the authority has to deliver.
Levers for the defence
- Deploy para 51 affirmatively: reasonable precautions, taken and documented at the time of the transaction, sustain reliance on the legality of the trades — the submission opens with the checking trail, not with indignation.
- Insist on objective factors: refusal presupposes, under paras 59 and 61, proof of knowledge or constructive knowledge on objective factors; mere proximity to a tainted chain is precisely not enough under paras 45 et seq.
- Neutralise civil-law defects: nullity or invalidity of the contracts does not carry a refusal (para 52) — objections built on the contractual level fall away.
- Decouple the upstream tax loss: that a supplier failed to remit the tax is irrelevant to the purchaser’s right of deduction (para 49) and is no substitute for proof of bad faith.
- Anchor the ex-ante perspective: “knew or should have known” attaches to the act of purchase (paras 56, 59); as our own assessment we conclude that investigative findings gathered later must not be projected back into the moment of purchase.
Defence assessment: NEUTRAL · Keywords: knew or should have known, carousel fraud, input VAT deduction, fiscal neutrality, reasonable precautions, good-faith protection
FAQ
Does a business lose its input VAT deduction simply because VAT was evaded somewhere in the supply chain?
No. The Court makes clear that the right to deduct is unaffected where another transaction in the chain is fraudulent, provided the taxable person neither knew nor could have known of it (paras 45 et seq.). Nor does a supplier’s failure actually to remit the tax matter as such (para 49). Refusal is permissible only where objective factors establish that the trader knew or should have known that his purchase was connected with evasion (paras 59, 61). Those factors are for the authority to demonstrate — later case-law has assigned it the burden of proof in express terms.
What does “should have known” mean in practice?
It is a normative attribution, not a psychological finding: the question is what a trader would have recognised had he taken the precautions that can reasonably be required of him (para 51). A trader who takes and documents such precautions may rely on the legality of his transactions. What is reasonable depends on the individual case and was later confined — notably in Mahagében and Dávid and in Aquila Part Prod Com: a trader owes no general investigation of his supplier. A living, evidenced verification system is therefore the most effective instrument of defence.
If you are facing a knew-or-should-have-known allegation, the quality of your checking trail decides the case — we map your facts against the Kittel criteria. → Confidential first assessment Whether your due-diligence documentation would satisfy the para 51 standard today is what the structured self-test reveals. → VAT CMS Quick Scan
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