Judgment of the Court of Justice of the European Union: 20% VAT sanction incompatible with the EU law

On 15 May 2021, the Court of Justice of the European Union (“CJEU” or “Court”) passed a judgment in case C-935/19 of Grupa Warzywna Sp. z o.o. (hereinafter: “Company”) against the Director of Fiscal Administration Chamber in Wrocław, in which the Court held that the Polish regulations which impose a VAT sanction for inaccurate classification of VAT-exempt transaction as a VAT-able transaction are incompatible with the EU law.


The case involved a Polish company – Grupa Warzywna, which purchased real property in a transaction erroneously classified as liable to VAT, deducted the output VAT shown in the invoice issued by the counterparty, showed a surplus of output tax over input tax and applied for a refund.

The refund was preceded by a tax inspection which demonstrated that the transaction of sale of the real property was exempt from VAT, which meant that the Company was not eligible to deduct the output VAT. The Company accepted the findings of the inspection, filed a corrected VAT return and consequently showed an amount of refund much lower than previously calculated.

Despite the correction made by the Company, the authority issued a decision whereby the Company was penalized and had to pay 20% of the amount of the unduly requested refund. The case was taken to the local court (Wojewódzki Sąd Administracyjny) in Wrocław, which decided to apply to the CJEU with a question whether an additional tax liability imposed in the above circumstances was in conformity with the EU principle of proportionality.

The judgement

In the judgment, the CJEU held that the Polish regulations were incompatible with the EU law insofar as they permitted automatic imposition of 20% VAT sanction, without differentiating between situations in which the inaccuracy in VAT settlement resulted from an error and was not linked with a tax fraud or exposure of tax liabilities to reduction, and situations which involved bad faith.

The judgment of the Court clearly indicates that VAT sanctions may be imposed on taxpayers only in situations of tax fraud and should not be imposed in cases where the increase of VAT refund / reduction of tax liability is caused by an error (additionally an error, which, as in the situation at hand, was corrected and did not result in reduction of the amount due to the State Treasury). Additionally, in our opinion, there are arguments in favour of applying the judgment to other VAT sanctions, even though it directly refers to the 20% sanction.

The CJEU judgment will open the way for taxpayers to resumption of tax proceedings and proceedings before administrative courts which have been finalized (the resumption can be made once the judgment is published in the Official Journal of the European Union, and at the time of preparation of this alert it was still not published) and applying for acknowledgment of overpayment. Prior to filing such a request or before taking a decision to resume proceedings, the circumstances in which the VAT sanction was imposed should be analysed.

Should you have any questions or doubts regarding the issues discussed here, we are ready to help you. Feel free to contact us.