The Palmstråle Judgment: VAT Exemption on Re-importation and the Role of Customs Formalities

The core facts of the case

The Swedish taxable person AA transported two horses to Norway to participate in competitions. Upon their return to Sweden (and thus to the EU), AA crossed the border without presenting the animals to customs or making a declaration for release for free circulation. During a check, the Swedish customs authorities determined that no import duties were due (as the goods were returning), but that VAT had to be paid: over SEK 41,000 (approx. € 3,750). The customs authority stated that for a VAT exemption on re-importation, not only the substantive conditions (the goods return in an unaltered state), but also the formal conditions (presentation and declaration) had to be met. Because AA had failed to do so, the exemption was refused.

The legal question

The matter was brought before the Swedish Supreme Administrative Court (highest Swedish administrative court), which referred a preliminary question to the Court of Justice. The referring court asked whether Article 86(6) of the Union Customs Code (UCC) must be interpreted restrictively, so that all conditions of Article 203 UCC must be fulfilled in order to benefit from the VAT exemption, or whether the exemption may still apply where the formal requirements of Article 203 UCC were not complied with.

More specifically, the referring court sought clarification on whether the VAT exemption for re-importation in Article 143(1)(e) of the VAT Directive (2006/112/EC) is always conditional upon strict observance of the formal requirements laid down in the UCC, even in the absence of fraud.

Legal framework

VAT Directive (2006/112/EC)

Article 143(1)(e) of the VAT Directive stipulates that the re-importation of goods in the unaltered state shall be exempt from VAT, provided that the goods also qualify for exemption from import duties.

Union Customs Code (UCC)

• Article 203 UCC provides for an exemption from import duties for returned goods that re-enter the EU within three years, provided they are declared and meet the conditions.
• Article 86(6) UCC extends this exemption to cases where a customs debt arises due to a failure to comply with obligations (such as presenting the goods to customs), as long as there is no attempt at deception.

The judgment of the Court of Justice

The Court of Justice swiftly dismissed the strict interpretation of the Swedish authorities.

Substantive conditions are paramount

The Court emphasized that it follows from the wording of Article 143 of the VAT Directive that the VAT exemption for the re-importation of goods in the state in which they were exported is, in particular, subject to the condition that these goods qualify for “exemption from import duties". The Union legislature has expressly chosen to align the conditions for applying the VAT exemption with the substantive and formal conditions laid down by the UCC for the exemption of import duties for returned goods.

In this case, it was established that the substantive conditions had been met, but the formal ones had not. The horses had not been presented or declared to Swedish customs. However, the Court of Justice referred to Article 79(1)(a) UCC: the customs debt that can arise from non-compliance, and considered that Article 86(6) UCC extends the exemption of Article 203 UCC to cases where a customs debt arises under Article 79 UCC, provided that the non-compliance that led to this debt does not constitute an attempt at deception.

Interestingly, the Court of Justice reasoned that Article 86(6) UCC would largely lose its effectiveness if this provision had to be interpreted so strictly that it would not apply to a case like the one in Palmstråle because the formal conditions for qualifying for an exemption from import duties had not been met. The application of Article 79(1)(a) UCC — and thus of Article 86(6) UCC — precisely presupposes that such conditions have not been complied with.

In short, the substantive conditions are paramount and take precedence over the formal conditions. If goods are returned in the same state and substantively meet the conditions for an import duty exemption, a VAT exemption must also be possible.

Formal errors must not be a barrier

The mere fact that AA had not presented or declared her horses should not automatically exclude the exemption. Article 86(6) UCC is specifically intended to correct errors made in good faith.

Good faith and no deception

The exemption can only be refused when there are indications of fraud or deliberate evasion. If only negligence is involved, the exemption must remain in effect.

Significance of the Palmstråle judgment

The judgment provides businesses with more legal certainty. Even if they fail to comply with all formalities due to carelessness, they in principle retain the right to an exemption as long as they have acted in good faith. This prevents companies from being disproportionately punished for administrative errors when the substantive situation is not in dispute.

Customs authorities will have to carefully weigh whether there is an attempt at deception or merely negligence. An exemption may only be refused in the case of fraud. This requires a more nuanced assessment and can lead to more discussion between businesses and customs. In practice, we already see this happening regularly.

The judgment is consistent with a broader trend in EU law: protecting good faith and avoiding disproportionate consequences of formal errors.

Nevertheless, businesses would be wise to know and follow the rules to prevent problems. In practice, it can be difficult to prove that there was no attempt at deception but only negligence. This will depend on the circumstances, documentation, and conduct of the business. There is also a risk of legal inequality. National authorities may deal with the concept of good faith differently.

Conclusion

The Palmstråle judgment clarifies the relationship between customs law and VAT on re-importation. The Court of Justice states that substantive reality takes precedence over formalities: if goods return in an unaltered state, a business should not lose the VAT exemption due to formal omissions unless there is fraud. This judgment offers businesses protection against disproportionate financial consequences, but also places a responsibility on customs authorities to handle the concept of good faith with due care.

Ploum has a specialised customs practice. Should you have any questions regarding customs or import VAT, please contact Jikke Biermasz or Arjan Wolkers.