Proposal for a Council Decision authorising the Republic of Lithuania to extend the application of a measure derogating from Article 193 of Council Directive 2006/112/EC on the common system of value added tax (Only the Lithuanian version is authentic)
Date: 2009-12-08
Institutions: European Commission
Subjects: Lithuania, VAT, delivery, derogation from EU law, financial solvency, industrial restructuring, provision of services, tax evasion, tax system, wood product

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 8.12.2009 
COM(2009)668 final 

Proposal for a 

COUNCIL DECISION 

authorising the Republic of Lithuania to extend the application of a measure derogating 
from Article 193 of Council Directive 2006/112/EC on the common system of value 
added tax 

(Only the Lithuanian version is authentic) 

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EXPLANATORY MEMORANDUM 

CONTEXT OF THE PROPOSAL 

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Grounds for and objectives of the proposal 

Pursuant  to  Article  395  of  Council  Directive  2006/112/EC  of  28  November  2006  on 
the common system of value added tax1 (hereafter 'the VAT Directive'), the Council, 
acting  unanimously  on  a  proposal  from  the  Commission,  may  authorise  any  Member 
State to apply special measures for derogation from that Directive in order to simplify 
the  procedure  for  charging  the  tax  or  to  prevent  certain  types  of  tax  evasion  or 
avoidance. 

By  letter  registered  with  the  Secretariat-General  of  the  Commission  on  9  September 
2009,  the  Republic  of  Lithuania  (hereafter  'Lithuania')  requested  authorisation  to 
continue  to  apply  a  measure  derogating  from  Article  193  of  the  VAT  Directive.  In 
accordance  with  Article  395(2)  of  the  VAT  Directive,  the  Commission  informed  the 
other Member States by letter dated 27 October 2009 of the request made by Lithuania. 
By letter dated 29 October 2009, the Commission notified Lithuania that it had all the 
information it considered necessary for appraisal of the request. 

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General context 

The  Lithuanian  government  would  like  to  extend  the  current  application  of  a  reverse 
charge  mechanism  in  relation  to  supplies  of  timber  and  supplies  by  taxable  persons 
under judicial insolvency or restructuring procedures. 

As regards the supplies of timber, Lithuania has been confronted with a considerable 
number of traders that fail to comply with their obligations. Businesses in this sector 
are frequently small resellers and intermediaries, which often disappear without paying 
to the tax authorities the tax they charged on their supplies but leaving their customers 
in receipt of a valid invoice for VAT deduction. 

Taxable persons under an insolvency procedure or a restructuring procedure subject to 
judicial  oversight  are  often  not  in  a  position  or  willing  to  pay  the  VAT  they  have 
received from their customers to the tax authorities. However, the purchaser can, as a 
compliant trader, still deduct the VAT incurred. 

Under the reverse charge mechanism, the customer becomes liable for the payment of 
the VAT on domestic transactions. This derogates from the general rule, as stipulated 
in  Article  193  of  the  VAT  Directive,  that  the  taxable  person  supplying  goods  or 
services is normally liable to pay VAT. 

This derogating measure (derogating from the then  applicable  Sixth Directive2 which 
has,  without  substantial  modification  to  the  content,  been  replaced  by  the  VAT 

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OJ L 347, 11.12.2006, p. 1. 
Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States 
relating to turnover taxes – Common system of value added tax: uniform basis of assessment (OJ L 145, 
13.6.1977) 

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Directive)  had  initially  been  granted  by  Council  Decision  2006/388/EC  of  15  May 
20063.  

Initially, this derogating measure was also applicable in relation to certain supplies of 
waste  and  certain  supplies  of  construction  work.  As  indicated  in  Article  3  of  that 
Decision,  the  authorisation  would  cease  to  have  effect  on  the  date  (if  that  date  was 
before  31  December  2009)  of  the  entry  into  force  of  a  Directive  rationalising  the 
derogations pursuant to Article 27 of the Sixth Directive (currently Article 395 of the 
VAT Directive) which would include a special scheme for the application of VAT to 
these  areas.  This  materialised  via  the  so-called  Rationalisation  Directive4  which 
replaced  the  Decision  as  legal  basis  for  the  application  of  the  reverse  charge 
mechanism  in  these  two  sectors  which,  as  a  result,  are  not  longer  subject  of  the 
extension request and of this Decision. 

The  Commission  understands  that  the  situation,  on  which  the  initial  derogation  was 
based,  continues  to  exist  and  that  the  previous  derogation  has  enabled  Lithuania  to 
reduce the risk of VAT evasion and to simplify the procedure for charging the tax in 
the  timber  market  and  as  regards  certain  supplies  under  insolvency  or  restructuring 
procedure. The derogation should therefore be granted for another limited period. 

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Existing provisions in the area of the proposal 

Similar derogations in relation to Article 193 of the VAT Directive have been granted 
to other Member States. 

Consistency with the other policies and objectives of the Union 

Not applicable. 

CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

Consultation of interested parties 

Not relevant. 

Collection and use of expertise 

There was no need for external expertise. 

Impact assessment 

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The  Decision  proposal  aims  at  simplifying  the  procedure  for  charging  the  tax  and  at 
combating  possible  VAT  evasion  or  avoidance  and  has  therefore  a  potential  positive 
economic impact. 

Impact will in any case be limited because of the narrow scope of the derogation. 

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OJ L 150, 3.6.2006, p. 13. 
Council  Directive  2006/69/EC  of  24  July  2006  amending  Directive  77/388/EEC  as  regards  certain 
measures to simplify the procedure for charging value added tax and to assist in countering tax evasion 
or avoidance, and repealing certain Decisions granting derogations (OJ L 221, 12.8.2006, p. 9). 

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LEGAL ELEMENTS OF THE PROPOSAL 

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Summary of the proposed action 

Authorisation for Lithuania to continue to apply a measure derogating from Article 193 
of  the  VAT  Directive  as  regards  the  use  of  a  reverse  charge  mechanism  in  case  of 
supplies of timber and in case of supplies of goods and services by businesses under an 
insolvency or restructuring procedure subject to judicial oversight. 

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Legal basis 

Article 395 of the VAT Directive. 

Subsidiarity principle 

In  accordance  with  Article  395  of  the  VAT  Directive,  a  Member  State  wishing  to 
introduce  measures  derogating  from  the  said  Directive  must  obtain  an  authorisation 
from  the  Council,  which  will  take  the  form  of  a  Council  Decision.  Therefore,  the 
proposal complies with the subsidiarity principle. 

Proportionality principle 

The proposal complies with the proportionality principle for the following reason(s). 

This  Decision  concerns  an  authorisation  granted  to  a  Member  State  upon  its  own 
request and does not constitute any obligation. 

Given the limited scope of the derogation, the special measure is proportionate to the 
aim pursued. 

Choice of instruments 

Under  Article  395  of  the  VAT  Directive,  derogation  from  the  common  VAT  rules  is 
only possible with the authorisation of the Council acting unanimously on a proposal 
from  the  Commission.  Moreover,  a  Council  Decision  is  the  most  suitable  instrument 
since it can be addressed to individual Member States. 

BUDGETARY IMPLICATION 

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The proposal has no implication for the Community budget. 

ADDITIONAL INFORMATION 

Review/revision/sunset clause 

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The proposal includes a sunset clause. 

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Proposal for a 

COUNCIL DECISION 

authorising the Republic of Lithuania to extend the application of a measure derogating 
from Article 193 of Council Directive 2006/112/EC on the common system of value 
added tax 

(Only the Lithuanian version is authentic) 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on European Union and to the Treaty on the Functioning of the 
European Union, 

Having  regard  to  Council  Directive  2006/112/EC  of  28  November  2006  on  the  common 
system of value added tax5, and in particular Article 395(1) thereof, 

Having regard to the proposal from the Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

By  letter  registered  with  the  Secretariat-General  of  the  Commission  on  9  September 
2009,  Lithuania  requested  authorisation  to  continue  to  apply  a  measure  derogating 
from  the  provisions  of  Directive  2006/112/EC  governing  the  person  liable  for  the 
payment of the value added tax (VAT) to tax authorities. 

In  accordance  with  Article  395(2)  of  Directive  2006/112/EC,  the  Commission 
informed the other Member States of the request made by Lithuania in a letter dated 27 
October 2009. By a letter dated 29 October 2009, the Commission notified Lithuania 
that it had all the information that it considered necessary to consider the request. 

The purpose of the measure is to continue to make the recipient liable for the VAT due 
on  the  supply  of  goods  and  services  in  the  case  of  insolvency  procedures  or 
restructuring procedures subject to judicial oversight and of timber transactions. 

Taxable  persons  under  insolvency  procedures  or  restructuring  procedures  subject  to 
judicial oversight are often prevented  by financial difficulties from paying to the tax 
authorities  VAT  invoiced  on  their  supplies  of  goods  and  services.  The  recipient, 
insofar  a  taxable  person  with  a  right  of  deduction,  can  nonetheless  deduct  the  VAT 
even though it has not been paid by the supplier to the tax authorities. 

Because  of  the  nature  of  the  market  and  the  business  involved,  Lithuania  has 
encountered problems in the timber market which  is  dominated  by small companies, 
often  resellers  and  intermediaries  which  the  tax  authorities  have  found  difficult  to 

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OJ L 347, 11.12.2006, p. 1. 

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control.  The  most  common  form  of  evasion  involves  the  invoicing  of  supplies 
followed by the disappearance of the business without paying tax leaving the customer 
in receipt of a valid invoice for tax deduction. 

By designating the recipient, insofar as he is a taxable person, as the person liable for 
the  VAT  in  the  abovementioned  cases,  the  derogation  removes  the  difficulties  of 
collection of the VAT without affecting the amount of tax due. This has the effect of 
simplifying  the  work  of  the  tax  authorities  for  collecting  the  tax  and  of  preventing 
certain types of tax evasion or avoidance. In this respect, the measure derogates from 
Article  193  of  Directive  2006/112/EC  which  stipulates  that  the  taxable  person 
supplying goods or services is normally liable for the payment of the tax.  

The measure has previously been authorised by Council Decision 2006/388/EC6 under 
the  then  applicable  Sixth  Council  Directive  77/388/EC  on  the  harmonisation  of  the 
laws of the Member States relating to turnover taxes – Common system of value added 
tax: uniform basis of assessment7. 

The  Commission  understands  that  the  legal  and  factual  situation  which  justified  the 
current  application  of  the  derogating  measure  in  question  has  not  changed  and 
continues  to  exist.  Lithuania  should  therefore  be  authorised  to  apply  the  measure 
during a further limited period. 

(6) 

(7) 

(8) 

(9) 

The  derogation  will  not  adversely  affect  the  Community's  own  resources  accruing 
from VAT,  

HAS ADOPTED THIS DECISION:  

Article 1 

By way of derogation from Article 193 of Directive 2006/112/EC, Lithuania is authorised to 
continue  to  designate  the  taxable  person,  to  whom  the  following  supplies  of  goods  and 
services are made, as the person liable for payment of VAT. 

(1) supplies of goods and services by a taxable person while under an insolvency procedure or 
a restructuring procedure subject to judicial oversight; 

(2) supplies of timber. 

This Decision shall expire on 31 December 2012. 

Article 2 

This Decision is addressed to the Republic of Lithuania. 

Article 3 

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OJ L 150, 3.6.2006, p. 13. 
OJ L 145, 13.6.1977, p. 1. 

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Done at Brussels,  

For the Council 
The President 

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