Case: Italian penalty provisions criticised

European Court of Justice (First Chamber),

J.-C. Bonichot (Rapporteur), President of the Chamber, C. Toader, A. Rosas, L. Bay Larsen and M. Safjan, Judges,

Judgement delivered 8 May 2019

Value added tax (VAT) — Fictitious transactions — Impossibility of deducting the tax — Obligation on the issuer of an invoice to pay the VAT indicated thereon — Fine in an amount equal to the amount of the improperly deducted VAT — Whether compatible with the principles of VAT neutrality and proportionality

EN.SA. Srl v Agenzia delle Entrate — Direzione Regionale Lombardia Ufficio Contenzioso


EN.SA is part of a group of companies involved in the supply of electricity. In order to make the companies’ accounts look better to potential financiers, they entered into a series of circular transactions where fictious electricity was bought and sold around the group. In each case the ‘selling’ company issued a VAT invoice (and accounted for output tax on its VAT return) and the ‘purchasing’ company recovered this VAT as input tax on their VAT return.

The Italian tax authority assessed EN.SA for overclaimed input tax (because VAT cannot be recovered on a supply which does not take place) but did not permit the ‘selling company’ to adjust its output tax (because when a VAT invoice has been issued the VAT declared is due to the tax authority). In addition, the companies received financial fines equivalent to 100% of the tax overclaimed.

EN.SA appealed against the actions of the tax authority and the Italian courts referred to the ECJ questions relating to whether the financial penalty and the refusal to allow the overpaid sales VAT to be corrected were compatible with the principles of neutrality and proportionality.

The referring court noted, and the ECJ accepted, that there was no intent on the part of any of the parties involved to defraud or otherwise case any loss to the Italian Treasury.

The ECJ concluded that the ‘selling companies’ should have been given the opportunity to correct the error and it was for the referring court to determine whether sufficient opportunity had been given and that a fine of 100% of the tax involved was, in this case, contrary to the principles of neutrality and proportionality.


This case will have little impact in the UK as it concerns the application of Italian law to a specific set of circumstances. The case underlines the importance of the principles of proportionality and neutrality.

For commentary on the principles applicable to EU Law see In-depth commentary at ¶1-500.

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