Selling Goods to a Fraudulent Buyer May Disqualify 0% VAT Rate

Business cooperation always involves both opportunities and risks – including the unfortunate possibility of dealing with a fraudster. When such a situation arises, crucial questions emerge about the tax consequences: how should the transaction be settled, and what obligations does the seller have towards tax authorities? This issue was examined by the Supreme Administrative Court in Poland, which addressed whether a taxpayer could retain the right to apply the 0% VAT rate on an intra-Community supply of goods if the foreign buyer turned out to be dishonest.

It Began with a Request for Tax Ruling

A company requested an individual tax ruling after entering into a business relationship with a UK-based partner (before Brexit). The potential client had contacted the company, requested a quote, and eventually placed an order for several shipments.

The seller verified the buyer using their website, online reviews, and the VIES system. Seeing no red flags, the company shipped the goods to the UK address via hired transport. Delivery was confirmed through a CMR document, a signed product specification, and email confirmation from the buyer’s alleged representative.

Based on this, the seller issued a VAT invoice with a 0% rate (as an intra-Community supply) and mailed it. However, after the payment deadline passed, it turned out the order had been forged. The UK company stated it had no knowledge of the order or the individuals involved. Fraud was reported both in the UK and in Poland. This raised the key question: was the seller entitled to apply the 0% VAT rate?

The company believed it had the right to do so, as it acted under a reasonable assumption that the buyer was legitimate and the goods were genuinely delivered — all documented appropriately. It maintained that it acted in good faith and had exercised due diligence, thus qualifying for the preferential tax rate.

Tax Authorities Disagree

The tax authority saw things differently. Although the goods had physically moved, they did not reach the legitimate buyer listed on the invoice. Moreover, the company had only communicated via phone and email with an unverified individual — a process the authorities deemed insufficient and lacking in due diligence.

EU case law clearly states that the 0% VAT rate for intra-Community supplies can only apply if the seller demonstrates due care in verifying the buyer’s legitimacy.

Regional Court Sides with the Company

The Provincial Administrative Court (WSA) ruled in favor of the company, stating that there was no evidence of bad faith or negligence. Despite the absence of a written contract, the company had taken reasonable steps to verify the counterparty through online research and communication. The court emphasized that expecting companies to endlessly verify every client is unrealistic and that the actions taken were adequate under the circumstances.

Supreme Court Overturns the Decision

However, the Supreme Administrative Court (NSA) disagreed. It concluded that the company had not exercised sufficient caution. Given that this was the first contact with the UK firm, the identity of the person placing the order should have been thoroughly verified. According to the court, the seller’s behavior amounted to negligence. The fact that the company had tried to gather information through phone conversations was not enough — methods that were once acceptable no longer meet today’s standards of due diligence.

The court pointed out that businesses must adapt their internal verification procedures to evolving market risks to avoid similar problems in the future.

Conclusion: No Right to 0% VAT

Ultimately, the NSA ruled that the conditions for applying the 0% VAT rate were not met. The company is therefore required to account for the transaction using the standard domestic VAT rate of 23%.