The recent Valentine Heights C-733/22 judgment by the Court of Justice of the European Union (ECJ) addressed the important issue of the conditions for applying a reduced rate of value-added tax (VAT) and its compliance with the principle of tax neutrality within the EU. The ECJ was deciding on a case between Valentine Heights, a company operating in the tourism sector, and the Bulgarian tax authorities.

Valentine Heights case facts

Valentine Heights applied a reduced VAT rate on accommodation services provided between 2016 and 2020, in accordance with local legislation in Bulgaria.

However, during a tax audit, the Bulgarian tax authorities found that the company did not have a valid certificate of classification in the relevant category of accommodation establishments, which was a requirement for applying the reduced VAT rate in Bulgaria.

The tax authorities insisted that the company should have applied the standard VAT rate of 20% during the period when the certificate was not valid. In response, the company argued that such national legislation was contrary to the European VAT Directive, which allows Member States to apply a reduced rate to accommodation services.

At the same time, the Court of Justice of the European Union was asked to examine whether the national requirement to hold a valid certificate was compatible with the principle of tax neutrality.

Ruling of the Court of Justice of the European Union.

The Court of Justice of the European Union has ruled that Member States have the right to set conditions for the application of a reduced VAT rate, such as requiring a valid certificate of classification for the accommodation establishment in the relevant category.

However, these conditions must not violate the principle of fiscal neutrality, which underpins the harmonized VAT system in the European Union and ensures that similar services are taxed uniformly to avoid distorting competition.

The Court emphasized that national rules must not result in discrimination among traders based on formalities such as the validity of a certificate.

Impacts of the decision

This case confirmed the importance of tax neutrality in ensuring fair competition. It also showed that applying different VAT rates to similar services can cause unfair advantages. If one establishment can apply a reduced VAT rate due to a valid certificate, it creates an imbalance in the market.

Such an approach results in unfair competition between providers of similar services, which goes against the principle of tax neutrality.

The decision also offers protection for businesses against additional tax obligations that could arise from failing to meet administrative requirements if those requirements are not consistent with European law. This can increase legal certainty for businesses and reduce the administrative burden. Member States may need to review and possibly adjust their national rules regarding the application of reduced VAT rates to ensure they follow the Court of Justice’s ruling and European law. This may lead to legislative changes in countries with conditions similar to those in Bulgaria.

Michaela Salayová

Senior Tax Manager | Accace Slovakia

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