The Court of Justice of the European Union answered a question tax directors worry about constantly.
You’re held liable for your supplier’s unpaid VAT even after the supplier has been dissolved, struck from the commercial register, and stopped existing as a legal entity.
The answer is yes.
In Case C-121/24, the CJEU ruled joint and several VAT liability survives company dissolution. The disappearance of the original debtor doesn’t extinguish your potential liability as a third party. This isn’t theoretical. This is happening now, and the implications ripple across every cross-border transaction in the EU.
The Vaniz Case: How a Transport Company Inherited a Tax Problem
Vaniz EOOD, a Bulgarian transport company, bought services from Stars International EOOD. Standard business transaction. Nothing unusual here.
Then Stars International went insolvent.
Insolvency proceedings began in July 2019. By August 2020, Stars International was removed from the commercial register. The company no longer existed.
In January 2022, two years after the supplier had been struck off, the Bulgarian tax authority showed up at Vaniz’s door. The claim: joint and several liability for Stars International’s unpaid VAT.
The tax authority argued Vaniz knew or should have known Stars International wouldn’t pay the VAT. Therefore, Vaniz was on the hook.
Vaniz challenged this. Their argument was straightforward: how do you hold us jointly liable when the primary debtor no longer exists? Doesn’t this violate principles of legal certainty and proportionality?
The Bulgarian court wasn’t sure. They referred the question to the CJEU.
What the Court Actually Said
The CJEU’s answer was clear.
Article 205 of the VAT Directive doesn’t prevent Member States from holding third parties liable even after the primary debtor has been dissolved. The key condition: the third party must have known or should have known the supplier wouldn’t pay the VAT.
The Court’s reasoning follows a logical path:
First, the nature of joint and several liability means the disappearance of one debtor doesn’t erase the obligations of co-debtors. This is how joint liability works in every legal system.
Second, allowing Member States to pursue third parties after the primary debtor’s dissolution aligns with the objective of collecting VAT effectively. This matters when the taxable person is insolvent or dissolved.
Third, this interpretation doesn’t violate proportionality or legal certainty as long as national legislation is clear and limitation periods are reasonable.
The Court emphasized national rules must be clear enough to let you understand when joint liability arises. Your tax exposure doesn’t remain open indefinitely. National limitation periods typically limit exposure.
Here’s what matters: when authorities act within a reasonable limitation period, legal certainty is respected.
The Knowledge Test: Your Only Shield
The entire liability framework hinges on one question: did you know or should you have known your supplier wouldn’t remit the VAT?
This isn’t new. The knowledge test has been central to VAT fraud cases for years.
What’s new is the explicit confirmation this test remains your primary defense even when the supplier has vanished.
The Court stressed joint liability won’t be imposed on an unwitting, innocent customer. The Bulgarian law itself included the “knew or should have known” test, which the ECJ approved as a proper safeguard distinguishing honest from dishonest buyers.
This knowledge-based test protects legitimate businesses while targeting those who facilitate VAT evasion.
But here’s the problem: what constitutes “should have known”?
The €128 Billion Context You Can’t Ignore
Tax authorities aren’t pursuing these cases for sport.
In 2023, the VAT compliance gap in the EU hit €128 billion. This is 9.5% of the VAT Total Tax Liability. An increase of 1.6 percentage points from the previous year.
€128 billion in uncollected VAT.
Member States are looking everywhere to close this gap. Joint liability mechanisms are one of their most powerful tools.
The European Commission recognizes variations between EU countries in the estimated VAT compliance gap point to differences in tax compliance, fraud, avoidance, bankruptcies, and insolvencies. Bankruptcies lead to insolvencies resulting in the inability to pay VAT.
Supplier insolvency is a recognized structural problem affecting VAT collection across the EU. When suppliers go under, the VAT they collected but never remitted becomes someone else’s problem.
You’re the someone else.
What This Means for Your Due Diligence Process
The central issue remains the knowledge test: did you know or should you have known VAT wouldn’t be remitted?
From a compliance perspective, this decision transforms supplier due diligence from a best practice to a legal necessity.
You need to demonstrate you assessed VAT risks at the time of the transaction. This means:
Supplier vetting becomes mandatory. You need documented evidence you verified your supplier’s VAT registration, financial stability, and compliance history.
Payment and pricing controls matter. Unusual payment terms, prices well below market rates, or requests for cash payments are red flags. Document why you proceeded despite irregularities.
Retain evidence. Keep records showing you performed reasonable checks. If authorities come knocking three years later, you need proof you acted in good faith.
The timeline in the Vaniz case is instructive. The supplier was dissolved in August 2020. The tax authority initiated proceedings in January 2022. This is a two-year delay between dissolution and liability assessment.
This extended risk window means you don’t relax because a transaction is old. Your exposure continues until the limitation period expires.
The Proportionality Safety Net
The Court didn’t give tax authorities unlimited power.
The decision includes important safeguards based on proportionality and legal certainty.
National legislation must be unambiguous. You need to ascertain your rights and obligations clearly. If the rules are vague or contradictory, the tax authority has the problem, not you.
Limitation periods must be reasonable. Tax claims don’t remain open indefinitely. Most Member States have limitation periods ranging from three to ten years. Once the period expires, you’re protected.
The burden of proof matters. Tax authorities must establish you knew or should have known about the VAT fraud. They don’t simply assert the fraud. They need evidence.
This creates a framework where legitimate businesses have protection, but those who turn a blind eye to obvious fraud remain exposed.
What You Should Do Now
This judgment doesn’t create new obligations. It clarifies existing ones.
The clarification has teeth.
Review your supplier onboarding process. Do you have documented procedures for verifying VAT registration? Do you demonstrate you checked financial stability? Would your due diligence withstand scrutiny three years from now?
Assess your current supplier base. Are any showing signs of financial distress? Delayed payments, reduced staff, or operational changes can signal trouble. Document your monitoring efforts.
Update your contract templates. Include provisions requiring suppliers to confirm VAT compliance and provide evidence of remittance. This won’t eliminate your risk, but it strengthens your defense.
Train your procurement team. They need to understand the cheapest supplier becomes the most expensive in the long run. Price anomalies require investigation, not celebration.
Document everything. When you conduct due diligence, create records. When you identify and investigate red flags, document your process. When you decide to proceed despite concerns, write down why.
The Bigger Picture
Case C-121/24 reflects a broader shift in VAT enforcement across the EU.
Tax authorities are under pressure to close the compliance gap. They’re using every tool available. Joint liability is one of the most effective.
Supplier insolvency doesn’t eliminate your potential liability. This fundamentally changes the risk calculation for cross-border transactions.
You’re not evaluating whether a supplier delivers goods or services. You’re evaluating whether they’ll remain solvent long enough to remit the VAT they collect.
This is a different analysis entirely.
The knowledge test provides protection, but only if you demonstrate you exercised reasonable care. “I didn’t know” isn’t enough. You need to show you couldn’t have known despite taking appropriate steps.
This judgment makes clear VAT compliance is no longer the finance department’s problem. This is a procurement issue, a contract issue, and a risk management issue.
The companies adapting their processes now will avoid the problems Vaniz faced. The ones who don’t will find a supplier’s bankruptcy becomes their tax liability.
The choice is yours. The Court has spoken, and the rules are clear.
