General Court requires examination of good faith in the tax assessment procedure
The Gericht der Europäischen Union (EuG, General Court of the European Union) has ruled on VAT margin taxation that the good faith of a reseller may not be taken into account only in a separate equitable relief procedure. According to the ruling, the tax assessment procedure is already decisive where a taxable person has received an invoice containing information on margin taxation and argues that it relied on its supplier’s entitlement to apply that regime.
The starting point was proceedings between a GmbH, which sells jewellery and watches via online platforms, and a Finanzamt (German tax office). In the disputed years 2013 and 2014, the claimant had applied margin taxation under § 25a UStG (German Value Added Tax Act) to part of its turnover from watches.
Following a tax audit, the tax authorities considered this to be incorrect because, in the authority’s view, the claimant’s suppliers had already used margin taxation unlawfully, even though they had expressly referred to § 25a UStG in their invoices.
Background to the main proceedings
Margin taxation under § 25a UStG for resellers
Margin taxation under § 25a UStG can, in certain resales, result in VAT being levied not on the entire selling price, but on the trader’s margin. The basis under EU law is found in Art. 314 of the VAT Directive. In the main proceedings, it was disputed whether the claimant was entitled to apply this special scheme even though, in the opinion of the tax authorities, its upstream suppliers did not meet the requirements.
The Finanzamt reassessed the VAT under the general taxation rules and based its assessment on the total amount. By contrast, the claimant relied on its good faith in the accuracy of the invoice information provided by its suppliers.
Decision of the Sächsisches Finanzgericht
The court of first instance in the main proceedings was the Sächsisches Finanzgericht (Saxon Fiscal Court). It ruled by judgment of 24 October 2023, Az. 2 K 92/21. In its view, any good faith on the part of the claimant was not to be taken into account in the tax assessment procedure.
The Finanzgericht (Fiscal Court) based its reasoning on the fact that § 25a UStG did not contain any separate protection of legitimate expectations for this situation. According to this view, such protection could only be achieved through the equitable relief provisions of §§ 163, 227 AO (German Fiscal Code). This would have meant that the issue was to be examined not in the tax assessment procedure, but in a separate equitable relief procedure.
BFH saw doubts under EU law
Request for a preliminary ruling by the XIth Senate
The Bundesfinanzhof (BFH, Federal Fiscal Court) had doubts under EU law regarding this separation between tax assessment and equitable relief. By order of 19 February 2025, Az. XI R 23/24, the BFH referred the matter to the European court. The order is officially published in BFHE 289, 42, and in BStBl II 2025, 668.
The BFH made the proceedings public in press release No. 051/25 of 31 July 2025. This was the third time the European court had been seised of this legal issue. In two earlier proceedings concerning input VAT deduction and the so-called direct claim, the question did not have to be answered for other reasons.
The referring XIth Senate of the BFH was dissolved at the end of 31 July 2025, shortly after the European court had been seised. The European proceedings were conducted under case number T-569/25.
Why the EuG, and not the EuGH, decided
The decision was not made by the Gerichtshof der Europäischen Union (EuGH, Court of Justice of the European Union), but by the Gericht der Europäischen Union. The basis for this is Art. 50b of the Statute of the Court of Justice. Under that provision, the Court of Justice may transfer requests for preliminary rulings in certain subject areas to the General Court.
These transferred subject areas expressly include the common system of value added tax. The margin taxation case therefore falls within an area in which the EuG was able to decide on the request for a preliminary ruling.
Key statements of the EuG decision
Refusal of the special scheme not solely because of errors by the upstream supplier
The EuG confirmed the doubts under EU law expressed by the BFH. According to the case law of the Gerichtshof der Europäischen Union, a taxable person who has received an invoice containing information on margin taxation may not be refused the special scheme solely because the upstream supplier was itself not entitled to apply margin taxation.
Accordingly, refusal is possible only if the authorities prove that the taxable person did not act in good faith. Good faith is therefore relevant to the application of margin taxation not only in the context of a subsequent equitable relief review.
Criticism of separate review in assessment and equitable relief
The EuG criticised German administrative practice, which separates the review of the tax assessment from the review of an equitable relief measure. It was emphasised that this separation does not necessarily follow from national law, but is based on an administrative practice under which tax assessment and equitable relief are decided by separate notices.
According to the Court’s reasoning, this practice can make the exercise of rights under EU law excessively difficult. In particular, the following aspects were cited:
– almost doubled advisory and court costs due to separate proceedings, – a double calculation of the amount in dispute, – proceedings extended by years, – more difficult production of evidence in the equitable relief procedure, – the risk that taxable persons may refrain from seeking judicial clarification because of the cost risk in relation to the tax debt in dispute.
In addition, the standard of review differs: while in the tax assessment procedure all relevant circumstances must be investigated ex officio, in the equitable relief procedure, as a rule, only the aspects submitted by the taxable person are examined.
Consequences for the tax assessment and court proceedings
Good faith must already be taken into account in the assessment procedure
According to the EuG decision, the good faith of a reseller must in future already be taken into account in the tax assessment procedure. The same applies to fiscal court proceedings challenging the tax assessment.
The review may therefore not be shifted to a separate equitable relief procedure where the requirements of protection of legitimate expectations under EU law in connection with margin taxation are to be assessed. The decision concerns the question of whether a taxable person was entitled to rely on its supplier’s application of margin taxation where it had received an invoice containing corresponding information.
Parallel case before the BFH
In a parallel case, the Bundesfinanzhof, by judgment of 11 December 2025, Az. V R 7/24, rejected a stay of proceedings under § 74 FGO (German Fiscal Court Code) with regard to the then pending proceedings T-569/25. This decision shows that the legal issue also played a role in further proceedings.
The decision of the EuG of 14 October 2026, Az. T-569/25, was issued in the proceedings of the claimant German trading company for jewellery and watches following the request for a preliminary ruling by the BFH. It is reported in BeckRS 2026, 25975 and, according to the published information, is expected to appear shortly in DStR.
Classification for companies with turnover subject to margin taxation
For companies that resell goods such as watches, jewellery or other items, the distinction between standard taxation and margin taxation is of considerable tax significance. The decision particularly concerns cases in which suppliers’ invoices expressly refer to § 25a UStG, but the tax authorities later deny that the upstream suppliers were entitled to apply the special scheme.
The core statement is not that margin taxation must always be applied in such cases. Rather, the decisive point is that the tax authorities must examine the taxable person’s good faith already in the tax assessment procedure and may not refuse the special scheme solely because of an error at the upstream stage without assessing the requirements of good faith.
Frequently asked questions
EuG T-569/25 margin taxation: Must good faith be examined in the tax assessment procedure?
Yes. According to the EuG decision, the good faith of a reseller must already be taken into account in the tax assessment and court proceedings and may not be reserved only for a separate equitable relief procedure.
§ 25a UStG: May margin taxation be automatically refused because of errors by the upstream supplier?
No, not for that reason alone. If the taxable person has received an invoice containing information on margin taxation, the authorities must prove that it did not act in good faith.
What practical consequences does the EuG judgment on margin taxation have for companies trading in watches or jewellery?
For companies engaged in corresponding resales, the decision may be significant if the tax authorities object to the application of margin taxation because of the treatment by upstream suppliers. The review of protection of legitimate expectations must then not be postponed to a later equitable relief procedure.
Tax law advice on questions of margin taxation
The EuG decision makes clear that questions relating to margin taxation, tax assessment and protection of legitimate expectations under EU law require a precise examination of the respective facts. MTR Legal Rechtsanwälte advises companies, investors and high-net-worth individuals on tax law issues with a commercial connection. Further information can be found at Legal advice in tax law.
