The ruling of the Court of Justice of the European Union (CJEU) in Case C-164/24 (Cityland EOOD), delivered on April 3 2025, is of notable significance as it challenges the often overly widespread practice of systematic cancellation of VAT numbers by tax administrations.
The judgment arose from a preliminary ruling procedure initiated in the context of a dispute between the Bulgarian company Cityland EOOD and the Bulgarian tax administration. The conflict centred on the decision by the Bulgarian authorities to remove the company from the VAT register due to alleged systematic breaches of its tax obligations. This measure was based on Bulgarian national legislation allowing deregistration from the VAT register for entities that have committed repeated violations.
Analysis of the Cityland case
Cityland, which operated in the construction sector, was subject to a tax inspection in 2022. Following the audit, its VAT identification number was revoked. The main reason was the non-payment of VAT for several tax periods. The company argued that these non-payments did not stem from fraudulent behaviour, but rather from legitimate commercial difficulties – especially due to a defaulting client that failed to pay the VAT stated in the invoices. Cityland also claimed that it later settled the principal amount of the tax debt, with only interest charges remaining.
The Bulgarian national court, tasked with resolving Cityland’s appeal, referred several preliminary questions to the CJEU. In essence, the court asked whether Bulgarian legislation allowing the exclusion of a taxable person from the VAT system without an individualised assessment of their conduct and the nature of the infractions is compatible with the principles of union law. The key legal concerns focused on articles 213 and 273 of the VAT Directive, along with the principles of proportionality and legal certainty.
The court recalled that the EU’s common VAT system relies on the proper identification of taxable persons through an individual number, which ensures sound tax administration and enables essential controls to prevent fraud. This identification not only certifies the fiscal status of the person but also ensures that the transactions they undertake are fiscally valid. Removing this identification number, in practice, severely hinders a company’s ability to operate economically.
Although member states retain a certain margin to adopt measures to ensure tax collection and prevent fraud, this discretion is not unlimited. Any measures taken must respect fundamental principles of union law, including proportionality. In this case, the court held that deregistering a taxpayer for formal infringements without assessing whether there was fraudulent intent or whether the situation was later remedied constitutes a disproportionate measure.
Moreover, automatic exclusion from the VAT register can have consequences extending beyond the tax sphere. Clients and business partners may be discouraged from engaging with a deregistered company due to uncertainty over their right to deduct input VAT. This could lead to the loss of contracts, serious reputational damage, or even the forced cessation of the company’s business activities – amounting to a de facto ban on economic activity.
The court also emphasised that imposing such a severe penalty without a specific evaluation of the taxpayer’s conduct goes beyond what is necessary to safeguard the integrity of the tax system. It demands that administrative authorities, in accordance with the principle of good administration, carry out a thorough assessment of all relevant factors before taking such serious decisions. They must consider:
The overall behaviour of the taxable person;
The impact of the violations;
Any subsequent remediation; and
Other relevant subjective circumstances.
When a company can be excluded from the VAT system due to minor or regularised infractions, without any assurance of legal stability, this introduces continuous uncertainty about its tax position and that of its business partners – contrary to the legal certainty required under EU law.
The principles of proportionality and legal certainty do not permit the removal of a taxpayer from the VAT register solely for formal breaches, without considering their nature or evaluating the taxpayer’s behaviour on a case-by-case basis. Any sanction of this nature must be proportionate, reasonable, and grounded in detailed analysis that distinguishes between merely formal breaches and those that pose a genuine risk to tax collection.
Implications of the judgment for tax administrations
Ultimately, this judgment sends a message to tax administrations: they cannot systematically and indiscriminately deregister VAT taxpayers without conducting an individualised assessment of each case. Merely identifying repeated or formal infringements is not enough to justify such a drastic measure; it is essential to analyse the taxpayer’s conduct, the severity of the breaches, and any subsequent remediation. Failing to do so would amount to disregarding core principles of EU law.
