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URL: http://www.bailii.org/eu/cases/ECHR/2018/497.html
Cite as: CE:ECHR:2018:0614JUD006803914, [2018] ECHR 497, ECLI:CE:ECHR:2018:0614JUD006803914

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FIRST SECTION

CASE OF EUROMAK METAL DOO v. THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA

(Application no. 68039/14)

JUDGMENT

STRASBOURG

14 June 2018

This judgment will become final in the circumstances set out in Article 44 § 2 of the Convention. It may be subject to editorial revision.

In the case of Euromak Metal Doo v. the former Yugoslav Republic of Macedonia,

The European Court of Human Rights (First Section), sitting as a Chamber composed of:

Linos-Alexandre Sicilianos, President,
Kristina Pardalos,
Aleš Pejchal,
Krzysztof Wojtyczek,
Armen Harutyunyan,
Tim Eicke,
Jovan Ilievski, judges,
and Abel Campos, Section Registrar,

Having deliberated in private on 22 May 2018,

Delivers the following judgment, which was adopted on that date:

PROCEDURE

1. The case originated in an application (no. 68039/14) against the former Yugoslav Republic of Macedonia lodged with the Court under Article 34 of the Convention for the Protection of Human Rights and Fundamental Freedoms ("the Convention") by Euromak Metal, a limited liability company with its registered seat in Skopje ("the applicant company") on 16 October 2014. The applicant company was represented by Mr I. Spirovski, a lawyer practising in Skopje. Following the removal of the applicant company from the register of companies on 2 February 2017 (see paragraph 22 below), Ms and Mr Pavlovski, as its sole shareholders, indicated their interest in continuing the application in its name and designated the same counsel to represent them.

2. The Macedonian Government ("the Government") were represented by their former Agent, Mr K. Bogdanov, and subsequently by their present Agent, Ms D. Djonova.

3. The applicant company alleged, in particular, that it had had legitimate expectations to obtain value-added tax ("VAT") deductions from the State. It complained that the State had failed to honour the deductions due to circumstances beyond the applicant company's control. It relied on Article 1 of Protocol No. 1.

4. On 5 September 2016 the application was communicated to the Government.

THE FACTS

I. THE CIRCUMSTANCES OF THE CASE

A. Background to the case

5. The applicant company was set up in 1998 as a limited liability company. Its founders and sole shareholders were Ms Zhaneta Pavlovska and Mr Rasko Pavlovski. It traded in scrap metal and for that purpose it purchased waste aluminium, copper, iron and other metals, processed them and then offered the product for sale.

6. The applicant was registered for the purposes of the Value Added Tax Act (the "VAT Act") and declared VAT on all invoices issued. VAT was also declared on all incoming invoices. This made it possible for the applicant company periodically to request VAT deductions from the State, which it did (in accordance with the rules of the "tax credit" system).

B. VAT audit and subsequent proceedings

7. Until the subsequent events, the applicant company had been submitting regular tax returns to the tax authorities, notifying the State of its VAT calculations, payments and deductions. The State had processed the tax returns without indicating any wrongdoing or additional amounts due on the part of the applicant company.

8. On 22 September 2009 the Internal Revenues Office, regional directorate - Skopje (Управа за јавни приходи, Регионална дирекција Скопје - "the IRO") issued an order to audit the applicant company for the purposes of VAT. The audit took place over several days during the months of October and November 2009 and took into account the period between 1 January 2005 and 30 June 2009.

9. On 6 November 2009 a tax assessment was compiled by the IRO. It was established that the applicant company's suppliers were registered for the purposes of VAT but some of them had not declared or paid VAT to the State, even though it had clearly been declared in the invoices sent to the applicant company. That finding was based on earlier audits of those companies, which remained without further specification. The audit further established that some of the invoices did not contain the addresses of the suppliers. Lastly, the audit found that all invoices from the suppliers had been paid in full by the applicant company and that VAT had been declared on all invoices from the applicant company. On account of the above issues related to the applicant company's suppliers, the audit concluded that the applicant company had failed to meet the conditions necessary to benefit from the VAT deductions it had received.

10. Relying on the tax assessment conducted earlier, on 20 November 2009 the IRO issued two decisions in respect of erroneous calculation of VAT, ordering the applicant company to pay an additional 3,827,546.00 Macedonian denars (MKD, around 62,000 euros (EUR)) in VAT. According to the IRO, those were the amounts the applicant company had unlawfully deducted from its tax obligations during the period 2005-07. An appeal lodged against those decisions had no suspensive effect.

11. The applicant company lodged an appeal with the Minister of Finance against the decisions of 9 December 2009. In the appeal it stated that it had met all of its VAT obligations stemming from the suppliers' invoices and that it could not be held responsible for the suppliers' mistakes.

12. On 8 February 2010 the Minister of Finance dismissed the appeal, reiterating the same findings and reasoning as in the audit report.

13. On 22 March 2010 the applicant company received a written reprimand from the IRO. The reprimand stipulated the full amount, including interest, to be paid by the applicant company. It amounted to MKD 6,059,124 (around EUR 100,000).

14. On 23 April 2010 the applicant company lodged an administrative action with the Administrative Court (Управен суд).

15. On 29 April 2010 the IRO blocked the applicant company's bank account pursuant to the payment decisions.

16. By a decision of 28 March 2011 the Administrative Court remitted the case to the Ministry of Finance, having found that the second-instance decision had been issued by an unauthorised person acting in the name of the Minister.

17. On 26 May 2011 the Ministry of Finance again dismissed the appeal of the applicant company, reiterating the findings from the audit.

18. On 22 July 2011 the applicant company lodged another administrative action.

19. On 1 March 2013 the Administrative Court dismissed the action. The relevant part of the judgment reads:

"... the cumulative conditions to obtain a deduction ... were not met. Specifically, the income of the applicant company was created by companies which failed to meet their legal obligations in relation to the payment of VAT ...

In the deliberations the court took into account the claims by the appellant that it was wrongfully deprived of the right to claim VAT deductions because the errors found in the tax assessment had pertained to other [companies] ... These claims were rejected by the court ... inter alia taking into account that it is in the interests of every taxpayer to know and be aware of those with whom they engage in business."

20. On 17 September 2013 the applicant company appealed to the Higher Administrative Court (Виш управен суд).

21. In a final judgment of 13 March 2014 the Higher Administrative Court upheld the findings and conclusions of the tax authorities and stated the following:

"... [T]he appellant failed to fulfil the cumulative conditions prescribed in sections 33 and 34 of the VAT Act to obtain a VAT deduction specifically because the monetary inflow of the appellant as a taxpayer was done by other taxpayers who failed to meet their obligations to declare or pay tax.

...

The court examined the complaint that all of the outstanding issues in the audit reflected errors committed by third parties and that the appellant should not be forced to bear the obligations of third parties ... but dismissed them ... having in mind that every taxpayer has an interest to enter into relations with other subjects."

22. On 2 February 2017 the applicant company was removed from the register of companies and ceased to exist. According to a document issued by the register of companies, it was removed in accordance with section 552-B of the Companies Act (Закон за трговски друштва), specifically for not having submitted an annual financial statement (завршна сметка) to the authorities for the year 2014.

23. The applicant company's bank account remained blocked by the IRO until 10 April 2017, when it was closed. Due to lack of funds on the account, the IRO failed to collect any money from the applicant company.

C. Other relevant facts

24. On 9 December 2011 the prosecution for organised crime (Основно јавно обвинителство за гонење на организиран криминал и корупција) filed an indictment against several individuals for criminal enterprise, abuse of office and tax evasion. The indictment encompassed the individuals responsible for several, but not all, of the applicant company's suppliers. It was alleged that the individuals used the supplier companies to issue fake invoices which were not the result of real commercial activity. The supplier companies as legal entities were not directly indicted. The domestic courts found the accused guilty of the offences by a judgment of 29 March 2013, which became final on 9 January 2014.

II. RELEVANT DOMESTIC LAW

A. Value-Added Tax Act, consolidated version (Закон за данок на додадена вредност, пречистен текст, Official Gazette No. 177/2014)

25. Under section 33 of the Act, the taxpayer has the right to reduce the VAT that it is obliged to pay for a certain time period by subtracting from it the amount that has already been paid on a transaction by other taxpayers in the supply chain.

26. Under section 34 of the Act, the right to obtain VAT deductions is dependent on the taxpayer obtaining an invoice issued in accordance with the Act, or a customs declaration. The right to obtain a deduction exists if all the conditions stipulated in section 33 are met.

B. Companies Act (Закон за трговските друштва, Official Gazette No. 28/2004 with further amendments)

27. Section 552-A provides that the Central Register (Централен регистер), which in turn is in charge of the register of companies, may publish on its website the details of any company which has become inactive or has met the criteria specified in section 552-B, thereby setting in motion proceedings for its removal from the register. The publication on the website allows for any creditor to act within the time-limit of one year and initiate bankruptcy proceedings against that company.

28. Section 552-B provides that a company may be removed from the trade register in accordance with section 552-A if it has failed to submit an annual financial statement in respect of the previous business year.

THE LAW

I. ALLEGED VIOLATION OF ARTICLE 1 OF PROTOCOL No. 1 TO THE CONVENTION

29. The applicant company complained under Article 1 of Protocol No. 1 that, in spite of its full compliance with its own VAT obligations, the domestic authorities had deprived it of its right to deduct the input VAT it had paid on received goods, because its suppliers had failed to meet their own VAT reporting obligations. Moreover, as a result of the refusal to allow the aforesaid deduction, the applicant company had been unjustifiably ordered to pay the input VAT which it had previously lawfully deducted, this time together with interest. Article 1 of Protocol No. 1 reads as follows:

"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."

A. Admissibility

1. Incompatibility ratione personae

(a) The parties' submissions

30. The Government urged the Court to reject the application as inadmissible ratione personae on account of the fact that the applicant company had ceased to exist. They submitted that owing to the removal of the applicant company from the register of companies, the order to pay the tax was no longer enforceable and there was no longer any threat of enforcement. Moreover, the applicant company was aware that the proceedings for its removal from the register of companies were ongoing, but had failed to notify the Court. In addition, the Government objected that the discontinuance of the business activities of the applicant company was unrelated to the tax assessment or the ensuing tax orders.

31. The applicant company submitted that it had indeed ceased its business activities from the moment its bank account had been blocked. On account of the above-mentioned block, it had been unable to pursue any further business activities, and as a consequence, it had indeed ceased to exist as of 2 February 2017. However, in its view, that did not prevent the Court from further analysing the case, as the two shareholders, Ms and Mr Pavlovski, were the sole shareholders of the applicant company and they had a legitimate interest in pursuing the case.

(b) The Court's assessment

32. The Court observes that the applicant company existed at the time the application was introduced, that is 16 October 2014, and that it ceased to exist on 2 February 2017. The Court further notes that the company was a family business of Ms and Mr Pavlovski, who were its sole founders and sole shareholders at the time of the introduction of the application and on the date of its removal from the register of companies. The Court also observes that the alleged breach of Article 1 of Protocol No. 1 in the present case concerns the tax assessment, and that the tax-related proceedings primarily involve a pecuniary claim affecting Ms and Mr Pavlovski's pecuniary interests as the sole shareholders of the company in question.

33. Accordingly, the Court notes that even if, in domestic terms, the applicant company's obligations and claims were formally extinguished after its removal from the register of companies, the dispute before the Court under the Convention remains unresolved, and Ms and Mr Pavlovski, who have expressed their wish to continue with the proceedings before the Court, have a legitimate interest in obtaining a final determination of that case by the Court (see, for instance, Uniya OOO and Belcourt Trading Company v. Russia, nos. 4437/03 and 13290/03, § 263, 19 June 2014, with further references). The Government's objection must therefore be rejected.

2. Non-exhaustion of domestic remedies

(a) The parties' submissions

34. The Government proposed that the Court should reject the application on account of non-exhaustion of domestic remedies, since the applicant company had failed to join the criminal proceedings against its suppliers, or to lodge a civil claim seeking to recover from those same companies the amounts it had been charged.

35. The applicant company dismissed those claims, stating that the criminal proceedings had been directed against physical persons, most of whom were not even founders or managers of the companies which were its suppliers. Moreover, pursuant to the VAT orders, the applicant company had not finally paid any amounts, so there was no actual amount to be sought from those parties.

(b) The Court's assessment

36. The Court would first reiterate that when there are a number of domestic remedies which an applicant can pursue, that person is entitled to choose a remedy which addresses his or her essential grievance. In other words, when a remedy has been pursued, use of another remedy, which has essentially the same objective, is not required (see, for instance, Popovski v. the former Yugoslav Republic of Macedonia, no. 12316/07, § 80, 31 October 2013). Moreover, the rule of exhaustion of domestic remedies contained in Article 35 § 1 of the Convention must be applied to reflect the practical realities of the applicant's position in order to ensure the effective protection of the rights and freedoms guaranteed by the Convention (see Hilal v. the United Kingdom (dec.), no. 45276/99, 8 February 2000).

37. In the instant case, the Court notes that the applicant company appealed against the tax assessment as well as the decisions ordering it to pay additional tax, presented its arguments before the domestic tax authorities and administrative courts, and afforded them the opportunity of preventing or putting right the alleged violation of Article 1 of Protocol No. 1.

38. In the opinion of the Court, it was not necessary for the applicant company, in addition to the administrative tax proceedings, to pursue other remedies concerning the same matter. In view of the above, the Court concludes that the applicant company exhausted the available domestic remedies in respect of the complaint submitted to the Court.

3. Conclusion

39. The Court notes that the application is not manifestly ill-founded within the meaning of Article 35 § 3 (a) of the Convention. It further notes that it is not inadmissible on any other grounds. It must therefore be declared admissible.

B. Merits

1. The parties' arguments

40. The applicant company claimed that it had been charged with additional amounts of tax. These were the VAT deductions that it had lawfully made in the past. The applicant company had met all of its own tax obligations and had had no obligation or opportunity to know whether its suppliers had met their VAT obligations, or to influence their actions in this respect in any way. The interference with its possessions had not been lawful, and punishing the applicant company by charging it additional VAT had placed a disproportionate burden on it. Lastly, the applicant company stated that the circumstances of the case were similar to those in the case of "Bulves" AD v. Bulgaria (no. 3991/03, 22 January 2009) and that the Court should therefore find a violation.

41. The Government stated that in the instant case it could not be said that there had been any interference by the State because the applicant company had never actually paid the amounts it had been charged. Additionally, they stated that even if interference was found to exist, it had been proportionate. In view of the State's wide margin of appreciation, the applicant company had been obliged to share the responsibility for the criminal activities of its suppliers, which it had supported by consenting to use and rely on invoices issued by them. Lastly, they submitted that in view of the State's wide margin of appreciation, the fact that the due tax had still not been collected by the State constituted sufficient reason to differentiate this case from the case of "Bulves" AD (cited above).

2. The Court's assessment

(a) General principles

42. The Court notes that the instant case falls to be examined under the second paragraph of Article 1 of Protocol No. 1 to the Convention, as the interference at stake was clearly aimed at "securing the payment of taxes". In this respect, the Court reiterates that although the State has a wide margin of appreciation in the field of taxation, an instance of interference must strike a "fair balance" between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights (see Gasus Dosier und Fördertechnik GmbH v. the Netherlands, 23 February 1995, §§ 59-60, Series A no. 306-�B and Khodorkovskiy and Lebedev v. Russia, nos. 11082/06 and 13772/05, § 870, 25 July 2013).

(b) Application to the instant case

43. The Court notes at the outset that there is no doubt that the applicant company's right to claim a deduction amounted to at least a "legitimate expectation" of obtaining effective enjoyment of a property right amounting to a "possession" within the meaning of the first sentence of Article 1 (see "Bulves" AD, cited above, § 57). It also notes that the tax assessment in respect of the applicant company (see paragraph 9 above) constituted an interference with its possessions (see Khodorkovskiy and Lebedev v. Russia, cited above, § 873).

44. In the case at issue, the Court observes that the applicant company declared VAT on all of the invoices that it had issued (see paragraph 6 above). It otherwise complied with all of its VAT obligations by paying VAT to the State and obtaining reimbursements on the basis of invoices from its suppliers where VAT had been declared. This finds support in the fact that for years, the applicant company had submitted tax returns to the State, which had processed them without making any remarks thereon (see paragraph 7 above). The conclusions drawn in respect of the applicant company's suppliers (namely, that they had failed to declare or pay tax to the State) were based on earlier tax audits conducted in respect of those companies, which had not been made available to the applicant company (see paragraph 9 above). The Court therefore notes that the applicant company did not have, and could not have had, knowledge of whether its suppliers had met their VAT obligations; nor was it alleged that it had participated in any criminal activities perpetrated by them, if any.

45. The Court notes that in the case of "Bulves" AD (cited above) it found a violation of the applicant company's right to peaceful enjoyment of its possessions under similar circumstances. It concluded as follows:

"71. Considering the timely and full discharge by the applicant company of its VAT reporting obligations, its inability to secure compliance by its supplier with its VAT reporting obligations and the fact that there was no fraud in relation to the VAT system of which the applicant company had knowledge or the means to obtain such knowledge, the Court finds that the latter should not have been required to bear the full consequences of its supplier's failure to discharge its VAT reporting obligations in timely fashion, by being refused the right to deduct the input VAT and, as a result, being ordered to pay the VAT a second time, plus interest. The Court considers that this amounted to an excessive individual burden on the applicant company which upset the fair balance that must be maintained between the demands of the general interest of the community and the requirements of the protection of the right of property."

46. In these circumstances, the Court finds that the same considerations are applicable in the case at hand.

47. The Court notes that the only relevant difference between the instant case and the "Bulves" AD case is the fact that in the instant case the applicant company did not settle its obligations towards the State stemming from the impugned decisions (see paragraph 9 above). In this connection the Court notes that the applicant company's bank account was blocked pursuant to the impugned tax-assessment orders and it eventually ceased to exist, thus making it objectively impossible for it to meet its obligations under those orders. In these circumstances, given that there is no doubt that the impugned tax assessment affected the applicant company's property rights, this difference does not have a decisive bearing on the Court's assessment under Article 1 of Protocol No. 1 (compare Business Support Centre v. Bulgaria, no. 6689/03, § 23, 18 March 2010).

48. Moreover, in so far as the possibility for the applicant company to lodge a civil claim against its suppliers, as suggested by the Government (see paragraph 34 above), might be of an importance for the Court's proportionality assessment (see Sulejmani v. the former Yugoslav Republic of Macedonia, no. 74681/11, § 41, 28 April 2016), the Court notes that in the context of the administrative proceedings the domestic authorities never suggested that this was a possibility open to the applicant company to alleviate the financial burden placed on it. In this connection, it is also noted that the Government failed to show that a civil claim would have been an effective and available remedy at the relevant time (see "Bulves" AD, cited above, § 50, and mutatis mutandis Andonoski v. the former Yugoslav Republic of Macedonia, no. 16225/08, § 39, 17 September 2015). The same considerations apply as regards the possibility that the applicant company should have joined the criminal proceedings as suggested by the Government (see paragraph 34 above).

49. In conclusion, the Government have not put forward any fact or argument capable of persuading the Court to reach a different conclusion in the present case from that in the case of "Bulves" AD (cited above).

50. This is sufficient for the Court to conclude that there has been a violation of Article 1 of Protocol No. 1.

II. APPLICATION OF ARTICLE 41 OF THE CONVENTION

51. Article 41 of the Convention provides:

"If the Court finds that there has been a violation of the Convention or the Protocols thereto, and if the internal law of the High Contracting Party concerned allows only partial reparation to be made, the Court shall, if necessary, afford just satisfaction to the injured party."

A. Damage

1. The parties' arguments

52. The applicant company claimed 111,816 euros (EUR) in respect of pecuniary damage. The amount constituted the profit it would have earned for the period after its bank account had been blocked until its removal from the register of companies, together with the losses incurred during the same period. In addition, the manager of the company, Mr Pavlovski, sought EUR 19,590 in respect of the same period, representing lost earnings and benefits. In respect of non-pecuniary damage, the applicant company claimed EUR 500,000.

53. The Government contested all of the amounts requested as excessive and unsubstantiated.

2. The Court's assessment

54. The Court does not discern any causal link between the violation found and the pecuniary damage alleged by the applicant company and Mr Pavlovski. It recalls that the violation found does not concern the removal of the applicant company from the register of companies or the loss of earnings by the company's manager. Indeed, only the excessive individual burden the applicant company had to bear due to the improper assessment of its VAT obligations was at stake before this Court. The Court therefore rejects both claims under this head.

55. In respect of the amount sought under the head of non-pecuniary damage, and having regard to its case-law (see Centro Europa 7 S.r.l. and Di Stefano v. Italy [GC], no. 38433/09, § 221, ECHR 2012, and Rock Ruby Hotels Ltd v. Turkey (just satisfaction), no. 46159/99, § 36, 26 October 2010), the Court considers, ruling on an equitable basis, that an award of EUR 4,000 should be made. This amount is to be paid to Ms and Mr Pavlovski, as the sole shareholders of the applicant company (see, mutatis mutandis, Holy Synod of the Bulgarian Orthodox Church (Metropolitan Inokentiy) and Others v. Bulgaria, nos. 412/03 and 35677/04, § 39, 22 January 2009).

B. Costs and expenses

56. The applicant company claimed EUR 3,184 for the costs and expenses incurred before the Court. Ms and Mr Pavlovski, as the applicant company's sole shareholders at the time of its removal from the register of companies, requested that any amounts under this head be paid and transferred to them.

57. The Government contested the claim as excessive.

58. According to the Court's case-law, an applicant is entitled to the reimbursement of costs and expenses only in so far as it has been shown that these have been actually and necessarily incurred and are reasonable as to a quantum. In the present case, regard being had to the documents in its possession and the above criteria, the Court considers it reasonable to award the sum of EUR 1,500 covering costs under all heads. In view of the fact that the applicant company has ceased to exist, this amount should be paid in full and transferred to its shareholders, Ms and Mr Pavlovski.

C. Default interest

59. The Court considers it appropriate that the default interest rate should be based on the marginal lending rate of the European Central Bank, to which should be added three percentage points.

FOR THESE REASONS, THE COURT, UNANIMOUSLY,

1. Decides that the applicant company's shareholders, Ms and Mr Pavlovski, have locus standi in the proceedings;

2. Declares the application admissible;

3. Holds that there has been a violation of Article 1 of Protocol No. 1 to the Convention;

4. Holds,

(a) that the respondent State is to pay the applicant company's shareholders, within three months from the date on which the judgment becomes final in accordance with Article 44 § 2 of the Convention, the following amounts, to be converted into Macedonian Denars at the rate applicable at the date of settlement:

(i) EUR 4,000 (four thousand euros), plus any tax that may be chargeable, in respect of non-pecuniary damage;

(ii) EUR 1,500 (one thousand five hundred euros), plus any tax that may be chargeable to the applicant, in respect of costs and expenses;

(b) that from the expiry of the above-mentioned three months until settlement simple interest shall be payable on the above amounts at a rate equal to the marginal lending rate of the European Central Bank during the default period, plus three percentage points;

5. Dismisses the remainder of the applicant's claim for just satisfaction.

Done in English, and notified in writing on 14 June 2018, pursuant to Rule 77 §§ 2 and 3 of the Rules of Court.

Abel CamposLinos-Alexandre Sicilianos
RegistrarPresident