EU – European General Court: Intra-EU Supply Chains, Dropshipment and Triangulation

EU VAT Framework – Triangulation 

Businesses that deal with intra-EU supplies of goods are well aware of the complexities that can arise in such circumstances. The EU triangulation VAT mechanism is designed to reduce administrative burden and compliance costs, and to accelerate the pace of cross-border intra-EU transactions under specific conditions. 

Triangulation exists to reduce the need for multiple VAT registrations across the EU. In cases where all mandatory conditions are met, it permits the intermediary (a taxable person acting as the middleman) to avoid VAT registration in the destination Member State (the end-customer Member State, the MS where goods are actually shipped to). 

VAT triangulation scheme, in its basic legal understanding, captures an intra-Community transaction involving three parties, each of whom is VAT-registered and established in a different Member state. 

Illustrative example: 

• First Party: Original Supplier – established in Italy 
• Second Party: Intermediary – established in Spain 
• Third Party: End customer – established in Latvia 

Triangulation scheme structure: 

• Goods are shipped from the first party to the third party
• First party issues VAT invoice which has VAT at zero to the second party; intermediary issues VAT-exempt invoice under reverse-charge model following intra-EU acquisition applicable provision 

Background of the Case 

The European General Court(EGC), which presently deals with most of the VAT-related cases brought before it by different Member States, issued a preliminary ruling in Case T-646/24 (Case) regarding whether the EU VAT triangulation simplification for intra-EU drop shipments also applies when more than three parties are involved.

The Case involves a supply chain that involves four parties. The Court issued its Ruling on December 3, 2025. 

Parties and Transaction Flow 

The Slovenian Administrative Court disputed the possibility of adherence to the triangulation simplification scheme on different grounds, with central points based on the assumption that triangulation cannot involve more than three parties. 

If the intermediary (SL-based company) knew that its customer (shell entities) wasn’t the end customer in the supply chain, it was aware of the VAT fraud. 

Parties in the called to action triangulation scheme: 

1. A German supplier;
2. The Slovenian company(intermediary trader);
3. A Danish company acting as its customer; and
4. Danish VAT-registered buyers who are actually end customers in this chain (customers of the intermediary customer)

A Slovenian VAT-registered intermediary (using its VAT SI number) acquired goods from suppliers established in Germany. The goods were resold later to three Danish VAT-registered companies.

A company identified for VAT purposes in Slovenia acquired certain goods from suppliers established in Germany, using its Slovenian VAT identification number. It resold those goods to three Danish companies, all of which were identified for VAT purposes in Denmark. 

However, in practical terms, the original customer of the SI intermediary hasn’t obtained the goods, received or stored them, or had any warehouse whatsoever. The goods were actually shipped directly from the German supplier to Danish-based VAT-registered customers of the original customer of the Slovenian intermediary. 

From the perspective of EU VAT compliance requirements, the Slovenian intermediary (the defendant) complied with all rules regarding proper invoicing, reporting, and the storage of documentation. Everything is aligned with the EU VAT rules (stipulated for triangulation schemes) and is also compliant with the SI national VAT rules. 

European General Court Ruling 

The reasoning of the EGC and key takeaways: 

• The Court recalled that under the EU VAT Law, the supply of goods is not limited to formal proceedings for the transfer of ownership under national law, but should be assessed based on the power to dispose of the goods as the owner. 
• The transfer of the power of disposal does not require the buyer to have physical possession of the goods or to receive delivery of the products.
• The Court’s interpretation of the applicability of Article 141 of the VAT Directive strongly suggests that there isn’t a default condition that the recipient of the subsequent supply(in the triangulation) has physical possession of the goods; and that the dispatch of the goods must end at this buyer’s address. 
• Direct transport to the VAT-registered customer, that is, the VAT-registered customer in the same Member State as the original customer (third party), doesn’t exclude the applicability of the simplification scheme if other mandatory conditions are met. 
• As regards the parties’ possibility to enjoy the benefits of the EU VAT system(input tax deductions, exemptions, refunds, and others), the Court gave a precise guideline, which is that no one can benefit from these advantages in the circumstances where there is a VAT fraud identified, being a part of the transaction. 
• When courts or other institutions of Member States determine that, within the disputed transactions, there is VAT fraud under national law, the triangular simplification scheme may be denied, and the taxable person cannot benefit from it. 
• The Court hasn’t agreed on the observation that the triangular simplification scheme cannot be used on the grounds of the existence of the fourth party in the supply chain or that the tangible property is shipped directly by the supplier to that party, if other mandatory schemes’ conditions are met. 

Takeaway