The Court of Justice of the European Union delivered its judgment in Case C-125/24, Palmstråle in June 2025, referred to it by the Supreme Administrative Court of Sweden (Högsta förvaltningsdomstolen) on horses that are used in competitive tournaments, and their movement in-and-out of the EU’s customs territory, namely, from Sweden to Norway, and back again: the intra-Nordic movement of goods.
In its judgment, the Court found that procedural non-compliance with does not automatically preclude VAT exemption, so long as there is no attempt at deception. Accordingly, a VAT exemption may still apply in the context of reimported goods.
Background and Facts
A dispute arose in Sweden and involved a private individual (AA), who owned horses used in international competitions. After exporting two horses to Norway for competition purposes, AA re-entered the EU via Sweden without presenting the horses to customs or declaring them for release for free circulation. Shortly after crossing back into Sweden from Norway, AA was stopped by the Swedish Customs Administration (Tullverket).
While the horses were not subject to import duties under Article 203 of the Union Customs Code (UCC) (Regulation 952/2013), the Swedish Customs Administration imposed a VAT liability of 41,178 SEK (€3,750 approx.), arguing that the conditions for an exemption for VAT under Swedish law and Article 143(1)(e) of the VAT Directive (Directive 2006/112) were not met.
At first instance before the Administrative Court of Karlstad (Förvaltningsrätten i Karlstad) and the Administrative Court of Appeal in Gothenburg (Kammarrätten i Göteborg) upheld the decision of the Swedish Customs Authority, reasoning that AA had failed to comply with formal customs obligations, including the requirement to present the horses to customs and to make a declaration for release for free circulation. These procedural failures – according to these two lower instance national courts – precluded the application of the VAT exemption.
AA appealed to the Supreme Administrative Court of Sweden (Högsta förvaltningsdomstolen), which referred the matter to the CJEU. The central legal question was whether the VAT exemption for reimported horses (goods) under Article 143(1)(e) of the VAT Directive could still apply when the importer failed to comply with certain formal customs obligations, provided there was no attempt at deception.
This case raised important questions about the relationship between customs formalities and VAT liability, particularly in the context of returned goods and the principle of good faith in EU customs law.
Applicable law
Article 143(1)(e) of the VAT Directive states:
‘Member States shall exempt the following transactions:…the reimportation, by the person who exported them, of goods in the state in which they were exported, where those goods are exempt from customs duties…’
In other words, it provides for VAT exemption on the reimportation of goods by the person who exported them, provided the goods are returned in the same state and are exempt from customs duties.
Article 86(6) of the UCC states:
‘Where the customs legislation provides for a favourable tariff treatment of goods, or for relief or total or partial exemption from import or export duty…such favourable tariff treatment, relief or exemption shall also apply in cases where a customs debt is incurred…, on condition that the failure which led to the incurrence of a customs debt did not constitute an attempt at deception.’
In other words, this extends this exemption to cases where a customs debt arises due to non-compliance with customs obligations, as long as there is no attempt at deception.
Article 203(5) of the UCC states:
‘The relief from import duty shall be granted only if goods are returned in the state in which they were exported.’
In other words, this provision, and its wider setting, sets out the conditions under which returned goods may be exempt from import duties, including the requirement that they be declared for release for free circulation.
Judgment of the Court
The Court ruled in favour of a more flexible, good-faith-based approach to VAT exemption in cases of reimportation of goods, even where formal customs procedures were not strictly followed.
The underlying issue for the Court was whether the failure to comply with formal obligations – presenting the goods to customs or making a declaration – automatically disqualifies the person reimporting the goods from a VAT exemption, even if the substantive conditions for exemption are met.
The Court distinguished between substantive and formal conditions. It acknowledged that AA had met the substantive requirements: the horses were reimported by the original exporter, in the same condition, and within the prescribed time frame. However, given that AA had failed to meet the formal requirements under Article 203 UCC, namely, presenting the horses to customs and declaring them for release for free circulation, the Court found that – contrary to the view of the Swedish Customs Administration – that procedural failures did not invalidate the VAT exemption.
The Court emphasized the importance of Article 86(6) UCC, which allows for customs duty relief even when a customs debt arises due to procedural non-compliance, provided there is no attempt at deception. The Court reasoned that this provision would be rendered ineffective if interpreted to require full compliance with the very formalities whose breach it is designed to mitigate.
In other words, Article 86(6) UCC presupposes that formal obligations may not be met, and yet still allows for relief from customs duties. Therefore, the same logic must apply to VAT exemption under Article 143(1)(e) of the VAT Directive, which is explicitly linked to customs duty relief.
The Court also invoked Recital 38 of the UCC, which stated there was to be consideration for the good faith of the person concerned and minimizing the impact of negligence. It held that a failure to comply with formal obligations due to negligence, rather than intentional deception, should not automatically disqualify a person from VAT exemption.
In the case at hand, there was no evidence of deception by AA. The referring national court had indicated that her failure to comply with customs formalities was likely due to negligence. The CJEU thus made it clear that if no deception was involved, the VAT exemption should apply.
Analysis
This judgment has tax implications for the cross-border movements of goods for a number of actors.
For individuals and other economic operators (in sport or otherwise), it confirms that VAT exemption on reimportation is not automatically lost due to procedural missteps, provided the substantive conditions are met, and there is no intent to deceive.
For customs authorities, the judgment serves as a reminder to distinguish between genuine errors and fraudulent behaviour. It encourages a more nuanced, case-by-case assessment rather than a rigid application of formal rules.
For the national courts in Sweden – whilst the reference for a preliminary ruling was evidently needed here, and the Supreme Administrative Court was under an obligation to make such a reference – the lower courts’ interpretation was ultimately found to be inconsistent with EU law, highlighting the importance of preliminary references in ensuring uniform application.
Why did the individual have to go through three different instances to ‘win’ their case? Evidently, the Administrative Court of Karlstad, and the Administrative Court of Appeal of Gothenburg, arrived at a conclusion of the law that was incorrect. Either one of them ought to have made a reference for a preliminary ruling earlier in the proceedings.
Read the judgment
The judgment of the Court of Justice of the European Union in Case C-125/24, Palmstråle referred to it by the Supreme Administrative Court of Sweden (Högsta förvaltningsdomstolen), and delivered on 12 June 2025, can be read here.