Bulgarian high court found liable for damages caused by infringement of EU law

The Sofia Appellate Court issued a landmark decision on an action claim brought against the Bulgarian Supreme Administrative Court, awarding the claimant compensation of nearly BGN 1 million for damages caused by infringement of EU VAT law.

The Sofia Appellate Court stated in its judgment that although the breaches of EU law were not intentional, they could not be justified in light of the expectations for quality of the Supreme Administrative Court's judicial acts.

Background

A Belgian company purchased metal scaffoldings for leasing. Although the company did not have a fixed establishment in Bulgaria, it had Bulgarian VAT registration and deducted the VAT credit on the purchase through its Bulgarian VAT number. The scaffoldings were leased to a company in Germany, and in accordance with Directive 2006/112/EC, the place of the subsequent supply of the service was in Germany.

Later, tax authorities denied the company the right to VAT credit, claiming that the company did not use the scaffoldings for provision of subsequent supplies with a place of supply in Bulgaria; and therefore the company acted as a final consumer of the goods.

The tax assessment notice was appealed and after years of litigation, the Supreme Administrative Court, acting as the court of last instance, confirmed it.

Not satisfied with this outcome, the company brought an action against the Supreme Administrative Court, citing an infringement of EU law. The first instance court rejected the claim, but the Sofia Appellate Court repealed the previous decision and ruled in favour of the claimant.

The compensation awarded includes the VAT on the purchase invoice, and the default interest and legal costs for conducting the proceedings for the appeal of the tax assessment notice.

Should a court be held liable for its rulings?

The Sofia Appellate Court found the answer to this question in CJEU case-law and specifically in the decision for case C-224/01 (Köbler v Austria), according to which member states will be liable for the damage caused to an individual by an infringement of EU law attributable to a supreme court.

The CJEU lays down three conditions for finding the state liable:

• the law infringed must be intended to confer rights on individuals;
• the breach must be sufficiently serious; and
• there must be a direct causal link between the breach of the obligation incumbent on the state and the loss or damage sustained.

The CJEU also states that the assessment lies with the national courts whether the criteria have been satisfied for establishing the liability of member states for damage, caused to individuals by breaches of Community law.

According to the decision of the Sofia Appellate Court, the Supreme Administrative Court's interpretation manifestly infringed EU Directive 2006/112/EC and binding CJEU case-law.

This decision sets a game-changing precedent for Bulgaria, which can now change the direction of damage claims against the courts. It was also issued at the moment when recent amendments to the Bulgarian State and Municipalities Liability for Damages Act expanded the scope of state liability to cases of EU law infringement.

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