Burden of Proof in Fictitious Invoice Allegations
Requiring Transaction-Specific Evidence in VAT Fraud Proceedings
Tax authorities accused a commercial enterprise of engaging in VAT fraud through the procurement and issuance of fictitious invoices, subsequently denying the taxpayer’s right to deduct input VAT and imposing statutory liability for tax shown on allegedly sham documents. The Regional Administrative Court, however, partially vindicated the taxpayer, holding that evidentiary standards require individualized proof of fraud for each contested transaction. The ruling in the Kielce case stands as a significant precedent constraining administrative overreach when tax authorities attempt to aggregate distinct commercial dealings into a unified finding of impropriety.
I. The Regulatory Framework Governing Fictitious Invoice Allegations
The case of a civil law partnership based in Kielce originated from an ostensibly routine commercial arrangement involving the supply and installation of gastronomic equipment for rehabilitation facilities. Following an administrative tax audit examining the supply chain, revenue authorities concluded that certain invoices documenting the taxpayer’s acquisitions constituted fictitious instruments lacking correspondence to genuine economic transactions.
The Head of the Tax Office determined that invoices issued by two of the partnership’s counterparties during November and December 2015 failed to reflect actual commercial events. This finding provided the statutory basis for denying the taxpayer’s right to deduct input VAT pursuant to Article 88(3a)(4)(a) of the Polish VAT Act. Moreover, given that the partnership had itself issued sales invoices for goods that—according to the tax authority’s assessment—it had never legitimately acquired, the administrative body imposed liability under Article 108(1) of the VAT Act, obligating the taxpayer to remit the tax indicated on the allegedly fraudulent documents.
II. The Evidentiary Foundation: Related-Party Transactions and Circular Trading Patterns
The tax authority’s reasoning rested substantially upon the interconnected relationships among entities participating in the supply chain. The taxpayer procured gastronomic equipment subsequently resold to Firm A—a beneficiary of European Union structural funds undertaking an investment project at a rehabilitation center. The problematic element, as identified by investigators, lay in the circular nature of certain transactions: a portion of the equipment originated from Firm A itself, which initially disposed of the assets only to reacquire them at elevated prices through intermediary transactions.
The transactional pattern exhibited characteristics consistent with VAT carousel fraud: Firm A sold equipment to intermediary P.B., who resold to the taxpayer partnership, which in turn invoiced delivery back to Firm A—the entire sequence occurring within several days, with each successive transaction incrementing the stated value. For tax authorities, this mechanism evidenced systematic invoice manipulation warranting comprehensive disallowance of VAT recovery and initiation of formal tax proceedings.
III. Judicial Intervention: The Imperative of Transaction-Specific Analysis
The Regional Administrative Court in Kielce, in its judgment of April 8, 2021 (Case No. I SA/Ke 96/21), introduced a critical analytical distinction absent from the administrative determination. While the court concurred with the tax authority’s findings regarding one counterparty—affirming that invoices issued by that entity documented fictitious transactions—it categorically rejected the extension of this conclusion to the second supplier, whose invoices the court deemed to reflect genuine commercial activity.
The pivotal passage from the court’s reasoning merits extended quotation: “The tax authority’s argumentation finds no support in the evidentiary record contained in the case file. Indeed, analysis of the contested decision’s reasoning in this regard reveals reliance upon generalized assertions, with evident improper aggregation of assessments and formulation of unified conclusions, notwithstanding the manifest distinctiveness of evidence and circumstances pertaining to each transaction.”
IV. Anatomizing the Fraudulent Transaction: The P.B. Intermediary Scheme
With respect to the first counterparty (P.B.), the court sustained the administrative findings, concluding that the taxpayer had indeed procured a fictitious invoice devoid of underlying economic substance. The evidentiary record established that Firm A had acquired an electric meat tenderizer, subsequently sold this equipment along with additional items to P.B., who then transferred them to the taxpayer partnership. The partnership ultimately invoiced delivery back to Firm A—at a price approximately twenty percent higher than the original acquisition cost.
The entire circular transaction concluded within nine days. The equipment never physically departed from storage, and the documentation served merely to fabricate the appearance of genuine commercial activity. Witness testimony proved internally inconsistent—P.B. could not coherently articulate the economic rationale for the transactions. She maintained that the equipment “remained in original packaging” and that Firm A “would wish to dispose of it,” yet simultaneously, Firm A was actively pursuing an investment project requiring precisely such equipment, only to repurchase these same items shortly thereafter at inflated prices.
The court characterized as economically irrational the conduct of an entrepreneur who disposes of assets despite foreseeable future requirements, only to reacquire identical items at premium prices within a compressed timeframe. In such circumstances, the procurement of a fictitious invoice and its incorporation into VAT records constitutes tax fraud resulting in forfeiture of input tax deduction entitlements.
V. Distinguishing Genuine Commercial Activity: The H.B. Transaction
The circumstances surrounding the second counterparty—H.B.—presented a fundamentally different evidentiary landscape. Administrative authorities had classified documents issued by this supplier as additional fictitious invoices within the fraudulent chain. The evidence adduced, however, contradicted this characterization.
Testimony from H.B. and employees of his supplier (the equipment manufacturer I.M.S. sp. z o.o.) unequivocally established that H.B. had genuinely acquired the equipment, maintained possession thereof, and subsequently delivered it via his supplier’s transport to the address designated by the purchaser. The taxpayer partnership had initiated telephone contact with H.B., received a commercial proposal, accepted the terms, and ordered a pierogi-forming machine.
H.B. transmitted an advance payment invoice, thereafter delivering the equipment to the specified location, where the partnership’s representative acknowledged receipt and remitted payment via bank transfer. Documentary evidence included a goods release document (WZ) containing detailed equipment specifications. Critically for assessing the authenticity of the transaction—the machine was physically installed and commissioned at the delivery address. The taxpayer’s employees confirmed their participation in the installation process.
VI. Chain Transactions and the Fictitious Invoice Doctrine
The court emphasized a significant circumstance overlooked by administrative authorities: the mere fact that delivery occurred directly to the ultimate recipient’s premises (Firm A) does not establish that a fictitious invoice was issued. Provisions governing chain transactions under Article 7(8) of the VAT Act expressly contemplate arrangements wherein goods are dispatched directly from the initial supplier to the final purchaser, while invoicing proceeds through intermediate entities. Such structures possess full legal validity and do not automatically constitute grounds for disallowing VAT deductions.
One cannot reasonably expect—the court reasoned—that equipment purchasers should receive goods at alternative locations and subsequently incur additional logistics costs for transport to the installation site. Such practices would prove economically irrational, and their absence cannot evidence transaction ficticiousness or invoice invalidity.
VII. Allocation of the Burden of Proof in Fictitious Invoice Cases
The Kielce judgment reaffirms a foundational principle of tax litigation: administrative authorities bear the burden of demonstrating that an invoice fails to document genuine transactions and thus constitutes a fictitious instrument. Generalized assertions regarding “invoice flows” or “sham activities” prove insufficient. Each transaction demands individualized assessment against the assembled evidence.
The court underscored that the appellate authority’s reasoning “exceeded the boundaries established by Article 191 of the Tax Ordinance”—the provision governing free evaluation of evidence. Free evaluation, however, does not equate to arbitrary evaluation—assessments must find support in evidentiary materials and conform to principles of logical reasoning. Deficient reasoning in a tax decision constitutes grounds for annulment.
VIII. Statutory Liability Under Article 108: The Fictitious Invoice Penalty
Article 108(1) of the VAT Act provides that any entity issuing an invoice indicating a tax amount becomes obligated to remit such tax—irrespective of whether the invoice documents an actual transaction. This provision operates as a deterrent sanction against introducing fictitious VAT invoices into commercial circulation, thereby preventing other entities from claiming unwarranted input tax deductions.
Jurisprudence from the Court of Justice of the European Union and domestic tribunals uniformly holds that Article 108 encompasses so-called “empty invoices” issued to document non-existent activities. This category of conduct—the issuance of fictitious invoices—falls outside the scope of Article 5 of the VAT Act defining taxable activities, yet remains subject to a distinct penalty regime.
In the present matter, administrative authorities applied the sanction to the entirety of the invoice issued by the partnership to Firm A. The court, however, corrected this approach—the tax payment obligation under Article 108 may attach only to those portions of an invoice that genuinely document fictitious transactions. Given that the transaction with H.B. possessed authentic commercial substance and did not constitute procurement of a fictitious invoice, the sales invoice subsequently issued on that basis likewise reflects economic reality in the relevant respects.
IX. Utilization of Evidence from Criminal Proceedings
The matter bore criminal law implications—parallel proceedings were underway concerning suspected EU subsidy fraud by Firm A. Tax authorities partially predicated their findings upon examination protocols from those criminal proceedings. The taxpayer challenged this as violating the principle of party participation—it had no opportunity to question witnesses examined by prosecutors.
The court rejected this contention. Pursuant to Article 181 of the Tax Ordinance, evidence assembled during criminal proceedings remains admissible in tax matters. The principle of evidentiary immediacy does not govern tax proceedings—no obligation exists to re-examine witnesses who testified in other forums. Parties may, however, request repetition of examination upon identifying specific testimonial inconsistencies requiring clarification.
X. Due Diligence Standards and Fictitious Invoice Procurement
Tax authorities frequently contend that entrepreneurs acquiring goods from entities participating in VAT fraud should have exercised due diligence in verifying counterparty reliability. In the instant case, the taxpayer had maintained a longstanding commercial relationship with Firm A, executing successive gastronomic equipment projects over several years.
The court declined to accept the authority’s thesis that because W.K. (the taxpayer’s representative) had collaborated with Firm A on other projects, he “knew or should have known” about the fictitious character of transactions involving P.B. Such argumentation rests upon presumption rather than evidence. Regarding the H.B. transaction, conversely, the court expressly found that the partnership had conducted itself professionally, documenting the transaction in appropriate fashion.
XI. Practical Implications for Commercial Enterprises
The Kielce judgment carries substantial significance for entities facing allegations of fictitious invoice procurement or participation in VAT carousel schemes. The decision demonstrates that effective defense remains achievable when entrepreneurs maintain documentation confirming transactional authenticity—invoices, goods release documents, payment confirmations, and commercial correspondence. In the present case, such documentation proved determinative in establishing the H.B. transaction as genuine, notwithstanding initial administrative classification as yet another fictitious invoice in the fraud chain.
Equally significant is the capacity to demonstrate economic rationality underlying transactions. The absence of coherent business justification—as exemplified by P.B.’s inability to articulate the purpose of her equipment acquisition—constitutes a material indicium of ficticiousness. Standard commercial transactions featuring negotiated pricing, delivery terms, and payment conditions conform to patterns of authentic commercial dealing.
XII. Appellate Remedies Against VAT Deduction Denials
Entrepreneurs receiving tax decisions denying VAT deduction rights premised upon fictitious invoice classifications should consider pursuing administrative appeals. The critical objective lies in demonstrating that authorities failed to prove the fictitious character of each contested transaction individually, instead resorting to impermissible generalization.
As the present case illustrates, even where certain administrative allegations prove well-founded, this does not automatically establish that all of a taxpayer’s transactions were fraudulent. Appeals to regional administrative courts represent the final instance of substantive factual review—courts examine whether evidentiary assessment remains within the bounds of free evaluation or transgresses into arbitrary determination.
XIII. Criminal Consequences of Fictitious Invoice Issuance
Issuance of fictitious VAT invoices may trigger not only Article 108 liability but also criminal sanctions. Provisions of the Polish Criminal Code prescribe severe penalties for issuing invoices containing false statements regarding factual circumstances that may affect the determination of public law obligations.
In extreme cases, where the aggregate value of fictitious invoices exceeds statutory thresholds, perpetrators face imprisonment. Accordingly, entrepreneurs wrongfully accused of participating in fictitious invoice schemes should mount active defenses in both tax proceedings and any parallel criminal matters.
XIV. Conclusion: The Requirement of Individualized Transactional Assessment
The Regional Administrative Court’s judgment in the Kielce case reaffirms a principle that should require no reiteration yet frequently encounters administrative disregard: allegations of fictitious invoice procurement or issuance demand individualized evidentiary substantiation for each transaction. The circumstance that an entrepreneur procured one fictitious invoice from a particular counterparty does not automatically establish the fraudulent character of all commercial dealings.
Commercial misjudgments and suboptimal business decisions constitute inherent elements of entrepreneurial risk. Any enterprise may unwittingly find itself within a supply chain subsequently revealed as defective. This reality, however, affords no license for administrative officials to characterize successive transactions as fictitious invoice procurements based solely upon opinions formed from a single fraudulent dealing, absent independent evidentiary demonstration.
Professional representation in tax disputes may prove indispensable when authorities formulate fictitious VAT invoice allegations. The stakes are considerable: denial of input tax deductions coupled with Article 108 sanctions effectively imposes dual liability—first through forfeiture of deduction rights, second through the obligation to remit tax indicated on allegedly fictitious sales invoices.
Author: Robert Nogacki, Attorney-at-Law – Founder of Skarbiec Law Firm
Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.
