Carousel Fraud (Missing Trader Fraud): Origins, Mechanism, Case Law
Carousel fraud (missing trader intra-Community fraud, MTIC; Polish: oszustwo karuzelowe; German: Karussellbetrug; French: fraude carrousel à la TVA) is a sophisticated form of tax fraud that exploits structural weaknesses of value added tax systems, in particular the zero rate applied to cross-border transactions within integrated economic areas.
Mechanism and nature of the scheme
Carousel fraud is a cyclical chain of fictitious transactions designed to exploit the different treatment of domestic and cross-border supplies under VAT systems. The name comes from the circular, carousel-like movement of goods and documents through several jurisdictions and entities, a pattern that can be repeated indefinitely until the tax authorities detect it.
The basic mechanism is a four-stage process. In the first stage a missing trader in the country of destination acquires goods from a supplier in another jurisdiction without paying VAT, relying on the zero rate for intra-Community supplies. The missing trader then sells the goods domestically, collecting VAT from the buyers, and disappears without remitting the tax collected. The goods pass through one or more buffer entities, which may be accomplices in the scheme or traders unaware of it who failed to exercise due care, before they reach an export broker. Finally, the last entity supplies the goods back to the original jurisdiction as a zero-rated intra-Community supply and claims a VAT refund, closing the circle.
In reality the goods or services serve merely as a vehicle for the transfer of VAT, while the transactions themselves lack economic substance. They are no more than a facade that enables a deduction of tax or a claim for its refund, even though at an earlier stage of the supply chain the entity known as the missing trader never paid the VAT due.
From the perspective of an honest trader, what matters is that a scheme which is a sham as to its economic purpose usually involves real goods that are actually delivered and resold. The organizers need legitimate businesses in the chain, whose unwitting role is to lend the scheme credibility by complying properly with their tax obligations, and in whose hands input VAT arises from invoices issued by the missing trader. When the organizer cannot be found, the authorities turn their attention precisely to those honest participants, and the purpose is to deny them the right to deduct.
Historical origins and development
The origins of carousel fraud go back to 1993, when the abolition of fiscal borders in the European Union introduced the transitional VAT system. That system, built on the zero rate for intra-Community supplies combined with deferred payment, was meant to facilitate the integration of the single market while preserving the autonomy of national tax systems. Paradoxically, the same design created a structural loophole that became the foundation of fraudulent schemes.
In the early phase the perpetrators concentrated on goods with a high value-to-weight ratio: mobile phones and computer processors. That choice allowed them to maximise profits while minimising the logistical difficulty of physically moving the goods.
The evolution of criminal methods led to more sophisticated variants that use goods whose movement is hard to verify, and intangible services, where control over the chain of transactions becomes practically impossible.
The exploitation of the market in CO₂ emission allowances reached an unprecedented scale. According to a Corporate Watch report, criminals opened trading accounts in national emissions registries, taking advantage of the intangible nature of the allowances. In 2009 the International Monetary Fund recorded large-scale VAT refund fraud in carbon certificate trading. The Deutsche Bank case, involving EUR 145 million of unjustified VAT refund claims, illustrates the scale of a single operation. The most alarming figures come from Europol, which estimated that in some EU member states as much as 90% of the trading volume on the carbon market was linked to criminal activity. The European Union’s total losses from fraud in emission allowance trading amounted to EUR 5 billion.
The use of intangible services marks a further stage in the evolution of carousel fraud. As the International Monetary Fund points out, the perpetrators deliberately shifted to cross-border trade in services, whose intangible nature makes flows considerably harder to control. The International Bureau of Fiscal Documentation confirms that carousel fraud has moved beyond trade in goods to services that can be traded without any physical movement, which makes detection particularly difficult for law enforcement.
Legal framework and the response of law enforcement
The European Union’s response has evolved through successive legislative and administrative initiatives. Its foundation is enhanced administrative cooperation between member states through improved information sharing and real-time data exchange systems. The VAT Information Exchange System (VIES) allows cross-border verification of a counterparty’s VAT registration status. Transaction network analysis provides automated data mining tools that connect the tax platforms of member states to detect fraud almost in real time.
The landmark judgment of the Court of Justice of the European Union in the joined cases Kittel and Recolta Recycling (C-439/04 and C-440/04) established the fundamental principle that taxable persons may not claim a VAT deduction if they knew or should have known that their transactions were connected with fraud. That principle became the cornerstone of the defensive measures of tax administrations, allowing them to refuse VAT refunds to businesses participating in fraudulent supply chains. Imposing joint and several liability on entities that should have detected the fraudulent connections, and sanctions of up to 100% of the tax involved (in Poland, Article 112c of the VAT Act), has also become standard.
Contemporary anti-carousel strategies rely increasingly on instruments of criminal law, in particular on the radical measures designed to combat organised crime. Extended confiscation mechanisms allow the seizure of assets derived from carousel fraud operations. Increased penalties, with maximum sentences of up to 25 years’ imprisonment, are reserved for large-scale criminal operations exceeding specified monetary thresholds. International cooperation frameworks through Europol, Eurojust and the European Public Prosecutor’s Office facilitate cross-border investigations.
Input VAT deduction in the shadow of a carousel: what the case law requires today
Since the judgment in the joined cases Kittel and Recolta Recycling (C-439/04 and C-440/04, 2006) the rule has not changed: a taxable person who knew or should have known that, by its transaction, it was taking part in VAT fraud loses the right to deduct, while a taxable person who did not know and could not have known keeps it. Twenty years of case law of the Court of Justice of the European Union and of the Polish Supreme Administrative Court have not altered that rule, but have clarified what the authority must prove, in what order, and what it may not demand of a trader. The current position can be summarised under five headings.
Substantive conditions of deduction
Before the word “fraud” enters a case, the authority examines the substantive conditions of deduction under Article 86(1) of the Polish VAT Act and Article 168 of Directive 2006/112: the buyer is a taxable person, the goods or services were supplied by another taxable person, and the purchase serves the buyer’s taxed transactions. Here the burden of proof lies with the taxable person, and an invoice alone is not enough, because the right to deduct depends on showing that the transaction actually took place (W. sp. z o.o., C-114/22, paragraphs 31 and 37). In Kemwater ProChemie (C-154/20, 2021) the Court allowed deduction to be refused without any proof of fraud where the actual supplier was not identified and the taxable person did not show that the supplier was a taxable person, while adding that, where the supplier’s status follows from the circumstances, if only from the volume and price of the purchases, a refusal infringes the principle of neutrality (paragraphs 38 to 41). In the Polish case W. sp. z o.o. (C-114/22, 2023) the Court drew a second line: a transaction being a sham under civil law (Article 83 of the Civil Code, Article 88(3a)(4)(c) of the VAT Act) is not enough to refuse deduction. The authority must show either that there was no supply within the meaning of EU law, or that a transaction which did take place is the result of fraud or abuse of law. Documentation of actual performance, contracts, specifications, transport and payment records, therefore decides the first tier of the dispute before the second is reached.
Proof of fraud and of the taxpayer’s knowledge
Where the substantive conditions are met, refusing deduction because of fraud in the chain is an exception to the rule, and it is the authority that must establish, to the requisite legal standard, objective evidence that the taxable person knew or should have known that its transaction was connected with fraud (Mahagében and Dávid, C-80/11 and C-142/11, paragraphs 45 and 49; C-114/22, paragraph 43). In carousel cases the Court has broken this duty down into two elements. First, the authority must define precisely the constituent elements of the fraud and prove the fraudulent conduct. Second, it must show the taxable person’s active participation or its actual or constructive knowledge. A finding that the transaction forms part of a closed invoicing chain is serious circumstantial evidence but not proof, and neither is the fact that the participants in the chain knew one another (Aquila Part Prod Com, C-512/21, 2022, paragraphs 32 to 36; Global Ink Trade, C-537/22, 2024, paragraphs 54 to 57). The standard also has a limit that favours the authority: it need not identify every participant in the fraud or every action taken by them. Participation in a multi-stage supply chain is in itself a lawful VAT construct (chain transactions); it becomes fraud only through the missing trader and the knowledge of the other participants.
The Supreme Administrative Court has adopted this test expressly. In its judgment of 27 March 2025 (I FSK 2143/21) it set aside the first-instance judgment and the authority’s decision because a closed invoicing chain had been treated as proof rather than as circumstantial evidence, the specifics of the mobile phone distribution market had been ignored, and the conclusions about the taxpayer’s knowledge rested on suppositions that shifted the burden of proof, which the Court of Justice prohibits. In its judgment of 10 November 2023 (I FSK 903/22) it dismissed the authority’s cassation appeal, recalling that the authority must prove both elements: the objective one, the fraudulent nature of the transaction, and the subjective one, the taxpayer’s state of mind. Trade credit from a long-standing supplier, foreign nationals on the boards of counterparties, or fast transactions within a circle of known buyers prove nothing in themselves. A scheme of this kind, fabrics from China through Poland to Turkey, was described earlier against the background of a 2020 judgment of the Regional Administrative Court in Łódź in our article Good Faith and the Right to Deduct VAT.
The scope of required diligence
The Court’s answer is graduated. Where nothing arouses suspicion, the authority may not require a buyer to check whether the issuer of the invoice is a taxable person, holds the goods, employs staff or accounts for VAT. Those are tasks of the administration, which may not be shifted onto a trader (Mahagében and Dávid, paragraphs 61 and 62; Tóth, C-324/11; Global Ink Trade, paragraph 50). Where there are indications of irregularity, increased diligence may be expected, but not the complex and in-depth checks that the authority carries out with means a trader does not have (Mahagében and Dávid, paragraph 60; Aquila, paragraphs 52 and 53; Global Ink Trade, paragraph 39). The assessment is always individual. In its judgment of 2 August 2024 (I FSK 679/24) the Supreme Administrative Court dismissed the authority’s cassation appeal because the decision did not identify the circumstances of the specific transactions that should have heightened the taxpayer’s caution, and because the diligence standard must be individualised to the trader’s commercial practice. The same judgment contains a warning: the physical existence of the goods, payment and correct records do not in themselves rule out knowing participation, since in a carousel they serve precisely to conceal the scheme.
The measure of diligence is the rule applicable to the transaction in question, not a universal template. In its judgment of 20 May 2025 (I FSK 578/22) the Supreme Administrative Court set aside a decision that had required a haulier providing services to companies from Cyprus, Slovakia and Bulgaria to investigate their actual place of business under criteria developed for deduction cases, whereas the standard is set by Article 18 of Council Implementing Regulation (EU) No 282/2011: confirmation of the VAT number in VIES, registration documents and normal commercial security measures, including checking that the payer is the contracting party. Administrative guidance, in Poland the Ministry of Finance Methodology of 2018, may serve to assess diligence only under the conditions laid down in Global Ink Trade (paragraph 52): it does not undermine the burden of proof resting on the authority, it does not impose a duty of comprehensive verification of the counterparty, the authority itself complies with it, and its content is unambiguous and predictable.
Evidence from other proceedings and the limitation period
Carousel cases run on two tracks, and material from one ends up in the other. In its order of 12 November 2025 (C-475/24) the Court confirmed that a court ruling on deduction may examine evidence gathered in criminal proceedings conducted against other persons, including proceedings that were discontinued, provided that the principle of equality of arms and the rights of the defence under Article 47 of the Charter of Fundamental Rights are respected (paragraphs 40 and 47). The taxpayer is therefore entitled to see and challenge every item of evidence on which the decision rests, whatever file it originated in. The standard derives from Glencore Agriculture Hungary (C-189/18), and Polish practice is assessed in our essay The Tax Collector’s Convenience: How Poland Punishes the Innocent in the Name of Fighting Fraud. The second procedural element is limitation. Carousel proceedings last for years, while a tax liability becomes time-barred five years after the end of the year in which the payment deadline fell (Article 70 § 1 of the Tax Ordinance Act, Ordynacja podatkowa). The initiation of criminal tax proceedings of which the taxpayer has been notified suspends that period (Article 70 § 6 point 1 and Article 70c), a device sometimes used shortly before the period expires. The resolution of seven judges of the Supreme Administrative Court of 24 May 2021 (I FPS 1/21) settled that the administrative court reviewing the decision examines whether the conditions for suspension actually occurred, including whether the criminal tax proceedings were initiated instrumentally.
Joint and several liability of the buyer
A separate instrument from deduction is the buyer’s joint and several liability for tax not paid by the supplier. In Poland it applies to supplies of goods listed in Annex 15 to the VAT Act (Article 105a) where the buyer knew or had reasonable grounds to suspect that the tax would not be paid, excluding purchases documented by an invoice above PLN 15,000 gross, which are subject to the mandatory split payment mechanism, and purchases paid through that mechanism. In Vaniz (C-121/24, 11 December 2025) the Court held that this liability may be pursued even after the supplier has ceased to exist as a legal person, provided that the buyer, when exercising its right to deduct, knew or should have known that the tax would not be paid and the authority acts within a reasonable limitation period. From 1 January 2027 the liability will also cover intangible services listed in a new Annex 16 (Act of 4 September 2026, Journal of Laws item 1270), with the threshold logic reversed: invoices of PLN 15,000 gross or more, and purchases below that threshold where the net value of services bought from one supplier in a month exceeds PLN 50,000, while payment through the split payment mechanism remains a full exclusion. The consequences of the judgment and of the new rules for Polish practice are discussed in our article Unpaid VAT by a Counterparty: The Purchaser’s Liability.
This map shows that the position of an honest trader does not rest on a declaration of good faith but on three layers of evidence: actual performance of the transaction, the absence of objective signs of fraud when it was concluded, and a reaction to such signs if they appeared. No statute obliges a trader to monitor the intentions of other market participants, but the case law expects it to react to what is visible. How we defend businesses facing VAT carousel allegations is described on our service page.
Publications on carousel fraud
The Tax Collector’s Convenience: How Poland Punishes the Innocent in the Name of Fighting Fraud
Unpaid VAT by a Counterparty: The Purchaser’s Liability after the CJEU Judgment in Vaniz (C-121/24)
Third-Party Tax Liability in Poland: Articles 110 to 117e of the Tax Ordinance
Robert Nogacki is a Polish attorney at law (radca prawny), the founder and managing partner of Kancelaria Prawna Skarbiec (Skarbiec Law Firm), which has operated continuously since 2006.
The law is equal for everyone, but the parties rarely are: on one side stands an organization with time, money, and lawyers, on the other a person with one business, one nest egg, and one life.
Clients rarely come to him with a legal problem. They come with a problem that also has a legal side: an audit that began with a single invoice, money entrusted to someone who has disappeared, a company that has to be passed on before it is too late. Most such matters are decided long before the first letter is written, in decisions made without asking and in deadlines nobody remembered. So he begins by asking how the client got here, not what the client should have done.
He advises entrepreneurs and families from more than a dozen countries, including those whose accounts the tax office has just seized and who do not know what to do tomorrow morning. He defends them in tax audits, customs and fiscal inspections, disputes with the tax authorities, and criminal tax proceedings. He represents victims of investment fraud and Ponzi schemes. He helps families set up family foundations and plan succession, so that a life’s work outlasts a single generation.
Not every case can be won. Every case can be run so that the client knows where they stand. Since 2006 he has represented the victims in the WGI case (Warszawska Grupa Inwestycyjna, the Warsaw Investment Group), one of the longest criminal cases in the history of the Polish financial market, because some things must not be left half finished, even when they take two decades. In the case of the collapsed cryptocurrency exchange Zonda (Zondacrypto, operated by BB Trade Estonia OÜ), he represents several hundred victims in the criminal investigation conducted by Poland’s National Prosecutor’s Office and in the Estonian bankruptcy proceedings.
Kancelaria Prawna Skarbiec is listed in the rankings of Poland’s largest tax advisory firms published by Dziennik Gazeta Prawna and Rzeczpospolita, and it is a four-time recipient (2015 to 2018) of the European Medal awarded by the Business Centre Club and the European Economic and Social Committee. Robert Nogacki publishes regularly, in the press and on the firm’s website, for people who have a problem rather than a law degree, because a legal opinion the client cannot understand protects only the lawyer.
He believes that the best legal advice is the kind that means the client never has to appear in court.
