The Innocent Middleman
When a Polish rapeseed-oil trader got caught in a VAT carousel, the courts had to decide: Can you be punished for a fraud you never knew existed?
The scheme worked like this. Rapeseed oil—golden, viscous, unremarkable—would leave a storage facility in southern Poland, cross into the Czech Republic, and promptly return home, its journey documented by a trail of invoices that multiplied like cells dividing. Each transaction generated a VAT claim. The oil went in circles; the money, presumably, did not.
Somewhere in the middle of this carousel sat M.S., a businessman who traded in rapeseed oil and who, by all accounts, had no idea he was riding it.
The case that bears his initials wound through the Polish administrative courts for nearly six years, generating two decisions by the Regional Administrative Court in Gliwice, a ruling by the Supreme Administrative Court, and enough legal briefs to make even the most dedicated tax scholar reach for something stronger than coffee. At its heart lay a question that sounds almost philosophical: Can a person be held responsible for participating in something they didn’t know existed?
The value-added tax, that European invention Americans have largely managed to avoid, works on a principle of elegant simplicity. At each stage of production and distribution, businesses charge VAT on their sales and reclaim VAT on their purchases. The difference goes to the government. In theory, the system is self-policing—every buyer’s deduction is some seller’s liability.
In practice, of course, criminals have found ways to exploit it.
The VAT carousel is perhaps the most baroque of these schemes. It typically involves goods crossing borders, a chain of companies (some real, some fictional), and at least one entity—known in the trade as a “missing trader”—that collects VAT from its customers and then vanishes before remitting it to the authorities. The companies further down the chain, meanwhile, claim refunds on VAT they’ve legitimately paid. The government ends up writing checks for taxes it never received.
The European Commission has estimated that VAT fraud costs member states tens of billions of euros annually. Poland, with its long borders and active trade in commodities, has not been immune.
M.S. ran a firm that bought rapeseed oil from a Polish supplier—let’s call it Company B—and sold it to customers in the Czech Republic. He was, in the language of VAT law, making intra-Community supplies, transactions that, when properly documented, qualify for a zero percent tax rate. This is not a loophole; it’s how the system is designed to work. Goods moving between EU member states shouldn’t be taxed twice.
Before doing business with Company B, M.S. had done his homework. He checked the company’s registration documents. He obtained certificates confirming it was current on its taxes and social-security contributions. He inspected its facilities—the storage tanks, the tanker trucks. He even demanded copies of invoices and proof of tax payments each month. When his oil arrived in the Czech Republic, his employees were there to supervise the unloading, photograph the delivery, and take samples for quality testing.
What M.S. didn’t know—couldn’t have known, the courts would eventually find—was that the oil he thought was heading to Slovakia for further distribution was actually circling back to Poland. The Czech companies he’d been selling to, it turned out, were nodes in a carousel. Company B, his trusted supplier, was connected to a web of shell companies, nominee directors, and virtual offices. The whole arrangement had been designed to look legitimate precisely so that traders like M.S. wouldn’t see through it.
“The creators of carousels construct the appearance of legal activity,” the Regional Administrative Court in Gliwice would later observe, “so that entities like the complainant cannot orient themselves to their machinations.”
The tax authorities discovered the carousel during an audit covering the second half of 2013. They found what they were looking for: a chain of transactions in which the same oil passed through multiple hands, each transfer generating an invoice, but only one physical shipment. Under Polish VAT law—specifically Article 7, Section 8—such “chain transactions” receive special treatment. When several entities trade the same goods and the first seller delivers directly to the final buyer, each participant is deemed to have made a separate supply. The question then becomes: which supply gets to be the “moving” one, the intra-Community transaction eligible for the zero rate?
The tax office concluded that M.S. had gotten this wrong. The transport, they argued, should have been attributed to someone else in the chain—probably Company G, which had organized the trucking for most shipments. That meant M.S.’s sales weren’t really intra-Community supplies at all. They were domestic transactions, and he owed VAT on them. More to the point, he wasn’t entitled to deduct the VAT he’d paid on his purchases.
There was just one problem with this theory. In the same audit report, the same tax office had reached another conclusion: M.S. had been an unwitting participant in the carousel. He’d exercised due diligence in vetting his suppliers. He’d documented his transactions meticulously. He had no reason to suspect fraud. Under established European Court of Justice precedent—particularly a 2006 ruling in joined cases involving companies called Optigen, Fulcrum Electronics, and Bond House Systems—an innocent trader cannot be denied VAT deductions merely because someone else in the supply chain committed fraud.
The tax authorities, in other words, had simultaneously found M.S. innocent of participating in a carousel scheme and guilty of incorrectly accounting for chain transactions that existed only because of that scheme.
The case first reached the Gliwice court in 2016. The judges were not impressed by the government’s reasoning.
“The appeals authority entirely ignored its own findings regarding the taxpayer’s lack of awareness,” the court wrote, noting that the agency had cherry-picked the unfavorable conclusion while disregarding the favorable one. The decision was annulled.
The tax authorities appealed to the Supreme Administrative Court in Warsaw, arguing that an innocent verdict on carousel participation didn’t immunize a taxpayer from scrutiny on other grounds. The Supreme Court agreed—in principle. The tax office was entitled to examine whether M.S. had correctly identified the location of his supplies, regardless of whether he’d knowingly joined a fraud. The case went back to Gliwice with instructions to assess whether the chain-transaction analysis held up on its own terms.
It did not.
In a ruling issued on March 4, 2019, the Regional Administrative Court took the government’s position apart piece by piece. The authorities’ reasoning, the judges found, was “not merely incorrect but internally contradictory.”
Consider the logic, the court suggested. If M.S. didn’t know he was part of a carousel, how could he have known he was part of a chain transaction? The carousel was the chain. The multiple invoices, the circuitous path of the oil, the question of who organized transport—all of it stemmed from a fraud that M.S., by the government’s own admission, knew nothing about. He’d bought oil from his supplier, sold it to his Czech customers, and documented everything according to his understanding of the facts. That understanding happened to be wrong, but only because criminals had deliberately deceived him.
“A taxpayer who lacked awareness of participating in a VAT carousel,” the court held, “could not have been aware that his tax accounting was inadequate to the transaction. Thus, the taxpayer accounted for his rapeseed-oil transactions in accordance with his business activities and the contracts he was performing.”
The physical evidence supported M.S.’s version. He had CMR transport documents—the international road-freight forms that function as bills of lading in Europe—listing his company as the shipper. He had confirmation of delivery from the Czech side. He had records of quality inspections conducted at the destination. He had certificates from the Czech customs authorities acknowledging his intra-Community supplies.
“If the oil was transported to the Czech Republic under the complainant’s supervision,” the court wrote, “unloaded in his presence, with samples taken and subjected to spot quality analysis, and he possesses confirmation of goods receipt and CMR delivery confirmation, it is difficult to share the authority’s view that he did not make intra-Community supplies.”
The court went further. Raw rapeseed oil, it noted, is not the sort of product that typically features in legitimate chain transactions. The Supreme Administrative Court had explained that such arrangements usually arise when a buyer seeks hard-to-find goods—rare items that require multiple intermediaries to source. Cooking oil is a commodity. Nobody needs a chain of specialized brokers to obtain it.
And then there was the structure of the fraud itself. The carousel involved at least five companies between the original source and M.S.’s supplier—far more than the three-party minimum that defines a chain transaction under Polish law. The tax authorities hadn’t even established where the oil originally came from, or whether a producer was involved at all. The “chain” looked less like a legitimate supply arrangement and more like an elaborate fiction.
The court annulled both the original assessment and the appellate decision, then took the unusual step of terminating the administrative proceedings entirely. M.S. had correctly accounted for his transactions as intra-Community supplies. There was nothing left to decide.
The Gliwice ruling joins a long line of European jurisprudence protecting traders who get caught up in frauds they didn’t create. The foundational case, decided by the European Court of Justice in 2006, established that “the right to deduct VAT of a taxable person who carries out [supply] transactions cannot be affected by the fact that in the chain of supply of which those transactions form part another transaction, prior or subsequent, is vitiated by VAT fraud, without that taxable person knowing or having any means of knowing.”
The principle seems obvious enough: don’t punish the innocent. But its application requires drawing a line between taxpayers who merely failed to detect fraud and those who should have seen it coming. “Due diligence” has become the operative concept—a term borrowed from corporate law that, in the VAT context, means demonstrating that you took reasonable steps to verify your trading partners.
M.S., by the courts’ assessment, had cleared this bar. He’d checked registrations and tax certificates. He’d visited facilities. He’d demanded documentation. He’d supervised deliveries in person. Short of hiring a private investigator, it’s hard to know what more he could have done.
The carousel’s organizers, of course, had anticipated this. That’s why they maintained real companies with real addresses and real storage tanks. That’s why they generated genuine invoices and transported actual oil. The whole point was to create a Potemkin village of legitimate commerce—a façade sturdy enough to fool the traders they needed to make the scheme work.
“The creators of carousels construct the appearance of legal activity,” as the Gliwice court put it, “so that entities like the complainant cannot orient themselves to their machinations.”
For practitioners of tax law, the case offers several useful lessons. First, and most obviously, document everything. M.S. prevailed in part because he could demonstrate, with paper and photographs, exactly what he’d done and why. Second, verify your suppliers—but understand that verification has limits. Due diligence is necessary but not sufficient; it proves your good faith, not that fraud didn’t occur. Third, watch for inconsistencies in the government’s reasoning. The Gliwice court was particularly troubled by the tax authorities’ willingness to reach contradictory conclusions from the same set of facts.
But perhaps the most important lesson is structural. The VAT system’s vulnerabilities are well known. Carousel fraud has been around for decades. The European Commission and national governments have tried various countermeasures—reverse-charge mechanisms, real-time reporting, joint-and-several liability rules—with mixed success. As long as the system permits deductions at one point in the chain without verifying collections at another, opportunities for abuse will exist.
The question is who should bear the risk when fraud occurs. The Gliwice court’s answer, grounded in European precedent, is clear: not the innocent trader who got caught in someone else’s scheme. The authorities are free to pursue the actual fraudsters—the missing traders who collected VAT and vanished, the shell companies that existed only on paper. But they cannot, in the court’s view, conscript unwitting participants into paying for losses they didn’t cause.
“Factual findings that confirm the exploitation of a VAT carousel organized by entities other than the taxpayer for fraudulent purposes,” the court concluded, “cannot burden a taxpayer whose conscious participation in the carousel has been excluded.”
It is a principle that sounds almost too sensible to require six years of litigation to establish. Then again, tax law has never been known for its efficiency.
This article discusses the legal principles established in the ruling of the Regional Administrative Court in Gliwice of March 4, 2019 (case no. III SA/Gl 27/19), the Supreme Administrative Court ruling of September 14, 2018 (case no. I FSK 1605/16), and European Court of Justice precedent in joined cases C-354/03, C-355/03, and C-484/03.
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.
