Penalties under article 171.One.4 of the VAT Act for reverse charge: the proportionality doctrine stands

The Spanish Supreme Court, in judgment no. 401/2026 of 30/03/2026 (cassation appeal 4256/2024), confirms that the penalty provided for in article 171.One.4 of the Value Added Tax Act (LIVA) for the infringement of article 170.Two.4 (failure to report in the return the VAT due under the reverse-charge mechanism) may be directly annulled by the court where, because it causes no real economic loss to the Treasury, it is disproportionate in the specific case, without the need to raise a question of unconstitutionality before the Constitutional Court or a preliminary reference to the Court of Justice of the European Union. The doctrine rests on the Supreme Court’s own case law (judgments 1093/2023, 1103/2023 and 1751/2024) and on the CJEU’s case law in Farkas (case C-564/15, 26/04/2017) and Grupa Warzywna (case C-935/19, 15/04/2021), where the Luxembourg court held that formal penalties disregarding the economic reality of the breach are contrary to the EU principle of proportionality.

The practical consequence, for defensive purposes, keeps a sound line of argument open. Where AEAT imposes a penalty under article 171.One.4 LIVA for a purely formal breach of the reverse-charge rules, with no real revenue loss, it is advisable to raise the disproportionality of the penalty from the very start of the challenge, provided that the case involves the reverse-charge mechanism, the taxpayer has a full right to deduct the VAT and there is no indication of fraud. Confirmation of the penalty at the administrative stage does not exhaust the defence: the court may directly disapply the penalty rule if it finds it disproportionate, in view of the taxpayer’s specific conduct and the actual loss caused.

Full analysis in → Penalties under article 170.Two.4 of the VAT Act for reverse charge may be annulled as disproportionate