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

The Spanish Supreme Court, in its judgment of 30 March 2026 (Contentious-Administrative Chamber, Second Section, judgment no. 401/2026, cassation appeal no. 4256/2024, Judge Rapporteur María Dolores Rivera Frade), confirms that the penalty for the infringement in article 170.Two.4º of the VAT Act (LIVA) may be annulled by the courts where it breaches the EU-law principle of proportionality, without any need to make a preliminary reference to the Court of Justice or to refer a question of constitutionality to the Constitutional Court.

It is worth clarifying the two provisions at stake, because their relationship is a common source of confusion.

Article 170.Two.4º LIVA makes it an infringement to fail to report, in the VAT return for the relevant period, the VAT due on transactions in which the taxpayer is the recipient under the reverse charge mechanism —under paragraphs 2º, 3º and 4º of article 84.One, article 85 or article 140 quinque LIVA—. In the typical case, this is a reporting omission that causes no loss of revenue, because the taxpayer is entitled to deduct the input VAT in full.

Article 171.One.4º LIVA, for its part, sets the amount of the penalty: a fixed 10% of the VAT on the unreported transactions, with no statutory scope for taking into account whether or not the public purse has suffered any loss.

The question of cassation interest was whether a court may annul that penalty —set at a fixed percentage, with no statutory room for adjustment— where, in the particular case, applying it is found to be contrary to the principle of proportionality.

The Supreme Court answers in the affirmative, reiterating the doctrine already laid down in its judgments 1093/2023 and 1103/2023 of 25 and 26 July 2023 (cassation appeals 5234/2021 and 8620/2021) and 1751/2024 of 31 October 2024 (cassation appeal 7826/2022). The State Attorney’s Office conceded the appeal, which confirms that the issue is settled. The judgment quashes the judgment of the Audiencia Nacional (National High Court, Sixth Section) of 30 October 2023 and annuls the penalty imposed in respect of 2014 VAT.

The doctrine has three steps.

First, the court may annul the penalty and, consequently, disapply the national penalty provision where it finds that it breaches the principle of proportionality recognised by EU law. There is such a breach where the provision sets the penalty as a fixed percentage, with no room for adjustment, for an omission that causes no real loss to the public purse —typically, a taxpayer with a full right of deduction— and that has nothing to do with any intention to commit tax fraud.

Second, there is no need to make a preliminary reference to the Court of Justice. The CJEU’s own case law relieves courts of the duty under article 267 TFEU where the point has already been clarified (acte éclairé), which is the case here in the light of the Farkas (case C-564/15) and Grupa Warzywna (case C-935/19) judgments, which give explicit guidance for assessing disproportionality.

Third, there is no need either to refer a question of constitutionality. Where the national court considers that the applicable statutory provision may also be contrary to EU law, the settled position of the Constitutional Court —and the case law confirmed in the CJEU’s Consorzio Italian Management judgment (C-561/19), which follows Cilfit— requires the court first to make the preliminary reference or, where appropriate, to disapply the provision in line with the clarified case law.

In our view, the Supreme Court’s doctrine provides an appropriate answer to a structural problem in the VAT penalty regime for reverse charge transactions. A taxpayer who fails to report the transaction but keeps the full right of deduction causes no real loss to the public purse; yet the law imposes a penalty of 10% of the unreported VAT, with no room for adjustment. That rigidity is squarely at odds with the principle of proportionality that the CJEU has been reiterating since Farkas.

For the defence, the judgment is of immediate use. In ongoing penalty proceedings under article 170.Two.4º LIVA, the defence may rely directly on the Supreme Court’s settled doctrine to have the penalty annulled before the contentious-administrative courts, without having to go down the longer and less certain route of a preliminary reference or a question of constitutionality. To that end, the statement of claim should set out the three cumulative elements the doctrine requires: (i) a reverse charge transaction, (ii) a full right of deduction that rules out any real loss to the public purse, and (iii) the absence of any sign of tax fraud in the taxpayer’s conduct.

In short, the case law on courts disapplying disproportionate penalties in reverse charge cases remains settled and fully applicable: where the court finds the penalty disproportionate in the particular case, it may annul the article 171.One.4º LIVA penalty directly, without referring the matter to the Constitutional Court or the Court of Justice.