Regional Court annuls SRS's refusal to refund cross-border VAT.
Regional Court annuls SRS's refusal to refund cross-border VAT.
The BDO team secures a ruling by which the Administrative Regional Court annuls the SRS's refusal to refund VAT to a company from another EU Member State, holding that a permanent establishment cannot be equated with a fixed establishment within the meaning of the VAT Directive. The dispute over approximately EUR 145 thousand continues - a parallel case is already pending before the Senate.
Cracks in the Wall: Latvian Court Upholds VAT Neutrality for Foreign Businesses
In my January 2024 article "Latvia’s Wheel-Spinning in the European Union’s Internal Market, or a Stone in the SRS’s Garden", I wrote about a company from another European Union ("EU") Member State which had turned to BDO for assistance (the "Client") and which had been refused a refund of value added tax ("VAT") by the State Revenue Service (the "SRS"), the refusal being reasoned on the ground that the Client should have registered a permanent establishment in Latvia. Back then I predicted that Latvia had "great prospects" of being mentioned in a ruling explaining, once again, the essence of the EU internal market and the principle of VAT neutrality. Today I can offer a continuation of that story - and with good news: on 1 July 2026 the Administrative Regional Court delivered a judgment in the Client’s favor, declaring the SRS’s decision unlawful and annulling it. Although, as you will see, the road to this judgment was a winding one.
A brief reminder of the essence of the case
The principle of VAT neutrality, which the Court of Justice of the EU (the "CJEU") has been consistently explaining to the Member States for more than ten years, in essence means a simple thing: VAT is paid by the final consumer, and therefore the VAT burden cannot fall on a business. A business must be able to deduct VAT as input tax and, where deduction is not possible in the Member State concerned, it must be able to reclaim the VAT paid.
The Client is a company registered in another EU Member State, well known in the business community, whose principal function is programming and the automation of production processes. Since the place of supply of services connected with immovable property is Latvia, the Client also paid VAT on the services received in Latvia in the period from 2022 to 2023 - around EUR 145 thousand in total. The Client was unable to deduct that tax in Latvia and therefore used the refund procedure available to taxable persons of other EU Member States.
The SRS refused the refund, taking the position that the Client had a permanent establishment in Latvia and had therefore carried out registrable economic activity in Latvia, which in turn precluded the VAT refund. Additional "elegance" was lent to the SRS’s position by a reference to an intergovernmental convention for the avoidance of double taxation with respect to taxes on income and on capital - a convention which, as its very title indicates, governs direct taxes, not VAT.
The bitter road: three defeats and a turnaround on appeal
It must be admitted that the road to the positive outcome was neither quick nor straight. It should first be explained that the dispute with the SRS covers several taxation periods and therefore proceeds in two parallel sets of court proceedings: in one case, a refund is sought of VAT paid in 2022, around EUR 90 thousand, while the other concerns 2023 and around EUR 55 thousand. In the case concerning the 2022 periods, the Administrative District Court dismissed the Client’s application as early as February 2024, and on 7 January 2026 a judgment unfavorable to the Client was delivered by the Administrative Regional Court as well. In that case the Regional Court did formally acknowledge that "permanent establishment" and "fixed establishment" are not identical concepts, yet it nevertheless found it possible to dismiss the Client’s appeal. In February 2026 the Client challenged that judgment in cassation, and the case is therefore currently pending before the Senate (the Supreme Court of Latvia).
In the case concerning the 2023 periods, meanwhile, the bitter feeling was compounded on 15 December 2025 by the Administrative District Court, which dismissed the Client’s application.
The Client did not give in and filed an appeal - and then came the turnaround. This case was examined on the merits by the Administrative Regional Court, sitting in a different composition of judges, which reached conclusions that deserve recognition and are worth highlighting.
First, the Regional Court found that neither the law "On Taxes and Duties" nor the Value Added Tax Law provides that the existence of a permanent establishment in itself gives rise to an obligation to register economic activity; moreover, the SRS had not substantiated in its decision how it had arrived at such a conclusion. The court held the reference to the intergovernmental convention to be unjustified in the context of a VAT refund, since that convention governs taxes on income and on capital.
Second - and this is the most significant finding of the judgment - the Regional Court agreed with the Client that the concept of "permanent establishment" used in national law cannot automatically be equated with the VAT Directive’s concept of "fixed establishment". A fixed establishment is an autonomous, functionally defined concept of EU law, and establishing its existence requires an assessment of the actual capacity of a specific structure - with a sufficient degree of permanence and a suitable structure in terms of human and technical resources - to supply or receive services independently. The SRS had not carried out any such assessment at all.
Third, the Regional Court recalled the essence of the principle of VAT neutrality, referring also to CJEU case-law: deduction or refund of input tax must be granted where the substantive requirements are met - that is, the transactions have actually taken place and are connected with taxable economic activity - even if the taxable person has failed to comply with certain formal requirements.
As a result, the SRS’s decision was annulled as unlawful, and the SRS was ordered to issue a new administrative act, reassessing the Client’s right to a VAT refund and observing the considerations set out in the judgment. The Client is also to be reimbursed by the State the State fee of EUR 90 - which, compared with the years and resources invested in the litigation, is admittedly a symbolic consolation.
A remarkable situation has thus arisen: one and the same Administrative Regional Court, within less than half a year, sitting in different compositions of judges, in one and the same dispute - merely concerning different taxation periods - has reached diametrically opposite conclusions on what is essentially an identical question of law.
What does this judgment mean?
In essence, the Regional Court confirmed what the CJEU has been explaining to the Member States for many years, and what the Senate of the Republic of Latvia had already recognized in a similar case: formal obstacles constructed at national level cannot deprive a company of another EU Member State of the right to a VAT refund. In my previous article I asked, rhetorically, whether the SRS had come up with something that had not occurred to the authorities of other EU Member States which have earned the CJEU’s reproaches. The Regional Court’s answer, in my view, is unequivocal - it had not. It is to be welcomed that this time the national court managed to put the house in order itself, without making the CJEU explain the elementary once again.
At the same time, one cannot fail to mention the price at which this insight was obtained. The transactions were concluded and the VAT was paid back in 2022 and 2023, whereas the Regional Court’s judgment was delivered in mid-2026. Throughout all these years, a total of around EUR 145 thousand - the aggregate VAT claimed in the two cases - has been withdrawn from the Client’s economic circulation and has sat in the Latvian State budget. However, one looks at it, such a situation is not, and cannot be regarded as, compatible with the free movement of services and capital in an EU internal market without internal borders.
Does the story end here?
Regrettably, it must be acknowledged that it is too early to celebrate final victory, and there are at least three reasons for that.
First, the Regional Court’s judgment has not yet become final: within one month, the SRS is entitled to file a cassation complaint with the Department of Administrative Cases of the Senate. Given the SRS’s steadfastness in this case so far, such a scenario cannot be ruled out, although in my view the prospects of a cassation complaint - considering both the Regional Court’s reasoning and the Senate’s existing case-law on questions of VAT neutrality - should be assessed with skepticism.
Second, even if no cassation complaint is filed, the case will return to the SRS, which will have to issue a new administrative act. And here it is worth recalling the history of this case: when, in another case, the Senate "rejected" the SRS’s argument concerning non-registration in the VAT payer register, the SRS found a new argument - the permanent establishment. Now that the Regional Court has "rejected" the permanent-establishment argument as well, it cannot be ruled out that some third ground will be sought in order to keep the money due to the Client in the budget for a while longer. I hope these concerns will prove unfounded and that the SRS will issue the new administrative act in good faith, observing the considerations set out in the judgment and the principle of VAT neutrality in substance, rather than searching for yet another formal obstacle.
Finally, it should be mentioned that the parallel case concerning the 2022 periods is already pending before the Senate. Moreover, should the Senate entertain doubts as to the interpretation of the provisions of the VAT Directive and the VAT Refund Directive, it is, in principle, required under Article 267 of the Treaty on the Functioning of the EU to refer questions to the CJEU for a preliminary ruling - which is precisely what the Client has requested in its cassation complaint. Accordingly, the prediction made in my previous article about Latvia’s "prospects" of being mentioned in a CJEU ruling explaining, once again, the principle of VAT neutrality may come true quite literally.
Be that as it may, the Regional Court's judgment of 1 July 2026 is a significant step in the right direction - both for the Client and for any company of another EU Member State that has paid VAT in Latvia and wishes to recover it. We are pleased that the Client has not resigned itself to an obvious injustice, and we are honored to have stood by the Client from the moment the first signs of the SRS's unjust approach emerged, and to continue defending the Client's legitimate interests until the principle of VAT neutrality operates in Latvia not only in theory but also in practice.
Riga,
14 July 2026
Sworn Advocate Jānis Zaļais,
BDO Law
In my January 2024 article "Latvia’s Wheel-Spinning in the European Union’s Internal Market, or a Stone in the SRS’s Garden", I wrote about a company from another European Union ("EU") Member State which had turned to BDO for assistance (the "Client") and which had been refused a refund of value added tax ("VAT") by the State Revenue Service (the "SRS"), the refusal being reasoned on the ground that the Client should have registered a permanent establishment in Latvia. Back then I predicted that Latvia had "great prospects" of being mentioned in a ruling explaining, once again, the essence of the EU internal market and the principle of VAT neutrality. Today I can offer a continuation of that story - and with good news: on 1 July 2026 the Administrative Regional Court delivered a judgment in the Client’s favor, declaring the SRS’s decision unlawful and annulling it. Although, as you will see, the road to this judgment was a winding one.
A brief reminder of the essence of the case
The principle of VAT neutrality, which the Court of Justice of the EU (the "CJEU") has been consistently explaining to the Member States for more than ten years, in essence means a simple thing: VAT is paid by the final consumer, and therefore the VAT burden cannot fall on a business. A business must be able to deduct VAT as input tax and, where deduction is not possible in the Member State concerned, it must be able to reclaim the VAT paid.
The Client is a company registered in another EU Member State, well known in the business community, whose principal function is programming and the automation of production processes. Since the place of supply of services connected with immovable property is Latvia, the Client also paid VAT on the services received in Latvia in the period from 2022 to 2023 - around EUR 145 thousand in total. The Client was unable to deduct that tax in Latvia and therefore used the refund procedure available to taxable persons of other EU Member States.
The SRS refused the refund, taking the position that the Client had a permanent establishment in Latvia and had therefore carried out registrable economic activity in Latvia, which in turn precluded the VAT refund. Additional "elegance" was lent to the SRS’s position by a reference to an intergovernmental convention for the avoidance of double taxation with respect to taxes on income and on capital - a convention which, as its very title indicates, governs direct taxes, not VAT.
The bitter road: three defeats and a turnaround on appeal
It must be admitted that the road to the positive outcome was neither quick nor straight. It should first be explained that the dispute with the SRS covers several taxation periods and therefore proceeds in two parallel sets of court proceedings: in one case, a refund is sought of VAT paid in 2022, around EUR 90 thousand, while the other concerns 2023 and around EUR 55 thousand. In the case concerning the 2022 periods, the Administrative District Court dismissed the Client’s application as early as February 2024, and on 7 January 2026 a judgment unfavorable to the Client was delivered by the Administrative Regional Court as well. In that case the Regional Court did formally acknowledge that "permanent establishment" and "fixed establishment" are not identical concepts, yet it nevertheless found it possible to dismiss the Client’s appeal. In February 2026 the Client challenged that judgment in cassation, and the case is therefore currently pending before the Senate (the Supreme Court of Latvia).
In the case concerning the 2023 periods, meanwhile, the bitter feeling was compounded on 15 December 2025 by the Administrative District Court, which dismissed the Client’s application.
The Client did not give in and filed an appeal - and then came the turnaround. This case was examined on the merits by the Administrative Regional Court, sitting in a different composition of judges, which reached conclusions that deserve recognition and are worth highlighting.
First, the Regional Court found that neither the law "On Taxes and Duties" nor the Value Added Tax Law provides that the existence of a permanent establishment in itself gives rise to an obligation to register economic activity; moreover, the SRS had not substantiated in its decision how it had arrived at such a conclusion. The court held the reference to the intergovernmental convention to be unjustified in the context of a VAT refund, since that convention governs taxes on income and on capital.
Second - and this is the most significant finding of the judgment - the Regional Court agreed with the Client that the concept of "permanent establishment" used in national law cannot automatically be equated with the VAT Directive’s concept of "fixed establishment". A fixed establishment is an autonomous, functionally defined concept of EU law, and establishing its existence requires an assessment of the actual capacity of a specific structure - with a sufficient degree of permanence and a suitable structure in terms of human and technical resources - to supply or receive services independently. The SRS had not carried out any such assessment at all.
Third, the Regional Court recalled the essence of the principle of VAT neutrality, referring also to CJEU case-law: deduction or refund of input tax must be granted where the substantive requirements are met - that is, the transactions have actually taken place and are connected with taxable economic activity - even if the taxable person has failed to comply with certain formal requirements.
As a result, the SRS’s decision was annulled as unlawful, and the SRS was ordered to issue a new administrative act, reassessing the Client’s right to a VAT refund and observing the considerations set out in the judgment. The Client is also to be reimbursed by the State the State fee of EUR 90 - which, compared with the years and resources invested in the litigation, is admittedly a symbolic consolation.
A remarkable situation has thus arisen: one and the same Administrative Regional Court, within less than half a year, sitting in different compositions of judges, in one and the same dispute - merely concerning different taxation periods - has reached diametrically opposite conclusions on what is essentially an identical question of law.
What does this judgment mean?
In essence, the Regional Court confirmed what the CJEU has been explaining to the Member States for many years, and what the Senate of the Republic of Latvia had already recognized in a similar case: formal obstacles constructed at national level cannot deprive a company of another EU Member State of the right to a VAT refund. In my previous article I asked, rhetorically, whether the SRS had come up with something that had not occurred to the authorities of other EU Member States which have earned the CJEU’s reproaches. The Regional Court’s answer, in my view, is unequivocal - it had not. It is to be welcomed that this time the national court managed to put the house in order itself, without making the CJEU explain the elementary once again.
At the same time, one cannot fail to mention the price at which this insight was obtained. The transactions were concluded and the VAT was paid back in 2022 and 2023, whereas the Regional Court’s judgment was delivered in mid-2026. Throughout all these years, a total of around EUR 145 thousand - the aggregate VAT claimed in the two cases - has been withdrawn from the Client’s economic circulation and has sat in the Latvian State budget. However, one looks at it, such a situation is not, and cannot be regarded as, compatible with the free movement of services and capital in an EU internal market without internal borders.
Does the story end here?
Regrettably, it must be acknowledged that it is too early to celebrate final victory, and there are at least three reasons for that.
First, the Regional Court’s judgment has not yet become final: within one month, the SRS is entitled to file a cassation complaint with the Department of Administrative Cases of the Senate. Given the SRS’s steadfastness in this case so far, such a scenario cannot be ruled out, although in my view the prospects of a cassation complaint - considering both the Regional Court’s reasoning and the Senate’s existing case-law on questions of VAT neutrality - should be assessed with skepticism.
Second, even if no cassation complaint is filed, the case will return to the SRS, which will have to issue a new administrative act. And here it is worth recalling the history of this case: when, in another case, the Senate "rejected" the SRS’s argument concerning non-registration in the VAT payer register, the SRS found a new argument - the permanent establishment. Now that the Regional Court has "rejected" the permanent-establishment argument as well, it cannot be ruled out that some third ground will be sought in order to keep the money due to the Client in the budget for a while longer. I hope these concerns will prove unfounded and that the SRS will issue the new administrative act in good faith, observing the considerations set out in the judgment and the principle of VAT neutrality in substance, rather than searching for yet another formal obstacle.
Finally, it should be mentioned that the parallel case concerning the 2022 periods is already pending before the Senate. Moreover, should the Senate entertain doubts as to the interpretation of the provisions of the VAT Directive and the VAT Refund Directive, it is, in principle, required under Article 267 of the Treaty on the Functioning of the EU to refer questions to the CJEU for a preliminary ruling - which is precisely what the Client has requested in its cassation complaint. Accordingly, the prediction made in my previous article about Latvia’s "prospects" of being mentioned in a CJEU ruling explaining, once again, the principle of VAT neutrality may come true quite literally.
Be that as it may, the Regional Court's judgment of 1 July 2026 is a significant step in the right direction - both for the Client and for any company of another EU Member State that has paid VAT in Latvia and wishes to recover it. We are pleased that the Client has not resigned itself to an obvious injustice, and we are honored to have stood by the Client from the moment the first signs of the SRS's unjust approach emerged, and to continue defending the Client's legitimate interests until the principle of VAT neutrality operates in Latvia not only in theory but also in practice.
Riga,
14 July 2026
Sworn Advocate Jānis Zaļais,
BDO Law