Value Added Tax (VAT) is a key source of state budget revenue, and its design—as an indirect tax based on a deduction mechanism—requires particular caution on the part of taxpayers. In recent years, the principle of due diligence, which taxpayers should adhere to in order to effectively exercise their right to deduct input VAT, has gained increasing importance. While this concept has not been defined legally, it plays a significant role in combating tax fraud and protecting the interests of the State Treasury.
The concept of due diligence in the context of VAT
Pursuant to Article 86(1) of the VAT Act (Journal of Laws of 2023, item 1570, as amended), a taxpayer has the right to deduct input VAT if the goods and services are used to perform taxable activities. In practice, however, this right may be challenged if it turns out that the taxpayer participated – even unknowingly – in transactions related to tax fraud.
In response to the problem of the use of “dummy” and fictitious invoices, both the case law of the CJEU and the practice of the National Tax Administration have developed a requirement for the taxpayer to exercise due diligence when verifying the contractor and the circumstances of the transaction.
Case law of the Court of Justice of the European Union
In a number of rulings (including C-439/04 Axel Kittel, C-80/11 Mahagében, and C-324/11 Optigen), the CJEU has held that a taxpayer cannot exercise the right to deduct VAT if they knew or should have known that a given transaction was part of tax fraud. The key criteria here are objective (whether a "prudent trader" could have noticed the irregularities) and subjective (whether the taxpayer actually knew about the fraud).
In the Kittel judgment, the Court found that:
"the refusal of the right to deduct is justified if the taxpayer knew or should have known that, through the acquisition, he was participating in a transaction involving VAT fraud."
This ruling became the basis for the further due diligence practice of national courts and tax authorities.
Due diligence in the practice of the Polish tax administration
Polish tax authorities, citing CJEU case law, increasingly expect taxpayers to actively verify their contractors. In response to the need for standardization, the Ministry of Finance published the "VAT Due Diligence Methodology for Domestic Transactions" in 2018, which provides a catalog of examples of actions taxpayers should take to demonstrate due diligence.
Recommended activities include:
- checking the contractor’s data in CEIDG, KRS and the VAT white list;
- verification whether the contractor is listed as an active VAT payer;
- analysis of the method of communication and the reliability of documents (e.g. contracts, invoices, delivery notes);
- assessment of the contractor's economic credibility;
- checking whether the transaction does not deviate from market standards.
Lack of due diligence and taxpayer liability
If the tax authorities find that the taxpayer has not exercised due diligence, they may:
- deny the right to deduct VAT;
- impose an additional tax liability (VAT penalty) – 30% or 20%;
- initiate tax penal proceedings against the taxpayer or his representatives.
In practice, even if a taxpayer did not knowingly participate in fraud but acted grossly negligently, they may suffer negative financial and legal consequences. This, in turn, raises questions about the limits of liability and the proportionality of sanctions.
Due diligence and the actual nature of the transaction
Due diligence isn't limited to verifying the contractor. Tax authorities also analyze whether a given transaction actually took place or was fictitious. Elements such as a lack of proof of delivery, a lack of payment, or a lack of communication between the parties can indicate a lack of genuineness of the transaction and thus lead to questioning the VAT deduction.
The principle of due diligence, although not explicitly regulated by law, currently constitutes one of the pillars of assessing the legality of VAT deductions. In practice, this means that taxpayers should implement VAT compliance procedures, including by:
- maintaining documentation on contractor verification;
- using checklists;
- training of employees responsible for concluding contracts;
- consultations with a tax advisor for unusual transactions.
This article is for informational purposes only and does not constitute legal advice.
The law is current as of September 10, 2025.
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