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«“Artificiality” A study of the concepts of Abuse and Economic Reality in the field of EU VAT Master thesis 30 credits Oskar Henkow Tax Law 9th ...»

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Lund University

Johan Bengtsson


A study of the concepts of Abuse and

Economic Reality in the field of EU VAT

Master thesis

30 credits

Oskar Henkow

Tax Law

9th semester







1.1 Purpose 6

1.2 Method 6

1.3 Disposition 7


2.1 Scope 10 2.1.1 Supply of goods and services 10 2.1.2 For consideration 10 2.1.3 Taxable person 11

2.2 Exemptions 11

2.3 Principle of neutrality 12

2.4 Right of deduction 13 3 PLAN, AVOID, FRAUD, ABUSE 14

3.1 A general division 15

3.2 The definition of the concept of tax avoidance in the field of VAT 16

3.3 The application of the concept of tax avoidance in relation to VAT 17 3.3.1 The linguistic dilemma 20

3.4 Tax avoidance in relation to direct taxation 20


4.1 Introduction to the concept of abuse in the case law of the ECJ 22

4.2 Different types of abuse? 24 4.2.1 Abuse of law 25 4.2.2 Abuse of rights 26 4.2.3 The difference between Abuse of law and abuse of rights 26

4.3 Concluding remarks 27


5.1 Introducing the concept of abuse to VAT. 29

5.2 Halifax 31 5

–  –  –

TABLE OF CASES 63 Summary One of the explicit objectives for the common VAT-system is to prevent tax evasion, -avoidance and -abuse. These concepts are related in the sense that all three concepts aim to prevent that the provisions of the system are applied in a manner that conflicts with the purpose of the system and the provisions. There are however substantial, inherent differences between the concepts and the way that they are applied.

By the decision in the Halifax-judgment the Court once and for all settled that the doctrine of abuse is fully applicable in the field of VAT in order to ensure the correct application of the system. Further the Court, following the rationale set out in Emsland-Stärke, established that the doctrine is to be applied as a two-part test. This two-part test is constructed by a comparison between the purpose of the procedure set out by the taxpayer and on the other hand the purpose and objectives of the VAT-system. The Halifaxdecision has been followed by a series of decisions further defining the implications and applicability of the concept. I several of these decisions reference has been made to the significance of “artificial transactions” or “lack of economic reality” and the Court has held that the objective of the application of the concept of abuse is to prevent these types of transactions When examining the decisions delivered on the assessment of abusive procedures the significance and meaning of the these terms and their relation two-part test is difficult to establish. On one hand the Court advocate a strict application of the two-part test, in relation to which the existence of “artificial elements” can be relevant. On the other the existence of such elements seem to act as a third, implied criterion when assessing possibly abusive procedures.

The concept of “economic reality” has further been actualized in a different line of cases, the “DFDS-line. Here the concept is addressed as a fundamental benchmark for the interpretation of the provisions of the directive. This line of cases to some extent over-laps the Halifax-line but should be regarded as separate. This is since the DFDS-line primarily relate to the interpretation of the provisions of the directive, whilst the Halifax-line aims to assess the correct application or invocation of the provisions.

Sammanfattning Ett av de uttalande målen för det gemensamma systemet för mervärdesskatt är att förhindra skatteflykt, skatteundandragande och missbruk. Dessa koncept besläktade i den bemärkelse att de alla hindrar att skattesystemet tillämpas på det sätt som det avsetts att göra. Dock finns det betydande, inneboende skillnader i koncepten och hur de tillämpas.

Genom avgörandet i Halifax-domen slog Domstolen en gång för alla fast att doktrinen om förfarandemissbruk är fullt ut tillämplig inom mervärdesskatteområdet i syfte att försäkra systemets korrekta tillämpning.

Vidare slog Domstolen fast att doktrinen om förfarandemissbruk inom mervärdesskattesystemet ska tillämpas som ett tvådelat test, inriktat på att undersöka å ena sidan syftet med lagstiftningen och å andra sidan den skattskyldiges syfte med transaktionerna. Efter Halifax har följt en rad avgöranden som ytterligare definierar doktrinens innebörd och tillämpning på området. I flera av dessa avgöranden har referenser gjorts till ”artificiella transaktioner” eller ”ekonomisk verklighet” och det har uttalats att det är doktrinens syfte att förhindra just artificiella transaktioner som inte motsvarar ekonomisk verklighet.

Innebörden av dessa begrepp är svår att definiera utifrån de avgöranden som avkunnats inom ramen för tillämpningen av doktrinen om förfarandemissbruk. Å ena sidan förespråkar Domstolen en relativt strikt tillämpning av det tvådelade testet, i förhållande till vilket förekomsten av artificiella element kan vara relevant. Å andra sidan andra sidan famstår det emellanåt som om förekomsten av artificiella element eller ”brist på ekonomisk verklighet” agerar som ett tredje, underförstått kriterium för tillämpningen av doktrinen.

Dock har begreppet ”ekonomisk verklighet” refererats till i en annan linje av domar (DFDS-linjen). Här har begreppet betraktats som en generell måttstock för mervärdesskattesystemet. Denna linje överlappar till viss del Halifax-linjen, men ska dock betraktas åtskild från denna. DFSD-linjen relaterar primärt till tolkningen av direktivens bestämmelser, medan Halifax-inriktar sig på att bedöma tillämpningen av dessa.

Preface There are some points in life that, even if you don’t realize it until later, comes to change the direction of where you’re heading. These points exist in every aspect of life. I call these points decisive moments. One my decisive points was when I decided to follow the advise to apply for what my friend referred to as “the best course ever”, the European Moot Court Competition. The Moot Court challenge introduced me to European media law, which introduced me to the concept of abuse through which I was introduced to the field of VAT-law.

As I’ve examined the prohibition of abuse I’ve been fascinated by the large diversity of perspectives put on the topic. It is clear to me that it’s a long way until we are able to fully understand the concept in a uniform manner.

The ambition of this essay is consequently not to provide any definite answers, but rather to add my perspective to an issue, in my opinion often over-looked.

I would like to thank all the persons who has stood by and inspired me, but especially my patient employer, Skatteverket and my patient supervisor, Oskar Henkow.

–  –  –

1 Introduction “Any legal order which aspires to achieve a minimum level of completion must contain self-protection measures, so to speak, to ensure that the rights it confers are not exercised in a manner which is abusive, excessive or distorted.” Advocate general Tesarou in case C-367/96 Kefalas 1 Measures that prohibit procedures that, even though formally compliant with the letter of the law, conflicts with the purpose of the legislation or the common values of the legislative system can be found throughout the Member States. These measures have taken different shapes in the different legal traditions of the different Member States, being expressed in Courtmade principles, general clauses and specific anti-avoidance legislation.

After the creation of the European Community in 1957 I didn’t take long to establish that such a self-protective measure was needed in this new legal order as well. How and when this measure is triggered and applicable has however been subject for discussion ever since the decision in Van Binsbergen 2 in 1974.

Even though this prohibition of abusive invocation of provisions of EU-law today is to some extent through legal codification in some of the legislative acts of the Union, 3 the concept of has primarily been developed through case law.

In 2006 the ECJ definitely established the applicability of the prohibition of abuse in the field of EU VAT by its’ decision in Halifax where the Court established that the assessment of abuse should be done by an application of a formalized, two-part test. 4 Despite the Courts’ rather thorough elaboration of the concept and its’ applicability in Halifax the decision has been followed by a series of judgments regarding this “new” phenomenon in the area of VAT. In one of these decisions the Court recently stated that “the effect of the principle prohibiting abuse of rights is therefore to prohibit wholly artificial arrangements which do not reflect economic reality” 5. This Case C-367/96 Alexandros Kefalas and Others v Elliniko Dimosio (Greek State) and Organismos Oikonomikis Anasygkrotisis Epicheiriseon AE (OAE). [ECR] 1998 I-02843.

(Cit. Kefalas). Para 24, see also Opinion of AG Poires Maduro in case C-255/02 Halifax plc, Leeds Permanent Development Services Ltd and County Wide Property Investments Ltd and others v Commissioners of Customs & Excise. [ECR] 2006 I-01609.(Cit Halifax).

Para 73.

Case 33/74 Johannes Henricus Maria van Binsbergen v Bestuur van de Bedrijfsvereniging voor de Metaalnijverheid [1974] ECR 01299 (cit. van Binsbergen) An example where the concept of abuse has been codified in Union law is article 54 of the Charter of Fundamental Rights of the European Union, OJ 2007, C 303/1 See section 5.2 Case C-504/10 Tanoarch s.r.o. v Daňové riaditeľstvo Slovenskej republiky [2011] n.y.r (cit Tanoarch), see also Case C-162/07 Ampliscientifica Srl and Amplifin SpA v Ministero reference to “artificial arrangements” or “lack of economic reality” can be seen in several of the Courts decisions on the subject.

Reference to the concept of “economic reality” as a benchmark for the assessment of the provisions of the VAT-system was however not a novelty introduced by the Halifax decision. Almost ten years earlier, in DFDS 6, the Court had established that “consideration of the actual economic situation is a fundamental criterion for the application of the common VAT system” 7 This fundamental criterion has been applied in a line of cases, not directly connected to the Halifax-line and the aim of this essay is to examine whether it is possible to reconcile these two lines of cases.

As shall be developed in section 3.3.1 the Court has shown an inconsistency in the terminological reference to the concept of abuse, using terms like circumvention, abuse, abuse of rights, abuse of law etc. For this essay the concept will, for the sake of consistency, be referred to as “abuse”, unless explicitly mentioned.

1.1 Purpose The purpose of this thesis is to examine and compare the concepts of abuse and economic reality and to examine how they relate to each other. What is the role has the element of “artificiality” or “lack of economic reality” in relation to the concept of abuse? If these elements have an affect for the application of the concept of abuse, can any guiding conclusions be drawn from the case law concerning the concept of economic reality?

1.2 Method In order to examine the current legal situation a traditional legal dogmatic method 8 will be applied. As the analysis is delimited to only cover the application of the concepts in EU law the assessment will emanate from a study of the case law of the ECJ. In order to deliver a comprehensive analysis of the topic it has been my ambition to fully cover the case law delivered by the ECJ regarding the concepts of abuse and economic reality as applied in relation to EU VAT-law. The material circumstances of the referred cases will however be described to a various extent.

dell’Economia e delle Finanze and Agenzia delle Entrate [2008] ECR I-04019 (cit.

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