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АКТУАЛЬНАЯ ТЕМА
УДК 34.03:336.22(4)
НАРУШЕНИЕ ЕВРОПЕЙСКОГО НАЛОГОВОГО ЗАКОНОДАТЕЛЬСТВА: ОБЗОР И ПОСЛЕДНИЕ ТЕНДЕНЦИИ В ПРЕЦЕДЕНТНОМ ПРАВЕ ЕВРОПЕЙСКОГО СУДА В ОТНОШЕНИИ ПРЯМЫХ И КОСВЕННЫХ НАЛОГОВ (ЧАСТЬ 1)
ДЭННИС М. ВЕБЕР
доктор права, профессор кафедры Европейского корпоративного налогового права Амстердамского университета, директор Амстердамского центра налогового права, Амстердам, Нидерланды E-mail: Dennis.weber@loyensloejf.com
АННОТАЦИЯ
В статье рассматривается право государств - членов ЕС бороться с нарушениями законодательства, которое определяется в прецедентном праве Европейского Суда как баланс между соблюдением принципа правовой определенности, правом выбора наиболее благоприятного налогового режима и правом государств бороться с уклонением от уплаты налогов. В первой части статьи рассматриваются субъективные и объективные критерии для установления злоупотреблений, концепция экономической реальности по сравнению с полностью искусственными структурами, идея общего принципа коммуни-тарного права и различные уровни злоупотребления.
Ключевые слова. нарушение; уклонение от уплаты налогов; искусственные структуры; общий принцип права в ЕС; выбор налоговой юрисдикции.
ABUSE OF LAW IN EUROPEAN TAX LAW; AN OVERVIEW AND SOME RECENT TRENDS IN THE DIRECT AND INDIRECT TAX CASE LAW OF THE COURT OF JUSTICE OF THE EUROPEAN UNION - PART 1
DENNIS M. WEBER
PhD (law), Professor, Chair European Corporate Tax Law, University of Amsterdam;
Director, Amsterdam Centre for Tax law (ACTL), Amsterdam, Holland E-mail: Dennis.weber@loyensloejf.com
ABSTRACT
This paper examines the right of the EU Member States to combat abuse, as defined in the case law of the European Court, in particular, the balance between enforcement of the principle of legal certainty, the right to choose the most favourable fiscal route and the right of states to combat tax avoidance. Part 1 addresses the subjective and objective tests for establishing abuse, the concept of economic reality v. wholly artificial arrangements, the idea of a general principle of community law and the different levels of abuse.
Key words: abuse; tax avoidance; artificial structures; general principle of EU-law; tax jurisdiction shopping.
1. GENERAL
1.1. Introduction — points of assumption
According to the case law of the Court, the Member States have the possibility, also under Community law, to combat abuse. In addition to the specific conditions with which this combating of abuse will have to comply in various areas of law, there are a number of general preconditions to the combating of abuse. First, I should like to refer to ECJ 12 May 1998, case C-367/96 (Kefalas), ECR I-2843 in which the Court reminded that:
‘the application of such a national rule must not prejudice the full effect and uniform application of Community law in the Member States (...). In particular, it is not open to national courts, when assessing the exercise of a right arising from a provision of Community law, to alter the scope of that provision or to compromise the objectives pursued by it’.
In addition, it is important to recognise that the principle of legal certainty is the starting point in the application of the law. This principle entails that rules of law must be made known and that situations of law governed by the Community law must be foreseeable. One consequence of this is that it must be possible for a taxpayer to choose the fiscal means most favourable to him on the basis of Community law known to him. In the VAT case law, the Court has acknowledged choosing the most favourable fiscal means (‘the most favourable tax route principle’) a number of times. In ECJ 21 February 2006, case C-255/02, (Halifax) it was considered (para. 73):
‘Moreover, it is clear from the case-law that a trader’s choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the VAT system (see, in particular, BLP Group, paragraph 26, and Case C-108/99 Cantor Fitzgerald International [2001] ECR I-7257, paragraph 33). Where the taxable person chooses one of two transactions, the Sixth Directive does not require him to choose the one which involves paying the highest amount of VAT. On the contrary, as the Advocate General observed in point 85 of his Opinion, taxpayers may choose to structure their business so as to limit their tax liability’
The principle of legal certainty entails that if a taxpayer can rely on (can foresee) the fact that if he is eligible for a certain tax advantage, he can also make use of this. The principle of legal certainty can only be set aside if there is a matter of abuse. The abuser, namely, can no longer rely on the foreseeability of the law.
In every situation, a balance will have to be found between enforcement of the principle of legal certainty, the right arising therefrom to choose the most favourable fiscal course, and combating tax avoidance. Finding this balance, however, is not an easy task.
2. OBJECTIVE AND SUBJECTIVE TESTS
2.1. General
It follows from ECJ 14 December 2000, case C-110/99 (Emsland-Starke) that abuse of Community law must be established on the basis of i) the objective circumstances from which it appears that the envisioned objective of the Community law cannot be attained (objective test); and ii) the subjective abuse intention (subjective test).
The Court has also used this test in tax law. In the area of VAT, see ECJ 21 February 2006, case C-255/02, (Halifax). With regard to the Capital Tax Directive,1 see ECJ 7 June 2007, case C-178/05 (Commission v Greece) ECR I-4185, and for direct taxation see ECJ 12 September 2006, case C-196/04 (Cadbury Schweppes).
2.1.1. Objective test
With respect to the objective test with regard to abuse, in Emsland-Starke the Court required ‘a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved’. Under the objective test, there should be awareness that in principle — on the basis of the letter of the law — a taxpayer has a right to a favourable treatment. If however, the objective circumstances are assessed in the light of the objective of the applicable Community law, then the conclusion can be reached that the envisioned objective has not been attained on account of the rule. In such a situation, this could constitute abuse, and this is often described by the Court such that the objective circumstances do not
1 Directive 69/335/EEC of the Council of 17 July 1969 concerning the indi-
rect taxes on the raising of capital, OJ L 249/25.
mean ‘bona fide commercial transactions’ or ‘normal commercial operations’; ‘create artificial conditions’ or ‘wholly artificial arrangements’. In VAT cases, the Court considers that abuse is not present in the case of ‘normal commercial operations’. In the VAT case Weald leasing,2 the Court ruled that for the question what were normal commercial transactions, the nature of the commercial operations which the taxpayer was usually engaged was not what was important, but only object and effects of the specific transactions in question, as well as their purpose (see para. 43 and 44 of Weald leasing). In Weald Leasing, the AG considered the question what ‘normal commercial operations for that matter under the subjective abuse test’ (see below on the test), the CJ, however, deals with the question under the objective abuse test.
The objective test, whereby the objective circumstances must be qualified in the light of the objective of Community law, is in fact basically an interpretation of the Community law, for which in the first instance, the Court has jurisdiction. In this framework, if necessary, the national court will thus have to refer preliminary questions to the Court about the objective of the relevant Community law.3
2.1.2. Subjective test
The Court describes the subjective test in Emsland-Starke as ‘the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it’
For the question whether restrictions on the free movement can be justified on the ground of prevention of abusive practices, the CJ considers in direct taxation cases: ‘the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory’ (Cadbury Schweppes, para. 55). The CJ emphasises hereby that the existence of tax motives do not imply that abuse is present given that an economic reality can still be present (Cadbury Schweppes, para. 65).
2 CJ 22 December 2010, case C-103/09, H&I 2011/3.10 (comments by de la Feira).
3 See also: A. Kjellgren, On the border of abuse: The European Court of Justice on circumvention, fraud and other misuses of Community law, EBLR 2000, p. 190; D. M. Weber, Tax avoidance and the EC treaty freedoms, EU-COTAX Series on European Taxation Vol 11, Kluwer Law International, The Hague, 2005, p. 186 and L. De Broe, International Tax Planning and Prevention of Abuse, Volume 14, Doctoral Series, IBFD, Amsterdam, 2008, p. 756.
In VAT cases, the description of the subjective element is different. In Weald leasing, for example, the CJ considered (para. 30): ‘it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. The prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages’, here referring to cases such as Part Services and Halifax.
If a person does not openly disclose that he is trying to avoid the national legislation via invoking Community law, his actual intention will have to be derived from the objective circumstances (the objectified intention).4 The artificiality of a transaction would thus have to be able to be redirected to a subjective abuse intention of a person.
Accordingly, when applying both the objective test and the subjective test, the objective circumstances will often have to be examined. The result is that these two tests can become somewhat intertwined and sometimes, can be difficult to separate from each other (see also paragraph 2.1.4).5
In my view, the case law of the Court deals with the subjective intention of a person. In his Opinion in Halifax, AG Maduro remarked, ‘the finding of artificiality should not be based on an assessment of the subjective intentions of [the persons]
(.. ) claiming the Community right. The artificial nature of certain events or transactions must certainly be determined on the basis of a set of objective circumstances verified in each individual case’. According to AG Maduro, the intention of the activity should be examined, not the intention of the persons (who perform the activities). ‘What matters is not the state of mind of [a person], but the fact that the activity, objectively speaking, has no other explanation but to secure a tax advantage’. Many agree with AG Maduro on this point,6 and in Halifax, in the test regarding the subjective intention, the Court mentioned the ‘essential aim of the transactions’ (para 75 from Halifax). This does not mean, however, in my view, that only the intention of the activity should be examined and thus the intention of the persons (who perform the activity/
4 Compare also AG Maduro in his Opinion to the joined cases C-255/02, C-419/02 and C-223/03, (Halifax), pt. 70.
5 Thus under both tests, the Court often mentions the ‘artificiality’ of a construction.
6 See for instance: L. De Broe, International Tax Planning and Prevention of
Abuse, Volume 14, Doctoral Series, IBFD, Amsterdam, 2008, p. 765.
instruct it) is irrelevant. In my opinion, this should be the other way round: first, you must examine the subjective intention of persons, however, given that you often do not know or may have doubts as to what the subjective intention of a certain person is, (a person may deny that he has an intention to abuse), in such a case, the objective circumstances (the activity) must be examined. The subjective intention of the person should be able to be discerned from these objective circumstances, which is what
I call the ‘objectified intention’. Worthy of remark is that sometimes a person is open about his intentions. Take, for example, the Centros case. The persons (shareholders) of the company incorporated according to UK law were open about their intentions. The Court established that the statement that the incorporation of the UK company for the purpose of avoiding application of Danish legislation on the formation of private limited companies had not been denied by the shareholders, either in the written observations or at the hearing (see para. 16-18 of Centros). In other words: the subjective intention of avoiding the national legislation had been established. In such a case, the subjective intention does not have to be examined on the basis of the objective circumstances.
In practice, however, I suspect that my opinion and that of AG Maduro are not so very different. We are both seeking the subjective intention. We both will often examine the objective circumstances, although only I attribute the intention that can be derived from the objective circumstances to the persons who perform the activities (the ultimate entitled parties). It is also the persons (the taxpayers) who ultimately enjoy the tax advantage, the activities themselves do not enjoy a tax advantage7.
It has been pointed out that other to Emsland-Starke,8 in VAT cases (Halifax) (and later also con-
7 The Netherlands Supreme Court, for example, clearly based itself in HR 10 February 2012, no. 08/05317 (Ziekenhuisconstructie), V-N 2012/12.23 on objective circumstances to subsequently find out the subjective intention of the parties (see: para 3.5.2 of the judgment). See also: HR 10 February 2012, no. 09/03203 (Ziekenhuisconstructie), V-N 2012/13.20, para. 3.5.2. To me, that seems to be a correct approach.
8 In Emsland-Starke, the Court points out that the evidence of the subjective element particularly can be delivered ‘by evidence of collusion between the Community exporter receiving the refunds and the importer of the goods in the non-member country. In Emsland-Starke, products were exported from the EU and immediately re-imported (immediately after having cleared customs, in an unchanged condition and with the same means of transport) for the purpose of obtaining an export refund which was higher than the import duty. Apparently, in order not to appear all too obvious in taking this U-turn, before being re-imported into the EU, a number of consignments of products were sold to another company which subsequently imported (on paper) them into the EU. By being sold and purchased in the non-member
firmed in cases such as Part services, RBS Deutschland and Weald Leasing) under the subjective test, the CJ does not explicitly require that there be a matter of artificiality. The Court has remarked in, amongst others, Halifax, that in order to find out what the subjective intention is, ‘it may take account of the purely artificial nature of those transactions and the links of a legal, economic and/ or personal nature between the operators involved in the scheme for reduction of the tax burden’. The subjective intention can be derived from the artificiality but it is not a condition as such. There can also be a matter of abuse when no artificial element is present.9 That could be present, for example, in a situation in which there is no question of artificiality, but there is an activity between affiliated bodies. Although the finding in earlier VAT case law that the CJ does not require the condition of artificiality, in more recent case law, it must be found that the CJ does consider artificiality decisive to the question whether the subjective test has been satisfied. We see this, for example, in RBS Deutschland.10 In that case, the Court considered (paras 50 and 51): ‘As regards the facts at issue in the main proceedings in the present case, it should be noted that the various transactions concerned took place between two parties which were legally unconnected. It is also common ground that those transactions were not artificial in nature and that they were carried out in the context of normal commercial operations’. As the national court has observed, the characteristics of the transactions at issue in the main proceedings and the nature of the relations between the companies that carried out those transactions contain nothing to suggest an artificial arrangement that does not reflect economic reality and the sole aim of which
country, it appeared as if the goods had in fact been traded and that there was no question of abuse. It must be pointed out however, that the companies which sold and bought the goods were established in the non-member country at the same address and were managed and represented by the same persons. According to para. 58 in the Emsland-Starke judgment, the Court ruled that the circumstance that ‘before being re-imported into the Community the product was resold by the purchaser established in the non-member country concerned to an undertaking also established in that country with which it has personal and commercial links (...). (•••) is one of the factual elements which can be taken into account by the national court to establish the artificial nature of the operation concerned. In essence, the question of transactions between apparently connected persons is whether an activity of an artificial nature has taken place.
9 See: A. Peeters, De vrije keuze van de minst belaste weg bekeken vanuit een Europeesrectelijk perspectief, Algemeen Fiscaal Tijdschrift, 2011/10, p.
17 and B. Kiekebeld, Anti-abuse in the field of taxation: is there an overall concept, EC Tax Review 2009/4, p. 144-145.
10 CJ 22 December 2010, C-277/09 (RBS Deutschland), H&I 2011/3.9 (comments by Lambion).
is to obtain a tax advantage (see, to that effect, Case C-162/07 Ampliscientifica and Amplifin [2008] ECR I-4019, paragraph 28), since RBSD is a company established in Germany carrying on business providing banking and leasing services’ (italics by author). It appears from RBS Deutschland, therefore, that in practice, the Court does seek the artificiality under the subjective requirement and when this is not the case, there is no question of abuse. We see the same approach in the Opinion of AG Mazak in Weald leasing where he observed that there is no question of abuse, despite the fact that the transaction took place with a subsidiary, given that the same advantage can be obtained by entering into an agreement under normal commercial conditions with an independent third party. The entering into a transaction with affiliated bodies thus only constitutes abuse if a certain artificiality is present. It must be remarked that in Foggia11 (concerning the tax merger directive) the Court does not emphasise the artificiality of the transaction.12
Finally, I note that the discovering of the subjective intention is an issue of fact which, in the first instance, is left to the national court. This national court will have to establish what the subjective intention is.13 This, thus, is different when applying the objective test, whereby the Court would be the designated judicial body in the first instance to determine the scope and goal of the relevant Community law.
2.1.3. Only tax avoidance when there is a tax advantage
In Halifax, the Court considers that abuse is present when it ‘results in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions’ (para. 74) and that in addition, also present must be ‘that the essential aim of the transactions concerned is to obtain a tax advantage’ (para. 75). In Cadbury Schweppes, the Court mentions abuse ‘with a view to escaping the
11 CJ 10 November 2011, C-126/10, (Foggia), H&I 2012/6.1 (comments by da Silva).
12 See on this: A. M. Jimenez, Towards a homogeneous theory of abuse in EU (direct) tax law, Bulletin 2012, p. 284. This could be linked to the fact that the anti-abuse provision in the merger directive places emphasis on ‘valid commercial reasons’
13 In Emsland-Starke, the referring court (Finanzgericht Hamburg) conclud-
ed that on the basis of the facts, the subjective test had not been satisfied and
thus, there was no question of abuse. See P. Koutrakos, Movement of goods, Emsland-Starke and the abuse of law test, published in ‘Prohibition of abuse of law — a new general principle of EU law, edited by R. de la Feria and
S. Vogenauer, Hart publishing, Oxford, 2009.
tax normally due on the profits generated by activities carried out on national territory’ (para. 55). It appears from this judgments that abuse can only be called into question in the case of less (or no) payment of tax (hereafter, in brief, ‘tax advantage’). The question that can be asked is whether a structure which provides only a financing advantage for the taxpayer and not a tax advantage can be labelled as abuse. One example in the scope of VAT is the situation in which an entrepreneur decides to lease and not to buy a good. Assume that this is a taxpayer not entitled to deduct VAT; when this taxpayer buys a good, the VAT is non-deductible at once, if the taxpayer decides to lease or hire out the good, the VAT is not deductible from the lease amounts. On balance, the same amount of VAT is paid, only the taxpayer has a financial advantage. The issue in the Weald leasing case14 was the difference between a tax advantage and a financing advantage.15 In his Opinion, AG Mazak dwelt on the fact that deferment of VAT payment (thus a financing advantage) in itself was not abuse (see: point 20 of his Opinion), but did not come to a clear conclusion that a financing advantage as such was not a tax advantage. The same applies to the Court. The Court even takes the position that in a financing advantage, there is a tax advantage; in para. 31, namely, the court considers: ‘As regards the main proceedings, the decision making the reference states that the essential aim of the leasing transactions at issue in the main proceedings was to obtain a tax advantage, namely spreading the payment of the VAT on the purchases in question, so as to defer the Churchill Group’s VAT liability’. Subsequently, the Court came to the conclusion that this tax advantage was not contrary to the objective of the VAT Directive (para. 34): ‘A taxable person cannot be criticised for choosing a leasing transaction which procures him an advantage consisting, as is apparent from the decision making the reference, in spreading the payment of his tax liability, rather than a purchase transaction which does not procure him any such advantage, provided that the VAT on that leasing transaction is duly and fully paid’. As substantiation of this decision, the Court observed
14 CJ 22 December 2010, case C-103/09, H&I 2011/3.10 (comments by de la Feira).
15 See in this framework, also the Opinion of AG Van Hilten in HR 10 February 2012, no. 08/05317 (Ziekenhuisconstructie), V-N 2012/12.23 and on Weald Leasing: Opinion of Van Hilten in HR 30 March 2012, no. 09/03079 (Gemeente Middelharnis), FED 2012/69 para. 7.4.2. and further an Opinion of Van Hilten in HR 10 February 2012, no. 09/03203 (Ziekenhuisconstructie), V-N 2012/13.20, para. 6.4.3.
(para. 38): ‘Furthermore, resort to a leasing transaction in respect of an asset does not automatically mean that the amount of VAT on that transaction will be less than would have been paid if the asset had been purchased’. Herewith, the CJ indicates implicitly that in the choosing for lease and not purchase, there is no question of a tax advantage. The Court then observed in para. 39 that the national court must examine ‘whether the contractual terms of the leasing transactions at issue in the main proceedings are contrary to the Sixth Directive and of the national legislation transposing it. That would particularly be the case if the rentals were set at levels which were unusually low or did not reflect any economic reality’. If the lease or rentals are unusually low, then there is a difference between the VAT amounts that have to be paid in the case of lease as compared with the VAT amount in the case of purchase. The judgment of the CJ would thus appear to indicate that only then is there a matter of a tax advantage which is contrary the objective of the VAT Directive. In other words: a VAT financing advantage is not contrary to the objective of the VAT Directive, unless a clear tax advantage is obtained.
Be that as it may, the above is, in essence, that in principle later payment of VAT, also in the eyes of the CJ, is not abuse. It is important to realise that these problems can also arise in direct taxation. In the Netherlands, for example, deferment of payment of tax in certain circumstances (for example, mergers) is considered by the legislature as tax avoidance. It would appear that such legislation now requires some adjustment.
A discussion that arose in the Netherlands case law is whether for the question of whether a tax advantage exists account can also be taken of transactions which are to take place in the future. In certain constructions, the tax advantage will only actually take place at a later moment and thus, at the present, is relatively uncertain. We can thus reason that abuse can only be present at the moment the tax advantage in fact arises. The Netherlands AG Van Hilten adhered to this latter interpretation, but the Supreme Court (Hoge Raad) ruled that account can be taken of future transactions.16 In that case, it had been established that the parties involved were aware that a tax advantage would be obtained by the (future) transactions (the advantage was, in brief, in
16 See: HR І0 February 20І2, no. 08/053І7 (Ziekenhuisconstructie).
the fact that by entering into a fiscal unity at a later date, no VAT whatsoever could be levied). The fact, according to the Supreme Court, that a part of the transaction (namely, the forming of a fiscal unity for VAT purposes) at the moment of the purchase of the goods lay in the future and thereby was not entirely certain, was not important.
2.1.4. The overlap between the objective test and the subjective test
Such as is indicated here above, for the question of whether abuse is present, it must be tested whether the actions are contrary to the objective of EU law (objective abuse test), and the question must be answered whether an advantage is obtained ‘by creating artificially the conditions laid down for obtaining it’ (subjective abuse test). In the direct taxation case law that concerns the justification of restrictive national measures, the Court indicated by application of the objective abuse test that there was no question of contrary to the objective of the treaty freedoms if an ‘economic reality’ is reflected (para. 65 of Cadbury Schweppes), which is not the case when there is a ‘wholly artificial arrangement’ (para. 55 of Cadbury Schweppes)1 In the framework of the subjective test, the Court considers that abuse is present in ‘wholly artificial arrangements’ ‘which do not reflect economic reality with a view to escaping the tax normally due on the profits generated by activities carries out on national territory’ (para. 55 of Cadbury Schweppes). Although there is a subtle, but important, difference between the two tests, namely, under the objective test a matter of artificiality is contrary to the objective of the treaty freedoms, and under the subjective test, this artificiality must also lead to the escaping from tax, it would appear that the objective test and the subjective test overlap largely under the treaty freedoms, given that under both tests it has to be examined whether there is a question of ‘wholly artificial arrangements’ and not of an ‘economic reality’.18 Upon scrutinising a judgment such
17 Here, I describe the object of the ‘treaty freedoms’ in general, although I am aware that the relevant case law in this framework in the area of direct taxation concerns particularly the purpose of the right of establishment. I assume, however, that under the other (economic) treaty freedoms, the Court will make the requirement that there must be a reflection of an ‘economic
reality. See in this framework also: M. Lang, Cadbury Schweppes line of case law from the Member States’ perspective, p 445 and 446; published in ‘Prohibition of abuse of law — a new general principle of EU law, edited by R. de la Feria and S. Vogenauer, Hart publishing, Oxford, 2009.
18 See also A. Peeters, De vrije keuze van de minst belaste weg bekeken
ІІ
as Cadbury Schweppes, I have the greatest difficulty in being able to separate easily the objective abuse test from the subjective abuse test. This, however, is understandable if we realise that for the large part, under the treaty freedoms, the tests overlap each other. With regard to the objective abuse test, it is important to realise that one of the means to achieve the objective of the Union is to establish an internal market (art. 3, para. 3 EU Treaty). Art. 26, para 2 TFEU determines that the internal market encompasses a scope ‘without internal borders in which the free movement of goods, persons, services and capital is safeguarded’. By means of these treaty freedoms, the ‘economic and social interpenetration’ within the Union is ensured, and for a person, this means that he can ‘participate, on a stable and continuing basis, in the economic life of a Member State other than his State of origin and to profit therefrom.19 Whether an economic reality is present (important to the subjective abuse test) and whether there is participation in the economic life of a Member State (of importance under the objective test; which, namely, is the aim of the treaty freedoms), are very closely linked together and thus the objective and subjective abuse tests overlap under the Treaty Freedoms. Nevertheless, the subjective test has an added value, also under the treaty freedoms, because there must be a matter of avoidance of tax. If the tax burden is not lower due to the artificial actions, then there is no question of abuse (see for this also paragraph 2.1.3. on the question of what avoidance of tax in fact entails).
In addition, there is not necessarily an overlap between the objective test and the subjective test under secondary EU law. Under the VAT Directive, a transaction can be contrary to the objective of a provision, for example, the principle of fiscal neu-trality.20 The question of whether a transaction is contrary to a the principle of fiscal neutrality (part of the objective abuse test) does not necessarily have to overlap with the question of whether a certain transaction is artificial or reflects an economic reality (part of the subjective abuse test). Accordingly, the objective and the subjective abuse tests will not so easily overlap each other in the area of VAT as they do under the treaty freedoms.
vanuit een Europeesrectelijk perspectief, Algemeen Fiscaal Tijdschrift, 2011/10, p. 20
19 See: Case C-55/94 Gebhard [1995] ECR I-4165, paragraph 25.
20 For example, a certain right to deduction which is contrary to the principal
of fiscal neutrality because there is no taxability to counteract this.
2.І.5. Wholly versus essential aim versus ‘the most favourable tax route principle’
In 'tax' cases in the area of direct tax law, consider here ICI, Hoechst, Lankhorst-Hohorst, X en Y, De Lasteyrie, Cadbury Schweppes and Test Claimants in the Thin Cap Group Litigation — the Court permitted in abstracto that ‘wholly artificial arrangements’ were to be combated.21 In ECJ 12 September 2006, case C-196/04 (Cadbury Schweppes) a link was made in this framework to Emsland-Starke and Halifax. It must be remarked, however, that particularly the subjective test for the VAT in cases such as Halifax and more clearly in ECJ 21 February 2008, case C-425/06 (Part Service), ECR I-897, is more broadly interpreted by the Court whereby abuse is present not only when there is a wholly artificial arrangements, but also when ‘it is apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage’ (italics DW).22 It can be derived from Part Service that if a tax benefit was the essential aim for an transaction, this subjective criterion has also been satisfied if in addition, non-fiscal economic objects have played a role (in Part Service, the Court mentions: marketing, organisation and guarantee). It thus does not necessarily have to be so that there is only a matter of abuse if exclusively the obtaining of a tax benefit is envisioned with a certain transaction. In VAT, it must concern the ‘essential aim’, which strongly resembles ‘principle objective’. By whatever means, this description of abuse gives the Member States more scope in the combating of abuse, particularly in situations in which the ultimate objective of a certain transaction in itself is non-fiscal, but the route to achieve this was prompted particularly by fiscal purposes. In this framework, it must be recalled that the Court uses ‘the most favourable tax route principle’ as starting point. In was considered, namely, in para. 73 of Halifax: ‘Where the taxable
21 ECJ 16 July 1998, case C-264/96 (ICI), ECJ 8 March 2001, cases C-397/98 and C-410/98 (Metallgesellschaft and Hoechst), ECR I-1727, ECJ 21 November 2002, case C-436/00 (X and YII), ECJ 12 December 2002, case C-324/00 (Lankhorst-Hohorst), ECJ 11 March 2004, case C-9/02 (Lasteyrie), ECJ 12 September 2006, case C-196/04 (Cadbury Schweppes) and ECJ 13 March 2007, case C-524/04 (Test Claimants in the Thin Cap Group Litigation).
22 See also: L. De Broe, International Tax Planning and Prevention of Abuse, Volume 14, Doctoral Series, IBFD, Amsterdam, 2008, p. 773 and J. Peteva, Abuse under EC Tax Law and the standard of review of the European Court of Justice, published in: M. Lang and P. Melz (Editors), Value Added Tax and Direct Taxation; Similarities and Differences, IBFD, 2009, p. 483.
person chooses one of two transactions, the Sixth Directive does not require him to choose the one which involves paying the highest amount of VAT. On the contrary, as the Advocate General observed in point 85 of his Opinion, taxpayers may choose to structure their business so as to limit their tax liability’. This principle is reiterated in, amongst others, Part Services, (para. 47); Weald Leasing (para.
27) and RBS Deutschland (para. 53 and 54). ‘the most favourable tax route principle’, however does not mean that a taxpayer always has the discretion to choose the most favourable tax route. The route as such, in my view, may also not be artificial and must reflect an economic reality. Of importance, however, is when the ultimate objective of a certain structure has a non-fiscal reason, In my view, testing the chosen route can be more marginal. How more obvious could it be in such a situation than to view the structure as a whole (thus with due consideration to the route and to the ultimate objective) and on that basis, to determine whether the essential aim of the transactions concerned is to obtain a tax advantage.23
The question is whether the broader description from the VAT case law is or will be declared applicable in the area of direct taxation, this particularly in situations in which the Treaty freedoms are exercised24. In the area of direct taxation and the Treaty freedoms, the Court still always mentions ‘wholly artificial arrangements’. I am of the opinion that there is no reason not to also apply the VAT case law when exercising the Treaty freedoms. Also in such a situation, there could be a transaction which ultimately has, in itself, a non-fiscal goal, but the route to achieve this could have been taken for purely fiscal and artificial reasons. The ‘essential aim’ case law then offers scope to combat this abuse. I remark that not everyone shares this opinion; De Broe is of the opinion that the Court must uphold a limited application of the possibility of combat-
23 In HR 29 June 2012, no. 10/00786 (Gemeente Albrandswaard), V-N 2012/37.26, the Netherlands Supreme Court ruled with reference to ‘the most favourable tax route principle’ that there was no question of abuse of law because the taxpayer in that case, according to the Netherlands regulation regarding education accommodation was permitted to choose between two different options of transfer of property of a school building and hereby the taxpayer was not obliged to choose the option whereby the highest amount of VAT would be due.
24 See also: A. M. Jimenez, Towards a homogeneous theory of abuse in EU (direct) tax law, Bulletin 2012, p. 278 and G. Kofler and M. Tumpel, «abuse’ in Direct and Indirect Community Tax Law: a convergence of standards, published in: M. Lang and P. Melz (Editors), Value Added Tax and Direct Taxation; Similarities and Differences, IBFD, 2009, p. 471.
ing abuse where the Treaty freedoms are exercised.25 Peteva is of the opinion that the threshold of ’the essential aim’ is not a clear standard of review when there is abuse26. AG Kokott would also appear to be stricter in the doctrine. In the Zwijnenburg case, the Netherlands Supreme Court asked preliminary questions about the anti-abuse provision of the Tax Merger Directive (Hoge Raad 11 July 2008, no. 43.144 (Zwijnenburg), (H&I 2008/1.17, comments by Weber). In this case, the Supreme Court assumed that in a situation in which the ultimate goal of a transaction was prompted by business reasons (the merging of two properties in a company with the view to the transfer of an undertaking from father to son), the route taken (in this case, a transfer of assets) to achieve this goal was not driven by business reasons (but purely by fiscal reasons) and thus this could constitute tax avoidance. Kokott rejected such an approach in her Opinion in Zwijnenburg: ‘Such a differentiation between object and means [the route taken] limits the organisational freedom of an undertaking, excessively in my view. After all, for the carrying out of a lawful plan, not seldom does an undertaking have a whole series of organisational options permitted by law, some of which might turn out to be fiscally more favourable than others. That the interested parties had ultimately elected the most fiscally favourable option, cannot in itself constitute a ground for the assumption of tax avoidance within the meaning of article 11, para. 1, sub a, of Directive 90/434’. I, however, gain the impression that on balance, her approach deviates very little from that of the Supreme Court. The Court does follow the opinion that where the ultimate goal is commercial operations, the route followed can still be non-commercial, but it does not follow from the Netherlands case law that where the route followed is non-commercial that this immediately implies that abuse is always present. The case law draws a finer distinction; should there be a situation of abuse, the route followed must also been in conflict with the object and scope of the law. In recent case law, the Netherlands Supreme Court has again stressed: ‘true, a taxpayer is free to choose the most advantageous route, but that
25 L. De Broe, International Tax Planning and Prevention of Abuse, Volume 14, Doctoral Series, IBFD, Amsterdam, 2008, p. 827.
26 See: J. Peteva, Abuse under EC Tax Law and the standard of review of the European Court of Justice, published in: M. Lang and P. Melz (Editors), Value Added Tax and Direct Taxation; Similarities and Differences, IBFD, 2009, p. 492.
freedom is not so far-reaching that, with a view to avoiding taxation, an artificial route, devoid of any realistic interest, can be chosen which leads to acting contrary to the objective and purport of the law.27 I have the feeling that Kokott has not entirely acquired an in-depth understanding of that aspect of the case law of the Supreme Court.
2.1.6. Do we need the subjective test?
Although both in VAT case law and in direct taxation case law28 the Court explicitly demands the subjective test,29 doubts have been raised in the literature30 and by the AGs31 about the usefulness of the subjective test. Lang, for instance, does not see the necessity for the subjective test.32 He is of the opinion that an interpretation of the objective and scope of a provision is sufficient in order to combat abuse.33 I hold another view: It must be considered that in abuse situations, the point of assumption is that a person according to the letter of the law, thus according to the ‘formal conditions’ is entitled to a certain favourable tax treatment. If the wording of the law is clear, we do not need a teleologi-cal interpretation. When, however, there is abuse of law, it is permitted that a certain case be decided contrary to the wording of the law.34 In light of the
27 HR 10 February 2012, no. 08/05317 (Ziekenhuisconstructie), para. 3.3.1.
28 See, for example, ECJ 12 September 2006, case C-196/04 (Cadbury Schweppes), paras 63-64.
29 In the literature, doubts are sometimes raised, incorrectly in our view, as to the existence of the subjective test: see, for example: K. E. S0rensen, Abuse of rights in Community law: a principle of substance or merely rhetoric? CMLrev 2006, p. 451.
30 See: K. E. Sorensen, Abuse of rights in Community law: a principle of substance or merely rhetoric? CMLrev 2006, p. 457, Lang and Heidenbauer, Wholly artificial arrangements; published in: A vision of taxes within and outside European borders, festschrift in honour of prof. dr. Frans Vanistend-ael, editors L. Hinnekens and P, Hinnekens, Kluwer 2008, p. 608 and 609 and P. Pistone ‘Abuse of law in the context of indirect tax’; published in ‘Prohibition of abuse of law — a new general principle of EU law, edited by R. de la Feria and S. Vogenauer, Hart publishing, Oxford, 2009.
31 AG Lenz defends in his Opinion in ECJ 5 October 1994, case C-23/93 (TV10), ECRI-4795 on not applying the subjective test to legal entities given that a legal person cannot develop a subjective attitude. AG Geelhoed remarks in point 173 of his Opinion in ECJ 23 September 2003, case C-109/01 (Akrich), ECR I-9607 in which he notes: ‘subjective criteria are not useful’; See Weber’s critique on this in: Abuse of law, European Court of Justice, 14 December 2000, Case C-110/99, Emsland-Starke, in Legal Issues of Economic Integration 2004, p. 51 and 52. AG Maduro endeavours in points 70 and 71 of his Opinion in Halifax to explain the subjective test such that it has to concern the artificiality of certain acts or transactions on the basis of objective circumstances and not subjective intentions of persons.
32 See M. Lang, Cadbury Schweppes line of case law from the Member States’ perspective, p. 448; published in ‘Prohibition of abuse of law — a new general principle of EU law, edited by R. de la Feria and S. Vogenauer, Hart publishing, Oxford, 2009.
33 See: Lang en Heidenbauer, Wholly artificial arrangements, incorporate in: A vision of taxes within and outside European borders, festschrift in honour of prof. dr. Frans Vanistendael, editors L. Hinnekens and P, Hinnekens, Klu-wer 2008, p. 608 and 609.
34 See also: J. Snell, The notion of and a general test for abuse of rights: some
fact that normally, a person must be able to rely on the principle of legal certainty (and thus on the letter of the law), such an opportunity must be dealt with extreme caution. In other words, that it can be established that a certain treatment is in conflict with the objective and scope of a provision is not yet sufficient to come to the conclusion that abuse is present. A law can namely be badly formulated and allow certain (tax) advantages which, in light of the objective of the legislation, were not the intention. The principle of legal certainty and the principle of legality oppose the setting aside of legislation which is textually clear merely by invoking the fact that the advantage is in conflict with the objective of the legislation. A person who has no subjective intention to abuse can simply make use of such an advantage. This is otherwise, however, when the advantage is in conflict with the objective and scope of the law and the person has a subjective intention to abuse. In such a case, by invoking abuse of law, the principle of legal certainty can be set aside given that a person who has the intention to abuse cannot invoke legal certainty. Only in such a situation can, in itself, clear law be interpreted with the aid of the teleological method of interpretation.
2.1.7. Economic reality versus wholly artificial arrangements
In the case law of the CJ in the areas of both direct taxation and indirect taxation, a distinction has been drawn, since 2006, between arrangements which entail ‘economic reality’ and arrangements which are ‘wholly artificial’. In this paragraph, I provide an overview.
2.1.7.1. Economic reality in direct taxation
a. Escaping tax normally due on profits from activities on national territory
Cadbury Schweppes is still the judgment where the Court has devoted the most attention to the economic reality test. The case concerned CFC legislation which formed a restriction on the right of establishment and the Court examined in what situation CFC legislation could be justified because it ‘specifically relates to wholly artificial arrangements aimed at circumventing the appli-
normative reflections, published in ‘Prohibition of abuse of law — a new general principle of EU law, edited by R. de la Feria and S. Vogenauer, Hart publishing, Oxford, 2009.
cation of the legislation of the Member State concerned’. The Court considered (para. 52) that ‘It is necessary, in assessing the conduct of the taxable person, to take particular account of the objective pursued by the freedom of establishment’. The Court then examined what the objective of the right of establishment was: ‘to allow a national of a Member State to set up a secondary establishment in another Member State to carry on his activities there and thus assist economic and social interpenetration within the Community in the sphere of activities as self-employed persons (...) To that end, freedom of establishment is intended to allow a Community national to participate, on a stable and continuing basis, in the economic life of a Member State other than his State of origin and to profit therefrom’. According to the Court, the concept of establishment within the meaning of the Treaty provisions on freedom of establishment involves ‘an actual establishment intended to carry on genuine economic activities in the host Member State’. There is no question of this in the case of ‘wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory’ (see para. 55; italics by author). The lack of reflecting an economic reality whereby taxation on profits from domestic sources are avoided forms the essence of the judgment. This keeps recurring in later judgments. In Cadbury Schweppes, the Court elucidated further on tax avoidance practices; the Court considered: ‘Like the practices referred to in paragraph 49 of Marks & Spencer, which involve arranging transfers of losses, within a group of companies, to companies established in the Member States which apply the highest rates of taxation and in which the tax value of those losses is therefore the highest, the type of conduct described in the preceding paragraph is such as to undermine the right of the Member States to exercise their tax jurisdiction in relation to the activities carried out in their territory and thus to jeopardise a balanced allocation between Member States of the power to impose taxes (see Marks & Spencer, paragraph 46) ’ (see para. 56 of Cadbury Schweppes). Here, the Court made a link between ‘wholly artificial arrangements’ and avoidance of tax on profits made on national territory. If such tax avoidance should
be permitted, this would threaten ‘balanced allocation between Member States of the power to impose taxes’. A link is thus made between the combating of ‘wholly artificial arrangements’ and the ‘balanced allocation between Member States of the power to impose taxes’.35 The Court makes this parallel more often, for instance in ECJ 18 July 2007, C-231/05 (Oy AA), para. 62 and ECJ 17 January 2008, case C-105/07, (Lammers & Van Cleeff). In the more recent SIAT case the Court observes (para. 48): ‘It must therefore be held that legislation such as that at issue in the main proceedings is suitable for attaining the objectives of preventing tax evasion and avoidance and of preserving both the effectiveness of fiscal supervision and the balanced allocation between Member States of the power to impose taxes, all of which — as is apparent from the foregoing — are closely linked in the case before the referring court’ (italics by author).
Transactions whereby tax on profits made on national territory is circumvented are therefore suspect. The Glaxo Wellcome case36 is also an example of a case in which the Court established both under the balanced allocation justification and under the abuse justification that the anti-abuse rule in the case provided for the combating of constructions in which normally in one Member State taxed profits are relocated to another Member State.
On the other hand, in Haribo,37 the CJ ruled that there was no question of the ‘balanced allocation’ being threatened in the case of taxation on foreign income (in that case, dividend paid from a third country to a shareholder in a Member State).
It is worthy of note that the criterion regarding the avoidance of tax on profits gained from activities performed on national territory is an important criterion which the CJ can apply in many situations in tax avoidance cases. If the transactions which are linked to the avoidance of tax on profits gained from national activities do not reflect any economic reality, then this will constitute tax avoidance. It must be noted that the criterion is not always easy to apply. In the case of taxation on income with a
35 See also: P. C. van der Vegt, Bescherming van Europese winstbelast-ingjurisdicties tegen misbruik, WFR 2009/6816, p. 761.
36 CJ 17 September 2009, C-182/08 (Glaxo Wellcome), H&I 2009/11.3 (comments by Wunderlich), para. 87 and 91.
37 CJ para. 10 February 2011, C- Joined Cases C-436/08 and C-437/08 (Har-
ibo), H&I 2011/10.1 (comments by Wattel), para. 123.
lesser link to national territory (consider dividend, royalties, interest), the criterion is less appropriate. The rejection of the existence of tax avoidance in Haribo (which concerned the taxation of the receipt of foreign dividend, which was thus paid from profit made from activities performed on the territory of another Member State) is one example of this. I agree with Poelsen38 that such a situation of tax avoidance must be established on the basis of another criterion, such as the short period of time between certain transactions (see further also here below in paragraph 2.1.7.3)
b. Physical presence, management and control of activities, economic value
Physical presence
In Cadbury Schweppes the Court dealt in more detail with the existence of a ‘wholly artificial arrangement’. The Court considered that whether there is a ‘wholly artificial arrangement’ or not must be determined ‘on objective factors which are ascertainable by third parties with regard, in particular, to the extent to which the CFC physically exists in terms of premises, staff and equipment’. If checking those factors leads to the finding that the CFC is a fictitious establishment not carrying out any genuine economic activity in the territory of the host Member State, the creation of that CFC must be regarded as having the characteristics of a wholly artificial arrangement. That could be so in particular in the case of a ‘letterbox’ or ‘front’ subsidiary, according to the Court. In Cadbury Schweppes, in light of the object of the national rule and the goal of the right of establishment, the CJ thus placed emphasis on the physical presence (in taxation often called: ‘substance requirements’) such as premises, staff and equipment’. Circumstances which AG Leger found relevant in his Opinion in Cadbury Schweppes in addition to i. physical presence, were39: ii. the genuine nature of the activity provided by the subsidiary, and iii. the economic value of that activity with regard to the parent company and the entire group.
Management and control of activities
With the second circumstance, ‘the genuine nature of the activity’, the AG referred to: ‘the competence of the subsidiary’s staff in relation to the services provided and the level of decision-making in
38 M. Poelsen, Freedoms of establishment and the balanced allocation of tax jurisdiction, Intertax, 2012, p. 211.
39 See paras 111-114 of the Opinion of the AG
carrying out those services. If, for example, the subsidiary proves to be nothing but a mere tool of execution because the decisions necessary to carry out the services it is paid for are taken at another level, it is also right to consider that the subjection of those services to the tax sovereignty of the host State constitutes a wholly artificial arrangement’40. In the literature, it is assumed that the second circumstance such as mentioned by the AG is not reiterated by the CJ in the judgment itself, and thus, is not required by the CJ.41 It is indeed so that in the judgment, the court does not deal with the competence of the staff and the level of decision-making. Nevertheless, it can be argued that such circumstances are of importance. In addition to the physical presence, in Cadbury Schweppes, the CJ also referred to a ‘letterbox’ or ‘front’ subsidiary with reference to the Eurofood case (C-341/04). Further to this reference, in the doctrine, emphasis is placed particularly on the fact that with a letterbox or front subsidiary, the CJ referred to a ‘company not carrying out any business in the territory of the Member State in which its registered office is situated’ (see para. 35 of the Eurofood case). De Broe42 and Lang43 both point out that in Eurofood the question does not concern a physical presence (office space/staff), but the question of whether an activity does take place or not (‘carrying out any business’). Thus in addition to physical presence, it should arise from Cadbury Schweppes that if there is a wholly artificial arrangement or not there must also be a matter of an ‘activity’. Although I do not wish to contest this conclusion as such (see also below), in my view it is important to include the concrete circumstances in Eurofood into consideration in order to place the judgment in the correct context. The case, namely, did not so much concern the activities of the company itself, but the question of from where the activities of the company were actually managed (from Eurofood itself or by the parent company). In Eurofood, there was the matter of the company Eurofood which provided financial services to companies of the Parmalat group (a multinational with subsidiaries in over 30 countries).
40 See para. 113 of the Opinion of the AG.
41 See: A. M. Jimenez, Towards a homogeneous theory of abuse in EU (direct) tax law, Bulletin 2012, p. 286.
42 See L. De Broe, International Tax Planning and Prevention of Abuse, Volume 14, Doctoral Series, IBFD, Amsterdam, 2008, p. 852.
43 See M. Lang, Cadbury Schweppes line of case law from the Member States’ perspective, p. 445; published in ‘Prohibition of abuse of law — a new general principle of EU law, edited by R. de la Feria and S. Vogenauer, Hart publishing, Oxford, 2009.
Eurofood was established (in all probability for fiscal reasons) in Ireland and the question was what national court had jurisdiction in insolvency proceedings. The competent court of the Member State is that within whose territory the centre of a debtor’s main interests is situated. Article 3 (1) of the Insolvency Proceedings Regulation provides that, in the case of a company, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary. Of importance is that the scope of the ‘centre of its main interests’ is highlighted by the 13th recital of the Regulation, which states that ‘the ‘centre of main interests should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties’ (italics by author). The Eurofood case namely concerned the question of whether Euro-food itself determined the policy of the company or whether the parent company determined the policy and what the influence of this was on the concept of the ‘centre of its main interests’. The questions in Eurofood were summarised by the Court as follows (paras 26 and 27): ‘the national court asks what the determining factor is for identifying the centre of main interests of a subsidiary company, where it and its parent have their respective registered offices in two different Member States. The referring court asks how much relative weight should be given as between, on the one hand, the fact that the subsidiary regularly administers its interests, in a manner ascertainable by third parties and in respect for its own corporate identity, in the Member State where its registered office is situated and, on the other hand, the fact that the parent company is in a position, by virtue of its shareholding and power to appoint directors, to control the policy of the subsidiary’. The CJ then gave the following answer to this question (para. 37): ‘In those circumstances, the answer to the fourth question must be that, where a debtor is a subsidiary company whose registered office and that of its parent company are situated in two different Member States, the presumption laid down in the second sentence of Article 3 (1) of the Regulation, whereby the centre of main interests of that subsidiary is situated in the Member State where its registered office is situated, can be rebutted only if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is
different from that which locating it at that registered office is deemed to reflect. That could be the case particularly in the case of a company not carrying out any business in the territory of the Member State in which its registered office is situated. By contrast, where a company carries on its business in the territory of the Member State where its registered office is situated, the mere fact that its economic choices are or can be controlled by a parent company in another Member State is not enough to rebut the presumption laid down by the Regulation’. It is important to read this answer in the context of the dispute. This case concerned a company which, according to the national court (such as, amongst others, reflected in para. 27) ‘regularly administers its interests, in a manner ascertainable by third parties and in respect for its own corporate identity’; in the answer to preliminary questions, the court paraphrased these activities as ‘a company carries on its business’ (paras 36 and 37), but in the context of the case, the question here was who ultimately administered the policy of the subsidiary. The competence of the staff and the level of decision-making would certainly appear of importance here and the Court makes clear that where a company in a certain Member State ‘regularly administers its interests, in a manner ascertainable by third parties and in respect for its own corporate identity’ its centre of main interests lies in that Member State and ‘the mere fact that its economic choices are or can be controlled by a parent company in another Member State’ has no influence on this. Eurofood thus, is namely a case that concerns where the policy of a company is administered, and not so much the activities as such (which were also not under discussion in the case). This is confirmed by the later Plan-zer judgment.44 Central in this case was the interpretation of the term ‘place of business’ in Article 1 (1) of the Thirteenth VAT Directive 86/560/ EEC. Also here, it in fact concerned the question of where the policy of the company took place and the CJ linked a parallel with a ‘letter box’ or ‘brass plate’ company, such as used from Eurofood and Cadbury Schweppes. The Court considered (paras 60-62): ‘With regard to a company, as in the case in the main proceedings, the term business for the purposes of Article 1 (1) of the Thirteenth Directive refers to the place where the essential decisions concerning the
44 ECJ 28 June 2007, case C-73/06 (Planzer).
general management of that company are adopted and where the functions of its central administration are carried out. Determination of a company’s place of business requires a series of factors to be taken into consideration, foremost amongst which are its registered office, the place of its central administration, the place where its directors meet and the place, usually identical, where the general policy of that company is determined. Other factors, such as the place of residence of the main directors, the place where general meetings are held, the place where administrative and accounting documents are kept, and the place where the company’s financial, and particularly banking, transactions mainly take place, may also need to be taken into account. Thus, a fictitious presence, such as that of a ‘letter box’ or ‘brass plate’ company, cannot be described as a place of business for the purposes of Article 1 (1) of the Thirteenth Directive (see, by analogy, Case C-341/04 Eurofood IFSC [2006] ECR I-3813, paragraph 35, and Cadbury Schweppes and Cadbury Schweppes Overseas, paragraph 68) ’.
Thus, as to the question whether a letterbox company exists appears to be dependent on the answer to the question, where is the policy of a company determined (management and central administration), the competence of the staff in relation thereto and the level of decision-making, would thus appear to be relevant.
Such as is remarket here above, the conducting of activities could also support for example, the (economic) existence of a company. In such a situation, there will not so easily be a case of a letterbox company. In my view, this does not mean that if there is sufficient substance the structure is always safe against anti-abuse provisions. When a company conducts sufficient activities, transactions can always be performed (such as loans not contributing to these economic activities) which could be artificial. Although in the event of the non-existence of activities this could be an indication of abuse, this must also be put into perspective: certain activities, after all, require little substance (consider holding or financing activities) such that substance
will then also play a less decisive role.45 46 See in this framework also the Foggia-case47 in which the CJ observes: ‘Indeed, a merger or restructuring carried out in the form of the acquisition of a company that does not carry on activity and that does not contribute assets to the acquiring company may, nevertheless, be considered by the latter to have been carried out for valid commercial reasons’.
Economic value
The last circumstance which was mentioned by the AG in Cadbury Schweppes and which can contribute to the economic reality was ‘economic value’. This circumstance would not seem to have been taken up by the CJ in Cadbury Schweppes. Here, the AG refers to the ‘value added by the subsidiary’s activity’ (...) ‘in so far as it might make it possible to take account of an objective situation in which the services provided by the subsidiary have no economic substance in the light of the parent company’s activity’. Nevertheless, it does seem to demonstrate consideration of the economic value a circumstance which can be important in order to demonstrate the economic reality. This can be deduced from the Foggia case.48 In this case, the taxpayer wanted to take over large tax losses by means of a merger, and although this could be an indication that the merger only had the aim to strive for a pure fiscal purpose, the restructuring had a positive effect in terms of cost structure, resulting from reduction of the administrative and management costs of the group. The CJ then observed (paras 47 and 48): ‘Therefore, in principle, there is nothing to prevent a merger operation from having valid commercial reasons where it carries out restructuring or rationalisation of a group that allows its administrative and management costs to be reduced. However, this would not be the case for an acquisi-
45 See also: Lang en Heidenbauer, Wholly artificial arrangements, published in: A vision of taxes within and outside European borders, festschrift in honour of prof. dr. Frans Vanistendael, editors L. Hinnekens en P, Hinnekens, Kluwer 2008, p. 604, E. Robert and D. Tof, The substance requirement and the future of domestic Anti-abuse rules within the Internal Market, European Taxation 2011/11, p. 442 and See also: A. M. Jimenez, Towards a homogeneous theory of abuse in EU (direct) tax law, Bulletin 2012, p. 286.
46 For the application of Cadbury Schweppes by national courts, reference is made to the French Rifaut case (Court Administrative d’Appel Nancy, 22 August 2008, Rifaut, no. 07NC00783, Highlights & Insights 2009/2.5 (with comments by Raingeard and Gutmann) and to the SIFA case, Cour Adminstra-tive d’Appel Paris, 18 December 2008, Highlights & Insights 2009/5.8 (with comments by Raingeard and Gutmann).
47 CJ 10 November 2011, C-126/10 (Foggia), H&I 2012/6.1 (comments by Da Silva).
48 CJ 10 November 2011, C-126/10 (Foggia), H&I 2012/6.1 (comments by Da Silva).
tion operation, such as the one at issue in the main proceedings, where it seems clear that, having regard to the magnitude of the anticipated tax benefit, that is, more than EUR 2 million, the saving made by the group concerned in terms of cost structure is quite marginal. In that regard, it should be added that the cost savings resulting from the reduction of administrative and management costs, when the acquired company disappears, is inherent in any operation of merger by acquisition as this implies, by definition, a simplification of the structure of the group’ (italics author). We see here that the CJ weighs the economic value (the costs savings for the group) against the tax advantage (the losses). That is a similar test to that which the AG set in Cadbury Schweppes.
c. Commercial reasons for a loan and the interest
Whether an economic reality is reflected is dependent on the circumstances of the concrete case. Also relevant to this is the objective and purport of the relevant provision and the type of abuse that has to be combated. In ECJ 13 March 2007, case C-524/04 (Test Claimants in the Thin Cap Group Litigation), the subject was UK thin capitalisation. In this case, circumstances such as physical presence (etc.), such as were under dispute in Cadbury Schwepppes, were not important to demonstrate an economic reality but the Member State was allowed, in principle, to require that the interest be at arm’s length. In the words of the Court (para. 80): ‘by the need to combat abusive practices where it provides that interest paid by a resident subsidiary to a non-resident parent company is to be treated as a distribution only if, and in so far as, it exceeds what those companies would have agreed upon on an arm’s-length basis, that is to say, the commercial terms which those parties would have accepted if they had not formed part of the same group of companies’.
The Court subsequently considered (para. 81):
‘The fact that a resident company has been granted a loan by a non-resident company on terms which do not correspond to those which would have been agreed upon at arm’s length constitutes, for the Member State in which the borrowing company is resident, an objective element which can be independently verified in order to determine whether the transaction in question represents, in whole or in part, a purely artificial arrangement, the
essential purpose of which is to circumvent the tax legislation of that Member State. In that regard, the question is whether, had there been an arm’s-length relationship between the companies concerned, the loan would not have been granted or would have been granted for a different amount or at a different rate of interest’. To this was added (para. 82) the condition that ‘on each occasion on which the existence of such an arrangement cannot be ruled out, the taxpayer is given an opportunity, without being subject to undue administrative constraints, to provide evidence of any commercial justification that there may have been for that arrangement’.49 We see here that with respect to thin capitalisation rules, the Court, correctly, gives a tailor-made description if there is a question of an artificial arrangement. Under thin capitalization rules, it concerns the question of whether there is an economic reality not on the substance, but on the commercial terms of the interest and the loan.
2.1.7.2. Economic reality in VAT cases
In VAT cases, the court initially deviated textually and considered that it must concern ‘transactions carried out not in the context of normal commercial operations’ (Halifax, para. 69).50 However, it was not long before, in for example, Planzer51 in the framework of an abuse test the term ‘economic reality’ was linked, see para. 43 in that case: ‘It should be noted in that respect that taking account of the economic reality constitutes a fundamental criterion for applying the common system of VAT’.52
In Part services,53 a case which also concerns abuse, the question was whether there were different performances or an ‘indivisible economic supply, which it would be artificial to split’. In the answer to this question the national court could feel itself necessitated to broaden its analyses to the
49 The Test Claimants in the Thin Cap Group Litigation case was confirmed in ECJ 17 January 2008, case C-105/07 (Lammers & Van Cleeff), ECRI-173.
50 See F. Vanistendael, Halifax and Cadbury Schweppes: one single European theory of abuse in tax law? EC Tax review 2006-4, p. 192, which further to Cadbury Schweppes and Halifax observed: ‘the conclusion is that both decisions have used a reasoning to refute tax avoidance that is very similar if not identical: the economic reality of the transaction’.
51 CJ 28 June 2007, case C-73/06 (Planzer), ECR 2007, p. I-5677.
521 note that earlier in DFDS (ECJ 20 February 1997, case C-260/95 (DFDS), ECR 1997, p. I-1022) the Court had considered that ‘consideration of the actual economic situation is a fundamental criterion for the application of the common VAT system’, with the remark that in that case, other reference points can lead to avoidance of tax. See for application of the term economic reality in other VAT case law: E. T. Terra, Waan of werkelijkheid; de econo-mische reele prestatie, MBB 2012/10.
53 ECJ 21 February 2008, case C-425/06 (Part Service), ECR I-897.
question of whether there is a matter of abuse, thus the CJ in that case. For the analysis, the CJ summed up a number of characteristics of the transactions in that case, whereby the Court observed: ‘the lease payments made by the customer are of an amount which is only slightly higher than the purchase cost of the vehicle; — that service, considered in isolation, therefore seems to be economically unprofitable, so that the viability of the business cannot be ensured solely by means of contracts concluded with the customers’; Here, the CJ does not say so, but it seems as if it wonders whether the transactions do have an economic reality.
In RBS Deutschland, the Court clearly concurs with the economic reality for the question of whether abuse is present. In that case, there were two non-affiliated parties who, according to the referring court (see the fourth prejudicial question), acted at arm’s length. The Court observed nothing to suggest an artificial arrangement and that an economic reality was reflected. The Court considered:
‘50 As regards the facts at issue in the main proceedings in the present case, it should be noted that the various transactions concerned took place between two parties which were legally unconnected. It is also common ground that those transactions were not artificial in nature and that they were carried out in the context of normal commercial operations.
51 As the national court has observed, the characteristics of the transactions at issue in the main proceedings and the nature of the relations between the companies that carried out those transactions contain nothing to suggest an artificial arrangement that does not reflect economic reality and the sole aim of which is to obtain a tax advantage (see, to that effect, Case C-162/07 Ampliscientifica and Amplifin [2008] ECR I-4019, paragraph
28), since RBSD is a company established in Germany carrying on business providing banking and leasing services.
52 I n those circumstances, the fact that services were supplied to a company established in one Member State by a company established in another Member State, and that the terms of the transactions carried out were chosen on the basis of factors specific to the economic operators concerned, cannot be
regarded as constituting an abuse of rights. RBSD in fact provided the services at issue in the course of a genuine economic activity’.
Criticism has been expressed on this opinion in the sense that on the basis of the facts, a different opinion could be reached.54 No matter how this criticism seems to be well founded, it must be remarked that in this case, the CJ agrees with the opinion of the national court, and it is up to this court to ultimately qualify the facts correctly.
The CJ also refers to the economic reality in the judgment in the case Weald Leasing which was also delivered on the same day as RBS Deutschland. The conduct of the taxpayer in that case was in principle not contrary to the VAT Directive, the CJ, however, used an opt-out (para. 39): ‘That being so, the national court will have to determine, first, whether the contractual terms of the leasing transactions at issue in the main proceedings are contrary to the Sixth Directive and of the national legislation transposing it. That would particularly be the case if the rentals were set at levels which were unusually low or did not reflect any economic reality’, see further on this in paragraph 2.1.3.
2.1.7.3. Other (older) case law: U-turns — Limited period — ad hoc structures
In the past, the CJ has delivered a number of judgments where reference is not so much made to the economic reality criterion, but in that case law, a number of case positions were up for discussion or examples were given by the Court of situations in which under the current case law, doubts can be raised as to whether there is sufficient reflection of economic reality. This case law concerns varying situations:
A number of so-called U-turn situations can be found in the (older) case law. For example, in ECJ 14 December 2000, case C-110/99 (Emsland-Starke) a good was exported, to simultaneously be re-imported in order to gain an advantage. This would appear to be an abuse situation. ECJ 10 January 1985, case 229/83 (Leclerc), ECR p. 1, is another example. In this case, books were first exported and then re-imported into the same Member State; this thus was also a U-turn. In this case, the Court considered that abuse was present: ‘where it is established that the books in question were exported
54 See: J. J. P. Swinkels, Abuse of EU VAT Law, International VAT monitor, 2011. p. 223.
for the sole purpose of re-importation in order to circumvent legislation of the type at issue’ (italics DW).55 Leclerc was delivered in 1985, and under the current case law, the CJ would probably come to the conclusion that a U-turn that comprises export and immediate import bears no connection with an economic reality.
We can find a U-turn in a tax case in the Lasteyrie judgment. In that case, the Court noted that emigration, the untaxed sale of shares and re-emigration with a ‘a relatively brief stay’, ‘with the sole aim of avoiding payment of tax’ can be viewed as tax avoidance and that this may be combated by ‘measures relating specifically to the risk of such a temporary transfer’. The Court gave as an example of an antiavoidance provision a measure that provides for ‘the taxation of taxpayers returning to France after realising their increases in value during a relatively brief stay in another member State, which would avoid affecting the position of taxpayers having no other aim than the bona fide exercise of their freedom of establishment in another Member State’. In his Opinion in the Glaxo Wellcome-case, AG Bot also remarked that a fiscal advantage that arises when within a group a foreign group company sells shares to a German company followed by fast on-selling of a (the same) foreign group company, justifies an assumption of tax avoidance. Although it is not entirely clear what exactly the tax avoidance consisted of, a U-turn can also be found in the Kofoed case. In this case, AG Kokott observed that ‘the close connection in terms of time between the distribution of profits and the exchange effected may point also towards possible abuse’ (point 59 of her Opinion). The CJ referred to this point in the Opinion in para. 39 of the judgment. This would also appear to be a variant that can be described as a U-turn. One characteristic that such U-turns have in common is that a number of transactions take place within a short period and due to this, in fact, the economic reality of these transactions comes up for discussion. I agree with Kemmeren56 that such U-turns do not
55 In ECJ 11 December 2003, case C-322/01 (Deutscher Apothekerverband), ECRI-14887 the export and re-import of medicinal products was at issue. The Court established that there was no abuse in the sense of Leclerc since the trader which exported the medicinal products was not involved in their reimportation’ (see para. 129 and 130). See in the comparable sense: ECJ 21 July 2005, case C-515/03 (Eichsfelder Schlachtbetrieb), ECRI-7355, para. 36.
56 E. C. C. M. Kemmeren, The Netherlands: Pending case filed by Nether-
lands Courts: the Gielen (C-440/08), Zwijnenburg (C-352/07) and X Hold-
ing (C0337/08) cases, ECJ-Recent Developments in Direct Taxation 2009,
No. 64, Linde Verlag Wien, p. 153-197.
have sufficient economic reality, due to which they can be called artificial arrangements.
In structures that are set up for a short period, a connection with the economic reality can be absent. In ECJ 17 July 1997, case C-28/95 (Leur-Blo-em) the CJ remarked that a ‘merger by exchange of shares with the aim of creating a specific structure for a limited period of time and not on a permanent basis may constitute evidence of tax evasion or tax avoidance’ (see para. 42) and as appears from ECJ 22 May 2008, case C-162/07 (Amplisci-entifica) that according to the Court, ‘the ad hoc formation of legal structures’ can encourage abuse and fraud. For that matter, in the Leur-Bloem case, the CJ mentioned de term ‘valid commercial reasons’ such as is contained in the anti-abuse provision in the Tax Merger Directive remarking that it ‘must be interpreted as involving more than the attainment of a purely fiscal advantage such as horizontal off-setting of losses’.
Moving a third party into a structure can be suspect, which, for example, was the case in Weald Leasing (see paras 40-41). In ECJ27 September 2007, case C-146/05 (Collee), however, the CJ noted that the engaging of an intermediary in order to receive contractual commissions (a commercial act) is not abuse of law, if it has been established that such act has not be performed with a view to obtaining an unjustified tax advantage.
3. GENERAL PRINCIPLE OF COMMUNITY LAW OR SOMETHING ELSE
For a long time, it was unclear whether the combating of abuse implied a general principle of Community law.57 In ECJ 5 July 2007 (Kofoed) the Court has given more clarity. In that case the Court mentioned that the anti-abuse provision of the Tax Merger Directive ‘reflects’ ‘the general Community law principle that abuse of rights is prohibited’ (para. 38). The Court referred hereby to various cases in various areas of law in which abuse had been under discussion, such as Centros (freedom of establishment/incorporation conditions for company), Halifax (VAT), Agip Petroli (carriage by sea within the Member States) and Cadbury Schweppes (right of establishment/direct taxes). Accordingly, after this judgment, it ‘appears’ (see further below) clear that
57 See extensively on this: R. de la Feria, Prohibition of abuse of (Community) law: the creation of a new general principle of EC law through tax, CMLrev 2008, p. 395.
the prohibition on abuse of law is a general principle of Community law in the view of the Court. One important consequence of this would seem to be that if the Member State itself does not provide for a general concept for abuse (such as in the United Kingdom and Denmark), this Member State can still combat abuse of EU law on the basis of the prohibition on abuse of law as a general principle of Community law.58 59 This occurred, for example, in ECJ 21 February 2006, case C-255/02 (Halifax) in which the Court gave the English Inland Revenue the possibility to maintain the general Community law principle that abuse of rights is prohibited under the VAT directive, whereas a similar national principle was not provided for in the United Kingdom. If a Member State wishes to invoke (due to lack of national anti-abuse legislation) the general Community law principle of abuse of rights, there must be a matter of abuse of a provision of secondary EU law. If there is presumed abuse of the EU treaty freedoms (primary EU Law) then invoking a general Community law principle of abuse of rights due to lack of national anti-abuse legislation is not possible. This arises from 3M Italia (CJ 29 March 2012, case C-417/10, H&I 2012/5.3 (comments by Thomas)) from which it appears that in making use of treaty rights a Member State cannot in general invoke a general Community law principle of abuse of rights. Such is only possible if a Member State for the purpose of justification of a national provision which restricts the free movement invokes the need to prevent abusive practices. In this framework, the CJ notes 3MItalia op (para. 32): ‘Finally, in any event, it is clear that no general principle exists in European Union law which might entail an obligation of the Member States to combat abusive practices in the field of direct taxation and which would preclude the application of a provision such as that at issue in the main proceedings where the taxable transaction proceeds from such practices and European Union law is not involved’. It appears, therefrom, from 3M Italia that in the case of lack of national anti-abuse legislation in the application of secondary commu-
58 See also: K. E. Sorensen, Abuse of rights in Community law: a principle of substance or merely rhetoric? CMLrev 2006, p. 440.
59 An exception to this is where a Directive itself contains a provision which permits the Member States to combat abuse. On the basis of the fact that the Directives must be transposed into national law and on the basis of the principle of legal certainty, it is not possible to merely fall back on the Community principle in the case of abuse of law, but the anti-abuse provision from the Directive must be transposed into national law, see ECJ 5 July 2007 (Kofoed), paras 40-46.
nity law such as the VAT directive the Member State can invoke abuse of law, but on application of the Treaty freedoms in the case of (presumed) abuse can only invoke the combating of abuse of law as justification of restrictive national provisions.60
Another question, which has not yet been fully clarified, is the question whether abuse of law as a general principle also implies that Member States have the obligation to combat abuse. In 3M Italia the CJ clearly ruled that this is not the case in direct taxation.61 In 3M Italia the CJ is clear as regards direct taxation: ‘it is clear that no general principle exists in European Union law which might entail an obligation of the Member States to combat abusive practices in the field of direct taxation’ (italics author).
In my view, there can only be an obligation to combat abuse in cases in which in a certain area, the Member States have assigned their jurisdiction on combating abuse to the Community. In situations in which there is unification or harmonisation, the Member States will often (but not always) assign their rights and obligations (including the right on combating abuse) to the Community, and in doing so have restricted their sovereignty.62 Particularly where in a certain area, a Community policy is in place and the non-combating of abuse should interfere with this policy, an obligation to combat abuse will exist. This obligation to combat abuse will more readily be at issue in the event the proceeds of a certain levy belong to the own resources of the Community. The principle of sincere cooperation in the Community (art. 4, para. 3 TEU) would appear to entail this. Such a situation would appear to have arisen in ECJ 14 December 2000, case C-110/99 (Emsland-Starke). With respect to the levying of VAT, it is also defendable that there is an obligation to apply the general principle of Community law with respect to abuse of law, given that to a far-reaching degree, VAT has been harmonised and forms part of the general resources of the Community.63 In my
60 See the comment of R. Szudoczky about 3M Italia, in European State Aid Law Quarterly, to be published and A. Zalasinski, The principle of prevention of (direct tax) abuse: scope and legal nature — remarks on the 3M Italia case, European Taxation 2012, p. 453.
61 See on this also: K. E. Sorensen, Abuse of rights in Community law: a principle of substance or merely rhetoric? CMLrev 2006, p. 440; P. J. Wattel, Nothing either good or bad, but thinking makes it so, in: ‘Dat is verder geen probleem, Friends bundle Jaap Zwemmer, p. 219
62 Cf. also: D. M. Weber, Tax avoidance and the EC treaty freedoms, EUCO-TAX Series on European Taxation Vol 11, Kluwer Law International, The Hague, 2005, paragraph 4.3.1.
63 See also P. Pistone, Abuse of law in the context of indirect tax: from (be-
view, this is different in a case in which Community law is applicable but the adoption of national law still belongs to the sovereignty of the Member States. This occurs, for example, in direct taxation, such as was under discussion in 3M Italia. In such a situation, the Member States have not assigned their sovereignty with respect to the combating of abuse to the Community. There can be no obligation to combat abuse.64 If, however, a Member State does combat abuse (voluntarily) and in doing so, the free movement is hindered, the combat of abuse will have to comply with the requirements laid down by the Court.65 This is exactly what the CJ ruled in 3M Italia, and I can wholeheartedly agree with this judg-mentAs I have remarked, it would appear clear after the Kofoed judgment that the prohibition on abuse of law is a general principle of Community law. The question is, however, whether we are dealing with a real general principle of Community Law in the strict sense66. Amongst others, Arnull has doubts about this.67 According to him, it would appear to be
fore) Emsland-Starke (1) to Halifax (and beyond), paragraph 8 and M. Lang, Cadbury Schweppes line of case law from the Member States’ perspective, paragraph III. 2; published in ‘Prohibition of abuse of law — a new general principle of EU law, edited by R. de la Feria and S. Vogenauer, Hart publishing, Oxford, 2009.
64 See also M. Lang, Cadbury Schweppes line of case law from the Member States’ perspective, paragraph III. 3, published in ‘Prohibition of abuse of law — a new general principle of EU law, edited by R. de la Feria and S. Vo-genauer, Hart publishing, Oxford, 2009.
65 See also D. M. Weber, Tax avoidance and the EC treaty freedoms, EUCO-TAX Series on European Taxation Vol 11, Kluwer Law International, The Hague, 2005, paragraph 4.3.1.
66 See also: R. de la Feria, Prohibition of abuse of (Community) law: the creation of a new general principle of EC law through tax, CMLrev 2008, p. 395.
67 A. Arnull, What are general principles of EU law, published in ‘Prohibition
of abuse of law — a new general principle of EU law, edited by R. de la Feria and S. Vogenauer, Hart publishing, Oxford, 2009.
more likely that the Court in Kofoed simply intended to apply the principle (general in the broader sense) recognised by the Grand Chamber in Halifax. That here we have nothing to do with a ‘real’ general principle of Community law can be defended, amongst others, on the basis of the fact that the prohibition on abuse of law is not so much a right for an individual but more of an instrument for the national (tax) administration. In his Opinion in Halifax, AG Maduro described the prohibition on abuse of law as a ‘principle governing the interpretation of Community law’ (see Opinion point 69). There is great empathy in describing the prohibition on abuse of law thus. It removes the weightiness of a ‘real’ general principle and it is also explicable that a principle governing the interpretation of Community law does not always have to be applied mandatorily. If, namely, it is not an independent principle in itself, but a principal that bears relation to the interpretation of Community law then it also depends on the interpretation of the relevant Community law as to whether there is a mandatory application of the prohibition on abuse of law or not. It must be noted, however, that the right to abuse of law must not only be regarded as a pure principle of interpretation but it can also constitute a justification ground to justify restrictive national provisions. In that framework, I also agree with Zalasinski68 who observed that ‘the status of a ‘principle’ originates from a sort of linguistic generalization referring to various forms and applications of the concept of abuse under EU law’.
68 See: A. Zalasinski, The principle of prevention of (direct tax) abuse: scope and legal nature — remarks on the 3M Italia case, European Taxation 2012, p. 453.
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