The CJEU has been consistently alluding to abuse and abusive practices in its rulings for more than thirty years, since its decision in Van Binsbergen. For a long time, however, the significance of these references was unclear. It all changed in the last decade, in particular with the Court’s decision in Halifax where it applied the newly designated “principle of prohibition of abuse of law” to the VAT area. Since Halifax, prohibition of abuse of law has firmly established itself as an EU principle – general or interpretative, the discussion is still ongoing – having been applied in many areas of law, not least in corporate income tax in Cadbury Schweppes. Recent jurisprudential and legislative developments, however, have highlighted both the difficulties of applying the concept of abuse of law, and the risks of relying too heavily on it.
According to the judgment in Halifax, an abusive practice will be found to exist where two conditions are met:
– the transactions concerned, notwithstanding formal application of the law, resulted in the accrual of a tax advantage, the grant of which would be contrary to the purpose of those provisions; and
– it is apparent from a number of objective factors, such as the purely artificial nature of the transactions, that the essential aim of those transactions concerned was to obtain a tax advantage.
The difficulties with applying this test became evident immediately after the decision was released. Given its vagueness, it was clear from the outset, that further guidance on the application of the test would be required, and thus new cases were likely to arise in this area. Indeed, insofar as VAT is concerned, soon after Halifax the CJEU was asked to decide in Part Service, and not long after that in Weald Leasing and RBS Holding. In direct taxation, after Cadbury Schweppes, there was Kofoed and Thin Cap Group Litigation, and since then many more. Many more cases applying the concept of abuse of law have been decided by national courts. Unfortunately – but unsurprisingly – the application of the concept has been far from uniform: not only have different courts taken different approaches to it, particularly as regards the criteria for determining the existence of abuse, but there have been different approaches depending on the subject area. Even within the tax area, there has been a marked difference between what constitutes abuse for the purposes of VAT, and what constitutes abuse for the purposes of direct taxation.
After the decision in Cadbury Schweppes, it appeared as if the Court would attempt to harmonise the concept of abuse of law by applying that used within VAT, namely in Halifax, to direct taxation. Instead, the recent decision in Ocean Finance appears to indicate the contrary: that the Court is applying the concept of abuse of law previously used within direct taxation, to VAT cases. The Court stated in that case:
“the contractual terms (…) may in particular be disregarded if it becomes apparent that they do not reflect economic and commercial reality, but constitute a wholly artificial arrangement which does not reflect economic reality and was set-up with the sole aim of obtaining a tax advantage” (our underline)
It seems that we are witnessing, therefore, a subtle, but clear, move towards equating abuse of law with artificiality. To our mind this is a dangerous development. Can an arrangement, which is not against the purpose of the law, and thus within the intention of the legislator, be deemed abusive solely on the basis that it was undertaken with sole purpose of saving tax? It is certainly true that in many situations an artificial arrangement will also be against the purpose of the law, but this is not necessarily the case. The CJEU found that this was not the case, for example, in Weald Leasing and in RBS Holding. How can an arrangement that complies with both the word and purpose of the law be deemed unacceptable? Worst still, in this era of “naming and shaming”, are the situations where artificiality – in the sense of setting up an arrangement with the sole purpose of saving tax – was actually the intention of the legislator, for example when tax advantages are granted to encourage investment, as it happened in the recent Vodafone case.
Democratic societies are characterised, to a higher or lesser degree, by the principle of separation of powers. There are very good reasons behind this principle: it limits the discretion of the executive, preventing abuses; it creates a system of checks and balances; it limits subjectivity; but above all, it ensures the respect for the democratic principle and the rule of law. Concentrating only on artificiality, and equating artificial arrangements with abuse of law, allowing the executive branch to dismiss / ignore the law, puts into question this basic principle, and as such creates serious risks for the rule of law. Some ends may justify certain means, but there is no end that can ever justify putting into question the fundamental principle of the rule of law.
Prof. Rita de la Feria
Professor, Durham Law School