On November 22, 2017, the ECJ issued its decision in the case C-251/16 (Cussens and Others).
Context: Reference for a preliminary ruling — Common system of value added tax (VAT) — Sixth Directive 77/388/EEC — Article 4(3)(a) and Article 13B(g) — Exemption of the supply of buildings, and of the land on which they stand, other than as described in Article 4(3)(a) — Principle that abusive practices are prohibited — Applicability in the absence of national provisions transposing that principle — Principles of legal certainty and of the protection of legitimate expectations
Article in the EU VAT Directive
Artciles 4(3)(a) and Article 13B(g) Sixth VAT Directive (Articles 12 and 135(1)(g) of the EU VAT Directive 2006/12/EC)
Article 12 (Taxable persons)
1. Member States may regard as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in the second subparagraph of Article 9(1) and in particular one of the following transactions:
(a) the supply, before first occupation, of a building or parts of a building and of the land on which the building stands;
(b) the supply of building land.
2. For the purposes of paragraph 1(a), “building” shall mean any structure fixed to or in the ground.
Member States may lay down the detailed rules for applying the criterion referred to in paragraph 1 (a) to conversions of buildings and may determine what is meant by “the land on which a building stands”.
Member States may apply criteria other than that of first occupation, such as the period elapsing between the date of completion of the building and the date of first supply, or the period elapsing between the date of first occupation and the date of subsequent supply, provided that those periods do not exceed five years and two years respectively.
3. For the purposes of paragraph 1(b), “building land” shall mean any unimproved or improved land defined as such by the Member States.
Article 135(1)(g) (Exemption)
1. Member States shall exempt the following transactions:
(g) the management of special investment funds as defined by Member States;
Facts
- The appellants in the main proceedings jointly owned a development site in the town of Baltimore, in Ireland, on which they constructed 15 holiday homes intended for sale.
- Before making the sales, they carried out, in March and April 2002, a number of transactions with a company associated with them, namely Shamrock Estates Limited. On 8 March 2002 they entered into two leases with that company, namely (i) a lease by which they granted it those properties for a term of 20 years and one month from that date (‘the long lease’) and (ii) a lease under which Shamrock Estates leased the properties back to them for a term of two years.
- On 3 April 2002 those two leases were extinguished by mutual surrender of the lessees, and the appellants in the main proceedings therefore recovered full ownership of the properties at issue in those proceedings.
- In May 2002 the appellants in the main proceedings sold all the properties to third parties, who acquired full ownership of them.
- It is apparent from the order for reference that, under section 4(9) of the VAT Act, no VAT was payable on those sales, as the properties at issue in the main proceedings had previously been the subject of a first supply on which VAT was chargeable, when the long lease was granted. According to the national legislation at issue in the main proceedings, VAT was chargeable only on the long lease.
- By tax assessment of 27 August 2004, the Commissioners asked the appellants in the main proceedings to pay additional VAT, in respect of the property sales carried out in May 2002. The Commissioners took the view that the leases at issue in the main proceedings, providing for the lease and lease back of the properties, constituted a first supply artificially created in order to avoid the subsequent sales being liable to VAT and that supply should therefore be disregarded for the purposes of assessing VAT.
- The appellants in the main proceedings appealed against the tax assessments of 27 August 2004 to an Appeal Commissioner (Ireland), who dismissed the appeal.
- The Circuit Court, Cork (Ireland), after dismissing the appeal brought against the Appeal Commissioner’s determination by the appellants in the main proceedings, nevertheless, at the latter’s request, stated a case for the opinion of the High Court (Ireland) on certain questions of law, taking as a basis the finding that the leases at issue in the main proceedings had no commercial reality and had been entered into in order to reduce the amount of VAT payable in connection with the sale of the properties at issue in the main proceedings.
- In reply to those questions, the High Court ruled that, as those leases had lacked commercial reality, they constituted an abusive practice in accordance with the judgment of 21 February 2006, Halifax and Others (C‑255/02, ‘the judgment in Halifax’, EU:C:2006:121). Furthermore, it held that the principle that abusive practices are prohibited, as resulting from the case-law that stems from the judgment in Halifax, is of general application and requires national courts to redefine abusive measures in accordance with reality, even in the absence of national legislation transposing that principle.
- The appellants in the main proceedings appealed against the decision of the High Court to the Supreme Court (Ireland). They contend that, in the absence of national legislation transposing the principle that abusive practices are prohibited, that principle cannot be deployed against them to remove their right to exemption of the sales of the properties at issue in the main proceedings that results from section 4(9) of the VAT Act. Such application of that principle is said to infringe the principles of legal certainty and of the protection of legitimate expectations.
- They also maintain that the transactions at issue in the main proceedings do not constitute an abuse of rights for the purposes of the Court’s case-law resulting from the judgment in Halifax on the ground that, in their submission, those transactions did not formally comply with the provisions of the Sixth Directive or national provisions implementing that directive, as those transactions were founded on section 4(9) of the VAT Act, which is, again in their submission, incompatible with the Sixth Directive. Furthermore, the aim pursued by those transactions, consisting in the disposal of the properties at issue in the main proceedings in a tax efficient way, is not contrary to the objectives of the Sixth Directive. The Commissioners oppose their arguments.
- The referring court observes that it is bound by the findings of the Circuit Court, Cork, set out in paragraph 19 above. It states that, in the context of the main proceedings, the Commissioners did not make any allegation of fraud against the appellants in those proceedings, nor did they demonstrate that there are national rules which would require them to disregard transactions constituting an abusive practice.
Questions
- Is the principle of abuse of rights, as recognised in the judgment of the Court in Halifax as being applicable in the sphere of VAT, directly effective against an individual in the absence of a national measure, whether legislative or judicial, giving effect to that principle, in circumstances where, as here, the redefining of the pre-sale transactions and the purchaser sales transactions (collectively referred to as the appellants’ transactions), as advocated by the Commissioners, would give rise to a liability on the part of the appellants to VAT, where such liability, on the proper application of the provisions of national legislation in force at the relevant time to the appellants’ transactions, did not arise?
- If the answer to question 1) is that the principle of abuse of rights is directly effective against an individual, even in the absence of a national measure, whether legislative or judicial, giving effect to that principle, was the principle sufficiently clear and precise to be applied to the appellants’ transactions, which were completed before the judgment of the Court in Halifax was delivered, and, in particular, having regard to the principles of legal certainty and the protection of the appellants’ legitimate expectations?
- If the principle of abuse of rights applies to the appellants’ transactions so that they are to be redefined – what is the legal mechanism by means of which the VAT due on the appellants’ transactions is assessed and is collected, since no VAT is due, assessable or collectable in accordance with national law, and how are the national courts to impose such liability?
- In determining whether the essential aim of the appellants’ transactions was to obtain a tax advantage, should the national court consider the pre-sale transactions (which it has been found were effected solely for tax reasons) in isolation, or must the aim of the appellants’ transactions as a whole be considered?
- Is s. 4(9) of the VAT Act to be treated as national legislation implementing the Sixth Directive1 , notwithstanding that it is incompatible with the legislative provision envisaged in Article 4(3) of the Sixth Directive, on the proper application of which the appellants, in relation to the supply before first occupation of the properties, would be treated as taxable persons, notwithstanding that there had been a previous disposal which was chargeable to tax?
- If s. 4(9) is incompatible with the Sixth Directive, are the appellants, by relying on that sub-section, engaged in an abuse of rights contrary to the principles recognised in the judgment of the Court in Halifax? In the alternative, if s. 4(9) is not incompatible with the Sixth Directive, have the appellants achieved a tax advantage which is contrary to the purpose of the Directive and/or s. 4? Even if s. 4(9) is not to be treated as implementing the Sixth Directive, does the principle of abuse of rights as established by the judgment of the Court in Halifax nevertheless apply to the transactions in issue by reference to the criteria laid down by the Court in Halifax?
AG Opinion
Questions 1 and 2
The provisions of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment and national measures transposing that directive must be interpreted in the light of the general EU law principle of prohibition of abuse of law. That is also the case:
– in the absence of any national measures, whether legislative or judicial, ‘giving effect’ to that principle;
– in cases such as the one before the referring court, where relevant transactions were completed before the Court’s judgment of 21 February 2006, Halifax and Others (C‑255/02, EU:C:2006:121).
Question 3
Where a breach of the principle of prohibition of abuse of law has been found to exist, the transactions involved must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abuse.
In circumstances such as those in the main case, to the extent that the pre-sales transactions are disregarded in application of the principle of prohibition of abuse of law, and subsequent sales of the properties are thus deemed to constitute a first supply thereof, those sales should be assessed for VAT in accordance with applicable national rules, read in the light of EU law, in particular Article 4(3)(a) and Article 13B(g) of the Sixth Council Directive.
Question 4
In a case such as that in the main proceedings, ‘essential aim’ should not be sought in relation to the pre-sales transactions and final sale taken together. It is for the referring court to determine the specific pre-sales transaction(s) in relation to which it is most appropriate to evaluate the ‘essential aim’ for the purposes of identifying a potential abuse of law in VAT.
Question 7
In cases such as those in the main proceedings where:
– a long-term lease is concluded between a taxable person and another, related taxable person;
– that lease is renounced within a very short time after its signature compared with its total duration; and
– during that short period, a lease-back was in place, with the net result that control over the leased properties was effectively never given up by the taxable person granting the long-term lease;
it would be contrary to the purpose of Article 4(3)(a) and Article 13B(g) of the Sixth Council Directive to treat the long-term lease as a ‘supply before first occupation’ within the meaning of Article 4(3)(a) of that directive.
Questions 5, 6 and 8
The fifth, sixth and eighth questions are rejected as inadmissible.
Decision
1. The principle that abusive practices are prohibited must be interpreted as being capable, regardless of a national measure giving effect to it in the domestic legal order, of being applied directly in order to refuse to exempt from value added tax sales of immovable goods, such as the sales at issue in the main proceedings, carried out before the judgment of 21 February 2006, Halifax and Others (C‑255/02, EU:C:2006:121), was delivered, and the principles of legal certainty and of the protection of legitimate expectations do not preclude this.
2. Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment must be interpreted as meaning that, if the transactions at issue in the main proceedings should be redefined pursuant to the principle that abusive practices are prohibited, those of the transactions which do not constitute such a practice may be subject to value added tax on the basis of the relevant provisions of national legislation providing for such liability.
3. The principle that abusive practices are prohibited must be interpreted as meaning that, in order to determine, on the basis of paragraph 75 of the judgment of 21 February 2006, Halifax and Others (C‑255/02, EU:C:2006:121), whether the essential aim of the transactions at issue in the main proceedings is to obtain a tax advantage, account should be taken of the objective of the leases preceding the sales of immovable property at issue in the main proceedings in isolation.
4. The principle that abusive practices are prohibited must be interpreted as meaning that supplies of immovable property such as those at issue in the main proceedings are liable to result in the accrual of a tax advantage contrary to the purpose of the relevant provisions of Sixth Directive 77/388 where the properties had, before their sale to third party purchasers, not yet been actually used by their owner or their tenant. It is for the referring court to verify whether that is the case in the main proceedings.
5. The principle that abusive practices are prohibited must be interpreted as being applicable in a situation such as that at issue in the main proceedings, which concerns the possible exemption of a supply of immovable property from value added tax.
Summary
This case concerned the application of the principle of abuse of rights for VAT purposes (as provided for in Halifax C—255/02) to property transactions entered into by the appellants.
The taxpayers in this case entered into a long lease with a connected company upon which VAT was chargeable and the connected company subsequently leased back the properties on a short lease. The leases were subsequently surrendered and the properties sold. In accordance with Irish legislation in force at the time the sales were exempt from Irish VAT. Irish Revenue took the view that the leases entered into by the taxpayers were artificially created in order to avoid the subsequent sales being exempt from VAT and sought to disregard the lease transactions on the basis that they lacked commercial reality and thus were an abuse of rights. The taxpayers appealed the assessment through the Irish courts arguing that in the absence of national legislation giving effect to the prohibition of abusive practices, the argument could not succeed against them to impose a greater VAT liability that that which was provided for under national law as this would infringe on their rights under the principles of legal certainty and legitimate expectations.
The CJEU ruled that the principle that abusive practices are prohibited was directly effective against individuals, even where no national legal measure existed to enforce it and therefore the Irish courts must look at the transactions considered to be abusive (i.e. the lease transactions in view of Irish Revenue) to determine whether a tax advantage had accrued to the taxpayer and if so, the final sales of the properties may be subject to VAT. An interesting aspect of the finding by the CJEU is that it appears that the Court is saying that the VAT concerned must be collected using national VAT law and not EU law. In its reference of the case to the CJEU the Supreme Court held that there were no provisions of national law which could be used to assess VAT on the transactions. It will be interesting to see if the Supreme Court will change the meaning and effect of Irish national law to authorise collection of the tax in the context of a VAT Directive which the CJEU has held, yet again in the Cussen case, still does not bind individuals.
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