Essay: The principle of prohibition of abuse of EU law may be regarded as a constitutional general principle of EU law

Introduction
As is widely known, economic operators in the internal market are at liberty to make use of their rights under EU law and move freely throughout the Union. However, not all thrive towards the same end; some merely abuse the rights conferred upon them by Union law solely for their own benefit, to the detriment of their home Member States. This makes identifying the line between use and abuse of rights in EU law an often difficult task.
The system of value-added tax in the EU is one which is vulnerable to abuse. Though the area has reached a high level of harmonisation, the EU is still presented with the challenge of constructing a single market consisting of 28 different value-added tax (VAT) systems, which withstands various attempts to obtain benefits for which it was not designed.
The Court has often used the aforementioned principle of abuse of EU law as a tool with which to combat fraud in the form of denying rights relied on from the VAT Directive, where such rights are derived in cases of established tax fraud or where there has been a failure to comply with the conditions of good faith.
Of particular interest to this paper is the extent to which a general principle may emerge, and whether the principle of prohibition of abuse of EU law may be regarded as a constitutional general principle of EU law. This will be done by examining the relevant case law of the Court and the recent trends, which, in the opinion of the author, confirm the notion that there is one general principle of abuse of EU law.
Part I: The Notion of Abuse in EU law
Early linguistic discrepancies notwithstanding, the author contends that there is indeed only one concept of abuse. This will be highlighted by the willingness of the Court to shore up the early, implied references to “abuse”, and finally settle on terming it as such.
1 Prohibition of abuse as a judicial rule
The principle of prohibition of abuse in EU case law is a recognised concept, which according to many enjoys the legal status of a general principle.
At the beginning, it was applied in a fundamental freedom context and then in almost every field of law not only reserved to Union competence, but also to the extensive interpretation of treaty and directive dispositions. Overtime the Court has denationalised abuse. It thus applies it in light of Union law, not national law.
2. The linguistic problem
A steady line of case law by the Court underlines a well-established prohibition of the use of Union law for abusive or fraudulent ends. It is no simple task to define the scope of that principle, as Advocate General La Pergola opined in Centros . Nor has the phraseology used by the Court been overly-coherent either; it has not always referred to the notion as “abuse”. Indeed, it has at different times used phrases such as “avoidance”, “evasion”, “circumvention”, “fraud” interchangeably with “abuse”.
Due to the mis-translation of EU documents, some minor linguistic discrepancies remain when the Court has referred to the concept of abuse. Nonetheless, after the judgment in Emsland-Stärke, “abuse” has been the only term used by the Court in referring to such situations. It can therefore be interpreted as the common denominator of the terms mentioned earlier, meaning they are merely different expressions of the same concept. How this “abuse” has been conducted can be divided into three groups, namely circumvention (or u-turn transactions), fraudulent behaviour, and misuse. The difference in form bears no practical difference in terms of applying the abuse of rights principle to a given case.
2.2 Circumvention
As is commonly known, Member States have the autonomy to introduce domestic legislation in areas not yet harmonised at Union level. Some provisions of secondary law explicitly allow such legislation, whilst it is sometimes implied that Member States may legislate outside of harmonised areas. Consequently, persons (or goods) originating from a Member State with strict rules, may trigger the application of EU law simply by crossing a border and then returning to their home State. The final destination of the transaction in such a case is the home State. This means that crossing the border renders the higher standards enacted by the home Member State redundant and ineffectual, were this conduct to fall outside the scope of abuse of rights.
In the area of services, Van Binsbergen was the first case where the Court regarded such behaviour to fall within the scope of abuse of rights, making it the first example of circumvention. Van Binsbergens lawyer had established himself in Belgium in order to avoid stricter rules in the Netherlands, which under Dutch law meant he lost the right to represent his client. This clearly constitutes circumvention, where a person: (1) established himself in another Member State, (2) in order to avoid the legislation of his home Member State. Though Centros narrowed the scope of the general concept, this remains the most common form of alleged abuse of rights before the CJEU.
2.3 Fraudulent Behaviour
In order to benefit from countless provisions of Union law, certain conditions must be fulfilled honestly and obtained in good faith. For fraud to occur, the claim to rights here must be based on objective false premises. An example can be found in the Van de Bijl case, where Dutch authorities questioned the validity of a certificate which a painter claimed meant that pursuant to Directive 64/427/EEC, he should be allowed to perform professionally in another Member State. The false certificate was deemed enough to constitute fraud, and Van de Bijl was not allowed access to the rights he sought.
2.4 Misuse
Misuse is a broad concept which encompasses activities by economic actors which are, in their result, contrary to the purpose of the right in question. In such a situation, the question is if the national measures at issue jeopardise the supremacy and uniform application of Union law. National courts are thus free to apply measures up to this point only, as to do otherwise would be contrary to the division of authority between Member State and the Union.
Part II: Abuse of law in the context of Taxation (dev of wholly artificial arrangements??)
3. Judicial Anti-Abuse tests
The Court has consistently used several terms to designate abuse of law in non-harmonised areas of taxation and abuse of rights in harmonised areas of tax.
In the context of taxation, many regard the starting point of the development of abuse of law as the Halifax and Emsland-Stärke decisions. Given after van Binsbergen, the Greek “challenge” cases, and Centros. Emsland-Stärke was essentially the result of a need to prevent European law from being relied upon in respect of transactions that in substance countered the European legal order. Thus, as a goal, this marks a structural similarity with tax avoidance and tax evasion.
3.1 The establishment of the abuse test and the precursor to Halifax: Emsland Stärke
Shortly after the ruling in Centros, the Court released the Emsland Stärke judgment. This case concerned the common agricultural policy. Emsland Stärke exported various forms of starch to Switzerland, and received an export refund for this. Immediately after, the same products were transported (unaltered) back to Germany, where they were sold. Upon return, the German authorities reclaimed the unduly granted refund back from Emsland Stärke.
Though the Court did not explicitly state that abuse of Community law is a general principle, it agreed with the Commission and implicitly did so. It set up a twofold test for determining such abuse; one part being objective and the other subjective. By including the subjective intention of an interested party involved, Emsland Stärke narrowed down the wide scope the prohibition of abuse had in Van Binsbergen, while conduct which under Centros criteria would be normally considered a mere exercise of fundamental freedoms, would instead constitute abuse, if the objective and subjective elements of the test were cumulatively met.
3.1.1 The Objective element
In establishing the objective element, the Court did not deviate from what was already established in previous caselaw. In order to fulfil this element, it must be proved that the person seeking to have the right has obtained it for the achievement of an “improper advantage, manifestly contrary to the objective of that provision”. Thus, if the right in question is exercised within the aims and limits of Union law, there is no abuse, merely a legitimate exercise of a right.
3.1.2 The Subjective element
The subjective element of this test attracted much controversy and produced much scholarly debate. Motives are irrelevant in this exercise, as they do not exist when it comes to legal persons. Determining that the transactions in question are created artificially in order to obtain an advantage from Union provisions must instead be determined by objective evidence and objective circumstances.
4 VAT: a system vulnerable to abuse
In force as Directive 2006/112/EC, the VAT system within the EU is built upon the general features of a general tax on consumption, which is calculated proportionate to the price of the supplied good or service. Virtually all commercial activities are subject to VAT and it exists essentially as a multistage turnover tax. In this form, it has created the foundation for Member States to design their own VAT rates and is as of yet not fully harmonised. Most relevant to this paper is how the system of EU VAT creates the possibilities for abusive practices to occur.
4.1.1 Vulnerability 1: Cross-border supply of goods and services: creating an environment for abuse in VAT
Due to harmonisation of the VAT system in the EU, there has been a significant increase in cross-border trade. The harmonisation included the creation of cross-border trade which would ensure a significant level of trade in goods and services, thereby lessening the possibility of VAT fraud and abuse of law. The Commission has constantly highlighted the vulnerability of the VAT system and due to the complexity of the 28 jurisdictions engaged in cross-border trade, the EU legislator is faced with a constant challenge of preventing VAT as an environment for abuse or VAT fraud.
4.1.2 Vulnerability 2:
4.2 The fundamental distinction between abuse of law and abuse of rights
In the context of taxation, the CJEU has defined “abuse” as a form of tax minimisation, which through misuse of legal forms achieves a result which is not in compliance with system principles. This means that though tax abuse and tax avoidance are related, they do not coincide.
At this juncture, it is important to note that both abuse of rights and abuse of law are not necessarily the same. Generally speaking, abuse of law indicates abuse in Union law, whereas abuse of rights indicates abuse of Union law. The former may be defined as a situation where a person relies on a European legal right to circumvent or displace national law, while taking advantage of a right in European law, but in a manner running contrary to its spirit constitutes the latter.
In 2006, the CJEU extended the abuse of law principle in the Halifax to apply to the field of VAT. The abstract distinction between both abuse of law and abuse of rights is based on a dictum from Centros, where it was provided that abuse of law involves avoiding national provisions through claiming fundamental freedoms, whereas abuse of rights involves abusing rights directly provided by EU law. According to this dictum, a Member State:
“is entitled to take measures to prevent certain of its nationals from attempting, under cover of the rights created by the Treaty, improperly to circumvent their national legislation or to prevent individuals from improperly or fraudulently taking advantage of provisions of Community law”.
Thus, abuse of law is illegitimate from the instrument point of view. Here, a person improperly uses a legal tool (often a fundamental freedom) with the aim of avoiding national tax measures. Abuse of rights on the other hand is illegitimate from the result point of view; while seemingly legal, the result would be a tax reduction, which is not.
5 Applying abuse of law to VAT: Halifax
5.1.1 Refining the subjective element
The subjective element alluded to in Emsland Stärke has been refined further by Halifax. According to Pistone, Halifax is regarded as the landmark decision on abuse for value-added tax (VAT) purposes. Among these is the fact the Court defined abuse in this area as a circumvention of tax rules through transactions, essentially driven by tax reasons. Secondly, Halifax also confirmed the previous case law on tax avoidance; it underlined that the existence of objective factors was sufficient for the existence of abusive practices.
5.1.2 “Artificiality” and “purpose”
Halifax concerned a banking company who established call centres for its business. Instead of recovering only 5% of the VAT paid on construction works, Halifax set up a scheme which enabled it to recoup the full amount of VAT incurred through various transactions involving different companies in the Halifax group.
The main issue which needed clarification was essentially: “Has the person performing a transaction constituting supply, the right to deduct the input VAT, where such a transaction on which that right is based has been concluded with the sole purpose of tax avoidance?”
The Court agreed with the Opinion of Advocate General Maduro insofar as the finding of “artificial” in the transactions should not be based on the subjective intentions of those claiming the Community right. Instead, emphasis was placed on the finding that the conduct in question could not possibly have any other purpose than to trigger the provisions of Community law in a manner contrary to their purpose. In addition, the Court also had to consider whether it was apparent from objective factors that obtaining a tax advantage was the essential aim of the transactions. In conclusion, the Court affirmed a less stringent approach towards determining abuse in matters of indirect taxation.
5.2 The concept of abuse in Part Service
In Part Service, the concept of abuse was once more discussed in relation to VAT. The referring court requested guidance on whether or not an abusive practice could be found in a situation when the:
“accrual of a tax advantage is the principal aim of the transaction… or if such finding can only be made if the accrual of that tax advantage constitutes the sole aim pursued, to the exclusion of other economic objectives ”
Essentially the referring court asked whether the essential aim referenced in the Halifax ruling meant the one and only aim of the transaction, or the most important aim. In reply, the court referenced Advocate-General Maduro and stated that if there was some explanation other than merely the attainment of tax advantages, then there was indeed no abuse present.
The reasoning here seemed to confirm the narrow interpretation of abuse, however in rereferring again to Halifax the Court clarified that for VAT purposes at least, there is an abusive practice when the tax advantage in of the opinion of the judge is the principal reason for engaging in the transaction. No clarity was given as regards the criteria on which a judge should evaluate the importance of the tax advantage to the non-tax advantages.
However, it is clear that this concept is not unlike the abuse concepts to be found in many of the national tax legislations of the Member States. The question, then, is whether this can still be regarded as a European concept of abuse.
5.3 Koefed: a loose use of the abuse concept
Neither based on VAT directives nor Treaty freedoms, the Koefed decision is an interpretation of the Merger Directive, and in particular the anti-abuse provision of the Merger Directive contained in Article 11. Of relevance to the purpose of this paper is the second part of the decision which dealt with the doctrine of abuse of Community law. It started its analysis from Article 11 of the Merger Directive, which provided that a Member State:
“May refuse to apply or withdraw the benefit of all or any part of the provisions… where it appears the merger… has at its principal objective or one of its principal objectives tax evasion or tax avoidance”
It then went on to emphasise that in line with the general principle that abuse of rights is prohibited, Article 11(1)a of the Directive states that individuals: “must not improperly or fraudulently take advantage of provisions of Community law.” , along with stating that the application of Community law cannot cover transactions carried out not in the context of commercial operations, but “solely for the purpose of wrongfully obtaining advantages provided for by Community law”.
In this instance it is apparent the Court adopted a rather flexible use of concepts which it had been using in its anti-abuse case law. Although Halifax formed a appeared to accept the prohibition of abuse of EU law as a general principle, the Court did not characterise the prohibition as such.
The Court did not make the pivotal distinction between two anti-abuse doctrines. The first of these entails prohibiting tax advantages when tax considerations were the only way to determine the taxpayer’s legal behaviour and there was no other credible explanation based on objectively ascertainable facts. The second involves a doctrine in which tax considerations may be the principal (or one of the principal reasons) for explaining the taxpayer’s behaviour. In failing to make this distinction, the Court is seen to interpret the rule of “principal” or “one of the principal” tax reasons as formulated in Article 11 of the Directive as the expression of the “one and only” doctrine of Cadbury Schweppes.
The Court then essentially gave the power of decision making back to the national court. By doing this, it left open the possibility for the national courts to control how the anti-abuse doctrine applied. This in turn gave the Directive provision a “reverse vertical direct effect”; it allowed the Member State to rely on it against an individual without transposition.
5.4 Acceptance as an overriding principle of EU law
Halifax and Koefed provide the framework provide a clear acceptance of the principle of abuse of EU law as a general principle. Thus,
5.5 The influence of Halifax in direct taxation: Cadbury Schweppes and “wholly artificial arrangements”
Cadbury Schweppes (CS) became the paradigmatic example of the difficulties Member States come up with in order to preserve traditional fiscal systems in a common market contest. Even though CS concerned cross-border issues and the fundamental freedom of establishment, the Court effectively imported the Halifax test, albeit with slight differences.
In CS, a company from the United Kingdom had set up a subsidiary in Ireland, for the purpose of taking advantage of Ireland’s attractive corporate tax rate, which was substantially lower than that found in the UK. The United Kingdom subsequently applied its tax charge upon the profit made by the subsidiary in Ireland.
The issue at hand concerned the compatibility of national measures concerning controlled foreign companies (CFC) legislation with the fundamental freedoms. In examining this legislation, the Court explained that should it be contrary to the freedom of establishment, then the question is whether it can be justified for the prevention of wholly artificial arrangements intended to escape the national tax measures which would otherwise be applicable.
The Court also clarified that the UK anti-abuse legislation must not be applied where, on the basis of objective factors, it can be proven that despite tax motives the subsidiary is established in the host State (Ireland) and carries out genuine economic activity.
Part III: Can multiple forms of abuse exist, or is there one unitary notion?
THE ACADEMIC DEBATE
6.1 Different tests but the same concept
Running against the general grain of this paper, it must be noted that there are of course those such as Lenaerts who would allude to the fact that the definition of a Union concept of abuse of rights by the Commission in Emsland- Stärke and its progressive application to both direct (Halifax) and indirect (Cadbury Schweppes) taxation mean it can be considered an implicit recognition of a general principle only. For many like Lyd , there is simply no difference in how the Court applies its test in areas of indirect and direct taxation.
The language used by the Court is often used to support this argument. Indeed, in the Kofoed case, the Court specifically referred to the prohibition of abuse of rights as one general principle of Union law. The aforementioned interchangeable use of words such as avoidance, fraud and evasion has been replaced by simply “abuse” since Emsland-Stärke.
Nonetheless, I recommend looking beyond the language debate and instead examining the substance of the matter. As described in part two, there has been a progressive application of abuse of rights to various areas of Union law. However, it is clearer still that the concept of abuse as it has developed in Kofoed and Part Service is substantially different from the one which was developed in Cadbury Schweppes. Accordingly, both claim to be the EU concept of abuse. Since both cases, the small chasm which appeared in Halifax has widened even further. The difference is that under the CS criteria, any reason other than a tax advantage is enough to keep the abuse concept at bay, whilst in Part Service, if the tax reasons are of more importance than the non-tax reasons, abuse may be established.
In dealing with situations outside of taxation, Vanistendael has noted that the decision in Centros is the example to keep in mind. The test in Centros highlighted the fact that establishing a company in a Member State whose company law rules are the least restrictive cannot in itself constitute an abuse of the right of establishment. This may be compatible with Cadbury Schweppes, but fundamentally incompatible with the decision in Part Service. The situations defining Cadbury Schweppes (a cross-border problem and fundamental freedom elements) and Halifax (the interpretation of a national tax rule) are also fundamentally different involving different tests. With this in mind, Vanistendael contends it is conceivable to have more than one concept of abuse.
6.2 After the VAT cases: should the abuse concept be codified?
Turning to the question of whether or not the abuse concept as elaborated in the VAT cases should be characterised as a uniform national concept borrowed from EU law, Vanistendael focuses on the fact that the PS decision has made this obsolete. He argues against a possible codification at Union level, much unlike the Opinion of Advocate General Maduro in Halifax, which concerned balancing the prohibition of abuse against the principles of legal certainty. Instead, he argues it would be more appropriate for the Court to further develop different concepts of abuse and have one which is specific to national situations, applied in accordance with secondary EU tax legislation. To do so would give more leeway to national courts in such situations.
The author endorses the opinion of the Advocate General over that put forward by Vanistendael. Part Service is indeed proof that the Court has shown an inclination to allow national courts to apply national law in the area of VAT, however this is insufficient in supporting the argument that more than one concept of abuse exists.
6.4 A chasm appearing in the area of VAT?
Whatever the arguments against multiple concepts of abuse existing, it would appear that in the case of VAT at least, the development in Part Service highlights the need for appropriate criteria to prevent further differentiation. In the context of civil law jurisdictions, the Halifax criteria is ultimately imperfect. If we compare the substance of the referred questions in both cases, there is a core element common to both. This further supports the argument that only one concept of abuse exists. As VAT is an object of common policy and interpreted in such a way that does not exactly match other areas of taxation, it follows that abuse may be countered in the absence of rules in this domain.
According to Pistone , Part Service has proven that even in the field of a harmonised area such as VAT, there are significant differences between common and civil law systems with regard to anti-abuse provisions. Pistone contends that it would be up to the Court of Justice to fill in these gaps via future case law; in his opinion, there should not be a different remedy or test in an area such as VAT which is harmonised across the Union.
6.5 Two different concepts corresponding to two distinct needs
Finally, Vanistendael argues that in the context of indirect and direct taxation, the two different concepts correspond to two distinct needs. Thus the Court was justified in setting a separate standard in balancing the fundamental freedoms and the effectiveness of national tax systems. Technically, VAT is secondary European law, yet it functions much like domestic tax law. The issues central to both Halifax and Part Central did not involve fundamental freedoms nor cross-border issues. As cross-border issues under fundamental freedoms are primary EU law, there is an extra dimension here; not only must the balance be obtained between legality and effectiveness (as it is in domestic law), the Court must also balance between the fundamental freedoms and the effectiveness of the national tax system in question. It is therefore logical that a separate standard is used here; i.e the “wholly artificial arrangement’ which the Court was again entirely justified in constructing.
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