Prohibition of Abuse of Law

A New General Principle of EU Law?

Rita de la Feria, Stefan Vogenauer, Rita de la Feria, Stefan Vogenauer

• Publisher: Hart Publishing
• Year: 2011
• ISBN:
  9781847317858
• Edition: 1
• Topic: Derecho
• Subtopic: Derecho internacional

The Court of Justice has been alluding to 'abuse and abusive practices' for more than thirty years, but for a long time the significance of these references has been unclear. Few lawyers examined the case law, and those who did doubted whether it had led to the development of a legal principle. Within the last few years there has been a radical change of attitude, largely due to the development by the Court of an abuse test and its application within the field of taxation. In this book, academics and practitioners from all over Europe discuss the development of the Court's approach to abuse of law across the whole spectrum of European Union law, analysing the case-law from the 1970s to the present day and exploring the consequences of the introduction of the newly designated 'principle of prohibition of abuse of law' for the development of the laws of the EU and those of the Member States.

VIII

The Confirmation?
Tax Law

25

The Anatomy of Tax Avoidance Counteraction: Abuse of Law in a Tax Context at Member State and European Union Level

JUDITH FREEDMAN*

I. INTRODUCTION

CONCEPTS OF ABUSE of rights, abuse of law and anti-avoidance in the field of taxation differ between jurisdictions and even within jurisdictions, depending upon the legal culture and the particular context. The concepts may vary even if they are superficially described in the same language; sometimes the language is different yet the concepts are similar. In the UK the phrase used in this area of tax law is generally ‘avoidance’—perhaps ‘aggressive’ avoidance or ‘unacceptable’ avoidance—rather than ‘abuse’. Elsewhere, we find a range of phrases which sound similar but are subtly different, such as: abus de droit par fraude á la loi, abus de droit par simulation, acte anormal de gestion, fraus legis, sham, substance over form and their equivalents in other languages.¹ Quite apart from the linguistic differences, there are important variations in meaning so that, for example, simulation in France is wider than the UK notion of a sham, and the US notion of sham is also more extensive than that in the UK, although the word used is exactly the same.²

It has been argued by Rita de la Feria³ and others that current developments in the case law of the Court of Justice seem to be creating a new European Union (EU) concept or, possibly, a set of concepts: a notion of abuse of EU law⁴ and perhaps also a related, but more general, principle of abuse. Thus there is being added a further layer of meaning or meanings.

Inevitably, the ideas emerging in the EU have been derived in part from national statute and case law and coloured by the way in which the questions are posed to the Court of Justice by national courts. Although what emerges are EU concepts, these concepts not only govern the answers to questions relating to EU law with some resulting level of standardisation across the Member States,⁵ but also, as discussed below, developments are beginning to suggest that these concepts may be influencing the evolution of abuse concepts in national tax systems more generally, even, perhaps, in some areas where EU law is not directly relevant. In this way there might emerge, very slowly and over many years, a more widespread harmonisation of ideas about the tests for abuse or avoidance, although this might more properly be called ‘seepage’ of legal ideas. As Malcolm Gammie has commented, in comparing the UK judicial anti-avoidance principle with the EU abuse of law principle, although the starting points might differ, the problems being dealt with are similar, so it is not surprising if the results are similar too.⁶ While cross-fertilisation of legal ideas across jurisdictions is nothing new, it is speeded up by the interaction between the law of the EU and that of Member States and the traffic is not one-way but multi-directional.⁷

Whether there is one coherent EU abuse principle, or rather a related but varied set of concepts which are applied to meet a range of similar, but not identical, difficulties is, of course, a central issue for this book.⁸ Frans Vanistendael, for example, has remarked that:

[T]he ECJ may finally come around to a coherent general theory of abuse of law that extends in a consistent way the notion of abuse of Community law to all tax matters. At the same time these theories may provide an instrument to protect the integrity of national tax systems.⁹

Part II of this chapter examines briefly the notion of abuse at EU level in a tax context and from the point of view of interaction with national laws. Other chapters in this book deal with this in more detail¹⁰ but the discussion here highlights themes of importance in relation to the national law of Member States. Part III considers the special difficulties of abuse and avoidance encountered in the area of taxation. It does not seek to examine the details of national tax systems but considers in general terms the common problems that have been encountered by the Court of Justice and national systems seeking to devise mechanisms to deal with these issues. Part IV considers how the EU concepts are likely to impact on the development of national concepts which seek to control tax avoidance. In conclusion, in Part V, it is argued that not only is there a formal influence on national tax systems from the Court of Justice’s decisions, but also that the discussion of various concepts at the level of the Court of Justice has already stimulated general national discussion and lawmaking around the concept of abuse in the area of taxation, and will continue to do so. The essence of a principle of abuse of law is, however, flexibility. Whilst guidelines and a reasonably certain framework are needed, attempts to turn the principle into a set of detailed rules through over-reliance by national courts on the specific wording of Court of Justice decisions could prove to be very unhelpful in controlling abuse.¹¹

II. CONCEPTS OF ABUSE AND ARTIFICIALITY DEVELOPED BY THE COURT OF JUSTICE IN A TAX CONTEXT

It seems that the argument for a coherent theory in the area of tax law requires us to equate at least two rather different conceptual situations. These differences have been widely recognised by the commentators and variously described.¹² There are two paradigm cases for the purposes of this discussion.

First, there are cases arising in harmonised areas of law, such as the value-added tax (VAT) case of Halifax,¹³ where the relevant questions are whether a tax advantage is being obtained by the taxpayer contrary to the purpose of the specific EU legislation and whether it is apparent from objective factors that the essential aim of the transactions concerned is to obtain a tax advantage, (the two part test). In such circumstances, the Halifax decision states that an abusive practice exists and 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 abusive practice. This is a very familiar situation for tax lawyers used to dealing with what is argued to be abusive use of national legislation and raises a similar set of questions. The only difference here is that what is in question is the purpose of EU legislation or of national legislation derived from EU legislation, and which is to be interpreted in accordance with an EU directive or regulation. The issues at both EU and national level are very similar. Key problems are the extent to which the test is objective; whether the accrual of a tax advantage has to be a principal, essential or a sole aim of the transaction; and whether there is an overriding legal principle in operation or merely a form of statutory interpretation. These are difficult but familiar questions at both national and EU levels and are discussed further in Part III. One thing clearly stated in relation to this type of case by the Court of Justice, however, is that in applying the relevant legislation, the courts may take into account whether the transactions in question have a purely artificial nature.¹⁴

The second type of case presents greater difficulties and appears, at least initially, to be of a completely different type from the first. In this model, as illustrated by the Cadbury Schweppes case,¹⁵ there is a piece of national anti-avoidance legislation, but the issue is not whether that national legislation is abused by the taxpayer. The question is, rather, whether that legislation may properly apply to the taxpayer: that is, whether and to what extent that legislation may legitimately prevent the taxpayer from exercising his right to freedom of establishment under EU law. In other words, in the Cadbury Schweppes context, is the attempt to establish a subsidiary in another Member State for tax purposes abusive of the freedom of establishment, so that the national legislation may properly inhibit it, or does that national legislation go too far? It is firmly established in the case law that setting up in a Member State for the purpose of enjoying a favourable tax regime in that State is not of itself an abuse of the freedom of establishment.¹⁶ Thus the question is whether there are any circumstances in which national anti-avoidance legislation can legitimately apply to prevent the exercise of this freedom or whether the national legislation is itself in breach of the freedom. On one view, no question arises on breach of the freedom by the national legislation where the establishment in question is not in genuine and actual pursuit of an economic activity in the host Member State. The freedom simply does not apply in such circumstances.¹⁷ On another analysis, as explained by the Advocate-General in Cadbury Schweppes, there is a restriction imposed on the freedom, and the question is whether the restriction is justifiable or proportional because the taxpayer has relied on the freedom abusively by setting up an artificial arrangement in order to avoid tax.¹⁸

The issue in this second type of case is linked to that of abuse of law because the test used to establish the circumstances in which there is no breach, or alternatively where the restriction is justified, is that of whether there are ‘wholly artificial arrangements’. This is said to be the same test as that developed in abuse cases such as Halifax, derived from earlier cases in other areas of law (the Halifax model).¹⁹ This seems to be a linguistic link rather than an assertion that the cases are conceptually identical. Advocate-General Léger in his Opinion in Cadbury Schweppes referred to a ‘formula, the language of which reproduces that of the doctrine of abuse of rights’ (emphasis added).²⁰

The Advocate-General pointed out that it had been established by the jurisprudence of the ECJ²¹ that ‘hindrance to a freedom guaranteed by the Treaty can only be justified on the ground of counteraction of tax avoidance if the legislation in question is specifically designed to exclude from a tax advantage wholly artificial arrangements aimed at circumventing national law’.²² He then went on to state that ‘application of Community law may be refused only when the company in question relies on it abusively because it has set up an artificial arrangement in order to avoid tax’.²³

Thus the language used in the two types of cases is similar. At the core is artificiality and how to identify that artificiality. Nevertheless the cases have different bases and potentially very different impacts.

In the first type of case, the Halifax model, it can be seen that it is easy to argue that the concept of abuse of EU law is simply an extended rule of statutory interpretation²⁴ (albeit a very special one that can run counter to the literal meaning of the legislation), since the question is how to apply a specific piece of legislation, and whether it applies where there is an artificial transaction. In the second type of case, the Cadbury Schweppes model, there is a different exercise undertaken. First of all, it is the national law rather than the Union law (the freedom of establishment) that has to be interpreted to see if it satisfies the test of restricting only abusive transactions. In one sense this involves interpretation of EU law—that is, of the freedom itself—since the Court of Justice must decide what nature of establishment the freedom attempts to protect. But when it comes to deciding the case at a national level, the detailed discussion is of the meaning of the national law. Statutory interpretation may be involved insofar as the national courts attempt to cut down the national anti-avoidance legislation in question by reference to the freedom in order to make it consistent with the Treaty, under the Marleasing principle (or principle of ‘indirect effect’).²⁵ The general process here, however, looks more like one of an overriding principle than a rule of construction. The freedom of establishment is an overriding principle and if the national legislation cannot be interpreted so as to comply with it, the national legislation must be changed.

A third type of situation is illustrated by the Kofoed case,²⁶ which dealt with the Merger Directive²⁷ in Denmark. Under the Directive, which had been implemented in national legislation, an exchange of shares of the kind undertaken in the case was not prima facie taxable, but the national court found that the exchange of shares in issue ‘was not carried out for any commercial reason whatsoever but solely for the purpose of achieving tax savings’.²⁸

Denmark had not chosen to enact a specific anti-avoidance clause as was provided for by that Directive. This would have applied where tax evasion or tax avoidance was a ‘principal objective or one of the principal objectives’ of the transaction. Nevertheless the Danish revenue authorities sought to apply general Danish anti-avoidance law to counteract the transaction.²⁹ The ECJ held that the national rules on ‘abuse of rights, tax evasion or tax avoidance’ could be applied if they could be interpreted in accordance with the abuse article in the Directive (despite the fact that the national legislature had not included this when implementing the Directive). Thus, in the national court, the revenue authorities can argue that the national anti-abuse law should be interpreted so as to accord with the unimplemented Article in the Directive....

Table of contents

• Cover
• Title
• Copyright
• Preface
• Foreword
• Contents
• Contributors
• I Introduction: Introducing the Principle of Prohibition of Abuse of Law
• II The Framework: General Principles of EU Law and the Prohibition of Abuse
• III The Origins: Free Movement of Services
• IV The Development: Freedom of Establishment, Company Law and Competition Law
• V The Test: Free Movement of Goods and Common Agricultural Policy
• VI The Unknown: Private Law and International Civil Procedure
• VII The Exceptions? Free Movement of Workers and Citizenship
• VIII The Confirmation? Tax Law
• IX Conclusion
• Table of Cases
• Table of Legislation
• Index