The European Court of Justice (Second Chamber) ruled that, under the sixth council directive, there could be a finding of an abusive practice when the accrual of a tax advantage constituted the principal aim of the transaction at issue. It was for the national court to determine, in light of the court's ruling on the interpretation of Community law whether, for the purposes of the application of VAT, transactions such as those at issue could be considered to constitute an abusive practice under the sixth directive.

Facts

Throughout 1987, a company, ITAL and a leasing company, IFIM, both belonging to the same financial group, were involved together in leasing arrangement transactions in connection, for the most part, with motor vehicles. IFIM concluded a contract with a customer for the use of a motor vehicle with an option to purchase, in consideration of lease payments, the setting up of a surety corresponding to the costs of the vehicle not covered by the lease payments and the provision of an unlimited security.

ITAL concluded a contract with the customer under which it insured the vehicle against all risks except civil liability and guaranteed, by financing the surety and providing the unlimited security, the fulfilment of the obligations, in favour of IFIM, undertaken by that customer. In consideration thereof the customer paid, in advance, to ITAL an amount which reduced the total of the lease payments agreed between the customer and IFIM, reducing that total, in the majority of cases, to an amount barely above the cost of the vehicle, as well as a commission of one per cent paid to a consultant.

The customer instructed ITAL to pay the amount financed to IFIM, on his behalf, by way of the surety provided for in the contract for use of the vehicle. ITAL entrusted the performance of the contract with the customer to IFIM which, as an intermediary, received additional remuneration from ITAL, and, in the event of default by the customer, an amount equivalent to that promised by ITAL to the customer, by way of refund, in the event of the customer fulfilling his obligations to make the lease payments.

Following investigations carried out into ITAL the tax office held that, although the different agreements signed by the interested parties were contained in separate contracts, they together constituted a single contract concluded between three parties. Accordingly, the consideration paid by the customer for the leasing arrangement had been artificially divided to reduce the taxable amount, as the role of lessor was split between ITAL and IFIM. Consequently, the tax office issued ITAL with an adjustment notice for VAT, in respect of the year 1987, with interest and penalties.

The Tax Court of First Instance upheld an appeal by ITAL, accepting that there was not a single contract, but several linked contracts, a format chosen for valid economic reasons. The Court of Appeal upheld that decision. The tax office then brought an appeal on a point of law against that judgment before the Supreme Court of Cassation. That court took the view that the decision to be taken required resolution of the question whether the actions of the relevant parties, having regard to their reciprocal links, could be considered to be an abuse of rights or of legal form according to the definition given by Community case law, notably in Halifax plc v C & E Commrs (Case C-255/02) [2006] BTC 5,308; [2006] ECR I-1609. It considered that the division of the contracts had the effect of reducing the VAT burden to a lesser amount than that resulting from an ordinary leasing contract, since tax was levied only on the granting of use of the vehicle, the cost of which was practically equivalent to the purchase price of that vehicle. The court therefore stayed the proceedings and referred to the ECJ for a preliminary ruling.

Issue

Whether, for the purposes of VAT collection, with regard to the economic objective sought, the contracts constituted a unitary whole, or whether each contract remained autonomous and, accordingly, subject to its own particular tax rules.

Decision

The European Court of Justice (Second Chamber) (ruling accordingly) said that, where a taxable person chose one of two transactions, the sixth directive did not require him to choose the one which involved paying the highest amount of VAT. On the contrary, taxpayers might choose to structure their business so as to limit their tax liability. Nevertheless, when a transaction involved the supply of a number of services, the question arose whether it should be considered to be a single transaction or as several individual and independent supplies of services requiring separate assessment. That question was of particular importance, for VAT purposes, for applying the rate of tax or the exemption provisions in the sixth directive.

It followed from art. 2 of the sixth directive that every transaction must normally be regarded as distinct and independent. However, in certain circumstances, several formally distinct services, which could be supplied separately and thus give rise, in turn, to taxation or exemption, had to be considered to be a single transaction when they were not independent. It could also be held that there was a single supply where two or more elements or acts supplied by the taxable person to the customer were so closely linked that they formed, objectively, a single, indivisible economic supply, which it would be artificial to split.

It was for the national court to assess if, the contractual structure of the transaction notwithstanding, the evidence put before the court disclosed the characteristics of a single transaction.

In that context, it might find it necessary to extend its analysis by seeking evidence of indications of the existence of an abusive practice, which was the concept with which the question referred was concerned. The court, when giving a preliminary ruling, might, where appropriate, provide clarification designed to give the national court guidance in its interpretation. In the present case, in order to assess whether the transactions in question could be held to constitute an abusive practice, the national court had to verify, first, whether the result sought was a tax advantage, the granting of which would be contrary to one or more of the objectives of the sixth directive and, then, whether that constituted the principal aim of the contractual approach adopted.

As regards the first criterion, the court could take into account that the anticipated result was the accrual of a tax advantage linked to the exemption, pursuant to art. 13(B)(a) and (d) of the sixth directive, of the services entrusted to the co-contracting company of the leasing company. That result would appear to be contrary to the objective of art. 11(A)(1) of the sixth directive, namely the taxation of everything which constituted consideration received or to be received from the customer. Since the leasing of vehicles under leasing contracts constituted a supply of services within the meaning of art. 6 and 9 of the sixth directive, such a transaction was normally subject to VAT, for which the taxable amount was determined in accordance with art. 11(A)(1).

As regards the second criterion, the national court, in the assessment which it had to carry out, might take account of the purely artificial nature of the transactions and the links of a legal, economic and/or personal nature between the operators involved, those aspects being such as to demonstrate that the accrual of a tax advantage constituted the principal aim pursued, notwithstanding the possible existence, in addition, of economic objectives arising from, for example, marketing, organisation or guarantee considerations.

European Court of Justice (Second Chamber). Judgment delivered 21 February 2008.