The European Court of Justice (Third Chamber) ruled that the second subparagraph of art. 4(4) of Council Directive 77/388 (‘the sixth directive’) was a provision which, in order to be implemented by a member state, required prior consultation of the Advisory Committee on VAT and the adoption of national legislation authorising persons, in particular companies, established in the territory of the country who, while legally independent, were closely bound to one another by financial, economic and organisational links, no longer to be treated as separate taxable persons for VAT purposes so that they could be treated as a single taxable person to whom a single VAT identification number would be allocated and the sole person entitled to submit VAT declarations.

Facts

The taxpayers were companies incorporated under Italian law which formed part of the Amplifon group, engaged in the research and development of new scientific instruments. More than 50 per cent of the share capital of X, which was formed in February 1989, was subscribed by Y, 99 per cent of which was in turn controlled by Z. X's business ceased in February 1993. For the 1990 tax year, Z submitted to the Milan VAT office the declaration provided for under national law, after making an entry in its accounts transferring a VAT debt for which X had previously been liable. For the 1991 tax year, it did the same with another of its subsidiaries that was involved in the real estate sector, S, formed in November 1990, which resulted in a significant VAT credit being transferred to it.

The Milan VAT office took the view that Z was not entitled to submit the contested declarations, since the national law provided that, in order for the simplified VAT scheme to be applicable, the link between the parent company or body and the subsidiary company must have existed ‘from the beginning of the calendar year’ preceding the year in which the declaration was made. It therefore issued notices of additional assessment for 1990 and 1991.

X and Z challenged those notices before the Provincial Tax Court, Milan, which granted their applications.

The Milan VAT office appealed to the Tax Court, Lombardy, which granted its appeals, taking the view that Z had failed to comply with the condition stipulating the period for which share capital had to be held in subsidiary companies and was not at that time entitled to submit the contested declarations. X and Z appealed to the Supreme Court, which stayed the proceedings and referred to the ECJ for a preliminary ruling.

Issue

Whether the second subparagraph of art. 4(4) of the sixth directive was insufficiently precise so that the member states were permitted to apply the VAT scheme set out in that rule to specific situations involving economic, financial or legal links among different persons; whether it was sufficiently precise so that, once a member state had decided to adopt that scheme, it required provision to be made for it to be applied in all cases involving the links set out in that rule; and whether the imposition of a temporal restriction was disproportionate to the objectives of the directive and an abuse of rights.

Decision

The European Court of Justice (Third Chamber) (ruling accordingly) said that the second subparagraph of art. 4(4) necessarily required, where that provision was implemented by a member state, the national implementing legislation to provide that the taxable person was a single taxable person and that a single VAT number be allocated to the group. The fact that express reference was made in the sixth directive to an individual VAT identification number only after the introduction of art. 28h of that directive, which formed the basis of the new art. 22(1)(c) to (e) of the directive, namely after the tax years in question in the main proceedings, had no bearing on that consideration. The use of such a number was dictated by the need, both for the economic operators and the tax authorities of the member states, to identify with a degree of certainty those effecting transactions subject to VAT. The clarifications brought about by art. 28H simply confirmed a pre-existing rule that was integral to the proper functioning of the common system of VAT.

The transposition of the second subparagraph of art. 4(4) had to be distinguished from the setting up of a mechanism to simplify VAT declarations and payments which enabled, inter alia, companies within the same group to remain separate taxable persons, even where VAT might be consolidated in the accounts of the parent company.

The second question was whether the temporal restriction imposed by the national law in order for a parent company or body to be able to make VAT declarations and payments in accordance with the simplified rules laid down in that provision was in breach of the principles of proportionality and fiscal neutrality and the rules against the abuse of rights. In order to qualify under the simplified system, the parent company or body must have held more than 50 per cent of the share capital or stock of the persons with whom it was closely linked, such as subsidiary companies, since at least the beginning of the calendar year preceding that in which the declaration was made.

As regards the principle of fiscal neutrality, it was a fundamental principle of the common system of VAT which precluded, on the one hand, treating similar goods, which were thus in competition with each other, differently for VAT purposes and, on the other, treating similar economic transactions, which were therefore in competition with each other, differently for VAT purposes.

The national legislation which simply treated taxable persons wishing to opt for a mechanism to simplify VAT declarations and payments differently according to the length of time for which the persons in question had a link established by a specific holding in the capital of a subsidiary applied to all economic operators equally, regardless of whether they were competing with each other in connection with their operations or their goods. The principle of fiscal neutrality did not preclude legislation which made a distinction that was objectively justified in order that the economic reality underlying a legal transaction might be established, so that recourse might be had to simplified VAT declaration and payment procedures. It was for the referring court to determine whether the national legislation applicable to the contested declarations constituted such a provision.

The principle prohibiting the abuse of rights was intended to ensure, particularly in the field of VAT, that Community legislation was not extended to cover abusive practices by economic operators, i.e. transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Community law. The effect of that principle was therefore to prohibit wholly artificial arrangements which did not reflect economic reality and were set up with the sole aim of obtaining a tax advantage.

Moreover, preventing possible tax evasion, avoidance and abuse was an objective recognised and encouraged by the Sixth Directive (Halifax plc & Ors v C & E Commrs (Case C-2 55/02) [2006] BTC 5,308 and Cadbury Schweppes &AnorvC&ECommrs (Case C-196/04) [2006] ECR I 7995 considered).

Finally, the principle of fiscal neutrality did not preclude national legislation which simply treated taxable persons wishing to opt for a mechanism to simplify VAT declarations and payments differently according to whether the parent company or body had held more than 50 per cent of the share capital or stock of the persons with whom it was closely linked since at least the beginning of the calendar year preceding that in which the declaration was made or, on the contrary, satisfied those conditions only after that date. It was for the national court to determine whether national legislation, such as the present, constituted such a provision. Moreover, neither the principle prohibiting the abuse of rights nor the principle of proportionality precluded such legislation.

European Court of Justice (Third Chamber).

Judgment delivered 22 May 2008.