Summary

The subject of this thesis is the European VAT treatment of mergers and acquisitions in light of Article 19 EU VAT Directive. In this respect I have studied current law and desirable law. For this purpose, I developed a theoretical framework which provides objective criteria to distinguish between current and desirable law.

Current VAT law is found in the EU VAT Directive, the national implementation thereof and in lower legislation. These rules are shaped by interpretation in case law. In this respect, the European Court of Justice should be seen as a monopolist in the interpretation of EU VAT law.

The meaning and interpretation of legal norms is necessarily obscure and incomplete. Court’s play an important role in this respect. Judicial interpretation gives substance to the objectively unknowable contents of legislation. Although legal adjudication is a dynamic process that will scarcely lead to certainty, it is the duty of Court’s to issue decisions that do justice to the principles of accessibility and foreseeability. This applies all the more in tax law, where the principle of legality requires that the law meets the reasonable expectations of citizens in respect of the claims that the state has towards them. The outer borders of desirable law are found in the requirements of accessibility and foreseeability (i.e. legal certainty) for taxpayers. Therefore, legal certainty should always be the first test for desirable law. My research shows that in particular the case law of the European Court of Justice sometimes leads to the conclusion that this outer threshold of desirable law is not met. A decision such as AB SKF, for example, makes it unreasonably difficult to know and predict the EU VAT consequences of the sale of a shareholding.

Furthermore, I studied to what extent it is possible to distinguish between desirable law and undesirable (current) law. On the basis of Dworkin’s ‘one right answer’ theory I have outlined a framework for the responsibility of Courts – and, in effect, every practitioner of VAT law – with regard to answering legal questions in EU VAT law. I concluded that a desirable interpretation of VAT law, should do justice to the essential characteristics of VAT. These essential characteristics are, firstly, the principle of general taxation, secondly, the principle of fiscal neutrality and thirdly, the legal character of VAT (the intention to tax consumer consumption). Where current law inadequately fits in with, or harms the essential characteristics of VAT, a difference exists between current law and desirable law.

As the EU VAT Directive hardly provides clues for the VAT treatment of mergers and acquisitions, an important part of the current law around my research topic is to be found in the case law of the Court of Justice.

The nature of the preliminary ruling procedure and the manner in which the Court of Justice proceeds in answering preliminary questions, make clear that the Court of Justice builds its legal reasoning and the principles that form the foundation of the scope of rules in VAT law, in a prudent, step-by-step fashion. This means that decisions of the Court of Justice in VAT law should always be understood to be part of a broader context. Each step is a contribution to the Court’s judicial discourse, formed by actual events that rule the life and development of a legal norm. The dialogue between the Court of Justice and the national referring Courts plays a vital role in this respect.

In this respect, the perpetual building work performed by the Court of Justice to the law of the European Union should be understood and appreciated. However, just as well, judgments of the Court of Justice can be criticized. In its step-by-step approach, the Court does not always make a sufficient distinction between cases on a factual and legal level when it invokes a precedent to answer a preliminary question. This leads to potential (substantive) legal uncertainty. In addition, it is not always clear where there are overriding principles at play and where the Court of Justice is merely providing a referring Court with factual suggestions to come to a reasonable solution in a specific case. This sometimes gives rise to criticism entailing that the Court’s legal reasoning was formulated sloppy or careless. Such ambiguity can often only be resolved by asking new preliminary questions.

In a general sense, it is striking that the principle based nature of the step-by-step approach can have the effect that the scope of legal norms can bestretched in cases where a principle invoked in earlier cases requires a similar application in a case at hand. Such principle-based approach carries the risk that the contents of a legal norm in VAT law, collides with the formal underlying principles and and other principles of VAT law. This can harm legal certainty. In this regard, I discussed whether the Court of Justice should form a separate chamber for tax or even VAT matters. I believe this is unnecessary because this might diminish the prudent, principled decisions of the Court of Justice in tax cases. However, the reciprocal understanding between VAT professionals and the Court might well benefit from an addition of tax or VAT knowledge in the support of members of the Court of Justice (for example in the appointment of legal clerks). In this way, the principle based step-bystep approach should not be harmed while technical mishits that result from a lack of deviation between similar, but technically or legally different cases, might be diminished.

Whether looked at from the point of view of the principle of general taxation of VAT, the objective nature of the tax or the principle of fiscal neutrality, it is clear that the transfer of a totality of assets ex Article 19 EU VAT Directive is a unique phenomenon in the context of the EU VAT system. It infringes the general nature of VAT, on subjective grounds as it allows the transfer of a specific set of assets to remain outside the scope of VAT as a whole. Furthermore, the no-supply-rule that is provided by Article 19 EU VAT Directive in itself can be considered a problematic figure in light of the principle of fiscal neutrality, and the a priori questions it raises around the right to recover input VAT. However, in regard of the essential characteristics of VAT, I deem this counterintuitive nature of the no-supply-rule justified.

The distinction between the subject of taxation on the one hand and the object of taxation on the other hand is blurred in light of the transfer of a totality of assets in VAT. The concept of a totality of assets is hybrid in the sense that it says something about the nature of the subject of taxation, and the content of the object of taxation. The subject is the object is the subject. This hybrid nature forms a particular characteristic of the transfer of a totality of assets that contributes to its unique character as a rule in EU VAT. Furthermore, it forms a variable based on which the scope of the provision of Article 19 EU VAT Directive can be determined. If more emphasis is put on the subject side, the provision can be understood as a succession facility for taxpayers where it mainly facilitates the succession of the person running the business, while if more emphasis is put on the object side of the scheme, it can be understood as a provision facilitating the VAT free transfer of significant set of assets that equals an independent business. This subtle distinction arises from the blur between the object and the subject of taxation. The distinction may have a far-reaching impact on the scope of the scheme. I conclude that an approach which puts emphasis on the object side (the transaction itself) is required from an EU VAT point of view. A strict application of the conditions laid down by the Court of Justice in this respect, leads to the conclusion however, that the subject side cannot be overlooked. It goes without saying, that if the object should consist of all elements necessary for the exercise of an autonomous economic activity, little room remains to conclude that such a situation does not involve the succession in the person of the taxpayer at a subject level. There are exceptions however. In my view, the Court of Justice should – unlike it did in the Christel Schriever-case – take away any doubt about the primacy of the object approach. I have established that the object approach, especially if it, as I advocate, requires a high minimum threshold, holds the best fit in light of the principle of general taxation and legal character of VAT. Obviously, an unambiguous definition and interpretation of the legal norm of Article 19 EU VAT Directive is also important from the perspective of fiscal neutrality. On the basis of EU and national case law, I demonstrated that in current law much unclarity exists around this issue.

Another feature of the transfer of a totality of assets in VAT is that its scope is not limited to transactions that would be taxable without the application of the scheme. In this sense, the transfer of a totality of assets reaches beyond the normal scope of VAT. It may also apply to transactions for which there is no a priori taxation or for those where a priori taxation is uncertain. In this way the transfer of a totality of assets functions partly as a general scoping provision for the EU VAT Directive as a whole.

To further improve the understanding of the bearing and importance of this unique figure in VAT in light of my theoretical framework, I studied the objectives that are attributed to the scheme of Article 19 EU VAT Directive. From a EU law perspective these objectives seem easy to define. The transfer of a totality of assets serves the interest of simplicity and also seeks to prevent overburdening the resources of the transferee with a disproportionate charge to tax which would in any event ultimately be recovered by deduction of the input VAT paid. With regard to the objective of simplicity I have argued that this goal appears to be missed in many cases. Parties applying the scheme, inter alia should take into account the objectives of the transferee, which hardly seems simpler and possibly even more complex than a transition that takes place within the normal scope of VAT. Even more so, given that the calculated tax in most cases can be deducted by the transferee anyway. The objective of avoiding an unnecessary financial burden for the transferee, is striking in light of the legislative history of the Sixth Directive, but not incomprehensible. With respect to operators which (also) carry out exempt activities, the objective can be viewed from two angles. On the one hand it can be argued that the exempt transferee achieves a competitive advantage over other exempt business that cannot acquire business assets without any burden of VAT. Such distortion could possibly be addressed by additional measures. On the other hand it can be argued that the provision actually reaches its objective in the situation that the transferee performs exempt activities and therefore lacks a (full) right torecover input VAT. In those circumstances, the transferee is indeed actually relieved of a real financial burden. I believe the first viewpoint mentioned is mistaken. After all, it is hard to see what market player suffers from the supposed competitive advantage obtained by an exempt transferee acquiring a totality of assets. This would be any exempt taxpayer purchasing assets that do not make up a totality of assets. Given the mandatory nature of the transfer of a totality of assets it seems to me that such a comparison is flawed and no distortion of competition exists under those circumstances.

The objectives of simplicity and the prevention of overburdening the resources of the transferee with a disproportionate charge of tax which would in any event ultimately be recovered should therefore be considered in conjunction. Deeming the payment of VAT which is recoverable at a later stage ‘unnecessary’ also originates from the general political and economic idea that mergers and acquisitions should not be hindered by taxation. For the remainder, the notion of paying VAT that would be recoverable at a later stage to be ‘unnecessary’ has its origins in the legal character of VAT. An act that is not a link in the production and distribution chain, does not lead to consumption, and can therefore be excluded from taxation. It is important to note that it is this combination between the general idea of mergers and acquisitions that should not be hindered by taxation and the legal character of VAT that together justify the substantial breach of the general and objective character of VAT. After all, there are more acts which might be regarded as not forming a link in the production and distribution process. In those cases, there is no further justification for an infringement of the principle of general taxation, as there is for mergers and acquisitions.

Although it was not formulated as an objective at the level of Union law or at a national level, it appears that combating (bankruptcy) fraud and, more generally, preventing a loss of tax revenue is a major reason for the tax authorities to call in the facility of the transfer of a totality of assets. Although it must be acknowledged that fraud is a major problem in the optimization of VAT revenue, this application of Article 19 EU VAT Directive in my opinion is not always justified. It disregards the facilitative nature of the scheme, and moreover is largely dismissive of the objectives of the provision. In my view, therefore, the facility should be used with caution as a weapon against taxpayers. In that context, it is important to note that a high threshold for applying the scheme works as a protection for taxpayers.

Based on the judgment in the Abbey National I-case, in principle a right exists to recover input VAT on purchased goods and services used by the transferor for the transfer of a totality of assets. This judgment fits into the line of reasoning of the Court of Justice that the taxpayer should be relieved from any input VAT charged to him as far as these costs find their origin in the general taxable activity. As a result, a right to recover input VAT can exist for costs that relate to an act that in itself remains outside the scope of VAT.

Problems can occur when a business is transferred cross-border. Member States involved in such a transfer will almost always have to be prepared to look beyond the assets that are transferred into or from their tax jurisdiction inorder to achieve effective application of the scheme. In addition, as Article 19 (and 29) EU VAT Directive only cover supplies of goods and the provision of services, it seems that intracommunity acquisitions cannot benefit from the no-supply-rule. Therefore, I believe Article 19 EU VAT Directive should be extended to include intracommunity acquisitions on the basis of fiscal neutrality, and also in light of the Treaty freedoms and the Merger Directive.

The succession of the transferor by the transferee is a core element of the transfer of a totality of assets. In principle, the succession only extends to the administrative position of the transferor. As a result, agreements with the tax authorities, such as settlement agreements, will not automatically pass over to the transferee due to the application of the provision. The same is true for rulings or explicit statements of position by the tax authorities. On the level of EU law, as yet little is known about the extent of the succession.

In determining the scope of the no-supply-rule with respect to asset transactions, I have studied the interpretation of the Court of Justice in the Zita Modes and Christel Schriever-case. In this regard, I have identified a possible difference in the two cases. The Court of Justice seems to judge in the Christel Schriever-case that the various assets that could benefit from the no-supply-rule are not required to constitute an independent undertaking, as long as the transaction takes place in the broader context of an intended transfer of a going concern. In my view this subjective approach is undesirable. As already indicated, an objective approach to the transfer of a totality of assets, is in my view desirable from the viewpoint of legal certainty, as well as from the perspective of the essential characteristics of VAT. A totality of assets exists if all necessary assets of an independent business (i.e. an autonomous economic activity) are transferred in conjunction.

On the basis of the criteria that follow from the Zita Modes-case I have outlined the scope of Article 19 EU VAT Directive for of asset transactions. In this respect, I distinguish three phases: the phase before the transfer, the phase after the transfer, and the phase during the transfer. Based on the case law of the Court of Justice and the Dutch Supreme Court it may be concluded that in order to apply the no-supply-rule, a bundle of assets must be used in conjunction for an independent economic activity by a single taxpayer before and after the transfer. In addition, the bundle of tangible and intangible assets which must be sufficient in itself to pursue an independent economic activity should be transferred in a single transaction. These EU law principles and the emphasis these place on the object approach renders a lot of the Dutch Supreme Court case law regarding the application of Article 37d Dutch VAT Act, dating from before the Zita Modes-case, obsolete.

A number of possible situations were not yet clarified by the Court of Justice or the Dutch Supreme Court. For example the situation in which there is a chain of transferors and transferees in which one or more parties gain a totality of assets and immediately (at least, without having operated such business) transfer it to the next. Whether the no-supply-rule should be applicable in such a situation is doubtful on the basis of the rather strict Zita Modes-criteria, particularly when looking at the requirements of continuation of the business concerned as well the requirement of non-liquidation. However, I have substantiated that if a preliminary question with respect to a chain transaction would be put in front of the Court of Justice, the Court would presumably look at such a situation from the perspective of fiscal neutrality, which might well result in a solution that would give priority to the purpose of the scheme and would therefore allow application of the no-supply-rule. In my view, such a solution would be justifiable from the perspective of fiscal neutrality and the purpose of Article 19 EU VAT Directive.

A transfer of intangible property (rights) may fall within the scope of the transfer of a totality of assets. In cases where a business is transferred that only consists of intangible property, this leads to the (exceptional), autonomous application of Article 29 VAT Directive. Examples of such businesses that consist of purely intangible assets, which may well benefit from the no-supply-rule, include tenancy rights, insurance policies, a loan portfolio and intellectual property rights. In this respect, it is important to note that intangible property is transferred that not only lends itself for exploitation, but that such exploitation must already have materialized. In this respect, it could be important to look at whether other ancillary assets are necessary for the operation to determine whether the no-supply-rule is applicable.

The transferee must have the intention to continue a business with the assets that are transferred, at least not to liquidate immediately. This requirement means that, even when applying the object approach, an assessment should be made by the transferor of the intentions of the transferee. This can be tricky. In my view it is therefore important to adhere to objective factors as much as possible when interpreting the conditions for the no-supply-rule. With regard to the transfer of a leased immovable property, the Dutch Supreme Court ruled that this can be the transfer of a totality of assets. In my view that decision is in accordance with desirable law, in particular on the basis of the legal dimension of the principle of fiscal neutrality. Furthermore, in my view there can be no doubt that this principle also applies to the transfer of a single immovable property with a single tenant. That the activity of the transferring party (e.g. real estate developer) might well deviate from the activity of the acquirer (e.g. investor) should not make a difference in this respect.

In my opinion, the Christel Schriever-case wrongly suggests that ongoing services may be part of a transfer of a totality of assets. Purpose and scope of the provision, as well as the principle of general taxation, oppose such position. However, from the viewpoint of the objectives of the provision for the transfer of a totality of assets, I consider it reasonable, to apply the no-supply-rule in cases where an ongoing service with respect to the unbundling of both businesses is provided by the transferor to the transferee. In my view, to benefit from such treatment such service must be performed for a predetermined period, and the services involved can not be acquired from a third party service provider, so that this extension of the scope of the transfer of a totality of assets should not lead to distortions of competition.

In principle, the acquisition, holding and sale of shares remains outside the scope of VAT. This may only be different if these acts are performed by a person acting as a stockbroker, an active holding company, to the extent that it combines its holding activity with transactions subject to VAT, or if these actions constitute a direct, permanent and necessary extension of the taxable activity. In particular, I studied the latter category. The extension-criterion is an often misunderstood instrument. It must first and foremost be seen as a means of determining the extent to which financial transactions or transactions relating to immovable property should be excluded from the calculation of the partial deduction method on the basis of Article 174 paragraph 2 EU VAT Directive. In addition, the extension-criterion is put forward in a few cases as a possibility to include transactions which in itself remain outside the scope of VAT, in scope of VAT, because of their close link with the taxable transactions of a taxpayer.

That dichotomy in the appearance of the extension-criterion must, however, be made cautiously given the rather arbitrary way in which the Court of Justice has used the instrument in factually deviating situations. The confusion that exists in this respect, was increased by the judgment in the AB SKF-case. On the one hand it follows from that case that the extension-criterion can be a separate way to include the holding and sale of shares in the scope of VAT. On the other hand it is concluded by the Court in the same case, that the sale of a shareholding by a taxpayer, no doubt in itself a taxable activity, forms a direct, permanent and necessary extension of the taxable activity. This second variant appears to be related to the calculation of the partial deduction method of AB SKF, although that question is not at issue in the case. The ambiguity of the criterion leads to substantive legal uncertainty, partly because it is hard to discover a line of principle in the related case law of the Court of Justice. It should be noted that this has everything to do with the large gap that the EU VAT Directive shows, as regards the position and impact of both holding companies and their subsidiaries. VAT law does not know its own strength in this field and it is up to the Court of Justice to close that gap using artifices. As I indicated, the Court of Justice does not always succeed in doing so without harming the legal and fiscal neutrality.

To the extent that the sale of shares takes place within the scope of VAT, the question arises to what extent the no-supply-rule can be applied. At least, that question was raised by the Court or Justice in its judgment in the AB SKF case. Considering the fact that a sale of shares takes place outside the scope of VAT or is exempt from VAT, the purpose of the question is not obvious. Yet the Court of Justice raised the possibility as it was confronted with its own case law on share dealings on the one hand, and its case law on deduction of input tax on the other hand. Both structures of case law seemed to collide in the AB SKFcase since the combination of both buildings of case law implied that the sale of shares by AB SKF should be regarded as an exempt transaction, with no right to recover input VAT, while in a number of “similar” cases a right to recover inputtax was awarded to costs made with respect to the purchase of a shareholding, the sale of a totality of assets and the issuance of shares. The Court therefore suggests the possible application of the transfer of a totality of assets to the sale of shares, so that on the basis of its judgment in the Abbey National I-case, it can safely arrive at the conclusion that input tax related to the sale can be recovered. The misconception that is the basis for the Court’s reasoning in this respect, follows from insufficient distinguishing between similar, but different fact patterns and the idea that such approach is required by fiscal neutrality. In order to apply the fiscal neutrality in an effective way, it should not be used to brush away all factual and legal differences. Fiscal neutrality leads to the conclusion that an exempt transaction does not give a right to deduct input tax. Moreover, this conclusion is due to the way the legal character of VAT (the intention to tax consumer consumption), in the EU VAT Directive is stretched, for example by including exemptions without a right to deduct. The result is that tension arises where an exempt-performing or non-taxable trader (e.g. a pure holding company) in effect becomes a final consumer. I have substantiated the view that this tension must be approached from the viewpoint of economic neutrality. The principle of economic neutrality seeks to prevent tax to accumulate in an otherwise fully taxable production and distribution chain.

From the judgment in the X bv-case it is clear that the Court of Justice in the AB SKF-case has taken a wrong turn. It can be regarded as an emergency stop. Upon preliminary questions raised by the Dutch Supreme Court, the Court of Justice confirms that an independent transfer of shares, in principle, can not fall within the scope of the transfer of a totality of assets. However, the Court of Justice does leave some room for doubt. As a result, in my view it is not entirely ruled out that a different conclusion would follow if a taxable shareholder would sell a 100% shareholding. Incidentally, I would find such conclusion undesirable as the arguments of the Court of Justice for the negative response in X bv should also be decisive in that situation. The question does remain whether the no-supply-rule can be applied in relation to a transfer of shares in a company which, together with the holding company that sells the shares, is part of a fiscal unity for VAT purposes. I believe this may be the case if the acquiring holding company will also form a fiscal unity for VAT purposes with the acquired company.

The consequences for the right to recover input VAT for a large extent seem to have been the reason for the Court of Justice to suggest the application of the transfer of a totality of assets to a share sale. In this respect, I studied the general principles at play when determining the right to recover input tax, particularly where acts are at issue which in itself remain outside the scope of VAT. The case law of the Court of Justice on this issue revolves around the Midland Bank-principle. It is a striking example of the step-by-step case law of the Court of Justice, in which several cases form the complex building blocks of a, in the end, principle-based and foreseeable line of reasoning. The underlying line of principle is that every taxable person must be relieved as much as possible of any input VAT charged to it on the purchase of goods and services. VAT on costs incurred for the purpose of performing VAT exempt transactions are not deductible. For the remainder, the question is whether costs find their sole origin in the economic activity at hand. In other words, in each case, it needs to be determined whether costs would also have been incurred without any taxable activity and, additionally, whether the costs were made in the context of the economic activity. In this light, the Midland Bank-principle ultimately proves to be easy to understand. Furthermore, my interpretation of the Midland Bank-principle reflects the essential characteristics of VAT. However, it should be recognized that each specific situation will eventually be settled by factual circumstances and generally accepted views. In addition, it must be recognized that the existence of a clear principle does not imply that it is always easy to apply to any case that might occur. There are still some important questions unanswered with respect to the deduction of input tax.

One of these important questions concerns the deductibility of VAT on acquisition costs, particularly in situations in which these are initially made by someone other than the (taxable) holding company. For those situations, I argue that the Rompelman-principle is paramount. To the extent that the costs are ultimately (re)charged to a taxable holding company that would otherwise have a full right to recover its input tax in my view, a right to recover input tax should exist. This should only be different if there is a wholly artificial arrangement.

I have proposed to include a simple arrangement for the position of shareholders and shares in the EU VAT Directive for the purpose of legal certainty. It should be established that only the sale of shares by a stock broker is seen as separate taxable transaction, which would be exempt under Article 135 paragraph 1 under f EU VAT Directive. Otherwise, no transfer of shares must be considered to constitute a taxable transaction in itself. The deductibility of input tax on costs incurred in connection with such transfers should be determined on the basis of the existing principles of the Midland Bank-case. Consequently, the question will be whether the acquisition, holding and sale of shares fulfills a function in the context of the overall economic activity, and whether costs incurred in this respect should be deemed to be incurred in the context of the economic activity. In my view, such approach would lead to a greater degree of fiscal neutrality than currently is the case. For taxable (group) companies my proposal would normally lead to the outcome that the holding of shares does not result in a limitation of the right to deduct input tax.

Little is known about the EU VAT consequences of legal mergers and demergers, especially given the lack of any provisions relating to the subject in the EU VAT Directive. Nor is there any relevant case law of the European Court of Justice. Although the ipso jure transfer following a legal merger can be characterized as a supply within the meaning of EU VAT, it will not lead to taxation because there is no consideration. At the level of the company which ceases to exist the legal merger or demerger indeed takes place for no consideration, while the supply of shares and any cash supplement at the level of the shareholder cannot be considered to be in such a direct connection to the merger that it can be seen as compensation for such supply. Any consideration received by the shareholder derives from the mere ownership of shares in the dissolving company.

However, there is a theoretical possibility that a transfer following a legal merger or demerger is to be considered a supply for no consideration for other than business purposes, which under Article 16 VAT Directive invokes a taxable event. Such application of Article 16 EU VAT Directive in my opinion is inconsistent with the object and purpose of the provision and the legal character of VAT, but is not entirely ruled following the judgment in the Kuwait Petroleum-case. The same result could be achieved by the application of Article 18 under c EU VAT Directive. However, transfers that fall within the scope of Article 19 EU VAT Directive are excluded from Article 18 under c EU VAT Directive.

The fact that the legal merger will only in exceptional circumstances lead to taxation of VAT does not mean that the possible application of the no-supply-rule of Article 19 EU VAT Directive is meaningless. That application offers legal certainty on the aspect of succession. This is particularly important when goods are transferred as part of merger which are part of an adjustment period in the sense of Article 187 EU VAT Directive. It should be noted in this respect that the transfer under general title following a legal merger or demerger as opposed to the application of Article 19 EU VAT Directive, leads to succession of the receiving company in the legal position of the company which ceases to exist. As a result, for example, any written agreements with the tax authorities are transferred ipso jure to the receiving company. This also applies to tax debts (e.g. unpaid VAT) which have arisen at the company which ceases to exist before the date of the legal merger.

The ipso jure transfer following a legal merger in itself can often meet the conditions for applying the no-supply-rule. This stems from the fact that if the company that ceases to exist performed taxable activity all of the necessary rights and obligations connected to its taxable activity must be deemed to be transferred to the receiving company which, after all, takes its place. However, it is not a certainty that the no-supply-rule would be applicable, as in each case it must be determined whether the transferred business is indeed continued by the receiving company, and not immediately liquidated. In addition, restrictions to the comprehensive nature of the transfer following a legal merger can occur on the basis of contractual arrangements, articles of incorporation or law. These restrictions could lead to the conclusion that the bundle that is transferred does not altogether constitute an undertaking or may not be fit to continue a business. In this respect, it is conceivable that the company which ceases to exist anticipates the merger, and for this purpose ends certain contractual relationships. There is a small risk that this will lead to the conclusion that such transfer, does not meet the criteria of the Zita Modes-case.

With regard to a demerger it is clear that application of the transfer of a totality of assets is less obvious. After all, in case of a demerger it will be considerably more uncertain that the transfer will consist of a set of tangible and intangible assets which in itself is sufficient to pursue an independent economic activity. Each case must be assessed on the basis of the criteria derived from the Zita Modes-case.

To the extent that the transfer of a totality of assets can be applied to a demerger, clarity exists around the question of succession. As already noted in connection with the legal merger, this is particularly important for the completion of adjustment periods. Since the application of the transfer of a totality of assets is particularly uncertain in case of a demerger, I recommend that, in the interest of legal certainty, in the Netherlands Article 8 Uitv. Besch. OB. should be amended to include the succession of the receiving company for the company which ceases to exist in any case of a transfer following a legal merger or demerger, notwithstanding the application of Article 19 EU VAT Directive.

Legal certainty, as a corollary of the principle of legality, requires that the law is accessible and foreseeable for taxpayers. In that sense, legal certainty should be regarded as a minimum requirement for desirable law. As such, I have mentioned legal certainty in Chapter 2 to be the outer shell of the theoretical framework I have applied to distinguish desirable law from current law. I also noted that uncertainty is an inevitable condition for a legal norm which will develop and change due to dynamics and factual experiences.

Strikingly, it must be noted that this outer shell of desirable law plays a not insignificant role in the findings of my research. I have concluded in this regard that the minimum threshold of legal certainty is not always met. Partly this is caused by a lack of detailed rules in the EU VAT Directive, due to which it is often up to the Court of Justice to fill in current law. In effect, current law that is found in the case law of the Court of Justice cannot always be said to increase the accessibility and foreseeability of tax law for individuals. In this respect, it is important to underline a lack of legal certainty partly finds it origin in the harmonization of EU VAT.

As an example of elements of current law which in my opinion do not meet the criterion of legal certainty, the AB SKF-case must be mentioned. The extension-criterion, which plays an important role in this case, is a vague medicine for unclear symptoms which is administered inaccurately. As such, this leads to legal uncertainty about the relationship between the VAT and shares, and, more generally, the boundaries of the scope of VAT and the concept of a taxable person for VAT. The suggestion by the Court of Justice that on the basis of the principle of fiscal neutrality in some cases a right to recover input VAT should exists for costs incurred in connection to VAT exempt transactions, also leads to legal uncertainty. The ambiguity which in my view is caused by the Christel Schriever-case on how to determine whether there is a totality of assets should be mentioned here as well.

It is important, however, to conclude that the Court of Justice often does justice to the requirement of legal certainty through its step-by-step case law, which leads to the Court of Justice’s prudent building of EU law. This building is never finished, rendering uncertainty inevitable and not harmful by definition, for the predictability of tax law for individuals. The examples of the violation of legal certainty discussed, arise mainly because the Court of Justice in some cases makes too little distinction in cases that are unequal in fact or law.

The concept of a transfer of a totality of assets has a unique place in VAT. I conclude that the purpose of the provision – to facilitate business transfers and to prevent an unnecessary financial burden for the parties concerned – should be appreciated in light of the legal character of VAT. As the transfer of a business does not result in consumer consumption, and to the extent that it forms no substantial link in the production and distribution chain, the prefinancing of VAT in such a transaction should be deemed unnecessary on the basis of its legal character. Breaches that are made by the no-supply-rule to the normal system of taxation can be justified in this way. It also should be noted that this justification finds it origin in the general political and economic idea that business transfers should not be distorted by way of taxation. This idea is the basis for excluding the transfer of a business from the scope of VAT. The legal character does not lead to the conclusion that any horizontal movement in the production and distribution chain, should remain outside the scope of VAT. This would go against the principle of general taxation.

This background calls for a high threshold for application of the transfer of a totality of assets. In this way the scheme can function as a facility for taxpayers, and it makes it more difficult to use the scheme against taxpayers as a weapon against bankruptcy fraud.

In addition, the legal character of VAT plays an important role where the application of exemptions is at issue. The introduction of exemptions without the right to deduct in the EU VAT Directive, stretched the legal character – the intention to tax consumer consumption – to a larger group of ‘end users’, namely the taxpayer who is not entitled to recover input VAT. From the perspective of the legal character, it would be sensible to call for the abolition of the exemptions without deduction. As long as these exist, however, the effect in my view cannot simply be put aside, with a reference to the legal character of VAT and the fiscal neutrality. This is particularly important with regard to transactions in shares, in current law. Transactions in shares take place along the borders of the VAT system. The legal character of VAT prevents that acts outside the production and distribution process, should be included in the scope of VAT. In desirable law, this should mean that apart from the commercial activity of a stock broker, transactions in shares should remain outside the scope of VAT. This proposal should also lead to a minimum of limitations of the right to recover input VAT in relations between otherwise taxable group companies.

With regard to the legal merger and demerger it is in line with the legal character of VAT that taxation in principle does not occur. In this context it is important that, despite the principle of general taxation, VAT should not be forced upon areas where there is no question of the provision of services for consideration.

Neutrality is a core principle of VAT. The tendency of the Court of Justice to uphold the principle of fiscal neutrality (in both the economic and the legal sense) is of major influence on the development of standards in VAT law. As a consequence, similar cases are treated equally, and the core of the system of deduction of input tax is maintained. However, when it comes to the economic neutrality, in my view more attention should be paid to the principle that no tax should culminate at group level in a group that otherwise performs taxable activities and has a general right to recover input VAT. My proposal for the desirable treatment of shares in VAT should be understood in light thereof.

When much emphasis is put on fiscal neutrality, it can lead to undesirable law. As was already discussed, this is the case, in my view as far as the Court of Justice for instance intends to grant a right to deduct input VAT to taxable persons who dispose of shares to a buyer inside the EU. Such stretching of fiscal neutrality is counterproductive because it leads to legal uncertainty and is also disproportionate, since the normal system of taxation clearly leads to the conclusion that no deduction should be granted in such situation. This is where proportionality (economic neutrality) and legal neutrality cross roads. Equal cases should be treated equally. In this respect, the art of distinguishing is essential. Different situations should be treated differently. A nuanced approach is required in this context, but it is not always found. Both in terms of the conditions for applying the transfer of a totality of assets to asset- transactions (the distinction between Zita Modes and Christel Schriever) and the right to deduct input tax are examples where legal neutrality spins off the road.

Mergers and acquisitions have an extraordinary place in EU VAT law. The relevant VAT consequences tend to occur at the very edges of the normal principles of the system of taxation of VAT. Those consequences generally transcend the normal system of taxation and the legal character of VAT, but at the same time confirm its basic principles. This is fitting for the special event a merger or acquisition is in the lifespan of a business.

The transfer of a totality of assets should be seen as generic merger facility in VAT, as far as asset deals and legal mergers and demergers are concerned. However, it is often in the interest of taxpayers to set a high threshold for the application of the facility. I believe it should be applicable in situations where a totality of assets is transferred that can function on its own merits as an autonomous economic activity. In this way, the provision of Article 19 EU VAT Directive has a modest but important place in VAT law of the EU.

The development of legal norms through factual experience in VAT law, occurs step-by-step. Slip ups, open ends and blind alleys, are of equal importance for this development as answers, confirmation and progress. Altogether, they form the growing pains of a young field of law in full bloom.