2.6.1 The principle of prohibition of abuse of law

The principle of prohibition of abuse of (Union) law is an integral part of the EU VAT system.1 It is also included in some of the provisions of the EU VAT Directive.2 The purpose and effect of the principle that the abuse of rights is prohibited is to bar wholly artificial arrangements which do not reflect economic reality and are set up with the sole (or principal) aim of obtaining a tax advantage.3 The CJEU has, in cases where abuse of law (‘fraus legis’) could be an issue, used ‘economic reality’ as a test for determining whether the setup of the parties involved constituted an abusive practice.4 The principle prohibiting the abuse of rights is intended to ensure, particularly in the field of VAT, that Union legislation is not extended to cover abusive practices by economic operators, that is to say transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Union law. The effect of that principle is therefore to prohibit wholly artificial arrangements which do not reflect economic reality and are set up with the sole aim of obtaining a tax advantage. This means that ‘economic reality’ is a reflection of ‘transaction carried out in the context of normal commercial operations’. Where transactions that are carried out, do not reflect economic reality, this could be an indication that the transaction could possibly be an abusive practice. In most of its cases on this issue, the CJEU uses the term ‘economic reality’, in one case it only uses ‘commercial reality’5 and in one case it uses both terms for the same test.6

This leads me to the conclusion that for the purpose of determining whether a certain practice qualifies as abuse of law, which is therefore in breach of the principle that prohibits the abuse of law, ‘economic reality’ and ‘commercial’ reality mean the same. These realities are reflections of the actual, factual, transaction(s) in question. They provide an objective view of the transaction. Wholly artificial arrangements do not reflect economic reality. This also follows from the fact that the CJEU requires that the transactions between parties that are found to be involved in an abusive practice, must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.7 In my view, that situation is what economic and/or commercial reality would or should have been without in absence of the ‘abusive transactions’. This means that, in cases where the CJEU tests whether the transactions of the case qualify as an abusive practice, economic and/or commercial reality is a reflection of the way independent businesses would normally do business and design or set up their transactions.