2.6.4 Economic and commercial reality deviates from legal reality – substance over form?

The other cases where the CJEU refers to economic and/or commercial reality is rather a mixed bag of cases where the common denominator is the fact that the economic and commercial reality of the relevant transaction(s) deviates from the legal reality of this transaction (i.e. what parties to the transaction agreed). A form of ‘substance over form’ without the facts leading to actual abuse of law. Using the economic and commercial reality of the transaction as the basis for taxation in these cases leads to ‘appropriate taxation’.1 In a number of these cases, the CJEU points out that “(…) it must be recalled that consideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT (…)“2 or that “(…) consideration of the actual economic situation is a fundamental criterion for the application of the common VAT system (…)”.3 In these cases, the CJEU seems to use economic reality as the objective, factual reality of a transaction that should be used as a basis for determining the VAT consequences of that transaction. Economic and commercial reality was also used as a relevant criterion for the application of the VAT system in three cases concerning promotional activities (Loyalty Management, Baxi (joined cases) and EMI).4 In two of these cases (the joined Loyalty Management and Baxi cases), the CJEU uses economic reality to describe the factual reality of a loyalty scheme, as opposed to what these schemes were designed to achieve from a VAT perspective.5, 6 In these cases, the VAT treatment of the transactions is determined on the basis of the ‘economic reality’ rather than the ‘legal reality’ as included in the relevant agreements between the parties involved. In the other case (EMI), the CJEU refers to commercial reality to explain why the supply of free samples is excluded from the provisions under which the application or supply of goods for no consideration is treated as a supply for consideration, and therefore taxed: “(…) the objective of the exemption (…) in relation to ‘applications for the giving of samples …’ is to reflect the commercial reality that the distribution of samples is carried out in order to promote the product of which the samples are specimens, by allowing for the quality of that product to be assessed and for verification that the product has the qualities sought by a potential or actual buyer (…)”.7 Here, commercial reality is used in the sense of ‘the way that taxable persons normally or usually run their businesses’. In yet another case (the Daimler and Widex-case), the CJEU holds that “(…) it is appropriate to point out that (…) the independence of the of status of the subsidiary was disregarded in favour of the commercial reality (…)”.8 Here, commercial reality prevailed over legal reality in determining the relevant facts for applying the relevant VAT rules. In a way, this form of ‘economic and commercial reality’ is also a form of VAT neutrality, as it ensures that transactions that are similar, from an economic and commercial perspective, are treated the same for VAT purposes.9