2.3.2 The principle of legal certainty

The principle of legal certainty, the corollary of which is the principle of the protection of legitimate expectations, requires, on the one hand, that rules of law must be clear and precise and, on the other, that their application be foreseeable by those subject to them.1 It requires that EU rules enable those concerned to know unequivocally the extent of their rights and obligations so that they are in a position to order their affairs with the benefit of full information.2 The principle of legal certainty also requires the tax position of the taxable person, in the light of his rights and obligations vis-à-vis the tax authority, not to be open to challenge indefinitely.3

Legal documents such as contracts normally reflect the economic and commercial reality of the transactions and in order to satisfy the requirements of legal certainty, the relevant contractual terms constitute a factor to be taken into consideration when determining the VAT treatment of an agreed transaction.4 As regards in particular the importance of contractual terms in determining the VAT treatment of a transaction, it is necessary to bear in mind the case-law of the CJEU according to which consideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT.5 This means that even though contractual terms constitute a factor to be taken into consideration, are not decisive for determining the VAT treatment of a transaction. They may in particular be disregarded if it becomes apparent that they do not reflect economic and commercial reality, but constitute a wholly artificial arrangement which does not reflect economic reality and was set up with the sole aim of obtaining a tax advantage, which it is for the national court to determine. This means that in certain cases, ‘economic reality’ can be more relevant than legal certainty. I will therefore examine the concept of ‘economic reality’ as a possible test for positive law in Section 2.5.

Other examples of principles underlying the EU VAT system are the principle of proportionality, the principle of prohibiting abusive practices and the principle of prohibiting tax fraud.6 These principles are not relevant for this research, and therefore I will not elaborate on them.