2.5 The economic and commercial reality of a transaction

Above, when discussing the fundamental principles underlying the EU VAT system, and more specifically the principle of legal certainty, I mentioned that in certain cases, ‘economic reality’ can be more relevant than legal certainty. I will now examine the concept of ‘economic reality’.

One of the criteria used by both the CJEU as well as national courts for deciding the appropriate VAT treatment of a transaction is the ‘economic and commercial reality’ of that transaction. What is economic and commercial reality?

In the dictionary, ‘reality’ is explained as “The state of things as they actually exist, as opposed to an idealistic or notional idea of them” or “Existence that is absolute, self-sufficient, or objective, and not subject to human decisions or conventions”.1 This means that reality should provide for an appropriate reference point where other aspects regarding a transaction, such as a legal agreement between the parties to the agreement, deviates from “reality”. This leads to the next question: what is “economic” reality?

In the dictionary, ‘economic’ is defined as “Relating to economics or the economy”.2 ‘Commercial” is defined as “Concerned with or engaged in commerce”.3 Looking at these definitions, ‘economic and commercial reality’ seems a reality that is based on the economy or commerce. This does not seem to make much sense as a test for qualifying a transaction in order to determine its VAT consequences. So, what does the CJEU mean by ‘economic and commercial reality’?

The CJEU does not only use the concept of ‘economic and commercial reality’, but also (non-exhaustively): ‘economic reality’, ‘commercial reality’, the ‘actual economic situation’ and ‘from an economic perspective’. In order to establish whether ‘economic reality’ can be a useful test for answering (some of) my research questions, I will first need to establish what this reality entails.