On 17 December 2015, the Court of Justice of the European Union (CJEU) ruled in the WebMindLicenses case (C-419/14). This case relates to the question whether or not a licensing structure can be seen as an artificial structure or as abusive. In my view, an interesting case, as this was the second CJEU VAT case in which the CJEU adopted a “substance over form” approach (also see CJEU Paul Newey (C-653/11)).
The relevant facts of the WebMindLicenses case can be summarized as follows:
- WebMindLicenses was established in Hungary and transferred know-how (licensed software) to Lalib, an independent company established in Madeira, Portugal. The software enabled Lalib to offer interactive audiovisual content via a website to individuals throughout the world.
- At that time, the place of supply of electronically supplied services was the country in which the supplier was established (this changed from 1 January 2015). Consequently, when offering the services from Madeira, the Portuguese 13 percent VAT was due.
- The Hungarian tax authorities took the position that the transfer of know-how from WebMindLicenses to Lalib was not a genuine economic transaction, and the website was therefore not exploited by Lalib but by WebMindLicenses. The tax authorities contended that WebMindLicenses had committed an “abuse of rights” aimed at circumventing Hungarian VAT law. In their view, Hungarian VAT at 23 percent should have been charged to customers, rather than Madeiran VAT of 13 percent.
The Hungarian court referred 17 questions to the CJEU, which related to (1) whether or not the transaction at hand was fictitious and had no real financial or commercial content and (2) whether in the case at hand there was an abusive practice.
Following established case law, the CJEU ruled that taxable persons are allowed to structure their businesses so as to limit their tax liability. Enjoyment of a difference in (VAT) rates between EU Member States is not a tax advantage which is contrary to the objectives of the VAT Directive, as this difference is a consequence of incomplete harmonization, and so did not lead to a finding of abuse.
In order to establish that the transaction (i.e. the license agreement) arose from an abusive practice, it would be necessary to show that the agreement constituted a wholly artificial arrangement. Consequently, the referring court would need to determine whether Lalib’s place of business or fixed establishment in Madeira was genuine, whether it had an appropriate structure in terms of premises and human and technical resources to make supplies and whether it engaged in that economic activity in its own name, on its own behalf, under its own responsibility and at its own risk.
This case shows that the CJEU uses the “substance over form” doctrine to determine whether transactions are genuine or wholly artificial, and whether the VAT treatment should be different than that was envisaged by the contracts alone. It seems that from an indirect tax perspective it is increasingly important to take into account substance requirements when establishing a business structure or reviewing existing transactions (also see CJEU case Paul Newey), and that a consideration of the economic reality remains closely linked to the doctrine of abuse of law, but should still be seen as separate from each other.