A Hungarian software company, WebMindLicenses Kft (WML), licensed software to an independent Portuguese company (Lalib) which exploited the software to run an adult website. Under the terms of the license agreement, WML remained responsible for ongoing maintenance and development of the software.

Following an audit, WML was assessed to Hungarian VAT in respect of Lalib’s supplies. The Hungarian fiscal authorities were of the view that the license agreement had not effectively transferred the rights in the software to Lalib. This meant that the operation of the website was in fact in Hungary. The authorities considered WML had committed an abuse of rights by giving the impression of being based in Portugal, in order to circumvent Hungarian tax law and qualify for lower tax in Portugal.

The Hungarian tax authorities based their decision on evidence which had been obtained covertly by other state authorities. In particular, parallel to the tax proceedings, a criminal investigation had commenced and the investigating authority had recorded telephone conversations of senior personnel at WML and Lalib.

WML appealed against the decision and challenged both the allegation of abuse and the use of the covertly obtained evidence. The Hungarian national court referred a number of questions to the Court of Justice of the European Union (CJEU), the majority of which related to the  abuse of rights doctrine as elucidated by the House of Lords in Halifax plc v C&E Commissioners [2006] STC 919.

Advocate General Wathelet’s Opinion

The Advocate General (AG) considered that under the Halifax abuse test, choosing a foreign place of business could constitute an abuse of rights where the essential aim was to obtain a tax advantage contrary to the purpose of the VAT Directive, and where there was no other justification for having an establishment abroad.

In the present case, the AG’s view was that in order to satisfy the Halifax principle, the national court would have to find that the licensing agreement was fictitious and created for the sole purpose of giving the impression that the benefits in question were provided by Lalib in Portugal, when they were in fact provided by WML, or that the establishment in Portugal had no substance.

In the view of the AG, the license agreement was not fictitious, or for the sole purpose of obtaining a tax advantage. There were commercial reasons for appointing Lalib. Hungarian banks would not offer payment systems to providers of adult websites. No one in the WML group had a sufficient  network of relationships or appropriate expertise to enable the website to be operated internationally. Lalib had a permanent structure, was autonomous, and met its tax obligations in Portugal.

The AG noted that at the time the first licensing agreement was signed with Lalib, the VAT   rate difference between Hungary and Portugal was only 4%. He considered such a margin was unlikely to be the sole reason for the arrangements.

In reaching his conclusion, the AG re-iterated a point which has been made at various levels by both the UK and European courts. It is perfectly acceptable for taxpayers to structure their affairs so as to limit their tax liability. However, in order to avoid the Halifax principle, there must be commercial reasons for the arrangements and transactions carried out. In this case, the AG considered there were commercial reasons for appointing Lalib and the transactions were not therefore abusive.

The AG also said that the seizure of emails without judicial authorisation and the lack of opportunity  for WML to verify the existence of any such authorisation for intercepting telephone calls, did not respect the principle of proportionality, referred to in the Charter of Fundamental Rights of the European Union 2000 (the “Charter”).

If the national court finds a violation of WML’s fundamental rights as contained in the European Convention on Human Rights and the Charter, any evidence obtained illegally or improperly used should be excluded. It will then be up to the national court to decide whether the admissible evidence is sufficient to support the tax adjustment decision of the Hungarian tax authorities.


The AG’s opinion confirms that carrying on a business from a member state with a lower VAT rate is not abusive, provided there are genuine commercial reasons for doing so.

The CJEU’s decision is expected shortly. If the CJEU follows the AG’s opinion, it may provide helpful guidance on the relevant factors that tax authorities and national courts should take into account when determining whether an abuse of rights has occurred.

The AG’s Opinion is not currently available in English and the above summary is based on a translation of the French text. Copies of the AG’s Opinion are available in French and a limited number of other European languages here.