On 17 December 2015, the European Court of Justice of the European Communities (ECJ) released its judgment in WebMindLicenses [2015] EUECJ C-419/14. This case concerned whether licensing agreements were abusive for VAT purposes. The ECJ agreed with the earlier Advocate General’s Opinion (details of which were reported in our October VAT update) and in doing so have provided helpful guidance on the relevant factors to take into consideration when determining whether an arrangement amounts to “abuse”.


A Hungarian software company, WedMindLicences Kft (WML), licensed website and knowhow rights to a Portugeuse company (Lalib). Under the terms of the licence 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 on the basis that the licensing agreement was not a genuine economic transaction and that the relevant supplies were actually made by WML in Hungary, rather than Lalib in Portugal.

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 relief in Portugal. They based their decision on evidence which had been obtained covertly by other state authorities.

The ECJ was asked to consider a number of questions relating to the application of the abuse of rights doctrine (Halifax C-255/02).

The ECJ’s judgment

The ECJ confirmed that it was not abusive for a company established in one member state to enter into a licensing agreement with a company established in another member state to exploit the lower VAT rate in force in that second member state. Only if the arrangements were fictitious would they satisfy the Halifax principle and be considered abusive.

In the instant case, it was clear from the documents submitted to the Court that Lalib was a separate company from WML and that it paid VAT in Portugal. However, the ECJ concluded that it was for the referring court to analyse all the facts placed before it to determine whether the arrangements were genuine or not. This would include examining whether the establishment of the licensee’s place of business, or fixed establishment, was genuine. In particular, whether the licensee (in this case, Lalib) had an appropriate structure, premises, human and technical resources and equipment to engage in economic activity in its own name, on its own behalf, under its own responsibility and at its own risk.

If an abusive practice is found to exist, the transactions involved must be re-defined so as to reestablish the situation that would have prevailed and VAT adjusted accordingly, even if VAT has been paid in another member state.

Separately, the ECJ also considered the circumstances where it would be compatible with EU law, for a tax authority to use evidence obtained without the taxpayer’s knowledge in parallel criminal proceedings, to establish an abusive practice for VAT purposes. In the view of the ECJ, EU law does not preclude tax authorities from using evidence obtained in such circumstances, provided that the rights guaranteed by EU law, especially the Charter of Fundamental Rights of the European Union, are observed. The national court must verify the investigation, the evidence obtained from it and that the use of the evidence was authorised by law, and is necessary.

In the present case, the tax authorities intercepted telecommunications and seized emails without judicial authorisation. It was therefore for the referring court to review whether this was provided for by law and necessary and whether the taxpayer had the opportunity of gaining access to that evidence and to make appropriate representations. If the court is unable to verify the position, the evidence is to be discarded.


The ECJ has confirmed 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. It has also provided some helpful guidance on the relevant factors which national courts should take into account when determining whether a licensing arrangement is genuine or not.

The ECJ’s judgment is available to view here.