Applying the Halifax principle to land transactions
Our pick of this week's cases
In E Cussens and others v T G Brosnan (Case C-251/16) (7 September 2017), the advocate general considered the application of the Halifax principle to a property transaction.
Mr Cussens, together with two associates, had built 15 holiday homes on a site in Cork, Ireland. They had granted a long lease of the properties to a related undertaking and then cancelled it a month later. The properties had then been sold to third parties. No VAT was payable on those sales, as VAT was only due on the original first disposal, the long lease. The issue was whether these transactions were abusive and came within the scope of the Halifax principle.
No national measure (in statute or case law) gave effect to the principle and the transactions had taken place before the CJEU’s decision in Halifax (Case C-255/02).
However, the advocate general observed that ‘direct effect’ and specific transpositions were not preconditions for the application of general principles of EU law, including the Halifax principle. He added that there were no temporal limitations to the application of the Halifax principle, noting in particular that the notion of ‘abuse’ predated the eponymous case.
The advocate general then articulated the first limb of the test; the transactions must have resulted in ‘the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions’. He noted that there is ‘no legal obligation to pay the maximum tax possible’ and that only the purpose of specific provisions of the applicable directive needs to be considered. He observed that the purpose of the Sixth VAT Directive Arts 4(3)(a) and 13(B)(g) was the application of VAT when immovable property enters the commercial circuit for the first time. He noted, inter alia, that the lease had been granted to an entity controlled by the taxpayers, so that the properties had never left their control, and that it had been collapsed after a very short time. The transactions were therefore contrary to the purpose of the relevant provisions.
As to the second condition – ‘was the essential aim to obtain a tax advantage?’ – the advocate general noted that the subjective test must be applied restrictively. If the transactions may have some economic justification other than a tax advantage, the test is not fulfilled. He added that the net should not be cast too widely, and that only the pre-sales transactions should be considered; consideration of the entire life of the property would always yield a commercial rationale and prevent the second condition from being fulfilled.
Finally, the advocate general suggested that the transactions be redefined so as to re-establish the situation that would have prevailed in the absence of the abusive transactions.
Why it matters: The advocate general opened his opinion with the following statement: ‘Tax authorities do not fall in love easily. There is (arguably at least) one notable exception to this rule: the 2006 judgment in Halifax … That judgment appears to have been embraced with a passion by tax authorities across the member states.’ The advocate general added however that the Halifax principle remained ‘somewhat underdeveloped’. This opinion and the future judgment of the CJEU will hopefully clarify its application.
Applying the Halifax principle to land transactions
Our pick of this week's cases
In E Cussens and others v T G Brosnan (Case C-251/16) (7 September 2017), the advocate general considered the application of the Halifax principle to a property transaction.
Mr Cussens, together with two associates, had built 15 holiday homes on a site in Cork, Ireland. They had granted a long lease of the properties to a related undertaking and then cancelled it a month later. The properties had then been sold to third parties. No VAT was payable on those sales, as VAT was only due on the original first disposal, the long lease. The issue was whether these transactions were abusive and came within the scope of the Halifax principle.
No national measure (in statute or case law) gave effect to the principle and the transactions had taken place before the CJEU’s decision in Halifax (Case C-255/02).
However, the advocate general observed that ‘direct effect’ and specific transpositions were not preconditions for the application of general principles of EU law, including the Halifax principle. He added that there were no temporal limitations to the application of the Halifax principle, noting in particular that the notion of ‘abuse’ predated the eponymous case.
The advocate general then articulated the first limb of the test; the transactions must have resulted in ‘the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions’. He noted that there is ‘no legal obligation to pay the maximum tax possible’ and that only the purpose of specific provisions of the applicable directive needs to be considered. He observed that the purpose of the Sixth VAT Directive Arts 4(3)(a) and 13(B)(g) was the application of VAT when immovable property enters the commercial circuit for the first time. He noted, inter alia, that the lease had been granted to an entity controlled by the taxpayers, so that the properties had never left their control, and that it had been collapsed after a very short time. The transactions were therefore contrary to the purpose of the relevant provisions.
As to the second condition – ‘was the essential aim to obtain a tax advantage?’ – the advocate general noted that the subjective test must be applied restrictively. If the transactions may have some economic justification other than a tax advantage, the test is not fulfilled. He added that the net should not be cast too widely, and that only the pre-sales transactions should be considered; consideration of the entire life of the property would always yield a commercial rationale and prevent the second condition from being fulfilled.
Finally, the advocate general suggested that the transactions be redefined so as to re-establish the situation that would have prevailed in the absence of the abusive transactions.
Why it matters: The advocate general opened his opinion with the following statement: ‘Tax authorities do not fall in love easily. There is (arguably at least) one notable exception to this rule: the 2006 judgment in Halifax … That judgment appears to have been embraced with a passion by tax authorities across the member states.’ The advocate general added however that the Halifax principle remained ‘somewhat underdeveloped’. This opinion and the future judgment of the CJEU will hopefully clarify its application.
