Ocean Finance - Contractual terms and economic reality - 12/07/2013
Ocean Finance (C-653/11) – Contractual terms and economic reality
On 20 June 2013, the Court of Justice of the European Union (“CJEU”) published its decision in the case C-653/11 Ocean Finance.
The case concerns Mr. Paul Newey who was a loan broker, established in the UK and operating as “Ocean Finance”. Mr. Newey was providing broking services in the UK. Such services were considered as VAT exempt without the right to deduct input VAT. As a consequence, Mr. Newey was not able to deduct any input VAT incurred on advertising supplied to him in the UK.
In order to avoid the non-recoverable VAT on these services, Mr. Newey incorporated in Jersey a broking company, Alabaster Limited, and granted the company an exclusive right to use the name Ocean Finance.
As Alabaster was acting as a broker instead of Mr. Newey, the broking agreements were concluded directly between the lenders and Alabaster and the broking commissions were paid directly to Alabastar (and not Mr. Newey).
Alabaster outsourced all the processing tasks for the loan broking business to Mr. Newey. On this basis, potential borrowers contacted Mr. Newey’s employees who processed each file and sent the applications (upon performing all the necessary checks) to Alabaster for approval. This approval was usually granted within one hour and no application was ever refused.
Within his role, Mr. Newey was also able to negotiate the terms of the broking agreements concluded between Alabaster and lenders.
For the purpose of its broking services, Alabaster purchased advertising services in the UK. At any point, Mr. Newey was not entitled to use the advertising services on behalf of Alabaster and assumed no liability for the payment of the advertising services. However, Mr. Newey was approving the content of the advertisements.
HM Revenue and Customs (HMRC) challenged this structure arguing that Mr. Newey avoided paying VAT on advertising expenses by creating a structure in Jersey. Based on their opinion, Mr. Newey was providing the loan broking services itself and for this purpose it received advertising services. Thus, the VAT incurred on such advertising services was non-deductible
The questions referred to the CJEU was focusing on the issue whether the contracts are considered as being decisive in determining the VAT supply position (i.e. identification of a supplier and a recipient) , whether a contractual analysis resulting in tax advantage may be contrary to the principle of abuse of law and if so how those arrangements should be re-characterised.
The CJEU ruled that the contractual terms are not decisive when identifying the supplier and the recipient of a service. It is within the national courts’ discretion to determine whether the contractual terms reflect a purely artificial arrangement which is not consistent with the economic and commercial reality of the transaction solely aiming at obtaining a tax advantage.
In case that the national court observes that the contractual terms do not reflect the economic and commercial reality of the transaction the contractual terms would have to be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice. The re-establishment in the present case means that Mr. Newey could be seen as the recipient of the advertising services and the provider of the loan broking services with related VAT consequences.
The importance of the case lies in the fact that the contractual terms can be disregarded if they significantly deviate from the commercial and economic reality and are solely aiming at obtaining a tax advantage. They can be disregarded even if the contractual terms are defining a structure that is not in breach with the VAT legislation.
Staatssecretaris van Financiën v. X BV (C-651/11) – “TOGC”
On 30 May 2013 the CJEU published its decision in the case C-651/11 Staatssecretaris van Financiën v. XBV.
The case concerns the eligibility of the disposal of 30 % of shares in a company “A” held by X, to be considered as a transfer of (part of) a totality of assets (“TOGC”) within the meaning of Article 19 of the EU VAT Directive and thus falling outside the scope of VAT.
Since a number of services have been supplied to X in connection to the sale of the shares, X deducted the respective VAT on the basis that the disposal of the shareholding constituted a TOGC. Therefore, the costs incurred by X due to this transaction should have been considered as part of the general costs associated with its entire economic activity and thus, were fully deductible.
If this disposal of shares is not eligible for a TOGC, CJEU was asked whether the conditions for applying the TOGC are satisfied if the other shareholders transfer all the other shares in that company to the same person and if that disposal of 30% of shares is closely linked to management activities carried out for that company.
In its decision, the CJEU emphasized that in order to qualify for a TOGC “all of the elements transferred must, together, be sufficient to allow an independent economic activity to be carried on”.
Considering this the CJEU stated that, unlike the holding of assets of an undertaking, the holding of shares in an undertaking is not sufficient to carry out an independent economic activity. Moreover, shareholders cannot be considered as the owners of the assets of the undertaking, especially as the holding of 30% of shares “represents only a limited entitlement in respect of that company”.
The CJEU as well concluded that the pure sale of shares should not be qualified as the TOGC, irrespective of the fact that all the remaining shareholders would sell their participation in the undertaking to the same purchaser and that the disposal is closely linked to the management activities carried out for that company.