In its judgement handed down on November 22nd 2017 in case C-251/16, the European Court of Justice (the “ECJ”) had to rule on a reference for preliminary ruling by the Irish Supreme Court on the question of whether or not the principle of abuse of rights, as found applicable in the sphere of VAT by the ECJ in the Halifax case (C-255/02), is directly effective against an individual even in the absence of national measures, whether legislative or judicial, giving explicit effect to that principle.
In the case at hand, three individual appellants jointly owned a development site in the town of Baltimore, Ireland, on which they constructed fifteen holiday homes intended for sale. However, before selling the holiday homes, the appellants entered into a long term lease agreement under which a related party rented the properties for a term of twenty years. On the same day, the related party leased the properties back to the appellants for a term of two years.
One month after the lease agreements were entered into, both agreements were extinguished by mutual surrender of the parties. The appellants recovered full ownership of the properties and sold them to third parties immediately thereafter. Pursuant to Irish domestic VAT Law, no VAT was payable on those sales, as the properties had previously been the subject of a first supply on which VAT was chargeable, i.e. the long term lease.
However, the Irish VAT authorities took the view that the lease agreements were an artificial construction created solely to avoid the subsequent sales being liable to VAT, and therefore should be disregarded for the purposes of assessing VAT.
The appellants challenged the position of the authorities and argued that, in the absence of national legislation transposing the principle that abusive practices are prohibited, the principle cannot be deployed against them to remove their right to VAT exemption on the sale of the properties.
The ECJ however ruled in favour of the Irish VAT authorities and held that abusive practices are prohibited as a general principle of EU Law, and such principle may be relied upon against a taxable person even in the absence of provisions of national law prohibiting abusive practices.
The ECJ reasoned in line with previous case Law that the refusal of a right or an advantage on account of abusive practices or fraudulent acts is simply a consequence of the fact that in such case the objective conditions required to benefit from the advantage have not been met.