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World Journal of VAT/GST Law

ISSN: 2048-8432 (Print) 2048-8440 (Online) Journal homepage: http://www.tandfonline.com/loi/rvat20

What looks like a duck is a duck: economic


purpose and legal reality in EU VAT law

Ad van Doesum

To cite this article: Ad van Doesum (2012) What looks like a duck is a duck: economic purpose
and legal reality in EU VAT law, World Journal of VAT/GST Law, 1:2, 202-204, DOI: 10.5235/
WJOVL.1.2.202

To link to this article: http://dx.doi.org/10.5235/WJOVL.1.2.202

Published online: 07 May 2015.

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CASE LAW: EUROPEAN UNION DOI: 10.5235/WJOVL.1.2.202

What looks like a duck is a duck: economic purpose


and legal reality in EU VAT law
(DTZ Zadelhoff v Staatssecretaris van Financin)*

Ad van Doesum
Professor of European Value Added Tax Law, Maastricht University.

The case of Zadelhoff concerned the VAT treatment of real estate brokerage services. What
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makes it really interesting is not so much the subject matter, but the question that underlies
the case. That question is whether the transfer of shares in a company should from a VAT
perspective be considered as a supply of immovable property or as a supply of shares, if the
intention of the seller and buyer is in fact to sell and buy the immovable property owned by
that company. In other words, if the economic purpose of a transfer of shares was to transfer
the immovable property, should the juridical form of the transaction (a transfer of shares) still
be decisive for its VAT treatment?
In order to have a good understanding of the discussion, it is important to realise that the
Netherlands did not make use of the option granted to Member States by Article 5(3)(c) of
the Sixth VAT Directive (now Article 15(2)(a) VAT Directive 2006). Therefore, shares or inter-
ests equivalent to shares giving the holder thereof de jure or de facto rights of ownership or
possession over immovable property or part thereof are not by law considered to be tangible
property in the Netherlands.
Nonetheless, it is settled CJEU case law that in order to determine the VAT consequences
of a supply, it is necessary to have regard to the objective character of the transaction in ques-
tion.1 But how does one determine what the objective character of a transaction is? Is that
done on the basis of the economic purpose of a transaction or (solely) on the basis of the
juridical form of a transaction?
In Cantor Fitzgerald, the CJEU considered that the principle of the neutrality of VAT does
not mean that a taxable person faced with a choice between two transactions (one exempt and
one taxed) may choose one of them and avail himself of the effects of the other. Moreover, it
explained that legal certainty and a correct and coherent application of the exemptions require
that the juridical form of a transaction is decisive for its VAT treatment.2
Notwithstanding the CJEUs rulings in BLP and Cantor Fitzgerald, it appears that some-
times, the CJEU considers the economic purpose of a (set of) transaction(s) to be decisive. In
particular, this seems to be the case when an activity is being broken down into separate serv-
ices which may then fallbased on the wording of the relevant provision in the VAT Directive

* Link to the full text of the judgment: http://curia.europa.eu/juris/document/document.jsf?docid=124746&mode


=lst&pageIndex=1&dir=&occ=first&part=1&text=&doclang=EN&cid=3739670.
1 Case C-4/94 BLP Group plc v Commissioners of Customs & Excise [1995] ECR I-00983, 24.
2 Case C-108/99 Commissioners of Customs & Excise v Cantor Fitzgerald International [2001] ECR I-07257, 33.

202 World Journal of VAT/GST Law (2012) vol 1 issue 2


Economic purpose and legal reality in EU VAT law

2006under an exemption. For example, in Abbey National, Volker Ludwig and JCM Beheer,
the CJEU considered that under such circumstances, it follows from the principle of fiscal
neutrality that traders must be able to choose the form of organisation that, from a strictly
commercial point of view, best suits them, without running the risk of having their transac-
tions excluded from the exemption.3
An economic approach to the VAT treatment of transactions can also be seen in SKF.
There, the CJEU considered that even though the business of SKFs subsidiary was sold by
means of a sale of the shares in the subsidiary, the CJEU ruled that in so far as the disposal
of shares is equivalent to the transfer of a totality of assets or part thereof of an undertak-
ing, Article 5(8) of the Sixth VAT Directive (now Article 19 VAT Directive 2006) may apply.4
Apparently, the principle of neutrality, legal certainty and the correct and coherent application
of the exemptions are not that important after all. It appears that it is not the juridical form
of a transaction that is decisive (ie the sale of shares), but rather the economic purpose of a
transaction (the transfer of a business). Still, there is room for doubt
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DTZ Zadelhoff shows that it is necessary, in accordance with the VAT systems objectives
of ensuring legal certainty and facilitating application of the tax, to have regard, save in excep-
tional cases, to the objective character of the transaction in question.5 Therefore, in this case
the underlying transaction was regarded as a supply of shares rather than a supply of the
immovable property owned by the subsidiary of which the shares were sold.
EU legislation must be certain and its application foreseeable by those subject to it.6 It
is settled CJEU case law that the requirement of legal certainty must be observed even more
strictly in the case of rules that entail financial consequences, in order that those concerned
may know precisely the extent of the obligations which they impose on them.7 In my view, the
same applies to CJEU case law.8 However, it is questionable whether the aforementioned case
law fully complies with the principle of legal certainty. As I have shown, it is difficult to predict
the outcome of CJEU case law in cases where a choice must be made between a legal and an
economic approach.
Although I believe that the CJEU should make (more) explicit what factors are decisive
for applying a legal or an economic approach respectively, we can perhaps glean some rough
guidelines from the CJEU case law.
Firstly, it is clear that the starting point is and remains that the objective character of the
transaction in question must be taken into account. The intentions of a taxable person, ie the
stimulus for his actions, are not relevant. What is relevant, is what the parties agreed to (what

3 Case C-169/04 Abbey National plc and Inscape Investment Fund v Commissioners of Customs & Excise [2006] ECR
I-04027, 68; Case C-453/05 Volker Ludwig v Finanzamt Luckenwalde [2007] ECR I-05083, 35; Case C-124/07 JCM
Beheer BV v Staatssecretaris van Financin [2008] ECR I-2101, 28. It is in particular this reference to the principle
of neutrality which indicates that the CJEU follows a more economic approach.
4 Case C-29/08 Skatteverket v AB SKF [2009] ECR I-10413, 41.
5 Case C-259/11 DTZ Zadelhoff vof v Staatssecretaris van Financin, not yet published, 25.
6 See eg Case C-301/97, Kingdom of the Netherlands v Council of the European Union [2001] ECR I-08853, 43; Case
C-255/02, Halifax plc, Leeds Permanent Development Services Ltd and County Wide Property Investments Ltd v
Commissioners of Customs & Excise [2006] ECR I-01609, 72.
7 Case 326/85, Kingdom of the Netherlands v Commission of the European Communities [1987] ECR 0509, 24;
Case C-17/01, Finanzamt Sulingen v Walter Sudholz [2004] ECR I-04243, 34; Case C-255/02, Halifax plc, Leeds
Permanent Development Services Ltd and County Wide Property Investments Ltd v Commissioners of Customs &
Excise [2006] ECR I-01609, 72.
8 After all, one of the CJEUs tasks is to interpret EU law.

(2012) vol 1 issue 2 World Journal of VAT/GST Law 203


Ad van Doesum

they intended to put down in the contract, ie the object of the contract). In fact, the legal
approach is the main rule.
Secondly, if it must be determined whether an exemption applies to the transaction in
question, it is settled CJEU case law that a strict interpretation is the basic principle. Neverthe-
less, the interpretation must be consistent with the objectives pursued by the exemptions and
comply with the requirements of the principle of fiscal neutrality. The requirement of strict
interpretation does not mean that the terms used to specify the exemptions should be con-
strued in such a way as to deprive the exemptions of their intended effect.9
Thirdly, if a strict interpretation of an exemption deprives that exemption of its intended
effect, does not comply with the principle of neutrality and if the wording of an exemption
does not stand in the way of a broader interpretation, the neutrality principle itself provides
leverage for a more economic approach to the supply. In fact, the economic approach is an
exception to the main rule of the legal approach.
In my view, the above guidelines are still too rough to provide sufficient legal certainty
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to economic operators. For example, CJEU case law as it stands does not provide enough
clarity with respect to the question whether a sale of shares must be considered a supply of a
service (which may be exempt under Article 135(1)f) VAT Directive 2006) or a supply of the
underlying assets (which may be non-taxable under Articles 19 and 29 VAT Directive 2006).
DTZ Zadelhoff points in the direction of the first possibility,10 while SKF leaves room for the
latter interpretation. In neither case is there any sign of the CJEU applying the aforementioned
guidelines that it did apply in other cases relating to the application of exemptions mentioned
in Article 135 of the VAT Directive 2006.
I suggest that the so-called duck test be applied in VAT matters more often: If it looks like
a duck, swims like a duck and quacks like a duck, then it probably is a duck. If it looks like a
sale of shares, has the form of a sale of shares and if the shares have been transferred, then it
probably is a sale of shares from a VAT perspective. In this respect, DTZ Zadelhoff sings rather
than quacks.

9 See eg Case C-445/05, Werner Haderer v Finanzamt Wilmersdorf [2007] ECR I-04841, 18; Case C-461/08, Don
Bosco Onroerend Goed BV v Staatssecretaris van Financin [2009] ECR I-11079, 25.
10 In the DTZ Zadelhoff ruling, there is no sign that it was argued that DTZ Zadelhoff was involved in the negotiation
with respect to a transfer of a totality of assets (Arts 19 and 29 VAT Directive 2006).

204 World Journal of VAT/GST Law (2012) vol 1 issue 2

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