UK and International Tax news
ECJ Judgment In Weald Leasing Case
Tuesday 22nd February 2011
The ECJ has recently released its judgment in the Weald Leasing case [C-103/09]. The case concerns a structure whereby the taxpayer group bought assets and leased them to an unconnected company. This third party leased the assets back to another member of the group which had a 1% VAT recovery, adding a small uplift. The leases were for a longer period than would normally be available in the open market. This provided a cash flow benefit of spreading the cost of irrecoverable VAT over a ten year period rather than incurring effectively the full amount of irrecoverable VAT up front.
The AG had earlier proposed in his opinion [see UK Tax News item of 29 October 2010] that the ECJ should answer the questions referred by the Court of Appeal (England and Wales) as follows:
(a) The adoption of an asset leasing structure involving an unrelated third party or a wholly owned subsidiary which is independently registered for VAT by a largely exempt trader instead of purchasing assets outright in order to defer the payment of irrecoverable tax does not in itself give rise to a tax advantage which is contrary to the purpose of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes.
(b)The use of a purely artificial structure essentially designed in order to gain a tax advantage by preventing tax authorities from directing in accordance with the provisions of national law adopted in full compliance with Sixth Directive 77/388 that the value of leasing arrangements between connected persons be taken to be their open market value is an abusive practice.
(c) Where an abusive practice has been found to exist, the transactions involved must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice. Where a purely artificial structure is adopted in leasing arrangements essentially in order to prevent tax authorities from directing that the value of those arrangements between connected persons be taken to be their open market value, those arrangements should be redefined by ignoring the presence of that structure.
(d) The concept of ‘normal commercial operations’ in the context of value added tax abuse is unrelated to the operations a taxpayer typically or habitually engages in. An assessment of whether a transaction is carried out in the context of ‘normal commercial operations’ refers to the nature of the transaction or scheme in question and whether it is a purely artificial construct established essentially in order to obtain a tax advantage rather than for other commercial reasons. The links of a legal, economic and/or personal nature between the operators involved in the scheme for reduction of the tax burden and thus whether the parties to the transaction operate at arm’s length, the question whether a transaction gives rise to commercial burdens and risks typically associated with such transactions are relevant for the purpose of assessing the nature of the transaction.
The ECJ has now held that the tax advantage accruing from an undertaking’s recourse to asset leasing transactions, such as those at issue in the main proceedings, instead of the outright purchase of those assets, did not constitute a tax advantage the grant of which would be contrary to the Sixth Directive [77/388/EEC of 17 May 1977] ….. provided that the contractual terms of those transactions, particularly those concerned with setting the level of rentals, correspond to arm’s length terms and that the involvement of an intermediate third party company in those transactions is not such as to preclude the application of those provisions, a matter which it is for the national court to determine. The fact that the undertaking did not engage in leasing transactions in the context of its normal commercial operations was irrelevant in that regard.
In addition, if certain contractual terms of the leasing transactions at issue in the main proceedings, and/or the intervention of an intermediate third party company in those transactions, constituted an abusive practice, those transactions must be redefined so as to re-establish the situation that would have prevailed in the absence of the elements of those contractual terms which were abusive and/or in the absence of the intervention of that company.
This is an important case on the principle of abuse and the ECJ has held that it is for the national court to determine whether the contractual terms of the transactions were based on arm’s length principles.
If you would like further details on this case, please contact Keith Rushen on 0044 (0)20 7486 2378.Contact Us