The Concept of ‘Abuse of Law’ in the Case Law of the European Court of Justice on Direct Taxation
| Date | 01 June 2015 |
| DOI | 10.1177/1023263X1502200302 |
| Author | Koen Lenaerts |
| Published date | 01 June 2015 |
| Subject Matter | Article |
22 MJ 3 (2015) 329
ARTICLES
THE CONCEPT OF ‘ABUSE OF LAW’ IN THE
CASE LAW OF THE EUROPEAN COURT
OF JUSTICE ON DIRECT TAXATION
K L *
ABSTRACT
Time and again, the Court of Justice has m ade clear that EU law does not protect natural
or legal persons who seek to pay less tax by creating situations that arti cially fall within
the scope of application of the fundamental freedoms. In the light of the judgments of the
Court of Justice in Cadbury S chweppes, in Cap and Glaxo Wellcome, this contribution
describes the steps that a nat ional court must follow when deter mining whether a particular
behaviour constitutes an abuse of l aw in the eld of direct taxati on.
Keywords: abuse of law; Cour t of Justice; direct taxat ion; fundamental freedoms; wholly
arti cia l arrangements
§1. IN T RODUCT IO N
In the eld of direct taxation, it is of paramount constitutional importance to draw a
conceptual distinction between ‘ta x mitigation’ (or ‘tax avoidance’) and ‘tax evasion’,
since that disti nction is essential for the Court of Justice in determ ining the extent to
which EU law places limits on the exercise of nat ional taxi ng powers. On the one hand,
the expression ‘tax mit igation’ relates to situations where an individua l (or a company)
seeks, in compliance w ith the law, to minimi ze the taxes he or she (or it) pays. In a
cross-border context, tax mitigation is made possible by regulatory competition among
the national tax s ystems. Given that the power to levy d irect taxes rema ins with the
Member States, the latter are, for example, free to ‘organise, in compliance with [EU]
law, [their] system for taxing distr ibuted pro ts and, in that context, to de ne the tax
* Vice-President of the C ourt of Justice of the Europe an Union, and Professor of Europea n Union Law,
Leuven University. Al l opinions expressed herei n are personal to the author.
Koen Lenaerts
330 22 MJ 3 (2015)
base and the tax r ate which apply to the shareholder receiving them’.1 As Member States
apply di erent income and corporation tax rates, a natura l (or legal) person may decide
to exercise an economic activ ity in a Member State other than his or her (or its) state of
residence so as to pro t from tax advantages. ‘[An EU] national’, the Court of Justice
stated in Barbier, ‘cannot be deprived of the right to rely on the provisions of the Treaty
on the ground that he is pro ting from tax adv antages which are legally provided by the
rules in force in a Member State other than his State of residence’.2 Consequently, the
application of the funda mental freedoms cannot be ru led out by the fact that the exercise
of such freedoms is motivated by a desire to m itigate tax liabilities.
On the other hand, an EU nat ional may not rely on the fundamental f reedoms in a
way that undermines the e ectiveness of the tax system of the Member State t hat has
jurisdiction to ta x him or her. In the Court of Just ice’s words, ‘nationals of a Member
State cannot attempt, under cover of the r ights created by the Treaty, improperly to
circumvent their national legislation. ey must not improperly or fraudulently ta ke
advantage of prov isions of [EU] law’.3 Accordingly, EU law does not protect natural or
legal persons who seek to pay less ta x by creating situations that arti cially fall within
the scope of application of the f undamental freedoms. Rest rictions on the free movement
of companies and capital wh ich seek to prevent tax evasion and do not go beyond what
is necessary to attain that objective are compatible with EU law. In summary, whilst a
Member State may not prevent genuine tax mitigation, EU law does not provide a shield
for tax evaders.
Logically, the quest ion is then how to draw a distinction between t hose two concepts.
To that end, the Court of Justice has developed the concept of ‘abuse of law’,4 according
to which ‘a national measure restricting [a fundamental freedom] may be justi ed
where it speci ca lly relates to wholly arti cial ar rangements aimed at circumventing t he
application of the legislation of the Member St ate concerned’.5 is means that a Member
State may adopt measures which, whi lst constituting a restriction on free movement,
seek to prevent abusive practices and are thus able to be jus ti ed.
1 See, e.g., Case C-374/04 Test Claimants in Class IV of th e ACT Group Litigation, EU:C:2006:773, pa ra.
50; Case C- 446/04 Test Claimants in the FII Gro up Litigation, EU:C:2006:774, pa ra. 47; Case C-194/06
Orange European Smallcap Fund, EU:C:2008:289, par a. 30; Case C-128/08 Damseaux, EU:C:20 09:471,
Commission v. Belgium, EU:C:2012:670, para. 37.
2 Case C-364/01 Barbier, EU:C:2003:665, para. 71.
3 Case 115/78 Knoors, EU:C:1979:31, para. 25; Case C-61/89 Bouchoucha, EU:C:1990:343, p ara. 14; and
Case C-212/97 Centros, EU:C:1999:126, para. 24.
4 See, general ly, R. de la Feria and S. Vogenauer (eds.), Prohibitio n of Abuse of Law: A New Ge neral
Principle of EU Law? (Hart Publish ing, 2011); and A. Saydé, ‘De ning the Concept of Abuse of Union
Law’, 33 Yearbook of European Law (2014), p.138–162.
5 See, to that e ect Case C-264/9 6 ICI, EU:C:1998:370, para. 26 ; Case C-324/00 Lankhorst-Hohorst,
EU:C:2002:749, para. 37; C-9/02 Lasteyrie du Saillant, EU:C:2004:138, para . 50; and Case C -446/03
Marks & Spence r, EU:C:2005:763, para. 57.
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