Provisional text

OPINION OF ADVOCATE GENERAL

KOKOTT

delivered on 16 May 2024 (1)

Case C‑171/23

UP CAFFE d.o.o.

v

Ministarstvo financija Republike Hrvatske

(Request for a preliminary ruling from the Upravni sud u Zagrebu (Administrative Court, Zagreb, Croatia))

(Reference for a preliminary ruling – Common system of value added tax – Directive 2006/112/EC – Scheme exempting small enterprises – Abuse of VAT law by forming a new company – EU law prohibition of abusive practices in the area of VAT law – Direct applicability versus an assessment of the facts carried out on the basis of the economic viewpoint approach)

I.      Introduction

1.        Under EU law, the general principle applies that no one can fraudulently or abusively rely on EU law. That principle applies also to VAT law, which has been extensively harmonised under Directive 2006/112/EC on the common system of value added tax (‘the VAT Directive’). (2)

2.        The national authorities and courts must therefore refuse to grant the rights to deduct, exempt or refund VAT provided for in the VAT Directive if they are claimed fraudulently or abusively. The question now arises as to whether that applies also to use of a small enterprise scheme, which the Member States may (but need not) provide for pursuant to Article 287 of the VAT Directive.

3.        In the main proceedings, the Croatian tax authorities are seeking to refuse the taxable person the right to use the Croatian small enterprise scheme on the grounds of an allegedly abusive practice, notwithstanding the fact that Croatian law does not provide any basis for such a refusal. An opportunity thus presents itself to provide clarification on the scope and limits of the case-law of the Court of Justice of the European Union (‘the Court’) concerning the general prohibition of abusive practices in VAT law.

4.        The question also arises as to the relationship between that general principle and the general principles of legal certainty, protection of legitimate expectations and legality of taxation, which are also enshrined in EU law.

II.    Legal framework

A.      European Union law

5.        Article 281 et seq. of the VAT Directive lays down special rules for small enterprises. Article 282 of the VAT Directive, in the version applicable to the case in the main proceedings, states:

‘The exemptions and graduated tax relief provided for in this Section shall apply to the supply of goods and services by small enterprises.’

6.        Point (19) of Article 287 of the VAT Directive, in the version applicable to the dispute in the main proceedings, states:

‘Member States which acceded after 1 January 1978 may exempt taxable persons whose annual turnover is no higher than the equivalent in national currency of the following amounts at the conversion rate on the day of their accession: …

(19) Croatia: EUR 35 000.’

7.        Article 1 of the Council Implementing Decision of 25 September 2017 (3) authorises the Republic of Croatia, by way of derogation from point (19) of Article 287 of Directive 2006/112, to exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 45 000 at the conversion rate on the day of its accession.

B.      Croatian law

8.        Article 287 of the VAT Directive was transposed into national law by Article 90 of the Zakon o porezu na dodanu vrijednost (Law on Value Added Tax, ‘Zakon o PDV’).

9.        That provision provides, mutatis mutandis, that a domestic legal or natural person can be treated as a small enterprise if its turnover during the previous calendar year did not exceed 300 000 Kuna (HRK) (more than EUR 39 000). A small enterprise is exempt in principle from VAT but, conversely, it is not entitled to deduct input VAT.

III. Factual background

10.      The referring court set out the relevant facts very succinctly as follows:

11.      In the case of the Croatia-based company, UP CAFFE d.o.o. (‘the applicant’) the Croatian tax administration (‘the defendant’) carried out a special VAT investigation. In the course of that investigation, the defendant established that the applicant had continued the business activities of SS-UGO d.o.o. (‘the former company’) to which it remained tied.

12.      The defendant thus concluded that the formation of the applicant company and the transfer of the business to it did not interrupt the continuity of the former company’s business activities. On that basis, it calculated the VAT payable by the applicant without applying the small enterprise scheme that was claimed. At the same time, however, it granted the applicant a corresponding entitlement to deduct input VAT.

13.      Subsequently, on 17 October 2018, the defendant issued the applicant with a VAT assessment notice. In that notice, the defendant set VAT and default interest for the period from 1 January 2018 to 31 July 2018. The applicant lodged an appeal against that notice, which was rejected by the defendant by decision of 24 August 2020.

14.      The applicant then brought an action against that decision before the referring court. It claims, in particular, that it fulfils all of the conditions for classification as a small enterprise. In addition, the applicant argues that it was only after the expiry of the tax period that, by amendments to the Opći porezni zakon (Tax Code), a general provision preventing abuse was introduced in Article 12a thereof. Likewise, the possibility of treating several persons as one tied person, and therefore as a single taxable person, was provided for only subsequently pursuant to the amendments to Article 49(1)(4) of the Opći porezni zakon. The retroactive effect of legislation would, however, run contrary to the Ustav Republike Hrvatske (Constitution of the Republic of Croatia).

15.      Those rudimentary statements of fact are substantiated by the following consistent statements submitted by the parties to the main proceedings:

16.      Originally, there was a restaurant business which was registered as a taxable person for VAT purposes from 1 January 2013 to 12 July 2017. The restaurant business was subsequently continued by the former company, which was set up by the owner of the restaurant business on 28 June 2017. The former company exercised the option granted to it under Article 90(1) of the Law on Value Added Tax to be treated as a small enterprise for VAT purposes.

17.      Due to the level of turnover achieved by the former company in 2017, it no longer met the conditions for continued application of the small enterprise scheme in 2018. The company ceased most of its catering business activities at the end of 2017.

18.      At that same time, the applicant was created – apparently by a person other than the owner of the former company. From 2018, the applicant exercised the option to be taxed as a small enterprise. It also operated a restaurant business on the same premises and with the same employees and suppliers as the former company.

19.      During the course of the special investigation, the defendant also established that the managing director and owner of the former company was employed by the applicant. However, it appears – at least as the observations of the European Commission suggest – that he is neither a shareholder nor a managing director of the applicant. However, he was jointly and severally liable, together with the applicant, for the rental payments due on the business premises and was the sole signatory of the company’s bank account.

IV.    Reference for a preliminary ruling

20.      The Upravni sud u Zagrebu (Administrative Court, Zagreb, Croatia), which has jurisdiction to hear the dispute in the main proceedings, decided to stay the proceedings and to refer the following question to the Court for a preliminary ruling under Article 267 TFEU:

‘Does EU law impose an obligation on the national authorities and courts to determine liability for value added tax (and not to refuse a claim for a refund) where the objective facts of the case indicate that VAT fraud has been committed through the creation of a new company, that is to say, by interrupting the continuity of the previous company’s taxable activity, in the case where the taxable person knew, or ought to have known, that it was participating in such an activity, and where, at the time when the chargeable event occurred, national law did not provide for such a determination of liability?’

21.      In the proceedings before the Court, the applicant, the Republic of Croatia and the European Commission submitted written observations. In accordance with Article 76(2) of the Rules of Procedure of the Court of Justice, the Court did not consider it necessary to hold a hearing.

V.      Legal assessment

A.      Admissibility and clarification of the question referred for a preliminary ruling

22.      The European Commission has doubts as to whether the referring court’s request for a preliminary ruling meets the requirements of Article 94 of the Rules of Procedure of the Court of Justice. According to that provision, the request must contain, inter alia, a summary of the relevant findings of fact as determined by the court, or, at least, an account of the facts on which the question is based.

23.      The order for reference contains only extremely brief information on the relevant facts. In particular, the specific factual circumstances that demonstrate how a potential abuse of rights may have occurred have not been explained in sufficient detail. However, the explanations provided by the referring court are just sufficient to understand the factual context of the dispute in the main proceedings. Furthermore, both the applicant and the Republic of Croatia have made consistent submissions on the facts of the case and have thus contributed to establishing an understanding of the factual background.

24.      However, it is also the case that the question referred for a preliminary ruling does not relate to a specific provision of EU law. The provisions of the VAT Directive cited by the referring court in the grounds for the request (Articles 11, 19, 28 and 80) have only a very limited nexus with the case in the main proceedings. However, it is sufficiently clear from the context that the matter at issue concerns the application of the exemption for ‘small enterprises’ that the Member States are authorised to grant under Article 287 of the VAT Directive, and the general principle that abusive practices are prohibited.

25.      On balance, I therefore consider that the referring court has explained the factual and legal context of the dispute in the main proceedings in a manner that is just sufficient to allow for an answer to be given to the question referred.

26.      However, in order to provide the referring court with a useful answer, it is necessary to reformulate the question referred for a preliminary ruling. The court is essentially seeking to establish whether the applicant can be denied the right to invoke the Croatian small enterprise scheme on the basis of the EU law principle that abusive practices are prohibited, even if Croatian law makes no provision for such a refusal, but had introduced it only subsequently.

B.      The question referred for a preliminary ruling

27.      The question referred for a preliminary ruling relates primarily to the prohibition of abusive practices as a general principle of EU law. For that reason, I shall firstly address its applicability and scope in relation to the present case (1.). I shall then turn to the factual conditions for (see section 2 below) and the legal consequences resulting from (see section 3 below) a finding that there has been an abuse of rights.

1.      Applicability and scope of the general principle that abusive practices are prohibited

(a)    General remarks

28.      According to the settled case-law of the Court, it is a general principle of EU law that abuse of rights is prohibited. (4) That principle also has far-reaching effect in the area of VAT law.

29.      Thus, a taxable person cannot, on the one hand, fraudulently or abusively invoke the rights to a VAT deduction, exemption or refund provided for in the VAT Directive. (5) On the other hand, however, the VAT Directive is to be interpreted as ‘precluding a national practice whereby the choice of a taxable person to carry on an economic activity in a way that enables that taxable person to reduce his or her costs is classified as “an unlawful exercise of the right” and, on that ground, that taxable person is refused the right to deduct input VAT’. That would be the case ‘where it has not been established that there is a wholly artificial arrangement which does not reflect economic reality and is set up with the sole aim or, at the very least, with the essential aim, of obtaining a tax advantage the grant of which would be contrary to the purposes of that directive’. (6)

30.      This demonstrates that, in VAT law, the general principle that abusive practices are prohibited is understood as a principle of interpretation. (7) Preventing possible tax evasion, avoidance and abuse is an objective that is recognised and encouraged by the VAT Directive. (8) Accordingly, the provisions of the VAT Directive must be interpreted in such manner that they cannot be relied upon by taxable persons for fraudulent or abusive ends.

31.      In the case at issue, it is only Article 287 of the VAT Directive and the Croatian transposition legislation laid down in Article 90(1) of the Law on Value Added Tax that are of relevance as legislation requiring interpretation. Given that Article 287 of the VAT Directive grants the Member States only an option to exempt taxable persons whose turnover falls below certain limits (the ‘small enterprise exemption’), that provision is not directly applicable in respect of individuals. Only Article 90(1) of the Law on Value Added Tax has direct effect vis-à-vis taxable persons.

32.      National courts are obliged to interpret national transposition law as far as possible in the light of the wording and purpose of the provision of the directive. In the light of the wording of the conditions for the granting of a small enterprise exemption set forth in the Member State legislation (Article 90(1) of the Law on Value Added Tax), those conditions appear to be fulfilled. In any event, that is suggested by the request for a preliminary ruling. A different interpretation does not appear to be possible in the present case. The parties are also in agreement that there is no provision in Croatian law capable of preventing abusive use of the small enterprise scheme.

(b)    Assessment of the facts versus interpretation of a rule of law

33.      The Court has held, however, that the principle that abusive practices are prohibited (in short: ‘the prohibition of abusive practices’) may also be relied on against a taxable person even if the national law does not contain any provisions to refuse fraudulent or abusive exercise of the rights conferred by the VAT Directive. (9)

34.      The Court bases its reasoning, inter alia, on the fact that refusal of fraudulent or abusive use of the benefits of the VAT Directive must be regarded as being inherent in the common system of VAT. (10) More particularly, the objective conditions required in order to obtain the advantage sought are not, in fact, met in such a case. (11)

(1)    Unproblematic: ascertaining the economic situation

35.      When determining the relevant facts, the transaction must in fact be assessed as the parties actually intended, that is to say, on the basis of the actual economic circumstances. The decisive factor is not the civil law arrangement that was chosen, that is to say the ‘external legal form’ of the transaction, but rather the economic intention of the parties as considered in the light of the overall circumstances. However, that is not a question of interpretation of EU law (or of national law), but is instead a question of assessing the facts.

36.      In proceedings under Article 267 TFEU, which are based on a clear separation of functions between the national courts and the Court of Justice, the national court alone has jurisdiction to find and assess the facts in the case before it. (12) At the most, the Court can provide guidance in that respect. If the referring court concludes that the applicant’s formation was, from a legal point of view, merely a sham for facilitating the economic continuation of the former company’s business activities, then it may, for example, and in the context of an assessment based on an economic viewpoint approach, disregard the ‘external legal form’ and focus instead on the real economic situation that was actually intended.

37.      That is already clear from the very fact that tax law ultimately seeks to tax economic situations in a uniform manner. Hence, the economic substance of the factual situation must first be properly understood. An arrangement that attempts, by means of a taxable person’s freedom to arrange his or her affairs under civil law, to artificially circumvent or conceal that economic substance cannot change the actual underlying facts. In view of the principle of equal taxation, factual situations that are comparable in economic terms must also (irrespective of how they are structured under civil law) be taxed in the same way. Indeed, on the basis of Article 11 of the Opći porezni zakon, as cited by the European Commission, such an assessment of the factual situation may even be conceivable in the present case. That is because the provision appears to require that the factual tax situation is ascertained on the basis of its economic substance.

(2)    Problematic issues: addition of unwritten criteria to EU law

38.      If the case-law cited in paragraph 33 were also to be understood, by means of an interpretive process, as an addition to EU law of unwritten criteria, that very broad (and dogmatically disputed (13)) approach – which is now the subject of proceedings before the European Court of Human Rights (14) – is, in any event, not relevant in the present case.

39.      In the present case, the conditions for obtaining the desired benefit, that is to say the small enterprise exemption, are not in fact laid down in the VAT Directive – unlike in the case of input VAT deductions, for example. On the contrary, it is only the Member States that are authorised to grant the small enterprise exemption in cases not exceeding certain turnover limits, and to regulate the specific conditions under which that exemption is granted. Hence, the specific conditions for the small enterprise exemption stem exclusively from Croatian law rather than from the VAT Directive. Accordingly, it simply cannot be asserted for the purposes of the present case that the EU-law conditions for obtaining the small enterprise exemption are not met.

40.      The conditions for obtaining the small enterprise exemption under Croatian law would appear, based on the wording of those conditions, to be fulfilled (see paragraph 32). A different interpretation based on the prohibition of abusive practices under EU law does not appear to be possible here. That is because the literal meaning derived from the wording marks the boundary of any interpretation, even if it serves to prevent abusive practices. The principle of interpreting national law in conformity with EU law is also subject to certain limits. Thus, the obligation on a national court to refer to the content of a directive when interpreting and applying the relevant rules of domestic law is limited by general principles of law and it cannot serve as the basis for a contra legem interpretation of national law. (15)

41.      In the case at issue, it is not therefore a question – as the referring court emphasises – of refusing, as in previous cases, a tax exemption or input tax deduction provided for under EU law. On the contrary, it is a matter of subjecting the taxable person to taxation by means of a general unwritten prohibition of abusive practices under EU law, notwithstanding the existence of a national tax exemption, and thus without any legal basis.

42.      However, that would run counter to the general principle of legality of taxation, which is also recognised by EU law, and which has recently been emphasised by the Grand Chamber of the Court on several occasions. (16) Tax law is an area of law that, by its nature, leads to interferences with the rights of individuals and legal persons. It therefore follows that any potential State interference with the fundamental rights of the taxable person by means of taxation must be regulated with a sufficient degree of certainty in a law that is directly applicable to the taxable person.

43.      Thus – according to the Court – ‘the principle of legality of taxation, which forms part of the legal order of the European Union as a general principle of law, requires that any obligation to pay a tax and all the essential elements defining the substantive features thereof must be provided for by law, and the taxable person must be in a position to foresee and calculate the amount of tax due and determine the point at which it becomes payable’. (17) The direct applicability of a general and unwritten prohibition of abusive practices under EU law is thus incompatible with that statement.

(c)    Interim conclusion

44.      If a Member State makes no provision to prevent abusive practices on the part of its taxable persons, it may have failed to fulfil its obligation to lay down rules to prevent abusive practices in the area of VAT law. However, a failure on the part of a Member State cannot be held against taxable persons who fulfil the conditions laid down by national law. The only remaining possibility is for the national law to be interpreted in conformity with EU law, although that is subject to certain limits. It is for the referring court to determine whether such an interpretation is appropriate in the case at issue. If the referring court considers it inappropriate, the general principle of the prohibition of abusive practices cannot be applied directly in the present case for the purposes of establishing a tax liability on the part of the applicant.

45.      It is conceivable, however, that the process of determining the economic substance of the transaction (establishment and assessment of the facts), which is the responsibility of the referring court, will reveal that there was no economic change in the factual situation despite the change in legal structure. In such case, the taxation must be based on the true economic factual situation. No special legal basis is required in order for the economically relevant factual situation that is to be subjected to taxation to be correctly determined on the basis of an ‘economic viewpoint approach’.

46.      The question of whether a new company with a different shareholder structure has in fact acted only formally as a new taxable person in order to artificially benefit from the small enterprise exemption cannot be assessed in view of the scant description of the facts. Moreover, that is not the function of the Court in the preliminary ruling procedure. On the contrary, it is a matter for the referring court or the tax authorities to make that finding of fact. It is possible that the following (in-the-alternative) explanations for the existence of an abuse of rights may facilitate that task.

2.      In the alternative: the conditions for a finding of an abuse of rights

47.      In case the Court should disagree with the above line of argument and hold that the general prohibition of abusive practices under EU law is to be applied directly in the present case, it is necessary to examine the factual conditions for a finding of an abuse of rights in further detail.

48.      According to settled case-law, a finding that an abusive practice is being engaged in within the context of VAT law requires that both an objective element (see point (a)) and a subjective element (see point (b)) are present cumulatively. Furthermore, the application of the general principle of the prevention of abusive practices to the specific case must not result in a violation of principles of legality of taxation, legal certainty and the protection of legitimate expectations (see point (c) below).

49.      A finding that an abusive practice is being engaged in thus depends on an overall assessment of all the circumstances of each specific case. In that regard, the burden of proof lies with the competent tax authority. (18) It is for the referring court to carry out the judicial review of that overall assessment.

(a)    Objective element

50.      According to the Court’s settled case-law, an abusive practice can be found to exist only if, firstly, the objective pursued by the provision relied on has not been achieved, notwithstanding formal application of the said provision. (19) Whether or not an abuse exists can therefore only ever be determined on the basis of the specific purpose of the provision in question.

51.      In the case at issue the main proceedings, it appears that the applicant has formally fulfilled the conditions for use of the small enterprise scheme. In particular, the relevant turnover thresholds for the previous or current year were not exceeded as a result of the applicant’s formation.

52.      However, use of the Croatian small enterprise scheme may have been inappropriate. It is therefore necessary to determine its purpose. With regard to Article 287 of the VAT Directive, which authorises the Member States to grant such a tax exemption, the Court has held that this is intended to support the creation, activities and competitiveness of small enterprises. (20) That is questionable in view of the fact they are, at the same time, denied the right to deduct input tax and the exemption encompasses only the annual turnover that an enterprise generates in one year in the Member State in which it is established. (21) The fact that the turnover threshold takes the form of an exemption limit rather than a tax-free allowance also militates against a conclusion that the tax exemption is intended to promote small enterprises, because it is precisely the particularly successful start-ups that are disadvantaged. (22)

53.      On the contrary, the tax exemption is intended primarily to enable administrative simplification (de minimis rule). Unless a turnover threshold is set, the tax authorities would have to treat every person with even the slightest economic activity as a taxable person. That would involve considerable administrative expenditure for the taxable persons and the tax authorities, without that expenditure being offset by corresponding tax revenues. (23)

54.      Assuming the purpose is to simplify administration, the provision operates in favour of the Member States in at least equal measure. (24) In the light of the foregoing, I have doubts as to whether a taxable person could be held to have invoked the small enterprise exemption in an abusive manner. That understanding is further supported by the fact that, pursuant to Article 289 of the VAT Directive, taxable persons who make use of the small enterprise scheme are not entitled to deduct input VAT. Thus, on an overall assessment, there need not necessarily be a tax advantage for the taxable person.

55.      Conversely, however, the possibility cannot be precluded that an unintended tax advantage may arise in individual cases. The annual turnover referred to in Article 287 of the VAT Directive relates to the individual taxable persons carrying out the activity. (25) It therefore follows that invocation of the provision could potentially be regarded as inappropriate if, by way of example, a single business were to be split up between several ‘self-created’ taxable persons in order to avoid exceeding the relevant turnover thresholds.

56.      That is certainly true if the various taxable persons cannot be regarded as a single taxable person for the purposes of Article 287 of the VAT Directive. (26) As the Republic of Croatia has asserted, the optional provision laid down in Article 11 of the VAT Directive, according to which several persons may be regarded as a single taxable person, has not been transposed into national law. Consequently, the applicant and the former company cannot be regarded as a single taxable person.

57.      Consequently, I would certainly not rule out the possibility that abusive use could also be considered in the context of the small enterprise scheme provided for under Article 287 of the VAT Directive. However, in view of the fact that the provision is aimed, in at least equal measure, at achieving administrative simplification for the Member States, an invocation of that provision could be regarded as abusive in exceptional cases only.

(b)    Subjective element

58.      In addition to the objective element, a finding of abuse presupposes a subjective element. It must be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. The prohibition of abuse cannot be applied where the economic activity carried out may have some explanation other than the mere attainment of tax advantages. (27)

59.      In principle, the taxable person may choose to structure his or her business so as to limit his or her tax liability. (28) Taxable persons are thus free, in principle, to choose the organisational structure and the form of transactions which they consider to be most appropriate for their economic activities and for the purpose of limiting their tax burdens. (29) It is only wholly artificial arrangements which do not reflect economic reality and are set up with the sole aim of obtaining a tax advantage that are barred. (30) By implication, there can be no wholly artificial arrangement if there are objective reasons militating in favour of the chosen arrangement.

60.      The defendant relied on the fact that the applicant continued its business operation at the premises and with the employees and suppliers of the former company. Those indications may militate in favour of a wholly artificial arrangement. By contrast, it does not appear that the same persons are behind the applicant and the former company. The involvement of different persons may be a strong indication that there were economic reasons for creating the applicant while continuing the business operation of the former company.

61.      It is a matter for the referring court to determine, on the basis of all the circumstances of the specific case, whether the essential purpose of the chosen arrangement was to obtain a tax advantage. In any event, the factual information provided by the referring court thus far does not, by itself, support a finding that the applicant’s formation by a third party coupled with the takeover of the former company’s business activity would constitute a wholly artificial arrangement.

(c)    No violation of the principles of legality of taxation, legal certainty and protection of legitimate expectations

62.      The applicant in the main proceedings also invokes the principles of legality and legal certainty.

63.      However, in certain older decisions relating to VAT law, the Court has held that taxable persons who have created the conditions for obtaining a right in a fraudulent or abusive manner are not justified in relying on those principles. (31)

64.      In view of the blanket manner of its formulation, I consider that assertion to be problematic from the perspective of the rule of law and in the light of the Court’s recent case-law on the common values on which the European Union is founded. It is also not consistent with the Court’s recent case-law on the principle of the rule of law.

65.      Thus, in its recent case-law, the Court has increasingly emphasised that the European Union is composed of States which recognise and share the values referred to in Article 2 TEU. (32) The values referred to in Article 2 TEU, on which the European Union is founded, include the rule of law in particular. The principle of the rule of law requires, firstly, that interferences by the State must always have a legal basis. That legislative proviso is expressed in tax law through the principle of legality of taxation (33) just as it finds expression in criminal law through the principle of nulla poene sine lege certa (the principle of legality in connection with criminal offences and penalties) and is understood by the Court as a specific expression of the general principle of legal certainty. (34)

66.      The principle of legal certainty, the corollary of which is the principle of the protection of legitimate expectations and which is thus also based on the principle of the rule of law, requires, inter alia, that rules of law be clear and precise and predictable in their effect, especially where they may have negative consequences on individuals and undertakings. (35) In that respect, the principles of legal certainty and of the protection of legitimate expectations must be observed not only by the EU institutions, but also by Member States in the exercise of the powers conferred on them under EU directives. (36)

67.      The Grand Chamber of the Court has already established that the requirement that the applicable law must be precise, which is inherent in the principle of legality (in that case in connection with criminal offences and penalties), means that the law must clearly define the legal consequences. That condition is met where the individual is in a position, on the basis of the wording of the relevant provision and if necessary with the help of the interpretation made by the courts, to know which acts or omissions will make him (in the cited case: criminally) liable. (37) Exactly the same is true of other areas of law that, by their nature, lead to interferences with the rights of individuals and legal persons, such as tax law and the fiscal responsibility provided for therein. Hence, the Court has also already recognised the particular importance of the legislative proviso in the area of tax law, describing it as a general principle of law forming part of the legal order of the European Union. (38)

68.      Where tax legislation creates obligations for individuals it must, therefore, be certain and its application foreseeable by those who are subject to it. According to the Court, that requirement is to be observed all the more strictly in the case of rules liable to entail financial consequences. (39) In that respect, any obligation to pay a tax and all the essential elements defining the substantive features thereof must be provided for by law. The taxable person must be in a position to foresee the amount of tax due. (40)

69.      The prohibition of abusive practices (under EU law) cannot, however, be based on written primary law and certainly not on the values referred to in Article 2 TEU. Thus, in situations where both the principle of the rule of law and the principle that abusive practices are prohibited are relevant, the foregoing therefore militates in favour of a very careful and restrictive application of the latter.

70.      On that basis, the applicant cannot therefore be blanketly denied the right to invoke the protection of legitimate expectations in the present case. That is all the more true in view of the fact that – as the Republic of Croatia has also asserted – the main proceedings do not concern an allegation of VAT fraud but rather ‘only’ an abuse of rights. That is a crucial difference which also justifies a difference in treatment.

71.      Tax fraud means obtaining a tax advantage by a means constituting a criminal offence. By contrast, abusive arrangements are characterised by the fact that, despite compliance with the relevant legislation (that is to say, lawful conduct), they have the sole effect of achieving a tax advantage that was not an intended objective of the legislation. In the context of an attempt by a taxable person to minimise his, her or its tax burden, the boundary between conduct that can already be regarded as abusive and ‘normal’ conduct that is as yet insufficient to be regarded as abusive may be blurred and depends significantly on the individual case. That is all the more true in view of the fact that the Court recognises that, where there is a choice between two transactions, the taxable person is not required to choose the transaction which entails the highest VAT payment, but is entitled to choose to structure his business so as to limit his tax liability. Taxable persons are thus generally free to choose the organisational structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purpose of limiting their tax burdens. (41)

72.      However, that also requires that the taxable person is able to rely on the legal situation in the Member State concerned. If, as is the case in the main proceedings, there is no statutory provision in that Member State to prevent abusive practices, and if the national law cannot be interpreted as meaning that an invocation of a tax exemption provision with the sole aim of minimising tax is unlawful, then the legal consequence of the tax exemption provided for under the legislation cannot be blanketly denied.

73.      On the contrary, it remains a matter for the referring court to determine, on the basis of all the circumstances of the specific case, whether the applicant could, in the present case, have had a legitimate expectation as to the existence of the legal situation. If the referring court answers that question in the affirmative, the defendant tax authority cannot rely on a general unwritten prohibition of abusive practices under EU law vis-à-vis the applicant if the Member State has not yet transposed that prohibition into national law.

3.      The legal consequence of an abuse of rights

74.      In the above respect, if the referring court should conclude that all of the conditions for a finding of an abuse of rights (including the absence of legitimate expectations) are met, the taxation would have to be based on the factual situation that would have prevailed in the absence of the abusive practices. (42)

75.      For reasons of proportionality, the taxation must, however, go no further than is necessary for the correct charging of the VAT. (43) It therefore follows that, although the defendant tax authority would be entitled to refuse the applicant the right to invoke the small enterprise scheme, the applicant would – as the Croatian tax authority also considered – have a right to deduct the input VAT paid in respect of the tax period in question.

VI.    Conclusion

76.      In the light of the foregoing considerations, I therefore propose that the Court should answer the questions referred for a preliminary ruling by the Upravni sud u Zagrebu (Administrative Court, Zagreb, Croatia) as follows:

The general principle that abusive practices are prohibited does not require the national authorities and courts to ignore – contrary to the principle of legality of taxation – the national exemption for small enterprises enacted pursuant to Article 287 of the VAT Directive if an interpretation of national law in conformity with EU law is not possible and there is no legal basis under the national law for refusing the tax exemption. However, when determining the situation to be taxed, the tax authorities can focus on the economically intended situation and ignore a situation that has been realised solely for the sake of appearances (known as the economic viewpoint approach).

1      Original language: German.

2      Council Directive of 28 November 2006 (OJ 2006 L 347, p. 1) in the version applicable to the year at issue (2018); last amended in that respect by Council Directive (EU) 2017/2455 of 5 December 2017 amending Directive 2006/112/EC and Directive 2009/132/EC as regards certain value added tax obligations for supplies of services and distance sales of goods (OJ 2017 L 348, p. 7).

3      Council Implementing Decision (EU) 2017/1768 of 25 September 2017 authorising the Republic of Croatia to introduce a special measure derogating from Article 287 of Directive 2006/112/EC on the common system of value added tax (OJ 2017 L 250, p. 71).

4      See, fundamentally, judgment of 5 July 2007, Kofoed (C‑321/05, EU:C:2007:408, paragraph 38).

5      Judgment of 18 December 2014, Schoenimport ‘Italmoda’ Mariano Previti and Others (C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraphs 49 and 62).

6      Order of the Court of 9 January 2023, A.T.S. 2003 (C‑289/22, EU:C:2023:26, paragraph 42).

7      Opinions of Advocate General Poiares Maduro in Halifax and Others (C‑255/02, EU:C:2005:200, paragraph 69) and of Advocate General Szpunar in Joined Cases Schoenimport ‘Italmoda’ Mariano Previti and Others (C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2217, paragraph 63). See also judgment of 21 February 2006, Halifax and Others (C‑255/02, EU:C:2006:121, paragraph 85).

8      Judgment of 18 December 2014, Schoenimport ‘Italmoda’ Mariano Previti and Others (C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 42 and the case-law cited therein).

9      Judgments of 18 December 2014, Schoenimport ‘Italmoda’ Mariano Previti and Others (C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 62), and of 22 November 2017, Cussens and Others (C‑251/16, EU:C:2017:881, paragraph 33).

10      Judgment of 18 December 2014, Schoenimport ‘Italmoda’ Mariano Previti and Others (C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 59).

11      Judgments of 18 December 2014, Schoenimport ‘Italmoda’ Mariano Previti and Others (C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 57), and of 22 November 2017, Cussens and Others (C‑251/16, EU:C:2017:881, paragraph 32); fundamentally, see judgment as far back as 14 December 2000, Emsland-Stärke (C‑110/99, EU:C:2000:695, paragraph 56).

12      Judgments of 26 April 2017, Farkas (C‑564/15, EU:C:2017:302, paragraph 37); of 6 October 2021, W.Ż. (Chamber of Extraordinary Control and Public Affairs of the Supreme Court – Appointment) (C‑487/19, EU:C:2021:798, paragraphs 78 and 132); and of 16 June 2022, DuoDecad (C‑596/20, EU:C:2022:474, paragraph 37).

13      See, for example, the clear criticism of two highly renowned VAT-law specialists based in Germany: H. Stadie in Rau/Dürrwächter, UStG, Introduction, paragraph 615 (status: January 2024): ‘While the CJEU’s remarks are in the end correct, they do not demonstrate any dogmatic approach’, and W. Reiß, Umsatzsteuerrecht, 20th ed. 2022, paragraph 303: ‘In this context, the CJEU is bound under EU law – notwithstanding its competence to give authoritative interpretations of EU law – by the directive, while having due regard for the general legal principles of EU law. However, it does not have the task of itself acting as a legislator and imposing requirements on the Member States – or their courts and authorities – that do not arise from the directive.’

14      The proceedings are registered at the ECtHR under application number 16395/18 – ITALMODA MARIANO PREVITI and Others v The Netherlands.

15      See, most recently, judgment of 20 February 2024, X (Lack of reasons for termination) (C‑715/20, EU:C:2024:139, paragraph 70 and the case-law cited).

16      Judgments of 8 November 2022, Fiat Chrysler Finance Europe v Commission (C‑885/19 P and C‑898/19 P, EU:C:2022:859, paragraph 97), and of 5 December 2023, Luxembourg and Others v Commission (C‑451/21 P and C‑454/21 P, EU:C:2023:948, paragraph 119).

17      Judgments of 8 November 2022, Fiat Chrysler Finance Europe v Commission (C‑885/19 P and C‑898/19 P, EU:C:2022:859, paragraph 97), and of 5 December 2023, Luxembourg and Others v Commission (C‑451/21 P and C‑454/21 P, EU:C:2023:948, paragraph 119). See also, to that effect, judgment of 8 May 2019, Związek Gmin Zagłębia Miedziowego (C‑566/17, EU:C:2019:390, paragraph 39).

18      See judgment of 26 February 2019, T Danmark and Y Denmark (C‑116/16 and C‑117/16, EU:C:2019:135, paragraph 117).

19      See, fundamentally, judgment of 21 February 2006, Halifax and Others (C‑255/02, EU:C:2006:121, paragraph 74); see also the recent judgment of 26 February 2019, T Danmark and Y Denmark (C‑116/16 and C‑117/16, EU:C:2019:135, paragraph 97).

20      See judgments of 26 October 2010, Schmelz (C‑97/09, EU:C:2010:632, paragraph 63); of 2 May 2019, Jarmuškienė (C‑265/18, EU:C:2019:348, paragraph 37); and of 9 July 2020, AJPF Caraş-Severin and DiGRFP Timişoara (C‑716/18, EU:C:2020:540, paragraph 40); as well as my Opinion in Schmelz (C‑97/09, EU:C:2010:354, paragraph 33).

21      Judgment of 26 October 2010, Schmelz (C‑97/09, EU:C:2010:632, paragraph 77).

22      See my Opinion in AJFP Caraş-Severin and DGRFP Timişoara (C‑716/18, EU:C:2020:82, paragraph 27).

23      Judgments of 26 October 2010, Schmelz (C‑97/09, EU:C:2010:632, paragraphs 63 and 68); of 2 May 2019, Jarmuškienė (C‑265/18, EU:C:2019:348, paragraph 37); and of 9 July 2020, AJPF Caraş-Severin and DGRFP Timişoara (C‑716/18, EU:C:2020:540, paragraph 40).

24      See my Opinion in AJFP Caraş-Severin and DGRFP Timişoara (C‑716/18, EU:C:2020:82, paragraph 28).

25      See my Opinion in Valstybinė mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos and Others (Joint activity agreement) (C‑312/19, EU:C:2020:310, paragraph 67).

26      See my Opinion in Valstybinė mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos and Others (Joint activity agreement) (C‑312/19, EU:C:2020:310, paragraph 65).

27      Judgment of 21 February 2006, Halifax and Others (C‑255/02, EU:C:2006:121, paragraph 75).

28      Order of the Court of 9 January 2023, A.T.S. 2003 (C‑289/22, EU:C:2023:26, paragraph 40), and judgment of 21 February 2006, Halifax and Others (C‑255/02, EU:C:2006:121, paragraph 73).

29      See Order of the Court of 9 January 2023, A.T.S. 2003 (C‑289/22, EU:C:2023:26, paragraph 40).

30      Judgments of 20 June 2013, Newey (C‑653/11, EU:C:2013:409, paragraph 46), and of 17 December 2015, WebMindLicenses (C‑419/14, EU:C:2015:832, paragraph 35).

31      Judgments of 18 December 2014, Schoenimport ‘Italmoda’ Mariano Previti and Others (C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 60); of 22 November 2017, Cussens and Others (C‑251/16, EU:C:2017:881, paragraph 43 and the case-law cited therein); and, indicatively, of 21 February 2006, Halifax and Others (C‑255/02, EU:C:2006:121, paragraph 84).

32      Judgments of 25 July 2018, Minister for Justice and Equality (Deficiencies in the system of justice) (C‑216/18 PPU, EU:C:2018:586, paragraph 35); of 10 December 2018, Wightman and Others (C‑621/18, EU:C:2018:999, paragraph 63); and of 24 June 2019, Commission v Poland (Independence of the Supreme Court) (C‑619/18, EU:C:2019:531, paragraphs 42 and 43). With regard to the taking into account of the values mentioned therein when interpreting directives, see also judgment of 9 March 2010, Commission v Germany (C‑518/07, EU:C:2010:125, paragraph 41).

33      Judgments of 8 May 2019, Związek Gmin Zagłębia Miedziowego (C‑566/17, EU:C:2019:390, paragraph 39); of 8 November 2022, Fiat Chrysler Finance Europe v Commission (C‑885/19 P and C‑898/19 P, EU:C:2022:859, paragraph 97); and of 5 December 2023, Luxembourg and Others v Commission (C‑451/21 P and C‑454/21 P, EU:C:2023:948, paragraph 119).

34      See Opinion of Advocate General Emiliou in Belgian Association of Tax Lawyers and Others (C‑623/22, EU:C:2024:189, paragraph 42), and judgment of 20 December 2017, Vaditrans (C‑102/16, EU:C:2017:1012, paragraph 50).

35      Judgments of 12 December 2013, Test Claimants in the Franked Investment Income Group Litigation (C‑362/12, EU:C:2013:834, paragraph 44); of 1 July 2014, Ålands Vindkraft (C‑573/12, EU:C:2014:2037, paragraph 127); and of 11 June 2015, Berlington Hungary and Others (C‑98/14, EU:C:2015:386, paragraph 77). See also my Opinion in Banco de Portugal and Others (C‑504/19, EU:C:2020:943, paragraph 79).

36      See, in the context of VAT law only, judgment of 9 July 2015, Salomie and Oltean (C‑183/14, EU:C:2015:454, paragraph 30 and the case-law cited therein).

37      Judgments of 28 March 2017, Rosneft (C‑72/15, EU:C:2017:236, paragraph 162), and of 5 December 2017, M.A.S. and M.B. (C‑42/17, EU:C:2017:936, paragraph 56).

38      Judgment of 8 May 2019, Związek Gmin Zagłębia Miedziowego (C‑566/17, EU:C:2019:390, paragraph 39); of 8 November 2022, Fiat Chrysler Finance Europe v Commission (C‑885/19 P and C‑898/19 P, EU:C:2022:859, paragraph 97); and of 5 December 2023, Luxembourg and Others v Commission (C‑451/21 P and C‑454/21 P, EU:C:2023:948, paragraph 119).

39      Judgment of 9 July 2015, Salomie and Oltean (C‑183/14, EU:C:2015:454, paragraph 31).

40      Judgments of 8 May 2019, Związek Gmin Zagłębia Miedziowego (C‑566/17, EU:C:2019:390, paragraph 39); of 8 November 2022, Fiat Chrysler Finance Europe v Commission (C‑885/19 P and C‑898/19 P, EU:C:2022:859, paragraph 97); and of 5 December 2023, Luxembourg and Others v Commission (C‑451/21 P and C‑454/21 P, EU:C:2023:948, paragraph 119).

41      Order of the Court of 9 January 2023, A.T.S. 2003 (C‑289/22, EU:C:2023:26, paragraph 40); judgments of 21 February 2006, Halifax and Others (C‑255/02, EU:C:2006:121, paragraph 73); and of 17 December 2015, WebMindLicenses (C‑419/14, EU:C:2015:832, paragraph 42).

42      See judgments of 20 June 2013, Newey (C‑653/11, EU:C:2013:409, paragraph 50), and of 17 December 2015, WebMindLicenses (C‑419/14, EU:C:2015:832, paragraph 52).

43      Judgment of 22 November 2017, Cussens and Others (C‑251/16, EU:C:2017:881, paragraph 46).