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VAT and leasing contracts in operations between related companies

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Definition of abusive practices in the VAT framework, in relation to financial leasing contracts. Transactions among group companies


In a judgement dated 22-12-2010, the EU Court (Weald Leasing case, C-103/09) examines whether certain financial leasing contracts between companies pertaining to a British group of companies can be regarded as abusive or fraudulent practices. This ruling examines whether tax planning among group companies in relation to VAT is legitimate or whether there is fraud or not.

In this case, a group company centralised the purchase of assets to subsequently lease out these assets to other group companies under the leasing system (with purchase a very high amount of VAT is always paid, while under the leasing system, VAT is paid progressively, thus deferring the VAT cost of a direct purchase of goods), but indirectly through an apparently independent company. The British authorities concluded that there was fraud to avoid the payment of VAT for the purchase of goods.

The Court referred to its Halifax (C-255/02) ruling, where it had previously outlined the concept of abuse, and concluded that the fact that a group of companies undertakes tax planning in relation to VAT payments does not necessarily mean that there is tax fraud. Taxpayers are not under the obligation to pay more when there are legal alternatives to defer the payment of VAT (e.g., through leasing contracts.)

Finally, the EU Court suggested that the British Court hearing the case should also examine whether the agreements entered into by the group's companies fulfil the arm’s length principle, as this may effectively be a possible reason for fraud as the result of manipulating prices would be altering the sum of VAT to be paid.

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