02 February 2016

The recent case of WebMindLicenses Kft. (WML) v Nemzeti Adó- és Vámhivatal Kiemelt Adó- és Vám Foigazgatóság, which was referred to the Council of Justice of the European Union (CJEU) provides guidance on when cross-border VAT arrangements will be considered "abusive". The case also raises some interesting issues on how far tax authorities can rely on evidence obtained in criminal proceedings when taking civil proceedings against a taxpayer.


WebMindLicenses (WML), a Hungarian company, had licensed know-how which allowed websites to provide “erotic interactive audiovisual services” to Lalib, a Portuguese company.

Because rates of VAT were lower in Portugal than in Hungary, it was more tax efficient for supplies to be made in Portugal through Lalib than directly by WML in Hungary.

Following a tax inspection by the Hungarian tax authority, the first-tier tax authority in Hungary found that licensing the know-how to Lalib was not a genuine economic transaction because it was actually WML, rather than Lalib, which had exploited the know-how by operating a website. WML were therefore found to be liable for VAT in relation to the website. The decision was based, in part, on the fact that Lalib had no capacity to operate the website concerned itself and therefore subcontracted its operation to contractors with whom the sole shareholder and director of Lalib had close personal ties.

On appeal by WML, several questions arising from the case were submitted to the Court of Justice of the European Union (CJEU).

Abusive arrangements

As a well-established principle of EU law, where VAT arrangements are found to be “abusive”, VAT must be recalculated on the basis of the transaction which would have taken place in the absence of the abusive arrangements. In this case, the Hungarian court had found that the transaction should be treated as having taken place in Hungary. Simply taking advantage of a lower VAT rate in another member state is not, per se, abusive.

The CJEU ruled that the arrangements in question would be abusive only if they were "wholly artificial" and concealed the fact that the services concerned (i.e. the operation of the website) were not actually supplied in Portugal but in Hungary. The sorts of factors which would be relevant to establishing this included where Lalib was physically based in terms of premises, staff and equipment. The CJEU also considered whether Lalib carried out the relevant economic activities in its own name, on its own behalf and at its own risk and whether it had the appropriate structure, in terms of premises, human and technical resources to carry out those activities.

That the know-how was created by the sole shareholder and director of WML and that he had control over its exploitation; that the website was operated by subcontractors and the reasons that WML had not exploited the know-how itself were not found to be decisive. In addition, the CJEU commented that the fact that a transaction was subject to a lower VAT rate than it would have been had it been carried out in another jurisdiction did not, in itself, make it abusive.

However, the CJEU did rule that, where arrangements are abusive, VAT will be chargeable as if the transaction had taken place without the abusive arrangements regardless of whether VAT had already been charged in another member state.

Evidence obtained in criminal investigation

The Hungarian tax authority had used evidence obtained in a criminal investigation against WML without its knowledge in the civil case against it.

WML argued that this was in conflict with its fundamental rights under the European Treaty, including its right to a fair trial; its right to a defence and its right to access data collected about it.

The CJEU agreed with WML that actions such as interception of telecommunications and seizure of emails interfered with a taxpayer's rights under the Treaty and noted that any such interference had to be justified on the principle of proportionality.

It therefore provided guidance on when a tax authority could use evidence obtained in a criminal investigation in civil proceedings against a taxpayer without breaching that taxpayer's rights under the Treaty. The CJEU held that before admitting such evidence, the national court must verify that the way the evidence was obtained was compatible with national law and necessary in the context of both the criminal procedure and the civil procedure. The national court also needed to establish that the taxpayer had access to the evidence obtained about it and an opportunity to be heard. If these requirements were not met, the evidence obtained in the criminal procedure should be disregarded in the civil one.

The Decision

It was not within the CJEU's remit to come to a decision on behalf of the Hungarian court, However, its judgment makes clear that the bar for arrangements being "abusive" is, in some respects, higher than the Hungarian court thought. In addition, the Hungarian court did not correctly consider the admissibility of evidence obtained in the criminal procedure in the context of WML's rights under the Treaty.

The decision should make it easier for taxpayers to argue that cross-border VAT arrangements are not abusive and to challenge decisions which were made on the basis of evidence obtained in criminal proceedings, where the evidence was obtained or used in breach of national law or the taxpayer’s Treaty rights.

For further information, please contact John Barnett.

Key contact

Headshot John Barnett

John Barnett Partner

  • Head of Partnerships
  • Private Client Services
  • Tax

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