Abuse of Rights - EC Law

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BEG Annual General Meeting 2006

Abuse of Rights in EC Law Origins and History By Paul Lasok QC Paper presented at the Bar European Group Annual General Meeting in Ljubljana, Slovenia, June 2006

INTRODUCTION Generally speaking, the concept of the abuse of rights has cropped up in the case law of the Court of Justice of the European Communities (the ECJ) in three contexts: (i) situations in which it has been asserted that reliance upon EC law amounts to, or results in, an abuse of rights in relation to domestic law (situations calling for the application of a domestic concept of abuse of rights); (ii) situations in which directly applicable provisions of EC law have been said to be the subject of abuse for the purpose of extracting a benefit (essentially financial) from the Community; and (iii) situations in which an abuse of rights is said to have arisen in an area that has been harmonised by EC legislation that does not contain, explicitly, an anti-abuse rule (the second and third situations calling either for the application of a domestic concept of abuse of rights or an EC law concept). Those situations generally concern the possibility of an abuse of rights by private persons. Another situation that should be canvassed is the possibility of abuse by Member States. The concept of the abuse of rights has recently become of particular interest as a result of the judgment in Case C-255/02 Halifax plc and others v Commissioners of Customs and Excise,1 a case falling within the third type of situation referred to above. None of those situations is necessarily one in which there is fraud or dishonesty; and the discussion that follows is therefore concerned with manoeuvres that lack that character. THE CONCEPT OF ABUSE OF RIGHTS Abuse of right(s) is the usual form in which the French expression abus de droit is translated into English. The French language (like German) does not distinguish, as clearly as the

1 [2006] STC 919.


English language, between right and law. In order to differentiate between those terms, French (like German) uses circumlocutions: droit subjectif is a right; droit objectif is law. The phrase abus de droit is therefore linguistically ambiguous because droit does not carry with it the qualification necessary in order to make it clear that the droit referred to is a right or law. Accordingly, the phrase is sometimes translated into English as abuse of right and sometimes as abuse of law. In one sense, that does not matter and may, indeed, be a red herring, particularly if one considers that, in a technical sense, right and law are, in truth, synonymous.2 However, in its original language (French), the phrase is conventionally used to refer to the abuse of a right; and will be used in that sense here.3 In legal systems in which rights are conferred or defined by written law, the boundaries to the right, the circumstances in which it may or may not be exercised, and the circumstances in which the right or its exercise may amount to a wrong (the situation implied in the case of the abuse of a right) are, or ought to be, matters of interpretation of the relevant legal provision(s) because it is the responsibility of the legislature to define what is (a) right and what is (a) wrong. It is very often the case that written law adequately serves that purpose by defining the scope or purpose of a legal right or the limits on its lawful exercise. Generally speaking, where the social, political or economic qualifications to a right (or its exercise) are stated in written law, or can be inferred from it, there is, technically, no such thing as the abuse of the right in question: abusive situations can only be those where the right is not in play at all; otherwise, if the right is in play, the application of the term abuse is nothing other than a rhetorical device whose purpose is to express disagreement with a particular, but lawful, exercise of the right. A different situation arises in connexion with (apparently) unqualified rights. As Pescatore notes,4 neminem laedit qui suo iure utitur but what happens if that is not so? In relation to that problem, the French courts developed a concept of abus de droit to cope with certain perceived misuses of unqualified rights: if, viewed objectively, the exercise of what appears to be a legal right makes no sense otherwise than as being done for the predominant purpose of harming someone, the exercise is abusive and wrongful. 5 A similar solution appears in the German Civil Code (the BGB): Article 226 provides that it is unlawful to exercise a right where the sole purpose of the exercise is to harm another. It seems that Article 226 is of little importance in practice.6 In some instances, French written law contains a written anti-abuse rule that deals with perceived abuses in a specified way. Where such a rule takes a written form, it technically operates as a limitation on the legitimate exercise of the right or on the right itself. However, in some instances, the written rule encapsulates a rule that originates in judicial decisions.7 Accordingly, it is difficult to

2 Cf. the discussion in Hans Kelsen, The Pure Theory of Law (University of California Press, 1967), page 125 and following (this footnote has been inserted in order to create an impression of erudition). In some instances, the phrase (abus de droit) has been applied simply to the situation in which a legal provision has been exploited in order to produce a result inconsistent with its purpose. However, those are usually situations in which the provision confers a right (that is why it is being exploited). Accordingly, the ambiguity (are we talking about abusing a right or abusing the law?) remains. 3 For what follows in the rest of this section, see generally Pescatore, Introduction a la Science de Droit (Luxembourg, 1960 1978 revision), paragraphs 200 and 202. A brief summary of the position in the Member States (as they were in 1998) appears in Case C-367/96 Kefalas v Greece [1998] ECR I-2843, paragraph 22 of the Opinion of Advocate General Tesauro (pages 2855-2856). There is a considerable volume of literature on the subject. A number of relevant works are cited in the Advocate Generals Opinions in the cases referred to below. The Advocate Generals Opinion in the Halifax case contains a lengthy resume of the relevant ECJ case law. 4 Op. cit., paragraph 200. 5 Amos & Waltons Introduction to French Law (OUP, 1969), pages 219-220 (an old edition but none the worse for that). Different views have been expressed as to the rationale of the principle: see Weill and Terre, Droit Civil Introduction Generale (Dalloz, 1979), paragraph 72 (another old edition). 6 Pescatore, op. cit., paragraph 202; Cohn, Manual of German Law (BIICL, 1968), paragraph 182. 7 E.g. the French fiscal abuse rule: see the case note on Bendjador and Lalande in Droit Fiscal 1990, no. 1, 28.


be doctrinaire about the difference in principle between the legislative approach to abuse of a right (which appears technically to relate to the definition of the right) and the jurisprudential approach (which, technically, should be regarded as imposing a limit on the exercise of a lawful right). On the basis of the hallowed authority of Bradford v Pickles,8 it is usually stated that the common law of England and Wales knows no doctrine of the abuse of rights:9 either one has a right and can exercise it or one does not; if there is a specific rule preventing the exercise of a right in a particular way, then the right does not go that far. In fact, however, English law recognises a true concept of the abuse of a right: the principles of Equity were developed largely for the specific purpose of preventing the abusive exercise of common law rights.10 Equity restrained, and restrains, the exercise of common law rights only in particular circumstances; but, as has been seen, different jurisdictions have taken different views of when the exercise of a right needs to be qualified.11 At all events, there appear to be two strands of thought regarding what exactly an abuse of a right is. The first is that the concept refers to the definition of the right.12 The second is that it refers to the (unacceptable) manner in which a right is exercised. It will have been noted that, at least in French and German law, the concept of abuse has arisen primarily in connexion with the perceived misuse of private law rights and has generated a concept that is linked to the causing of harm to another: in other words, where harm is caused, it may not be a defence to assert that the cause was the exercise of a legal right. That approach does not immediately appear to be transposable to matters of public law: in relation to tax, for example, it does not cause damage to the State for an individual to retain (lawfully) ownership of his own property since it is for the State to define with sufficient clarity the obligation of the individual to hand over his or her property to the State.13 There are, of course, cases in which the individual has a right as against the State that is capable of being abused; but, more often than not, what may be characterised as an abuse of right is really an attempt to avoid an obligation imposed by law or, to put it another way, to arrange or bring about a situation that falls outside the scope of the obligation. That has a consequence: the need for a more sophisticated approach to the remedy that is appropriate to deal with the problem. In the sphere of private rights, it may be sufficient to classify the abusive exercise of a right as a wrong because that will bring in its train civil liability for the harmful consequences of the commission of the wrong. However, if it is the State that is seeking to exercise a legal right (more accurately, a power) and the individual is attempting to avoid the correlative obligation, the problem is more complex, not least because, properly speaking, what is being abused is a liberty or a freedom. 14 That leads on to the question: can the State abuse a right? The public law parallel to abuse of right has been said to be detournement de pouvoir (or misuse of power); and the distinction between acting outside the true scope of a power and misusing it has also been drawn.15 However, that distinction appears to be even more difficult to draw in the case of public powers than in the

8 [1895] AC 589. 9 Allegedly, of the Member States in 1998, only Denmark, Ireland and the United Kingdom did not recognise the concept of abuse of right: see Kefalas (above), footnote 23 of the Opinion of Advocate General Tesauro (page 2855). 10 E.g. the 19th century cases on equitable estoppel, when injunctions would be issued to halt proceedings before the common law courts because the equity of the bill impeaches the title to the legal demand. 11 Cf. the Kefalas case (above), paragraph 22 of the Advocate Generals Opinion (page 2856). 12 E.g. Case C-212/97 Centros Ltd. v Erhvervs-og Selskabsstyrelsen [1999] ECR I-1459, per Advocate General La Pergola (Page 1477). 13 Raids on the Revenue are, of course, in a different category: e.g. F.A & A.B. Ltd. v Lupton [1972] AC 634. 14 In Cases C-439/04 and C-440/04 Kittel v Belgium, Advocate General Colomer pointed out that taxpayers cannot be criticised for profiting from a legal provision or exploiting a gap in the law so as to pay less tax: see paragraph 54 of his Opinion (14 March 2006). That seems to underline the difference between raids on the Revenue and instances where a tax liability is minimised. 15 E.g. Pescatore, op. cit., paragraphs 200-201 and 203.


case of private rights because, whereas the latter can be unqualified, it is extremely difficult, if not impossible, to conceive of an unqualified public power. While private persons can be said to possess basic or fundamental rights (many of which may be unqualified)16 because of their nature as human beings, the same cannot be said of public bodies or of individuals who exercise the powers of the State (at least so far as States subscribing to modern, Western, constitutional traditions are concerned) because public powers are qualified, at the very least, by the purposes for which they have been created and conferred. Although misuse of power is a specific ground on which, for example, the lawfulness of an act of a Community institution may be annulled,17 another parallel with abuse of right (as that concept is applied in the context of private rights) is the application of the principle of proportionality.18 However, it does not seem correct to draw too close a parallel between the disproportionate exercise of a public power and the abuse of a private law right. At the risk of being too simplistic, the principle of proportionality, as applied to the exercise of public powers, is based on two main concerns, both of which are encapsulated in the basic consideration that State action must be limited to what is strictly necessary in order to secure the objectives served by the particular power that has been conferred on the State (or the State body in question). The first concern is to preserve the liberty of the individual from the encroachments of the State. The second is to ensure the proper direction of the resources of the State. The second concern is an efficiency consideration that, like the first concern, ultimately derives from the relationship between the individual and the State: if the action of the State bears down more heavily than it need to in relation to one part of the States activity, there is a risk not only that the resources of the State are being overly concentrated on that activity, at the expense of other parts of the States activity, but also that inequalities and social and political tensions may emerge. Due to the separation of powers, the role of the courts in supervising the exercise of State power by reference to the principle of proportionality is necessarily limited: it is not the function of the courts to second guess the decisions of the State and turn themselves into administrators. It is rather difficult to apply the same approach to the exercise of private rights and liberties because the underlying concerns are completely different. An individual is free to drive along the roads (subject to observance of regulations like speed limits) and has a right to, for example, exploit his or her real property by mowing the lawn and keeping it as kempt or unkempt as her or she wishes. By reference to the principle of proportionality, one might criticise an individual for driving a car that was larger or more highly powered than was strictly needed (the use of large, four-wheel drive vehicles by denizens of fashionable areas of London springs to mind) or using a large lawn mower when a smaller one would do (or mowing the lawn so that the grass was very sort rather than simply being sufficiently short to look neat enough); but such criticisms do not readily translate into legal concerns. Private persons (and, indeed, the State) are not normally concerned with the use made by other private persons of their own resources when exercising their rights and liberties. Traditionally, from the perspective of proportionality, the use of a private right turns into an abuse only when the harm caused to another by the exercise of the right is wholly out of proportion to the benefit enuring to the holder of the right (strictly speaking, following the French approach, the disparity must be so great that the only sensible explanation for the exercise of the right is that the predominant purpose is to cause harm to another). Hence, the principle of proportionality is applied by reference to completely different perspectives depending upon whether the alleged abuser is the State or a private person: so far as the State is

16 One necessarily notes in passing Article 17 of the European Convention on Human Rights and Fundamental Freedoms, which (under the heading prohibition of abuse of rights) provides that the Convention cannot be interpreted as implying the existence of a right to engage in any activity or perform any act aimed at destroying any right or freedom under the Convention or limiting such a right or freedom to an extent greater than envisaged in the Convention. 17 Article 230 of the EC Treaty. See, for example, Lasok and Millett, Judicial Control in the EU (Richmond, 2004), paragraph 114. 18 E.g. Advocate General La Pergola in Centros (above), page 1477, and the works cited in footnote 42 on that page.


concerned, the essential question is what are, or were, the alternatives properly open to the State, rather than the degree of any harm caused to private persons; whereas, so far as private persons are concerned, the essential question is the explanation for the harm caused to others. All that seems a rather long-winded way of coming to the following conclusions. First, the distinction between the definition of a right or power and the (technical) abuse of that right or power seems to be rather tenuous. The abuse of right (or power) concept is better expressed as concerned with a particular type or types of limitation on the exercise of a right or power which can manifest themselves either in the form of written law or in the form of judicial decisions. What matters is not the legal nature or origin of the limitation but rather its rationale. Secondly, there appears to be no particular reason why public bodies and private persons are in any materially different legal position so far as the application of the concept is concerned. In the case of the former, the concept may be described as the misuse (or abuse) of a power rather than a right. Despite the conceptual difference between a power and a right, that particular aspect of the different positions of public bodies and private persons does not appear to be material. Thirdly, the concept of abuse of right (or power) is ultimately concerned with the exercise of a right (or power) either for ends different from the legal purpose served by the right (or power) or in an excessive or disproportionate way.19 Fourthly, whatever formulation is used to express the concept, the application of the concept to given sets of fact cannot in all cases be guaranteed to be free from difficulty; and there are material differences in the way in which the concept ought to be applied to private persons and to the State. Fifthly, the concept is suited to the exercise of rights or powers but is not suited to converse situations, that is, to the conduct of persons who are the object of the exercise of a right or a power. In particular, so far as private persons are concerned, the concept originated in concerns about the exercise of private rights where such an exercise could, in effect, cause gratuitous harm to another. It does not follow that the concept can be applied to private persons, without modification, in the context of public law. To develop the last point, saying that abuse of right is not appropriately applied to situations converse to the exercise of a right (or power) is not the same as saying that such converse situations cannot be abusive or amount, or give rise, to legal wrongs. It is, perhaps, more a comment on the legal techniques that may be required to resolve the problem. In the case of an abuse of right or power, it is sufficient to paralyse or render ineffective in law the abusive exercise or classify it as a wrong that will, conventionally, attract the usual legal consequences that follow when a legal wrong is committed (for example, liability in damages for loss suffered). In converse situations, either the conduct of the putative obligee is unsuccessful, in which case the problem falls away; or it is, or appears to be, successful. In the latter event, partic ularly in the case of the exercise of a public power, the question arises as to how the public power is to be applied in the context of the factual and legal situation that has actually arisen (rather than the context of the situation as it would otherwise have been). Classifying the manoeuvre as a legal wrong is pointless because the State is not interested (or should not be interested) in attracting the usual legal consequences of a legal wrong: it is (or should be) interested in securing the correct application of the legal power.

19 That formulation is different from that adopted by Advocate General Tesauro in Kefalas (above), paragraph 24 of his Opinion (page 2856).


ABUSE OF RIGHT IN EC LAW Before turning to consider the various situations in which the question of abuse of rights has arisen in EC law, it may be useful to identify the principal cases. In Case C-367/96 Kefalas v Greece,20 the ECJ was asked to answer the question whether, when dealing with an allegation of abuse of right, a national court could apply a domestic definition of the concept or had to apply a Community law definition. The context was the exercise of private rights. The facts were that, under Greek law, the government had power (amongst other things) to apply to companies in serious financial difficulties a scheme whereby their management and administration would be taken over by a public body (the OAE). That scheme was applied to a company in which Mr. Kefalas was a shareholder. The OAE decided to increase the capital of the company and had power to do so in derogation from the rules normally applied to limited liability companies. Former shareholders had a preferential right to acquire new shares in the company within one month. It is not clear how realistic that right was. At all events, Mr. Kefalas was faced with a situation in which his interest in the company had been diluted without his consent. He and a number of other shareholders challenged the OAEs right to increase the capital of the company unilaterally, citing Article 25 of the Second Company Law Directive,21 which provided that increases in capital had to be decided by the company in general meeting. That provision had not been complied with because the OAE had acted under the derogation provided for in Greek law. For their temerity, Mr. Kefalas and the other shareholders were accused by the OAE and the Greek government of abusing their rights contrary to domestic law. In a characteristically authoritative Opinion, Advocate General Tesauro concluded that, ultimately, the question was one of definition: a national court could withdraw the right to rely upon rules of Community law in well-defined cases, in which, in the final analysis, such rules were not meant to apply.22 In its judgment, the ECJ held that a domestic anti-abuse rule 23 can, under Community law, be applied for the purpose of assessing whether or not the exercise of a right under EC law is abusive; but the ECJ qualified that ruling by pointing out that the application of such a national rule must not prejudice the full effect and uniform application of Community law in the Member States and that it is not open to national courts, when assessing the exercise of a right arising from a provision of Community law, to alter the scope of that provision or to compromise the objectives pursued by it.24 The ECJ then held that Community law does not preclude a national court, on the basis of sufficient telling evidence, from examining whether, by bringing an action under [the provision of EC law there in issue][the claimant] is seeking to derive, to the detriment of [another person], an improper advantage, manifestly contrary to the objective of that provision [that is, the provision of EC law there in issue].25 In Centros, Advocate General La Pergola regarded that passage as formulating the EC law principle of abuse of right.26 As can be seen, the substantive elements of the principle are: (i) re liance on a provision of EC law; (ii) the derivation of an improper advantage to the detriment of another; and (iii) the advantage must be manifestly contrary to the objective of the provision relied upon. There is also an evidential requirement: the evidence of abuse must be sufficiently telling. In Case C-373/97 Diamantis v Greece,27 the ECJ refined the test by requiring there to be objective evidence of abuse and specified that the remedy is to deny the abuser the benefit of the provision relied on by him.

20 [1998] ECR I-2843, in particular, paragraph 28 of the judgment. 21 Directive 77/91 (OJ 1977 No. L26/1). 22 See, in particular, paragraph 27 of his Opinion (page 2858). 23 In casu, Article 281 of the Greek Civil Code, which provides that the exercise of a right is prohibited where it manifestly exceeds the bounds of good faith or morality or the economic or social purpose of that right: see paragraph 4 of the Advocate Generals Opinion (page 2846). 24 Paragraphs 21-22 of the judgment. 25 Ibid., paragraph 28. 26 Above, see paragraph 20 and footnote 41 of his Opinion (pages 1476-1477). 27 [2000] ECR I-1705, paragraphs 33-34 of the judgment.


Later in 2000 (the year in which Diamantis was decided), the ECJ decided the Emsland Starke case.28 There, abuse was defined as comprising two elements: first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of the rules has not been achieved and second, a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it. That formulation is not the same as that adopted in Kefalas. It boils down to the following: (i) formal observance of the conditions laid down by a provision of EC law; (ii) failure to achieve the purpose of that provision; (iii) intention to obtain an advantage; and (iv) the artificial creation of the conditions laid down for obtaining that advantage. In Halifax,29 abuse (or, rather, an abusive practice) is described as transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Community law. The ECJ went on to hold: an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of [EC law] and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage.30 The differences between the Kefalas formulation and the Emsland Starke and Halifax formulations can be explained by the different circumstances of the cases. Emsland Starke and Halifax were both cases in which a manoeuvre was made in order to extract a particular financial benefit afforded (in principle) by the legislation in question. Kefalas (like Diamantis) was a purer case in that there was no manoeuvre: it was the straightforward exercise of a right (or reliance upon a legal provision) for a purpose that was said to be ulterior or, at least, not what the legislation intended. Despite the difference in formulation, there appears to be one common feature: the use of the provision in question to obtain an advantage that is (manifestly) contrary to the purpose or objective of the provision. In the Emsland Starke and Halifax type of case, the provision in question gives a particular advantage in certain circumstances and what has happened is that there has been formal observance of the conditions attached to the grant of the advantage but the actuality is rather different. In contrast, in the Kefalas type of case, there is no lack of correspondence between form and reality. Instead, the provision in question does confer the advantage claimed, in the actual circumstances of the case, but the vice lies in the facts that the advantage is improperly to the detriment of another31 and manifestly contrary to the objective of the provision. Since the Kefalas type of case does not involve artificial manoeuvres or the creation of a divergence between form and substance, a question inevitably arises concerning the precise advantage that results from (or in) the abuse: how can it be said to be manifestly contrary to the objective of the provision in question? There seem to be two possible answers to that question. The first is that it indicates that the possibility of there being an abuse in Kefalas type cases is exceedingly rare (an answer that is certainly consistent with the fact that, in the cases, there appear to be no, or virtually no, true cases of a Kefalas type abuse). The second possible answer is that, in Kefalas type

28 [2000] ECR I-11569. See further below. 29 Above, paragraphs 69 and 74-75 of the judgment. 30 Kittel v Belgium (above), Advocate General Colomer summarised the position as being that there must be (i) apparent observance of the law which produces a result inconsistent with what the law envisages; and (ii) no explanation for the transaction(s) other than to obtain an unjustified benefit (benefice indu) see paragraphs 55-56 of his Opinion (14 March 2006). 31 All rights exercisable against another can be said to be detrimental to that other. The problem lies in determining the point at which the detriment ceases to be an acceptable consequence of the (proper) exercise of the right.


cases, the advantage referred to is not the same as the advantage envisaged in an Emsland Starke or Halifax type of case. In the latter type of case, the legal provision in question confers a right, giving rise to a correlative obligation, in certain circumstances for a specific purpose or to achieve a specific objective. The person concerned engineers a situation in which the conditions giving rise to the right and the correlative obligation are, to all appearances, satisfied. The advantage sought, and referred to in the cases, is the operation of the correlative obligation. When that is operated, the result is a factual situation that is inconsistent with the purpose served by the right/obligation. In Kefalas type cases, on the other hand, the advantage sought, and referred to in the cases, appears to be the consequence, detrimental to the obligee, of the operation of the correlative obligation. So far as Emsland Starke and Halifax type cases are concerned, it is far from clear (despite the views to the contrary expressed by others) that the formulations propounded in those two cases are the same. ABUSE OF RIGHT BY THE INVOKATION OF EC LAW AGAINST A RULE OF DOMESTIC LAW From time to time, it has been said that reliance upon EC law is the abuse of a right where it leads to the avoidance of a rule of domestic law. The problem is a real one because that is precisely the scheme and purpose of EC law: conceptually, seen from the perspective of domestic law, the EC is nothing other than a vast avoidance exercise. The ECJ has recognised that a Member State has a legitimate interest in preventing certain of its nationals, by means of facilities created under the Treaty, from attempting wrongly to evade the application of their national legislation.32 However, it has not been particularly expansive on the means by which that legitimate interest may be protected.33 In dealing with claims that reliance on EC law rights is abusive, the case law has thrown up two types of situations: cases where an EC law right is not actually being exercised and those where what is at issue is the definition of the claimed EC law right. The best known example of the former is probably Case 229/83 Association des Centres distributeurs Edouard Leclerc and others v Sarl Au ble vert,34 in which an attempt was made to circumvent French legislation fixing the resale price of books by exporting books from France for the sole purpose of reimporting them and claiming that the French legislation offended the free movement of goods rules in the EC Treaty. The ECJ held that the free movement of goods rules did indeed prohibit the application of the French legislation to reimported books but laconically observed that that result was not applicable where circumvention of the French legislation was the sole purpose of the movement of the books. Putting it another way, there was an EC law right to circumvent the French legislation that arose for the purpose of enabling a person to market books imported into France from another Member State and, thus, as the consequence or complement of a primary right. However, the importation that took place in the Au ble vert case did not involve the exercise of the primary right but was a device employed in order to generate the consequential or complementary right.

32 Case 115/78 Knoors v Secretary of State for Economic Affairs [1979] ECR 399, paragraph 25 of the judgment. Cf. cases like Case C23/93 TV10 SA v Commissariaat voor de Media [1994] ECR I-4795, paragraphs 20-22 of the judgment. 33 For example, in Knoors, the ECJ remarked that it is always possible for the Community legislature to remove the causes of any abuse of the law (paragraph 27 of the judgment), implying that, if that is not done, Member States may be handicapped in the action that they may take unilaterally. 34 [1985] ECR 1 (see paragraph 27 of the judgment).


A more difficult situation to deal with is illustrated by a comparison between Case 33/74 van Binsbergen v Bestuur van de Bedrijfsvereniging voor de Metaalnijverheid35 and Case C-212/97 Centros Ltd. v Erhvervs-og Selskabsstyrelsen.36 The van Binsbergen case concerned the activities of a Mr. Kortmann, a Dutch national who acted as an unqualified legal adviser and represented his clients in Dutch courts and tribunals in which the parties were not obliged to instruct a professionally qualified lawyer. In the middle of proceedings before a Dutch social security court, he changed his residence to a place in Belgium. He was then informed by the court that he could no longer represent his client because, under Dutch law, only persons established in the Netherlands could act as representatives or advisers of a party to the proceedings. Mr. Kortmann objected and that aspect of the proceedings was referred to the ECJ for a preliminary ruling. The common sense answer to Mr. Kortmanns difficulty is obvious. However, in paragraph 13 of the judgment, the ECJ observed: a Member State cannot be denied the right to take measures to prevent the exercise by a person providing services whose activity is entirely or principally directed towards its territory of the freedom guaranteed by Article 59 [as it then was] for the purpose of avoiding the professional rules of conduct which would be applicable to him if he were established within that State. It went on to say: such a situation may be subject to judicial control under the provisions of the chapter relating to the right of establishment and not of that on the provision of services. In Centros, a Danish couple, Mr. and Mrs. Bryde, set up a company in England. Only two shares were issued. According to the Advocate General, the companys share capital of 100 had not actually been paid up but was kept in a cash box at Mr. Brydes home. The company address was that of a friend of the Brydes in the United Kingdom. At the time of the litigation giving rise to the reference to the ECJ, the company had never done any business. The litigation arose because Mrs. Bryde approached the Danish authorities for the purpose of seeking recognition of the companys memorandum of association in order to set up a branch of the company in Denmark. At that time, companies established in Denmark had to have a paid-up capital of not less than DKK 200,000. However, there was no minimum capital requirement for companies from other Member States seeking to establish a branch in Denmark. The Danish authorities took the view that the Brydes were employing a device to circumvent the Danish minimum capital requirement and refused to register the branch. In the ensuing legal proceedings, Mr. Bryde gave evidence, saying that he did not know if the purchase of the English company and the subsequent establishment of a branch in Denmark could be called circumvention of Danish law but it is certainly easier to find 100 than DKK 200,000.37 The court of first instance effectively applied van Binsbergen and found against the Brydes. On appeal, the matter was referred to the ECJ. The ECJ ruled (in brief) that the Brydes were not abusing the right of establishment enshrined in the EC Treaty because, even if they were seeking to avoid rules of Danish law, that was precisely what the Treaty enabled them to do.38 At first sight, the dictum in van Binsbergen, quoted above, is difficult to reconcile with Centros. However, those cases refer to different things. Van Binsbergen is concerned with the concept of establishment, which is essentially a matter of economic fact. If a person is resident in Member State A but his or her economic activity is conducted wholly in Member State B, the economic facts point to an establishment in B despite the notional, or formal, establishment in A. In contrast,

35 [1974] ECR 1299. 36 [1999] ECR I-1459. 37 [1999] ECR I-1459 at 1463. 38 See, in particular, paragraphs 26-27 of the judgment, which follow a general pronouncement on the subject of abuse and circumvention in paragraphs 24-25.


Centros is concerned with the freedom to use a particular legal form (a company, or legal personality) in order to carry on an economic activity and, more particularly, the right to select from among the different legal forms available in different Member States the one that is most suitable. The dictum in van Binsbergen and the judgment in Centros indicate the necessity to identify the right that is in play before concluding that it is being, or may be, abused. Where an EC law right is in play, it does not follow that domestic abuse of right rules cannot be applied;39 but they apply subject to qualifications imposed by EC law.40 ABUSE OF DIRECTLY APPLICABLE PROVISIONS OF EC LAW FOR THE PURPOSE OF OBTAINING A BENEFIT FROM THE COMMUNITY Fraud has sadly been endemic in the context of the Common Agricultural Policy. In addition to that, the complexity of the EC legislation dealing with the distribution of Community funds generally has attracted the kind of literalistic approach to the interpretation and application of the legislation that is familiar in the fiscal sphere. However, whereas tax legislation is generally concerned with the extent of the States right to take the property of private persons, the EC agricultural legislation is usually concerned with the distribution of Community funds to private persons, very often coupled with financial obligations imposed on the latter whose objective is to secure performance of the conditions to which an entitlement to Community funds is subject. Case C-110/99 Emsland Starke GmbH v Hauptzollamt Hamburg-Jonas,41 concerned the regime for granting export refunds for the export to third countries of products based on potato starch and wheat starch. Emsland Starke exported the products to Switzerland, claimed the refund and received it. It transpired that the goods had been sold to one of two related Swiss companies (Fuga and Lukowa). Immediately after the goods had been released for home consumption in Switzerland, they were transported back into the Community, unaltered and using the same means of transport (in relation to some at least of the consignments, the transport company invoiced Fuga for the through transport of the goods from their point of departure in the Community to Switzerland and back into the Community). Import duties were paid when the goods were reimported into the Community. Article 4(3) of Council Regulation No. 2988/9542 set out an anti-avoidance or anti-abuse rule under which acts established to have as their purpose the obtaining of an advantage contrary to the objectives of Community law by artificially creating the conditions required for obtaining that advantage would result in either the failure to obtain the advantage or, if it had been obtained, the withdrawal of the advantage. However, Regulation No. 2988/95 was not applicable at the time when the transactions in question were performed. Nothing daunted, the ECJ held that, if there were an abuse, the EC legislation setting out the rules for granting an export refund (which were adopted before Regulation No. 2988/95 and said nothing on the point) did not preclude an obligation to repay an export refund. Abuse was defined in two ways in the judgment: (i) as a purely formal dispatch from Community territory with the sole purpose of benefiting from export refunds; and, as noted above, (ii) as first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of the rules has not been achieved and second, a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it. The existence of

39 E.g. Centros (above), paragraphs 24-25 of the judgment. 40 See further below. 41 [2000] ECR I-11569, paragraphs 37-38 and 50-53 of the judgment. 42 OJ 1995 No. L312/1.


the second element could be established by evidence of collusion between the exporter receiving the refunds and the third country importer of the goods. ABUSE OF HARMONISING LEGISLATION The Kefalas case, referred to above, was an example of an alleged abuse of a provision of harmonising legislation. Such legislation typically contains no anti-abuse rule. At first sight, the conclusion might be that, as harmonisation does not extend to the abuse of a right, domestic anti-abuse rules apply, even though they vary from State to State. If that were so, the only constraint placed by Community law on the operation of such domestic rules would be that they should be limited to what can properly be understood as an abuse and should not be allowed to become disguised means of fettering the proper exercise of EC rights (the abusive use of an anti-abuse rule). That was effectively the approach taken in Case C-441/93 Pafitis v Trapeza Kentrikis Ellados.43 In cases like Kefalas and Diamantis,44 however, the ECJs position had evolved to the point at which domestic anti-abuse rules could be used only to the extent that they encompassed the EC concept of abuse of right. That necessarily means the non-application of domestic anti-abuse rules that go beyond the scope of that concept, even though, ex hypothesi, the relevant EC harmonising legislation contains no express provision harmonising such rules. The evolution was effectively completed with the decision in Halifax,45 which effectively dispenses with the need for a domestic anti-abuse rule. Although Emsland Starke was cited in Halifax, the two cases do not adopt the same test for what amounts to an abuse. Whereas the former opted for a two stage test comprising an objective and a subjective element, the latter uses a two stage objective test: (i) despite formal compliance with the conditions laid down by the Sixth VAT Directive46 and the national implementing measures, the conduct in question must have as its result the obtaining of a fiscal advantage that is contrary to the objective of the provisions in question; and (ii) it must result from a combination of objective factors that the essential aim was to obtain a fiscal advantage.47 As will have been noted, in Diamantis 48 the ECJ introduced the requirement of objective evidence of an abuse. In that context, the ECJ seems to have been referring to abuse as a concept that must be objectively verifiable by reference to the evidence as opposed to something that can be established on the basis of some kind of subjective prejudice against people who seek to exercise rights under EC law. In the context of Halifax, however, the reference to objective factors harks back to earlier passages in the judgment in which the ECJ emphasised that, in relation to VAT, the appropriate analysis is objective in character, in the sense that the activity is considered per se and without regard to its purpose or results.49 However the concept of abuse in the Halifax case is to be understood, the implication of that judgment is that EC harmonising legislation contains by (judicial) implication a harmonised concept of abuse and a harmonised anti-abuse rule. That inevitably raises a question about the continued applicability of domestic concepts of abuse and domestic anti-abuse rules: on the face of it, neither can now be said to be effective in any area covered by EC harmonising legislation. ABUSE BY MEMBER STATES Although EC law appears to contain no express rule dealing with abuse by Member States, provisions such as Article 30 of the EC Treaty can be seen to contain such a rule. The proviso in Article 30, that the prohibitions or restrictions permitted by that provision shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between member

43 [1996] ECR I-1347, paragraphs 67-70 of the judgment. 44 Above. 45 Above. 46 Council Directive 77/388 (OJ 1977 No. L145/1). 47 Paragraphs 74-75 of the judgment. 48 Above. 49 Paragraph 55 of the judgment (and see also paragraphs 56-60).


States is recognisably an anti-abuse rule. When the ECJ developed a principle similar to Article 30 in the context of the right of establishment and the freedom to provide services, it qualified it in a similar way so as to preclude the possibility of it being used abusively.50 CONCLUSION In the Kefalas case,51 Advocate General Tesauro said: any legal order which aspires to achieve a minimum level of completion must contain self-protection measuresto ensure that the rights it confers are not exercised in a manner which is abusive, excessive or distorted. He also took the view that abuse of right is a legal concept which certainly has a home, or at least a foundation, in well-established legal systems, but much less so in a legal order like that of the Community, whose evolution towards integration is far from being capable of being considered to be complete. The first statement would no doubt attract universal assent. In relation to the second, the recent evolution of the ECJs case law shows that abuse of right certainly does have a home in the Communitys legal order. More importantly, however, the EC principle of abuse has effectively supplanted domestic concepts in areas of the law covered by EC law (even where harmonisation has not, in express terms, spread that far). In many areas, it may in practice be impossible to maintain parallel concepts of abuse of right; and we may well see the adoption of the EC concept (or concepts) in the legal systems of some at least of the Member States even in areas of the law that are not, de iure, affected by EC law. For more information on Paul Lasok QC, please contact the Clerks on 020 7405 7211 or consult the Find a Barrister Section on www.monckton.com.

50 E.g. Case C-3/95 Reiseburo Broede v Sandker [1996] ECR I-6511, paragraph 28 of the judgment; and, more recently, Case C-137/04 Rockler, 16 February 2006, paragraphs 22-25 of the judgment. 51 Above, paragraphs 23-24 (page 2856).

Abuse of Rights - EC Law

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