Economic Reality in EU VAT and the Reductionist Approach

The consideration of economic reality (ER) constitutes a fundamental criterion for applying the common system of VAT. In this article, which is a follow-up to a contribution in EC Tax Review 2020–5, the authors argue that its use by the CJEU gives rise to various complications, such as hindsight bias and misconceived economic concepts. Consequently, the notion should be applied restrictively in cases not involving fraud or abuse of law. Further, courts should justify the use (or non-use) of economic activity and explain how it was determined. Only under these conditions can its application strengthen the legal integrity and effective functioning of the EU VAT system.