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.