C-12/98 Amengual Far

JUDGMENT OF THE COURT (Second Chamber)

Legal context and the dispute

3 February 2000 *

In Case C-12/98,

REFERENCE to the Court under Article 177 of the EC Treaty (now Article 234 EC) by the Audiencia Provincial de Palma de Mallorca, Spain, for a preliminary ruling in the proceedings pending before that court between

Miguel Amengual Far

and

Juan Amengual Far

on the interpretation of Article 13B(b) of the Sixth Council Directive (77/388/ EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1),

* Language of the case: Spanish.

I - 5 38 AMUNGUAL FAR

THE COURT (Second Chamber),

composed of: R. Schintgen, President of die Chamber, G. Hirsch (Rapporteur) and V. Skouris, Judges,

Advocate General: A. La Pergola, Registrar: R. Grass,

after considering the written observations submitted on behalf of:

— the Spanish Government, by S. Ortiz Vaamonde, Abogado del Estado, acting as Agent,

— the French Government, by K. Rispal-Bellanger, Deputy Director in the Legal Affairs Directorate of the Ministry of Foreign Affairs, and G. Mignot, Secretary for Foreign Affairs in that Directorate, acting as Agents,

— the Commission of the European Communities, by M. Diaz-Llanos, Legal Adviser, C. Gómez de la Cruz and E. Traversa, of its Legal Service, acting as Agents,

having regard to the report of the Judge-Rapporteur,

after hearing the Opinion of the Advocate General at the sitting on 18 March 1999, having regard to the Second Chamber's order to re-open the oral procedure of 24 September 1999,

after hearing the Opinion of the Advocate General at the sitting on 21 October 1999,

gives the following

Judgment

1By order of 12 January 1998, received at the Court on 20 January 1998, the Audiencia Provincial de Palma de Mallorca (Provincial Court, Palma, Mallorca) referred to the Court for a preliminary ruling under Article 177 of the EC Treaty (now Article 234 EC) two questions on the interpretation of Article 13B(b) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p.l, hereinafter 'the Sixth Directive').

2The questions have been raised in proceedings between Miguel Amengual Far, a landlord and his brother, Juan Amengual Far, his tenant, concerning the latter's eviction for failure to pay in good time the part of the rent corresponding to value added tax (hereinafter 'VAT') on business premises which he was renting.

3The court making the references seeks to ascertain whether VAT applies to lettings of business premises.

4It states that it follows from Article 4(2)(b) and Article 11(2) of Law No 37/1992 of 28 December 1992 that in Spain all lettings of commercial premises are subject to VAT. Article 20(23) of that Law exempts only 'tenancies considered to be services within the meaning of Article 11 of this Law ... the subject matter of which are:

(a) ...

(b) buildings or parts of buildings to be used exclusively for dwelling purposes, including garages and annexes to those buildings, and movable property let jointly with them.

...'

5The national court is, however, unsure whether Law No 37/1992 may thus make lettings of business premises subject to VAT without infringing Article 13B(b) of the Sixth Directive.

6Article 13B(b) of the Sixth Directive provides:

'Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose for ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

(a) ...

(b) the leasing or letting of immovable property excluding:

1. the provision of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use as camping sites;

2. the letting of premises and sites for parking vehicles;

3. lettings of permanently installed equipment and machinery;

4. hire of safes.

Member States may apply further exclusions to the scope of this exemption'.

7Taking the view that an interpretation of Community law was necessary in order for it to deliver its judgment, the Audiencia Provincial de Palma de Mallorca decided to stay proceedings and to refer the following questions to the Court for a preliminary ruling:

'1. Has the Spanish law on VAT, by making subject to that tax any letting or lease of immovable property in which an economic activity is pursued, correctly transposed Article 13B of Directive 77/388/EEC?

2. Should the Court rule that Article 13B of Directive 77/388/EEC has not been correctly transposed, is that Community provision, in so far as it lays down a general exemption from VAT in respect of leases of immovable property, directly applicable?'

The first question

8By its first question the national court asks in substance whether Article 13B(b) of the Sixth Directive allows Member States, by a general rule, to subject to VAT lettings of immovable property and, by way of exception, to exempt only lettings of immovable property to be used for dwelling purposes.

9The Spanish Government first points out that, in the Spanish version, the second subparagraph of Article 13B(b) of the Sixth Directive is worded incorrectly in so far as it suggests that the Member States may extend the scope of the exemption to other cases.

10In that regard, it must be stated, as the Advocate General points out in point 7 of his Opinion of 18 March 1999, and as is clear from the other language versions of Article 13B(b) of the Sixth Directive and from the context of that article, that the second subparagraph of that provision allows Member States to provide for further exclusions to the scope of the exemption laid down for the letting of immovable property (see, to this effect, the judgment in Case C-63/92 Lubbock Fine [1993] ECR I-6665, paragraph 13).

11However, the national court inquires whether Law No 37/1992 may subject to VAT lettings of immovable property to be used for purposes other than dwelling purposes, so that the subjection to VAT of lettings of immovable property for the exercise of an economic activity arises from the application of a general rule and not from an exception to the general exemption rule laid down in Article 13B(b) of the Sixth Directive.

12As regards that question, it must be remembered that, according to Article 189(3) of the EC Treaty (now Article 249(3) EC), a directive is binding, as to the result to be achieved, upon each Member State to which it is addressed but leaves to the national authorities the choice of form and methods.

13Furthermore, it is clear from the actual words of Article 13B(b) and C of the Sixth Directive that the latter has left the Members States wide discretion as to whether the transactions concerned are to be exempt or taxed.

14It is therefore immaterial that a Member State which considers it appropriate to subject to VAT all lettings of immovable property to be used otherwise than for dwelling purposes achieves this result by means of a general rule which subjects all lettings of immovable property to VAT and which exempts only lettings of immovable property for dwelling purposes or arrives at that same result by means of exceptions to a general rule exempting lettings of immovable property.

15The answer to be given to the first question must therefore be that Article 13B(b) of the Sixth Directive allows Member States, by means of a general rule, to subject to VAT lettings of immovable property and, by way of exception, to exempt only lettings of immovable property to be used for dwelling purposes.

The second question

16Having regard to the answer given to the first question, it is not necessary to reply to the second question.

Costs

17The costs incurred by the Spanish and French Governments and by the Commission, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main proceedings, a step in the proceedings pending before the national court, the decision on costs is a matter for that court.

Operative part

On those grounds,

THE COURT (Second Chamber)

in answer to the questions referred to it by the Audiencia Provincial de Palma de Mallorca by order of 12 January 1998, hereby rules:

Article 13B(b) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment allows Member States, by means of a general rule, to subject to value added tax lettings of immovable property and, by way of exception, to exempt only lettings of immovable property to be used for dwelling purposes.

Schintgen Hirsch Skouris

Delivered in open court in Luxembourg on 3 February 2000.

R. Schintgen R. Grass

President of the Second Chamber Registrar

I - 5 47

OPINION OF ADVOCATE GENERAL

LA PERGOLA

delivered on 21 October 1999 ( *1 )

1The Audiencia Provincial de Palma de Mallorca (Provincial Court, Palma, Mallorca) has referred to the Court for a preliminary ruling the question whether Spanish law, by making subject to value added tax (‘VAT’), as a general rule, the letting or lease of immovable property in which an economic activity is pursued, has correctly transposed the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment. ¹

2By decision of 19 January 1999, the Court decided, in accordance with Article 44a of the Rules of Procedure, to dispense with the oral procedure. The Advocate General's Opinion was delivered on 18 March 1999.

3By order of 24 September 1999, the Court ordered that the oral procedure be reopened, pursuant to Article 61 of the Rules of Procedure. However, the parties waived their right to a hearing.

4Since there are no new matters of law or of fact, I would refer the Court to the Opinion delivered on 18 March 1999.

Conclusion

5I therefore propose that the Court answer the questions referred to it by the Audiencia Provincial de Palma de Mallorca as follows:

The Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment allows the Member States to extend the scope of the exclusions from the exemptions to cases not provided for, which may include, as in this case, the letting of property as an economic activity.

( *1 ) Original language: Italian.

¹ OJ 1977 L 145, p. 1.

O P I N I ON OF ADVOCATE GENERAL LA PERGOLA delivered on 18 March 1999 *

1By this reference for a preliminary ruling, the Audiencia Provincial (Provincial Court) of Mallorca has asked the Court to clarify whether Spanish law, by making subject to value added tax (hereinafter 'VAT') as a general rule, the letting or lease of immovable property in which an economic activity is pursued, has correctly transposed the Sixth Directive of the Council on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment ' (hereinafter 'the Sixth Directive').

Community provisions

2The Sixth Directive introduced under Title x (Articles 13 to 16) a system of exemptions, by which some operations are not taxable and do not allow the deduction of VAT at the preceding stage. Cases of exemption include, in particular, the leasing or letting of immovable property. Arti

* Original language: Italian.

1 — Council Directive 77/388/KEC of 17 May 1977 (OJ 1977 L 145, p. 1).

cle 13B, which is the subject of the reference for interpretation, provides:

'Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

(a) ...

(b) the leasing or letting of immovable property, excluding:

1. the provision of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use as camping sites;

I - 5 29 2. the letting of premises and sites for parking vehicles;

3. lettings of permanently installed equipment and machinery;

4. hire of safes.

Member States may apply further exclusions to the scope of this exemption; ...'

National provisions

3Under Spanish law, the levying of VAT is at present regulated by Law No 37/1992 of 28 December 1992 which replaced the previous Law No 20/1985 of 2 August 1985. Under Article 11(2) of Law No 37/1992, all lettings with or without the option to purchase are liable to the tax. Article 20(23)(a) provides for exemptions for lettings for 'building or parts of buildings to be used exclusively for dwelling purposes'. 2 Lettings of business premises are therefore not exempt.

Facts of the case

4The main proceedings before the Audiencia Provincial, which is the referring court, concern the termination, on the ground of failure to pay, of the contract by which Miguel Amengual Far leased business premises to his brother, Juan Amengual Far. At the time of the agreement — which was verbal — the parties did not agree specifically on whether the rent should include VAT, payable by the landlord under Spanish tax laws. The order for reference states that the tenant originally considered that it should not be included. Juan Amengual Far made a first offer of payment which did not include VAT. The landlord did not accept the offer and took action to have him evicted for failure to pay before the Court of First Instance in Inca. During the proceedings, the tenant repeated his offer, and also lodged the sums due in court, but still not including the VAT. However, he later sent the sum due for VAT to his brother.

2 — The same Law, however, provides for a series of cases in which exemption does not apply.

In view of the repeated offers to pay, and the payments made, even though they were late, the application for termination of the contract was dismissed at the Court of First Instance. The landlord then brought an appeal at the Audiencia Provincial on various grounds, including the fact that the tenant should have paid the monthly rent including VAT in advance. For his part, the defendant disputed the right of the landlord to charge him VAT, which was not specifically requested when the contract was concluded and thus until payment to the tax authorities.

Under Spanish legislation, any taxes payable to the tax administration form an integral part of the rent, so that failure to pay them constitutes an automatic ground for termination, without the need for any special notification. Consequently, the Audiencia Provincial considered that it should first of all establish whether VAT was payable on the lease in question: the possibility was raised that Spanish law, which provides for the payment of VAT in respect of all lettings of business premises as a general rule, does not comply with Article 13B of the Sixth Directive, which, in the opinion of the referring court, lays down a general principle of exemption for lettings of immovable property.

The questions referred for a preliminary ruling

5The Audiencia Provincial of Mallorca therefore submitted the following questions:

'(1)Has the Spanish Law on VAT, by making subject to that tax any letting or lease of immovable property in which an economic activity is pursued, transposed correctly Article 13B of Directive 77/388/EEC?

(2) Should the Court rule that Article 13B of Directive 77/388/EEC has not been correctly transposed, is that Community provision, in so far as it lays down a general exemption from VAT in respect of leases of immovable property, directly applicable?'

The first question

6The first question asks whether the Spanish Law implementing the Sixth Directive which subjects to tax any letting of immovable property in which an economic activity is pursued has correctly transposed Article 13B of the Sixth Directive. This provision exempts the letting and lease of immovable property, except in specific situations — relating to the hotel sector, sites for parking vehicles, permanently installed equipment and machinery, and safes — also stating that Member States may 'apply further exclusions to the scope of this exemption'.

7The Spanish Government, which intervened to argue that the rules of implementation comply with the Sixth Directive, observes that the doubt concerning interpretation is in fact caused by an error in the drafting of the Spanish version of Article 13B, final subparagraph, of the Sixth Directive, which is worded as follows: 'Los Estados miembros podrán ampliar el ambito de aplicación de esta exención a otros supuestos.' The provision would therefore appear to exclude the power of Member States to limit the scope of the exemptions. However, from a comparison with the other language versions, it is clear that this version is not correct. 3 Moreover, as the Agent for the Spanish Government pointed out, a provision which aims to extend the scope of a general rule would not be meaningless in the tax scheme. In

3 — For example, the Italian text is as follows: 'Gli Stati membri possono stabilire ulteriori esclusioni al campo di applica zione di tale esenzione'; the French version reads 'Les Etats membres ont la faculté de prévoir des exclusions supplé mentaires au champ d'application de cette exonération'; the German version is: 'Die Mitgliedstaaten können weitere Ausnahmen vom Geltungsbereich dieser Befreiung vorse hen'; finally, the English version reads, 'Member States may apply further exclusions to the scope of this exemption.' actual fact, the Directive allows the States to provide for further exceptions to the exemption cases.

This explanation is useful, but it does not eliminate the doubt concerning interpretation. The referring court clearly starts from the presumption that, as stated in the case-law of the Court of Justice, Community law allows Member States to establish further exceptions in addition to those specifically listed in Article 13B. However, it states that, under Spanish tax law, the subjecting of business lettings to VAT is the result of the application of a general rule, not of an exception to the general principle of exemption laid down in the directive.

8We must therefore ascertain whether Spanish law respects the relationship between the rule (of exemption) and exception established by the Council regarding the letting of property. The Commission considers that the choices of the Spanish legislator are essentially correct. It notes in particular that the general application of VAT to business premises is in agreement with the general aspect of VAT, a tax which is levied on all supplies of goods and provisions of services, and whose application is in principle laid down for all stages of the production process. The general application also means that the person liable to the tax can recover any tax paid on purchases. 4 As already stated by Advocate General Darmon in the Lubbock Fine case, a system of value added tax achieves the highest degree of simplicity and of neutrality when the tax is levied in as general a manner as possible and when its scope covers all the stages of production and distribution, and the provision of services. 5 For this reason, the exemptions, which constitute an exception to the general principle of taxation, are interpreted restrictively. 6 This criterion has been consistently followed in the case-law of this 7 Court. Likewise, therefore, the power of the Member States to apply exceptions to the exemptions listed in the directive must

4 — The person liable to tax recovers the tax he pays on purchases by obtaining credit with the State and recovers the tax payable to the State by the right of recovery towards those who purchase his goods and services. Therefore, the exemption only benefits the final consumer who purchases the goods or service at a cost to which VAT is not added; it can even by disadvantageous for the person liable to tax who carries out exempt operations, as the exempt operations have limitations concerning the right to deduct VAT on purchases. See Tesauro, F., Istituzioni di diritto tributario, Milan, 1995, p. 211.

5 — See Opinion in Case C-63/92 Lubbock Fine & Co v Commissioners of Customs and Excise [1993] ECR I-6665, at paragraphs 13 and 15.

6 — As observed by Advocate General Darmon 'there is all the more reason to construe exemptions restrictively since they may disrupt the chain of deductions between taxable persons and give rise to a tax burden owing to the fact that tax paid at the preceding stage ("input tax") cannot be deducted'. See his Opinion in Case C-63/92 Lubbock Fine, cited above, at paragraph 20.

7 — In Case 107/84 Commission v Germany [1985] ECR 2655, at paragraph 20, the Court interpreted Article 13A(a) strictly literally, and barred this provision from including services provided by public postal services. The need to follow a restrictive interpretation is stated generally in Case 348/87 Stichting uitvoering Financiële Acties [1989] ECR 1737, at paragraph 13; see also Case C-185/89 Velker International Oil Company [1990] ECR I-2561, at paragraph 19.

be construed broadly. This was recently 8 confirmed in the Blast case.

9In fact, apart from the provisions under discussion, the directive as a whole allows the Member States a wide margin for assessing the economic situation. It is particularly significant that, even though Article 13B places the letting of immovable property generally amongst the exempt operations, Article 13C allows the Member States to give persons liable to tax the right to opt for taxation in the case of lettings and leases. 9 An observation should be made here. Even though the power of Member States to derogate from the cases of exemption indicated in the directive is to be defined broadly, in this case, unlike those previously submitted to the Court, it is not a question of analysing a specific case to assess whether it falls within the general clause of exemption or within the exceptions; instead, we should assess whether or not the general category of business premises can be subject to VAT. In my opinion,

8 — Case C-346/95 Blasi v Finanzamt München I [1998] ECR I-481, at paragraph 18 (the provision of short-term accommodation for persons other than friends and family is considered to be taxable as the provision of accommodation). See also Case 173/88 Henriksen [1989] ECR 2763 (closed garages are included in the concept of 'letting of premises and sites for parking vehicles', exception to the principle of exemption stated in Article 13B(b)).

9 — See paragraph 17 of the judgment in Case C-381/97 Belgocodex v Belgian State [1998] ECR I-8153: 'the Member States have a wide discretion under Article 13B and C. It is for them to assess whether they should or should not introduce the right of option, depending on what they consider to be expedient in the situation existing in their country at a give time.'

In addition, regarding a different aspect, the Council has provided ample possibility for derogating from the provisions in Article 10 concerning the moment when the tax becomes payable. See Case C-144/94 Italittica [1995] ECR I-3653, at paragraph 15.

we should look at the compatibility of the choices made by the Spanish legislator, concerning the general and neutral nature of the tax, but also concerning the logic followed by the Council in providing for and regulating the cases of exemption. The directive is intended to be applied uniformly throughout the Community and for this purpose it establishes a harmonised 10 system of exemptions. Therefore, I do not agree with the opinion expressed by the Agent for the Spanish Government when he states that the directive allows Member States to derogate from the exemption relating to lettings of property without any limit, if only for the reason that it make the scope of the exemptions derisive. Rather than resorting to quantitative criteria, we should consider whether the reasons on the basis of which the Council defined the cases of exemption apply. As Advocate General Jacobs observed in the Blast case, the levying of VAT is not generally justified in regard to the letting of property, which, he stated, 'is normally a passive activity, not entailing significant added value'. Advocate General Jacobs concluded in that case that the common characteristic of the operations excluded from exemption under Article 13B(1) to (4) lies in the fact that they 'entail a more active exploitation of the immovable property, justifying further taxation, in addition 1 to that levied upon its initial sale'. 1

10 — As shown in the eleventh recital of the preamble to the directive, it was considered appropriate 'that a common list of exemptions should be drawn up so that the Communities' own resources may be collected in a uniform manner in all the Member States.'

11 — Opinion in Case C-346/95 Blasi, cited above, at paragraphs 15 and 16.

10I now come to the national legislation under examination. The tax applies to an operation which is part of an active production process, following the reasoning of Jacobs. In exercising the power provided for in Article 13B to establish further exclusions from the scope of the exemption in relation to the letting of property, the Spanish legislature therefore legitimately subjected to tax the letting of premises used, in the course of business activity, for taxable operations.

The second question

11Given my answer to the first question, it is not necessary to answer the second. I shall merely point out that, if the Spanish legislation were to be incompatible with the directive, according to the known and settled case-law of the Court, an individual could not invoke against another individual the provision of the directive not correctly 1 transposed into national law. 2

12 — See, ex mukis, Case 152/84 Marshall [1986] ECR 723, at paragraph 48, and most recently Case C-97/96 Daihatsu Deutschland [1997] ECR I-6843, at paragraph 24. Conclusion

Conclusion

12In view of the foregoing, I therefore propose that the Court answer the questions referred to it by the Audiencia Provincial of Mallorca (Third Chamber) as follows: The Sixth Directive allows the Member States to extend the scope of the exclusions from the exemptions to cases not provided for, which may include, as in this case, the letting of property as an economic activity.