C-137/02 Faxworld

JUDGMENT OF THE COURT (Fifth Chamber)

29 April 2004 *

In Case C-137/02,

REFERENCE to the Court under Article 234 EC by the Bundesfinanzhof (Germany) for a preliminary ruling in the proceedings pending before that court between

Finanzamt Offenbach am Main-Land

and

Faxworld Vorgründungsgesellschaft Peter Hünninghausen und Wolfgang Klein GbR,

on the interpretation of Article 17(2) of 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), as amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18),

* Language of the case: German.

THE COURT (Fifth Chamber),

composed of: P. Jann, acting for the President of the Fifth Chamber, A. Rosas and S. von Bahr (Rapporteur), Judges,

Advocate General: F.G. Jacobs, Registrar: M.-F. Contet, Principal Administrator,

after considering the written observations submitted on behalf of:

— Faxworld Vorgründungsgesellschaft Peter Hünninghausen und Wolfgang Klein GbR, by R.W. Horn and A. Kowol, Rechtsanwälte,

— the German Government, by W.-D. Plessing and M. Lumma, acting as Agents,

— the Commission of the European Communities, by E. Traversa and K. Gross, acting as Agents, assisted by A. Böhlke, Rechtsanwalt,

having regard to the Report for the Hearing,

after hearing the oral observations of the Finanzamt Offenbach am Main-Land, represented by J. Aue, acting as Agent, Faxworld Vorgründungsgesellschaft Peter Hünninghausen und Wolfgang Klein GbR, represented by R.W. Horn, the German Government, represented by M. Lumma, and the Commission, represented by K. Gross, assisted by A. Böhlke, at the hearing on 11 September 2003,

after hearing the Opinion of the Advocate General at the sitting on 23 October 2003,

gives the following

Judgment

Legal context and the dispute

1By order of 23 January 2002, received by the Court on 12 April 2002, the Bundesfinanzhof (Federal Finance Court) referred to the Court for a preliminary ruling under Article 234 EC a question on the interpretation of Article 17(2) of 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), as amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18), ('the Sixth Directive').

2That question was raised in proceedings between the Finanzamt Offenbach am Main-Land ('the Finanzamt') and Faxworld Vorgründungsgesellschaft Peter Hünninghausen und Wolfgang Klein GbR ('Faxworld GbR') concerning the Finanzamt's refusal to allow Faxworld GbR to deduct the value added tax ('VAT') incurred on transactions from which it benefited.

3The question essentially concerns the right of a Vorgründungsgesellschaft, which is a civil-law partnership the object of which is to prepare the means necessary for the activities of a capital company to be formed, to deduct VAT where its sole output in performance of its object is to transfer the totality of its assets to that company once it has been formed. The question is based on the premiss that the Member State concerned has exercised the option provided for in Articles 5(8) and 6(5) of the Sixth Directive to consider that no supply of goods or services takes place upon the transfer of a totality of assets or part thereof and that the recipient is to be treated as the successor to the transferor.

Legal framework

Community legislation

4Point 1 of Article 2 of the Sixth Directive provides that the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such are to be subject to VAT.

5Under Article 4(1) and (2) of the Sixth Directive:

'1. "Taxable person" shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.'

6As regards the supply of goods, Article 5(8) of the Sixth Directive provides:

'In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and in that event the recipient shall be treated as the successor to the transferor. Where appropriate, Member States may take the necessary measures to prevent distortion of competition in cases where the recipient is not wholly liable to tax.'

7Article 6(5) of the Sixth Directive states that 'Article 5(8) shall apply in a like manner to the supply of services'.

8With respect to the right to deduct, Article 17(1) and (2) of the Sixth Directive provides:

'1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person;

...;.

National legislation

9The relevant provisions of the Sixth Directive have been transposed into German law by the Umsatzsteuergesetz 1993 (1993 Law on turnover tax, BGBl. 1993 I, p. 565, 'the UStG 1993'). In the version applicable to 1996, the financial year in question, Paragraph 1(1) of the UStG 1993 stated, as a general rule, that supplies effected for consideration by a trader in Germany in the course of his business are subject to turnover tax.

10However, since the Federal Republic of Germany has exercised the option granted to the Member States in Articles 5(8) and 6(5) of the Sixth Directive, Paragraph 1 (la) of the UStG 1993 states:

'(la) Transactions in the context of the transfer of a business to another trader for the purposes of his undertaking are not subject to [VAT]. A transfer of a business takes place where an undertaking or separately managed business unit forming part of an undertaking is in its entirety transferred, whether for consideration or not, or brought in as a contribution to a company. The recipient trader takes the place of the transferor.'

The main proceedings and the question referred for a preliminary ruling

11Faxworld GbR is a civil-law partnership founded on 1 October 1996 with the sole object of setting up the company Faxworld Telefonmarketing Aktiengesellschaft ('Faxworld AG').

12As the national court explains, the establishment of an Aktiengesellschaft (German company limited by shares) may, as in the case before the national court, be preceded by a Vorgründungsgesellschaft. A Vorgründungsgesellschaft is based on a preliminary agreement between the founders of the company to cooperate with a view to establishing the Aktiengesellschaft. Therefore, if that company, once established, wishes to assume the assets, rights and obligations of the Vorgründungsgesellschaft, which are not transferred to it automatically, they must be transferred by way of a separate legal transaction.

13Thus, as a Vorgründungsgesellschaft, Faxworld GbR rented office premises, acquired fixed assets and had fixtures and fittings installed in the office premises. It also sent introductory mailings and engaged in advertising for the company to be established. After Faxworld AG was established by notarial act of 28 November 1996, Faxworld GbR ceased activities and transferred to Faxworld AG all the previously acquired assets at their book value, for a price of just under DEM 90 000. Faxworld AG was thus able to take up its commercial activities in the offices rented and equipped for its purposes by Faxworld GbR, without having to take any additional measures.

14Therefore, in performing its sole object, Faxworld GbR effected no output transactions other than the transfer of the assets it had acquired to Faxworld AG.

15For the financial year 1996, Faxworld GbR treated that transfer as a non-taxable transfer of a business under Paragraph 1(la) of the UStG 1993. For the same financial year, the Finanzamt refused to allow Faxworld GbR to deduct, as input tax, the VAT of just under DEM 13 000 incurred on its input transactions. In a tax notice of 5 January 1998, the Finanzamt justified that refusal by stating that Faxworld GbR was not to be regarded as a trader within the meaning of Paragraph 2 of the UStG 1993 since the only output transaction which it intended to effect was the business transfer to the company to be established, which transfer is, under Paragraph 1(la) of the UStG 1993, not deemed to be a taxable supply.

16However, the Finanzgericht (Finance Court) delivered a judgment granting Faxworld GbR's application challenging the Finanzamts decision, on the ground that that partnership was an undertaking and, as such, was entitled to deduct the input tax. The principle of neutrality of VAT required the deduction of the input tax even though, as a Vorgriindungsgesellschafi, Faxworld GbR never intended to use the input services procured in order to effect taxable transactions itself.

17It is against that judgment that the Finanzamt has brought an appeal on a point of law before the Bundesfinanzhof, claiming that Faxworld GbR is not entitled to deduct because it is not a trader since at no time did it intend to provide taxable services itself and because Faxworld AG's activities cannot be attributed to it.

18The Bundesfinanzhof, which, for its part, is inclined to recognise Faxworld GbR's right to deduct the input tax, takes the view, first, that the supplies to Faxworld GbR in connection with the planned establishment of the capital company are costs which, by their very nature, are part of the economic activity of the business as a whole (Case C-408/98 Abbey National [2001] ECR I - 1361, paragraphs 35 and 36).

19Second, the Bundesfinanzhof takes the view that, if the transfer by Faxworld GbR of all its assets to Faxworld AG, which was its only output transaction, must be regarded as a 'transfer of a totality of assets' within the meaning of Article 5(8) of the Sixth Directive and not as a taxable transaction for the purposes of Article 17 (2) of that directive, it would seem appropriate to link the input supplies of Faxworld GbR to the planned transactions of Faxworld AG.

20However, observing that, according to the judgment in Abbey National, a taxable person may deduct only the VAT on input supplies used for the purposes of its own taxable transactions and that, therefore, account cannot be taken of the transactions of the recipient of the transfer, the Bundesfinanzhof points out that, in the case at issue in the main proceedings, the legal distinction between Faxworld GbR and Faxworld AG is merely the result of the particular features of German civil law relating to the establishment of companies. Moreover, the national court points out that the principle of fiscal neutrality underlying the system of VAT precludes economic operators carrying on the same activities from being treated differently as far as taxation is concerned, and takes the view that the particularities of German civil law relating to the establishment of companies cannot result in the loss of a right to deduct tax in the preparatory phase (Case C-216/97 Gregg [1999] ECR I-4947, paragraph 20).

21In the light of those considerations, the Bundesfinanzhof decided to stay the proceedings and refer the following question to the Court for a preliminary ruling:

'Is a partnership which has been established for the sole purpose of forming a limited company entitled to deduct input tax paid on goods and services procured by it if, after that company has been formed, that partnership effects by formal act a transfer for consideration of the procured goods and services to the subsequently founded limited company and, from the outset, did not intend to carry out any other output transactions and if, in the Member State concerned, a transfer of a totality of assets is not deemed to be a supply of goods or services (first sentence of Article 5(8) and Article 6(5) of the Sixth Directive ...)?'

22The Bundesfinanzhof states that if the Court answers that question in the negative the further question arises as to whether the company, in this case, Faxworld AG, is entitled to deduct the input tax paid on transactions for supplies to the Vorgründungsgesellschaft, in this case, Faxworld GbR, even though the company had not been founded at the time of the supplies.

Grounds

The question referred for a preliminary ruling

23By its question, the Bundesfinanzhof is asking essentially whether, under the Sixth Directive, a partnership created for the sole purpose of establishing a capital company is entitled to deduct the VAT paid by it where that partnership's only output transaction was to transfer all of its assets to the company once it had been established and where, because the Member State concerned has exercised the options provided for in Articles 5(8) and 6(5) of the Sixth Directive, such a transfer is not deemed to be a supply of goods or services.

24As regards the right to deduct, Article 17(2) of the Sixth Directive provides that the taxable person is entitled to deduct from the tax which he is liable to pay the VAT due or paid in respect of goods or services supplied or to be supplied to him by another taxable person 'insofar as the goods and services are used for the purposes of his taxable transactions'. Thus, it is clear from the wording of that provision that, in order for a person to be entitled to deduct, he must be a 'taxable person' within the meaning of the Sixth Directive and the goods and services in question must have been used for the purposes of his taxable transactions.

The classification of Faxworld GbR as a taxable person

25As regards the classification of Faxworld GbR as a taxable person, Article 4(1) of the Sixth Directive provides that any person who independently carries out in any place any economic activity specified in paragraph 2 of that article, whatever the purpose or results of that activity, is to be regarded as a taxable person. According to paragraph 2, the economic activities referred to in paragraph 1 comprise all activities of producers, traders and persons supplying services.

26Only the German Government does not regard Faxworld GbR as a taxable person within the meaning of Sixth Directive, on the ground that the partnership never carried out any economic activity. In support of that argument, it submits, first, that all of Faxworld GbR's input activities were intended solely to prepare the economic activities of a different legal entity which was yet to be established, namely Faxworld AG. Second, the transfer of assets by Faxworld GbR to Faxworld AG, which was Faxworld GbR's only output activity, was not a taxable transfer of a business for the purposes of Article 5(8) of the Sixth Directive.

27Those arguments cannot be upheld. First, Article 4 of the Sixth Directive gives VAT a very wide scope, comprising all stages of production, distribution and the provision of services (see Case 235/85 Commission v Netherlands [1987] ECR 1471, paragraph 7; Case 348/87 Stichting Uitvoering Financiële Acties [1989] ECR 1737, paragraph 10; and Case C-186/89 van Tiem [1990] ECR I-4363, paragraph 17).

28According to settled case-law, a person who acquires goods for the purposes of an economic activity within the meaning of Article 4 does so as a taxable person (Case C-97/90 Lennartz [1991] ECR I-3795, paragraph 14; Joined Cases C-110/98 to C-147/98 Gabalfrisa and Others [2000] ECR I-1577, paragraph 47; and Case C-400/98 Breitsohl [2000] ECR I-4321, paragraph 34), even if the goods are not used immediately for such economic activities (see, to that effect, Case 268/83 Rompelman [1985] ECR 655, paragraph 22). Contrary to what the German Government argues, the validity of those findings is in no way limited by the identity of the person whose economic activity is in question.

29Second, the German Government's argument based on the exercise by the Federal Republic of Germany of the option provided for in Article 5(8) of the Sixth Directive, by which it intends to show that Faxworld GbR's only output transaction does not fall within the scope of Article 4 of that directive, is erroneous. In accordance with the purpose of the Sixth Directive, which is, inter alia, to found a common system of VAT upon a uniform definition of 'taxable persons', the status of taxable person must be assessed solely on the basis of the criteria set out in Article 4 of the Sixth Directive (see van Tiem, cited above, paragraph 25). Accordingly, the scope of Article 4 of the Sixth Directive cannot be altered by the fact that a Member State has or has not exercised the option provided for in Article 5(8) of that directive, which enables it to deem that no supply of goods takes place where the totality of assets or a part thereof is transferred (see, with respect to the exercise by a Member State of the option provided for in Article 5(3) of the Sixth Directive, van Tiem, paragraph 26).

30A partnership such as Faxworld GbR must therefore be regarded as a taxable person within the meaning of the Sixth Directive.

Whether taxable transactions within the meaning of Article 17(2) of the Sixth Directive were effected

31As stated in paragraph 24 of this judgment, Article 17(2) of the Sixth Directive provides that a taxable person may deduct the VAT incurred on goods or services used 'for the purposes of his taxable transactions'. With respect to establishing whether a taxable person has effected taxable transactions, point 1 of Article 2 of the Sixth Directive provides, as a general rule, that the supply of goods or services effected for consideration by a taxable person acting as such are subject to VAT.

32However, where a Member State has exercised the options provided for in Articles 5(8) and 6(5) of the Sixth Directive, no supply of goods or services is deemed to take place upon the transfer of a totality of assets or part thereof.

33Since its only output transaction was the transfer of the totality of its assets and given that the Federal Republic of Germany has exercised the options provided for in Articles 5(8) and 6(5) of the Sixth Directive, Faxworld GbR itself effected no taxable transactions within the meaning of Article 17(2) of the Sixth Directive.

34In that regard, Faxworld GbR argues that it and Faxworld AG must be regarded as a single economic unit. Since the goods and services acquired by Faxworld GbR were to be used for the purposes of Faxworld AG's taxable transactions, Faxworld GbR is entitled to deduct the input tax. Moreover, it observes that, according to the judgment in Breitsohl, cited above, the right to deduct the VAT paid on supplies acquired with a view to the realisation of a planned economic activity continues to exist even where the tax authority is aware, from the time of the first tax assessment, that the economic activity envisaged, which is to give rise to taxable transactions, will not be taken up. That ruling applies a fortiori where, as in the case before the national court, the economic activity was taken up.

35According to the German Government, if, contrary to its argument, Faxworld GbR is to be regarded as a taxable person for the purposes of the Sixth Directive, it is not entitled to deduct the VAT incurred on input transactions. In its view, it follows from the judgment in Abbey National that, where the Member State has exercised the option provided for in Article 5(8) of the Sixth Directive, the input tax may be deducted in the event of a transfer of the entire business only if the input transactions are part of the trader's overheads. However, in the case before the national court, Faxworld GbR's sole output transaction was the transfer of its assets to Faxworld AG, which means that Faxworld GbR cannot rely on the right to deduct under Article 17 of the Sixth Directive.

36Although it does not dispute that Faxworld GbR is to be treated as a taxable person, the Commission shares the view taken by the German Government as regards that partnership's right to deduct. Relying on the judgment in Abbey National, paragraph 28, which states that the right to deduct presupposes that the expenditure incurred in acquiring the output services was part of the cost components of the taxable transactions, the Commission argues that the deduction of input tax requires that taxable transactions be effected; Faxworld GbR, however, never intended to effect such transactions.

37It should be noted, first of all, that the deduction scheme is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT (see Rompelman, paragraph 19; Case C-37/95 Ghent Coal Terminal [1998] ECR I-1, paragraph 15; Gabalfrisa, cited above, paragraph 44; Case C-98/98 Midland Bank [2000] ECR I-4177, paragraph 19; and Abbey National, paragraph 24). Given the general nature of that right, derogations are permitted only in the cases expressly provided for in the Directive (see, to that effect, Ghent Coal Terminal, cited above, paragraph 16).

38In the case giving rise to the judgment in Abbey National, the taxable person in question had transferred a business and wished to deduct the VAT which it had paid on the services received by it for the purpose of that transfer in circumstances in which the transfer did not constitute a taxable transaction because the Member State concerned had exercised its option under Article 5(8) of the Sixth Directive.

39Recognising that the taxable person was, in principle, entitled to deduct the VAT, the Court found that the costs of the services in question formed part of the taxable person's overheads and that, even in the case of a transfer of a totality of assets, where the taxable person no longer effects transactions after using those services, their costs must be regarded as part of the economic activity of the business as a whole before the transfer. Otherwise, an arbitrary distinction would be drawn between, on the one hand, expenditure incurred for the purposes of a business before it is actually operated and that incurred during its operation and, on the other hand, the expenditure incurred in order to terminate its operation (see Abbey National, paragraph 35).

40That interpretation made it possible to relieve the taxable person in question of the burden of the VAT paid in the course of its economic activity. Accordingly, the taxable person's additional argument that it had to be able to rely on the recipient's taxable operations in order to be entitled to deduct all the VAT incurred on those services was rejected (Abbey National, paragraphs 31 and 32).

41However, in contrast to the facts of the case giving rise to the judgment in Abbey National, the taxable person in the case before the national court, namely Faxworld GbR, as a Vorgründungsgesellschaft, did not even intend to effect itself taxable operations, its sole object being to prepare the activities of the Aktiengesellschaft (limited company). None the less, the VAT which Faxworld GbR wishes to deduct relates to supplies acquired for the purpose of effecting taxable transactions, even though those transactions were only the planned transactions of Faxworld AG.

42In those precise circumstances, and in order to ensure the neutrality of taxation, it must be held that, where the Member State has exercised the options provided for in Articles 5(8) and 6(5) of the Sixth Directive, as a result of the fact that, according to those provisions, 'the recipient shall be treated as the successor to the transferor', a Vorgründungsgesellschaft, as the transferor, must be entitled to take account of the taxable transactions of the recipient, namely the Aktiengesellschaft, so as to be entitled to deduct the VAT paid on input services which have been procured for the purposes of the recipient's taxable operations.

43Accordingly, the answer to the question referred by the Bundesfinanzhof must be that a partnership established for the sole purpose of founding a capital company is entitled to deduct the input tax paid on supplies of goods and services where its only output transaction in the performance of its object was to effect by formal act the transfer for consideration of the supplies obtained to that company once founded and where, because the Member State concerned has exercised the options provided for in Articles 5(8) and 6(5) of the Sixth Directive, a transfer of a totality of assets is not deemed to be a supply of goods or services.

Costs

Costs

44The costs incurred by the German Government and by the Commission, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main action, a step in the proceedings pending before the national court, the decision on costs is a matter for that court. On those grounds,

THE COURT (Fifth Chamber),

in answer to the question referred to it by the Bundesfinanzhof by order of 23 January 2002, hereby rules:

A partnership established for the sole purpose of founding a capital company is entitled to deduct the input tax paid on supplies of goods and services where its only output transaction in the performance of its object was to effect by formal act the transfer for consideration of the supplies obtained to that company once founded and where, because the Member State concerned has exercised the options provided for in Articles 5(8) and 6(5) of 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, as amended by Council Directive 95/7/EC of 10 April 1995, a transfer of a totality of assets is not deemed to be a supply of goods or services.

Jann Rosas von Bahr

Delivered in open court in Luxembourg on 29 April 2004.

V. Skouris R. Grass

President Registrar

OPINION OF ADVOCATE GENERAL JACOBS delivered on 23 October 2003 1

1Under Articles 5(8) and 6(5) of the Sixth 2 VAT Directive, Member States may consider that, where 'a totality of assets or part thereof' is transferred, no supply of goods or services has taken place and the recipient is to be treated as the successor to the transferor.

2Germany has exercised that option and, in the present reference for a preliminary ruling, the Bundesfinanzhof (Federal Finance Court) seeks guidance on the application of the rule to a particular type of civil-law partnership (Vorgriindungsge-sellschaft GbR) created for the sole purpose of setting up — but not operating — the business of a limited company yet to be formed and transferring that as yet non-operational business to it once formed. The issue to be resolved is whether — and if so, on what basis — either the partnership itself or the limited company enjoys a right to deduct input tax paid by the partnership on supplies received in the course of setting up the business.

Relevant legislation

Community VAT provisions

3The essence of the VAT system is set out in Article 2 of the First VAT Directive:

'The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.

On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods and services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.'

4That system thus envisages a chain of transactions in which the net amount payable in respect of each link is a specified proportion of the value added at that stage. When the chain comes to an end, the total amount levied will have been the relevant percentage of the final price. More detailed rules are contained in the Sixth Directive.

5Under Article 2 of that Directive, a supply of goods or services effected for consideration by a taxable person acting as such is subject to VAT. A taxable person is defined in Article 4(1) as one who carries out an economic activity, whatever its purpose or result. Economic activities are 'all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions', together with the 'exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis'. Under Articles 5 to 7, taxable transactions are supplies of goods, supplies of services or imports.

6Article 5(1) defines a supply of goods as the transfer of the right to dispose of tangible property as owner. However, under Article 5(8):

'In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and in that event the recipient shall be treated as the successor to the transferor. Where appropriate, Member States may take the necessary measures to prevent distortion of competition in cases where the recipient is not wholly liable to tax.'

7Under Article 6(5), Article 5(8) applies in like manner to the supply of services — defined in Article 6(1) as any transaction which does not constitute a supply of goods.

8The essentials of the right to deduct are set out in Article 17 of the Sixth Directive. Article 17(2) states: 'In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay (a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person ...' That entitlement arises, in accordance with Article 17(1), at the time when the deductible tax becomes chargeable.

9Certain transactions are however exempted from VAT under Articles 13 to 16. No VAT is chargeable on any exempted transaction, and it follows furthermore from Article 17(2), which limits the right of deduction to tax on supplies used for the purposes of taxable transactions, that the supplier is precluded from deducting any input tax on supplies used for the purposes of such transactions made within the Community. 4

10Where, as is often the case, the exempt transaction is the final link in the chain (private consumption), the effect is simply to reduce the VAT burden by the amount which would have been levied on the last value added. However, the impossibility of deduction in those circumstances persists even if an exempt transaction constitutes a cost component of a subsequent taxable supply. Input tax may thus in some situations become 'locked' in the value of the supply with the result that, contrary to the normal operation of the system, the value on which VAT is charged at later stages includes the tax charged at earlier stages. It might be said that the chain of transactions is broken off, and a new chain commences with a higher net value. A similar situation may occur where goods are bought by a taxable person in a private capacity (not 'acting as such' within the meaning of Articles 2 and 4(1)) but are then transferred into the sphere of his economic activity.

The Court's interpretation of the Community provisions

11The Court has on a number of occasions considered in what circumstances supplies are used 'for the purposes of' taxable output transactions, thereby giving rise to a right to deduct under Article 17(2) of the Sixth Directive.

12Of relevance to the present case are the O

14 Abbey National concerned the sale judgments in Rompelman, 6 INZ , 7 Ghent between unrelated companies of a building , 9 Coal Terminal, 8 Gabalfrisa Schloßstraße and Breitsohl, to the operated as a rental business subject to VAT. It was sold as a going concern which effect that whenever a person has the was one part of the transferor's overall intention, confirmed by objective evidence, to commence an economic activity and acquires initial taxed supplies for that purpose, he must be regarded as a taxable person acting in that capacity and as having the right immediately to deduct the VAT on supplies acquired for the purposes of his intended taxable transactions, without having to wait for the actual exploitation of the business to begin and even if it does not in fact begin.

13In only two previous cases, however, has the Court been asked to consider the deductibility of input tax in relation to a 'transfer ... of a totality of assets or part thereof' where a Member State has exercised the option in Article 5(8): Abbey National and Zita Modes.

business. A major issue in the case was whether the transferor could deduct input tax on (essentially legal) services acquired in order to effect the transfer.

15The Court noted that the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities, ensuring complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT. However, to give rise to the right to deduct, the goods or services acquired must have a direct and immediate link with a taxable output transaction — they must form part of the costs of that transaction.

16If a Member State has opted not to regard the transfer of a totality of assets or part thereof as a supply of goods then under Article 2 of the Sixth Directive such a transfer is not subject to VAT, and cannot constitute a taxable transaction within the meaning of Article 17(2). The fact that it would have been a taxable transaction if the option had not been exercised is irrelevant. Nor is there a direct and immediate link with the transferee's taxable output transactions. Deduction is only possible where the output transactions are those of the taxable person seeking to deduct; in any event, costs involved in effecting the transfer do not directly burden the cost components of the transferee's taxable transactions, as required by Article 2 of the First Directive.

17However, those costs form part of the transferor's overheads, and as such are cost components of the products of his business. Where a taxable person transfers a totality of assets and no longer effects transactions thereafter, the costs of services needed for that transfer must be regarded as part of the economic activity of the business as a whole before the transfer. Any other interpretation of Article 17 of the Sixth Directive would be contrary to the principle that the VAT system must be completely neutral as regards the tax burden on all the economic activities of a business provided that they are themselves subject to VAT, and would make the economic operator liable to pay VAT in the context of his economic activity without giving him the possibility of deducting it. An arbitrary distinction would thus be drawn between, on the one hand, expenditure incurred for the purposes of a business before it is actually operated and during its operation and, on the other hand, expenditure incurred in order to terminate its operation. Thus in principle services used by the transferor for the purposes of the transfer of a totality of assets or part thereof have a direct and immediate link with his whole economic activity.

18The questions in Zita Modes focus on the definition of a 'transfer of a totality of assets' and on the need — or otherwise — for the transferee to carry on the same business as that previously pursued by the transferor. Judgment has not yet been delivered in that case.

German law

19The Community provisions set out above are implemented in German law by the Umsatzsteuergesetz (Turnover Tax Law — 'UStG') 1993.

20Paragraph 1(1a) of that Law provides: 'Transactions in the context of the transfer of a business (Geschäft) to another trader (Unternehmer) for the purposes of his undertaking (Unternehmen) are not subject to turnover tax. A transfer of a business takes place where an undertaking or a separately managed business unit forming part of an undertaking is in its entirety transferred, whether for consideration or not, or brought in as a contribution to a company. The recipient trader takes the place of the transferor.'

21For those purposes, 'trader' and 'undertaking' are defined in Paragraph 2: 'A trader is any person who independently carries out a commercial or professional activity. An undertaking comprises the whole of a trader's commercial or professional activity. Commercial or professional activity means any sustained activity carried out for the purpose of obtaining income, even where there is no intention to make a profit or an association carries out its activities only in relation to its members.'

22Paragraph 15 concerns the right to deduct. Under Paragraph 15(2)(1), no deduction may be made in respect of tax for supplies used by à trader to carry out, inter alia, exempt transactions.

23Certain aspects of German company law are also relevant to this case. The referring court explains them as follows.

24An Aktiengesellschaft (company limited by shares — 'AG') does not acquire legal personality until it is entered in the commercial register. A necessary preliminary stage is the Vorgesellschaft (pre-registration company), a sui generis association of persons which always comes into existence when the company statutes are established. The Vorgesellschaft may itself be preceded by a Vorgründungsgesellschaft based on an agreement between the founders of the company to cooperate with a view to its formation, usually in the form of a civil-law partnership (Gesellschaft bür gerlichen Rechts — 'GbR'), the purpose being to regulate the liability of the persons involved. Where a Vorgründungsgesellschaft is set up to prepare a company's subsequent activities, its assets, rights and duties are not automatically transferred to the Vorgesellschaft and subsequently to the company when it is formed; if such a transfer is to take place it must be effected by a separate legal transaction.

The main proceedings

25Faxworld Vorgründungsgesellschaft Peter Hünninghausen und Wolfgang Klein GbR ('Faxworld GbR') was set up on 1 October 1996 for the sole purpose of preparing for the establishment of Faxworld Telefonmarketing AG ('Faxworld AG'). To that end, it rented and equipped office premises, acquired fixed assets, sent introductory mailshots and engaged in advertising for the future AG. Once Faxworld AG was formed by notarial deed on

28 November 1996, Faxworld GbR ceased its activities and, in performance of its object, transferred all previously acquired assets to the AG for consideration on 1 December 1996. Faxworld AG was immediately able to take up its commercial activities in the office premises which had been rented, equipped and furnished by Faxworld GbR.

26The transfer price of DEM 87 495.29 was the book value of the assets acquired, that is to say the cost of their acquisition excluding VAT. Thus the amount of VAT paid by Faxworld GbR on its acquisitions was not passed on to Faxworld AG in the transfer price.

27Faxworld GbR subsequently sought to deduct — that is to say, in the circumstances, obtain reimbursement of — the input tax incurred on the supplies it had acquired and transferred. The tax authority refused the deduction on the ground that the claimant's only output transaction was a transfer of a business, which is not to be treated as a taxable transaction, and that Faxworld GbR was therefore not a trader (taxable person). Faxworld GbR challenged that refusal before the competent tax court, which allowed its claim on the basis of the principle of the neutrality of VAT; input tax could be deducted even though the claimant never intended to use its input supplies to carry out taxable transactions itself, since it had acquired them for the purposes of the business to be carried on by Faxworld AG.

28The tax authority has appealed on a point of law to the Bundesfinanzhof, which has stayed the proceedings and referred the following question to the Court for a preliminary ruling:

'Is a partnership which has been established for the sole purpose of forming a limited company entitled to deduct input tax paid on goods and services procured by it if, after that company has been formed, that partnership effects by formal act a transfer for consideration of the procured goods and services to the subsequently founded limited company and, from the outset, did not intend to carry out any other output transactions and if, in the Member State concerned, a transfer of a totality of assets is not deemed to be a supply of goods or services (first sentence of Article 5(8) and Article 6(5) of the [Sixth Directive])?'

29The Bundesfinanzhof also indicates that, if the partnership has no right to deduct in those circumstances, any need for a further reference could be obviated if the Court were further to rule whether the limited company instead could have such a right.

The differing points of view put forward

30The Bundesfinanzhof states that it is inclined to favour the claim for deduction. The right to deduct arises at the time when the deductible tax becomes chargeable, namely when the input supplies are acquired. In the present case, those supplies were acquired solely for the purpose of taxable output transactions. If Faxworld GbR had itself effected those transactions, the input tax would have been deductible. It follows from Abbey National that in the case of a transfer of a totality of assets the transferor may deduct input tax only from tax on his own output transactions. However, it is only because of procedural requirements in German company law that in the present case there is a difference in identity between the person acquiring the input supplies and the person effecting the taxable output transactions. The principle of the neutrality of VAT must mean that the right to deduct is not determined by national differences in legal form.

31In its observations to the Court, Faxworld GbR argues essentially that it and Faxworld AG constitute a single economic unit (in accordance with the so-called Fußstapfentheorie apparently applied by the Bundesfinanzhof, derived from the law of succession and expressing the idea that the recipient follows in the footsteps of the transferor — equivalent to the English idea of 'stepping into the transferor's shoes'). Since the goods and services acquired by Faxworld GbR were to be used for the purposes of Faxworld AG's taxable transactions, Faxworld GbR is entitled to deduct the input tax on those goods and services. Moreover, it submits, in Breitsohl the Court held that the right to deduct the VAT paid on supplies acquired with a view to the realisation of a planned economic activity still exists even where the tax authority is aware, from the time of the first tax assessment, that the economic activity envisaged, which was to give rise to taxable transactions, will not be taken up. That ruling applies a fortiori where, as here, the economic activity was taken up.

32The approach taken by the tax authority before the Bundesfinanzhof and by the German Government before the Court is by contrast that Faxworld GbR and Faxworld AG are two separate persons, and that Faxworld GbR is not a taxable person, never having carried out or had the intention to carry out either any economic activity within the meaning of Article 4 of the Sixth Directive or any taxable transaction within the meaning of Articles 5 or 6. There can thus be no question of any right to deduct since, essentially, there is no person who could enjoy such a right and no transaction within the VAT system from which a deduction could be made. The German Government relies significantly on Abbey National in that regard.

33At the hearing, the German Government raised an objection to the alternative question alluded to by the Bundesfinanzhof, as to whether Faxworld AG, rather than Faxworld GbR, might enjoy a right to deduct. That question, it considers, is purely hypothetical and can have no bearing on the outcome of the proceedings brought by Faxworld GbR; national courts are not entitled to raise such questions in the context of the system set up by Article 234 EC.

34The Commission considers that the acquisition of goods and services by Faxworld GbR falls clearly within the definition of economic activity and thus within the scope of the VAT system. However, since those goods and services were not used by that partnership for — and can have no direct and immediate link with — any taxable output transactions of its own, Faxworld GbR has no right to deduct the input tax thereon. On the other hand, in the Commission's view, Faxworld AG, as 'successor' to Faxworld GbR within the meaning of Article 5(8) of the Sixth Directive, and having used the same goods and services for its taxable outputs, does have a right to deduct. Such a solution is not contrary to the judgment in Abbey National, which dealt only with the transferor's right to deduct, and not the transferee's.

Assessment

35On a preliminary matter, the German Government's objection to the Bundesfinanzhofs alternative question cannot in my view be accepted. The Bundesfinanzhof has expressly refrained from referring that question as such but included it in the order for reference in order to identify an issue which the Court may find relevant to its analysis. It does not in any event seem to me possible, in a situation covered by Article 5(8) of the Sixth Directive, to consider the position of the transferor in isolation from that of the transferee.

36Next, I should state that the result favoured by the German authorities appears to me to be inconsistent with the principle of the neutrality of VAT, in so far as it denies any right to deduct the input tax in issue, whether for Faxworld GbR or for Faxworld AG.

37From an economic point of view, it seems clear, a single business has been set up, going through various preparatory stages before becoming operational. The continuity of the business from preparatory to operational stages — the continuity of its identity as a business — does not appear to be in any doubt. The normal operation of the VAT system requires that input tax on supplies acquired by a business at both preparatory and operational stages be deductible from its output tax.

38Any deviation from that normal operation, and therefore from the principle of neutrality, can in my view be accepted only where there is clear authorisation in the legislation, as interpreted where appropriate by the Court.

39In the present case, from a legal point of view the preparatory and operational stages were carried out by two separate entities, a partnership and a limited company. It is on that separation that the German authorities base their arguments.

40The partnership was not set up for the purpose of effecting taxable output transactions, it did not effect any and there was at no stage any intention that it should do so. Its sole actual or intended output transaction was to sell the embryo, as yet non-operational, business to the limited company. By virtue of the German legislation implementing Article 5(8) of the Sixth Directive, that transaction was not taxable.

41None the less, I agree with the Commission that Faxworld GbR falls within the definition of taxable person in Article 4(1) of the Sixth Directive. Its activities were undoubtedly economic in nature and A neither the purpose nòr the result of those activities is relevant. In that context, I consider the German Government to be mistaken in its reference to Lennartz 21 a case which concerned acquisition for private use of goods subsequently used for taxable transactions. In the present case it is not questioned that the input supplies were acquired for business purposes and not for private consumption.

42Furthermore, the right to deduct is not lost because no taxable output supplies were in fact made — see INZO 22 and Ghent Coal Terminal 3 — but it is necessary according to that same case-law for there to have been an intention to make such supplies, and Faxworld GbR appears to have had no intention to make such supplies itself.

43None the less, although the partnership and the limited company in the present case are two separate legal persons, there is not only a perceptible economic continuity between them but also a degree of legal continuity.

44Article 5(8) requires that, if no supply is considered to have taken place, the recipient should be treated as the 'successor' to the transferor. In the German version of Article 5(8), the comparable word 'Rechtsnachfolger' is used. The German implementing legislation speaks of 'an die Stelle treten’ (taking the place of) while German law also appears to recognise a 'Fußstapfentheorie'. The French and some other language versions of Article 5 (8) speak of 'continuing the personality' of the transferor.

45As I said in my Opinion in Zita Modes, 25 the various formulations clearly recall the notion of universal succession, in which one person takes over all of the rights and obligations of another (limited in this context to all of the VAT rights and obligations in relation to the business transferred), so that the transferee acquires, with the business, any outstanding VAT debts and the right to deduct any input tax not already deducted against output tax on taxable transactions. In Abbey National 27 I suggested, using the common metaphor of a chain of transactions for VAT purposes, that whilst one link in the chain is deemed not to exist, the result is not — as would be the case for an exempt transaction — a break and a recommence ment of the chain but rather a continuing sequential relationship between the links on either side.

46In that light, is it possible to attribute Faxworld AG's intention to make taxable supplies also to Faxworld GbR, so that the conditions for the latter to enjoy a right to deduct are met?

47Certain provisions of the legislation and indications in the case-law might appear to militate against such attribution. Under Article 17(1) of the Sixth Directive, the right to deduct arises at the time when the deductible tax becomes chargeable — that is to say when input supplies are acquired — and the Court stated in Lennartz that 'only the capacity in which a person is acting at that time can determine the existence of the right to deduct'. At the time of acquisition, Faxworld GbR was acting as a taxable person, but the supplies were not intended for taxable outputs of its own.

48None the less, I am of the view that the 'succession' provision in Article 5(8) not only justifies but requires the drawing of a significant distinction between the situation with which it is concerned and other, more usual situations.

49It must be borne clearly in mind that the effect of applying the option in Article 5 (8) of the Sixth Directive cannot be to create an exempt transaction. Had that been the legislator's intention, the provision would have been included in Title X of the Directive, concerning exemptions, and not in Title V, on the definition of taxable transactions. An indication of the actual purpose is given in the explanatory memorandum to the Commission's Proposal for a Sixth Directive, in which the option was described as being available 'in the interests of simplicity and so as not to overburden the resources of the undertaking'. The point is thus to avoid often large sums of tax being invoiced, paid to the State and then recovered by way of deduction of input tax. A further advantage is to protect the revenue authorities from loss of tax if the transferor is insolvent.

50If input VAT borne by the assets of a transferred business could not be deducted, there would be not inconsiderable distortion of competition, in comparison with other businesses. And, as the Court reiterated in Abbey National, the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities, ensuring complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT.

51In the present case, the assets transferred were acquired by Faxworld GbR for the future purposes of taxable output transactions to be made by Faxworld AG, and thus form cost components of those transactions. There is, moreover, a direct and immediate link between the input supplies and the taxable output transactions which give rise to the right to deduct since, by the operation of Article 5(8), no intervening transaction is deemed to have taken place between the acquisition of those supplies and their use for the purposes of the output transactions. Faxworld AG is the successor — or 'continues the person' — of Faxworld GbR. At the time when the right to deduct arose — that is to say, when the input tax became chargeable — Faxworld GbR was acting as a taxable person within the meaning of Article 4(1) of the Sixth Directive. The conditions for deduction are thus in my view met.

52That being so, it seems obvious that the best modus operandi from a practical point of view is that, where national law allows, the consideration for the transfer should always in such circumstances cover the full value of the assets transferred, including any input VAT which has not yet been deducted. Indeed in most cases it will be difficult if not impossible to isolate the presence (or absence) of such an element in the price.

53In some cases, however, national law may impose other requirements — that all outstanding input tax must be deducted before the transfer, for example. In the present case, while there does not appear to have been any such requirement, it seems clear that the tax can be identified as not having been passed on.

54Here, therefore, a distinction must be drawn between the transferor and the transferee. The objective of ensuring the neutrality of VAT would not be achieved if the tax paid could be deducted by a person other than the one who bore the economic burden of it. Even if in this case the partners or shareholders of both entities are in fact the same — so that the same 'pockets' will ultimately be affected — that will not always be so. Where the transfer price of the business is the book value of the assets excluding VAT, to allow the transferee rather than the transferor to deduct would — as the German Government pointed out at the hearing — give the former an unjustified financial advantage; it would also leave the latter with an irrecoverable tax burden. Where on the other hand the burden of input VAT is passed on in the transfer price, the right to deduct must vest in the transferee. To proceed otherwise would again entail distortion of competition, an outcome which, in addition to being inconsistent with the principles of the VAT system and Community law in general, is specifically referred to in Article 5(8) as worthy of prevention.

55In the present case, therefore, it is Faxworld GbR and not Faxworld AG which must enjoy the right to deduct.

56It might be questioned whether the view I have reached is wholly compatible with the Court's judgment in Abbey National. At paragraphs 32 to 35 of that judgment, it will be recalled, the Court stated that a taxable person may deduct only the VAT on the goods and services used for the purposes of his own taxable transactions, and that the amount of VAT paid by the transferor on the costs incurred for the services acquired in order to carry out a transfer of a totality of assets or part thereof does not directly burden the various cost components of the transferee's taxable transactions. None the less, such costs form part of the overheads of the transferor's business and as such are cost components of the products of that business; the transferor thus enjoys a right to deduct on that basis.

57I view that reasoning however as specific to the circumstances of Abbey National. The tax in issue in that case was payable on services acquired for the purposes of effecting the transfer, and not on the assets actually transferred. Those latter assets, in issue in the present case, clearly do form cost components of the transferee's transactions, and the continuity of personality as between the transferor and his successor, the transferee, justifies treating input VAT on their acquisition as giving rise to a right to deduct on that basis.

58In order to respect the principle of the neutrality of VAT and to avoid any distortion of competition, that right should vest in the person, whether transferor or transferee, who actually bears the economic burden of the tax, in circumstances where Article 5(8) of the Sixth Directive applies. It would only be in wholly exceptional — and difficult to imagine — circumstances that those aims could still be achieved by allowing the other party to the transfer the right to deduct.

Conclusion

Conclusion

59I am therefore of the opinion that the Court should give the following answer to the question raised by the Bundesfinanzhof:

Where

— a Member State has made use of the option in Articles 5(8) and 6(5) of the Sixth VAT Directive, so that a transfer of a totality of assets is treated as not being a supply of goods or services, and

— goods and/or services are acquired by one natural or legal person (the transferor) for the sole purpose of setting up but not operating a business, and of transferring the assets of that business to another natural or legal person (the transferee) who intends to use those assets to carry out taxable transactions,

the right to deduct VAT paid or payable on the goods and/or services acquired vests in principle in

— the transferor where the burden of the tax has not been passed on to the transferee in the transfer price, and

— the transferee where the burden of the tax has been passed on to him in the transfer price.

Notes

(1) Original language: English.

(2) 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 ('the Sixth Directive').

(3) First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes, OJ, English Special Edition 1967, p. 14.

(4) This situation is to be distinguished from an exemption with reimbursement of input VAT, or zero-rating.

(5) See Case C-97/90 Lennartz [1991] ECR I-3795, paragraphs

(8) and 9 of the judgment.

(6) Case 268/83 [1985] ECR 655.

(7) Case C-110/94 [1996] ECR I-857.

(8) Case C-37/95 [1998] ECR I-1.

(9) Joined Cases C-110/98 to C-147/98 [2000] ECR I-1577.

(10) Case C-396/98 [2000] ECR I-4279.

(11) Case C-400/98 [2000] ECR I-4321.

(12) Case C-408/98 [2001] ECR I-1361.

(13) Case C-497/01, Opinion delivered on 26 September 2002.

(14) Paragraphs 24 to 29 of the judgment, citing Rompelman, cited in note 6, paragraph 19; Ghent Coal Terminal, cited in note 8, paragraph 15; Gabalfrisa, cited in note 9, paragraph 44; and Case C-98/98 Midland Bank [2000] ECR I-4177, paragraphs 19, 20, 24, 29 and 30.

(15) Paragraphs 30 to 34.

(16) Paragraphs 35 and 36.

(17) Cited in note 11.

(18) See in particular the case-law cited in paragraph 12 above.

(19) Although it seems plausible that the two partners in the partnership are also the (only) two shareholders in the company.

(20) It may be noted that under the German legislation such transactions 'are not subject to turnover tax' whereas Article 5(8) authorises Member States to 'consider that no supply... has taken place.' It is important none the less that a distinction be drawn between exempt supplies and those which are deemed not to have taken place (see paragraph

(10) above and paragraph 49 below).

(21) Cited in note 5.

(22) Cited in note 7, paragraphs 19 and 20 of the judgment.

(23) Cited in note 14, paragraphs 17 and 24 of the judgment.

(24) See paragraph 31 above.

(25) At paragraphs 46 and 49.

(26) It appears however that the VAT rules in some Member States require the transferor to settle all outstanding VAT accounts prior to the transfer, so that the 'succession' in such cases is confined to adjustments pursuant to Article

(20) of the Sixth Directive.

(27) At paragraph 38 of the Opinion.

(28) Cited in note 5, at paragraph 8 of the judgment.

(29) See paragraph 41 above.

(30) In paragraph 10 I have outlined the undesirable effects which such transactions may entail

(31) Bulletin of the European Communities, Supplement 11/73, at p. 10; what is now the first sentence of Article 5(8) was Article 5(4) in the original proposal.

(32) See, for a somewhat fuller consideration, paragraphs 19 to

(32) of my Opinion in Zita Modes.

(33) Cited in note 11; paragraph 24 of the judgment.

(34) See Abbey National, paragraph 25 of the judgment, and the case-law cited there.