C-142/99 Floridienne and Berginvest

JUDGMENT OF THE COURT (First Chamber)

14 November 2000 *

In Case C-142/99,

REFERENCE to the Court under Article 177 of the EC Treaty (now Article 234 EC) by the Tribunal de Première Instance de Tournai, Belgium, for a preliminary ruling in the proceedings pending before that court between

Floridienne SA

Berginvest SA

and

Belgian State,

on the interpretation of Article 19 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: French.

THE COURT (First Chamber),

composed of: M. Wathelet, President of the Chamber, P. Jann and L. Sevón (Rapporteur), Judges,

Advocate General: N. Fennelly, Registrar: H.A. Rühi, Principal Administrator,

after considering the written observations submitted on behalf of:

— Floridienne SA and Berginvest SA, by P. Malherbe, D. Waelbroeck and P.-P. Hendrickx, avocats of the Brussels Bar,

— the Belgian State, by A. Snoecx, Adviser in the Directorate-General for Legal Affairs of the Ministry of Foreign Affairs, Foreign Trade and Development Cooperation, acting as Agent, assisted by B. van de Walle de Ghelcke, of the Brussels Bar,

— the Commission of the European Communities, by E. Traversa, Legal Adviser, and H. Michard, of its Legal Service, acting as Agents,

having regard to the Report for the Hearing,

after hearing the oral observations of Floridienne SA and Berginvest SA, the Belgian Government and the Commission at the hearing on 17 February 2000, after hearing the Opinion of the Advocate General at the sitting on 4 April 2000,

gives the following

Judgment

Legal context and the dispute

1By judgment of 31 March 1999, received at the Court on 21 April 1999, the Tribunal de Première Instance (Court of First Instance), Tournai, referred to the Court for a preliminary ruling under Article 177 of the EC Treaty (now Article 234 EC) a question on the interpretation of Article 19 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, 'the Sixth Directive').

2That question was raised in proceedings between (i) Floridienne SA ('Floridienne') and Berginvest SA ('Berginvest') and (ii) the Belgian State regarding the treatment, for the purposes of value added tax ('VAT'), of dividends and interest on loans received by those companies in their capacity as holding companies from subsidiaries within the group.

The Community legislation

3Article 2(1) 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 is subject to VAT and, consequently, activities which are not economic activities fall outside the scope of the tax. Under Article 4(1) of the directive any person who independently carries out in any place any economic activity specified in paragraph 2 is a taxable person. 'Economic activities' is defined in Article 4(2) as comprising all activities of producers, traders and persons supplying services and, inter alia, the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis.

4Article 17 of the Sixth Directive headed 'Origin and scope of the right to deduct' provides, in paragraph 2, that the taxable person has a right to deduct only 'in so far as the goods and services are used for the purposes of his taxable transactions...'. As regards goods and services used by a taxable person both for transactions in respect of which VAT is deductible and transactions in respect of which VAT is not deductible, under paragraph 5, only such proportion of the VAT is deductible as is attributable to taxable transactions.

5That proportion is calculated, for the entirety of the transactions carried out by the taxable person, in accordance with Article 19 of the Sixth Directive, paragraphs 1 and 2 of which provide:

'1. The proportion deductible under the first subparagraph of Article 17(5) shall be made up of a fraction having:

— as numerator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions in respect of which value added tax is deductible under Article 17(2) and (3), — as denominator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which value added tax is not deductible. The Member States may also include in the denominator the amount of subsidies, other than those specified in Article 11A(1)(a).

The proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next unit.

2. By way of derogation from the provisions of paragraph 1, there shall be excluded from the calculation of the deductible proportion, amounts of turnover attributable to the supplies of capital goods used by the taxable person for the purposes of his business. Amounts of turnover attributable to transactions specified in Article 13B(d), in so far as these are incidental transactions, and to incidental real estate and financial transactions shall also be excluded. Where Member States exercise the option provided under Article 20(5) not to require adjustment in respect of capital goods, they may include disposals of capital goods in the calculation of the deductible proportion.'

The facts in the main proceedings and the question referred for a preliminary ruling

6The judgment making the reference explains that Floridienne, a holding company at the head of a group of companies operating in the chemicals, plastics and agri-foodstuffs sectors, and Berginvest, an intermediary holding company at the head of the plastics division, claim that they are directly or indirectly involved in the management of their subsidiaries, in particular by supplying them with administrative, accounting and information technology services and with loan finance. Furthermore, Floridienne and Berginvest receive dividends from their subsidiaries on their shares and interest on the loans.

7When they provide services to their subsidiaries, Floridienne and Berginvest carry out taxable transactions, in respect of which tax which has been imposed on goods and services supplied to them is deductible. Their practice of deducting the entirety of their input tax has been called into question by the Belgian tax authorities, in particular on the ground that some of the goods and services received are used in the collection of dividends and interest, an activity which the authorities consider to be exempt from VAT. Taking the view that the interest on the loans made by Floridienne and Berginvest to their subsidiaries relates nevertheless to a specific professional activity of a financial nature, the authorities reinstated it in the denominator of the fraction used to calculate the general deductible proportion. By contrast, as regards the dividends, only those paid by the subsidiaries which had actually received management assistance were included in the income reinstated in the denominator of that fraction.

8In those circumstances, the authorities issued payment orders with a view to recovering the VAT that they alleged was owed by the two companies in respect of transactions carried out between 1990 and 1994. Those orders were for a principal sum of BEF 13 812 839 in the case of Floridienne and BEF 17 598 876 in the case of Berginvest. Those companies brought proceedings to have the payment orders set aside, applying for their annulment and for damages for loss caused to them by the Belgian State.

9In the national court, Floridienne and Berginvest claimed, inter alia, that the system of deductions must be applicable only to transactions covered by the economic activity of the taxable person and that merely holding shares does not constitute a taxable activity. Moreover, no substantial resources were allocated by the companies to the collection of dividend income or interest from their subsidiaries. Collecting the dividend income produced by those shares does not therefore fall within the scope of VAT.

10Holding that those two companies were only partially liable to tax, since they carried out both transactions in respect of which VAT could be deducted and transactions outside the scope of VAT, the Tribunal de Première Instance, Tournai, decided to stay proceedings and refer the following question to the Court of Justice for a preliminary ruling:

'Must share dividends and interest on loans always be excluded from the denominator of the fraction used to calculate the deductible proportion, even where the company receiving such dividends and interest has involved itself in the management of the undertakings paying them, save in the exercise of its rights as shareholder?'

The question referred for a preliminary ruling

11By its question, the national court is asking essentially whether Article 19 of the Sixth Directive must be interpreted as meaning that (i) dividends distributed by its subsidiaries to a holding company, which is subject to VAT in respect of other activities and which supplies management services to those subsidiaries, and (ii) interest paid by the subsidiaries to the holding company on account of loans it has made to them, must be excluded from the denominator of the fraction used to calculate the deductible proportion.

12In order to answer that question, it is necessary to consider, in particular, whether the income concerned is outside the scope of VAT since it is not generated by transactions falling within the scope of an economic activity subject to VAT.

13As regards, first, the dividends, Floridienne and Berginvest submit that they do not constitute consideration for a specific economic activity carried out by the shareholder but merely arise as a result of ownership of the asset and, consequently, do not fall within the scope of VAT and must not be taken into account when calculating the deductible proportion, even if the company which receives the dividends has been involved in the management of its subsidiaries.

14Although the parent company is subject to VAT in respect of that management activity the dividends are not, however, related to that activity unless they constitute payment for it, which presupposes that there is a direct link with the activity subject to VAT. However, it is hard to believe that such a link exists since dividends are paid as a result of a decision taken unilaterally by the subsidiary and the same dividend is declared in respect of all the shares of a given class, irrespective of whether the shares are owned by the holding company. As to the dispute in the main proceedings, Floridienne and Berginvest point out in that regard that, independently of the dividends allocated to them, they receive specific remuneration for the services they supply to their subsidiaries. FLORIDLENNE AND BERGINVEST

15The Belgian Government and the Commission submit, by contrast, that the involvement of a parent company in the management of its subsidiaries must be regarded as an economic activity consisting in the exploitation of an asset for the purpose of obtaining income from it in the form of dividends. To that extent, the dividends do actually constitute consideration for that economic activity. Those dividends should therefore be included in the fraction used to calculate the deductible proportion, but solely in the denominator since the activity concerned is not one in respect of which deductions may be made.

16The Belgian Government adds that interpretation of Article 19 of the Sixth Directive to the contrary would vitiate the principle of the neutrality of VAT by allowing the holding company to deduct all the VAT paid for goods and services used by it, while those goods and services were used for both transactions in respect of which VAT is deductible and transactions in respect of which VAT is not deductible.

17In that regard, it should be observed that the Court has consistently held that a holding company whose sole purpose is to acquire holdings in other undertakings, without involving itself directly or indirectly in the management of those undertakings, without prejudice to its rights as a shareholder, does not have the status of taxable person and has no right to deduct tax under Article 17 of the Sixth Directive. That conclusion is based, inter alia, on the fact that the mere acquisition of financial holdings in other companies does not constitute an economic activity within the meaning of the Sixth Directive (see Case C-60/90 Polysar Investments Netherlands v Inspecteur der Invoerrechten [1991] ECR I-3111, paragraph 17; and Case C-333/91 Sofitam [1993] ECR I-3513, paragraph 12).

18However, the Court has held that it is otherwise where the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired, without prejudice to the rights held by the holding company as shareholder (Polysar, paragraph 14).

19It follows that involvement of that kind in the management of subsidiaries must be regarded as an economic activity within the meaning of Article 4(2) of the Sixth Directive, in so far as it entails carrying out transactions which are subject to VAT by virtue of Article 2 of that directive, such as the supply by Floridienne and Berginvest of administrative, accounting and information technology services to their subsidiaries.

20Nevertheless, if the receipt of dividends paid by those subsidiaries to the holding company thus involving itself in their management is to fall within the scope of VAT, a further requirement is that the dividends are capable of being regarded as consideration for the economic activity in question, which presupposes that there is a direct link between the activity carried out and the consideration received (see, inter alia, Case 154/80 Staatssecretaris van Financiën v Coöperatieve Aardappelenbewaarplaats [1981] ECR 445, paragraph 12; and Case C-288/94 Argos Distributors v Commissioners of Customs and Excise [1996] ECR I-5311, paragraph 16).

21In that regard, the Court has held that, since the receipt of dividends is not the consideration for any economic activity, it does not fall within the scope of VAT. Consequently, dividends resulting from shareholding fall outside the deduction entitlement (Sofitam, paragraph 13).

22Certain features of dividends account, in particular, for their exclusion from VAT. First, it is not in dispute that the existence of distributable profits is generally a prerequisite of paying a dividend and that payment is thus dependent on the company's year-end results. Second, the proportions in which the dividend is distributed are determined by reference to the type of shares held, in particular by reference to classes of shares, and not by reference to the identity of the owner of a particular shareholding. Lastly, dividends represent, by their very nature, the return on investment in a company and are merely the result of ownership of that property (Polysar, paragraph 13).

23In view, specifically, of the fact that the amount of the dividend thus depends partly on unknown factors and that entitlement to dividends is merely a function of shareholding, the direct link between the dividend and a supply of services (even where the services are supplied by a shareholder who is paid dividends), which is necessary if the dividends are to constitute consideration for the services, does not exist.

24As regards, secondly, the interest received by a holding company on loans which it has made to its subsidiaries, Floridienne and Berginvest submit that making capital available to a third party constitutes an economic activity consisting in exploiting assets only when it involves more than merely managing an asset and is such that it is linked to another taxable activity of which it is a direct, permanent and necessary extension. That is not the case as regards the transactions giving rise to the dispute in the main proceedings. The two companies have merely reinvested the dividends paid by their subsidiaries in loans to certain of those subsidiaries without there being any link with the management services provided to the subsidiaries. The interest on the loans constitutes, on the contrary, income resulting from ownership of the debts owed by the subsidiaries, or even income from credit transactions incidental to the main activity, namely the holding of shares, which, as such, falls outside the scope of VAT.

25The Belgian Government and the Commission claim, however, that the income from the loans to the subsidiaries constitutes the direct, permanent and necessary extension of a taxable activity comprising the supply of services, in particular management services, to the subsidiaries and that the income must therefore be included in the denominator of the fraction used to calculate the deductible proportion.

26In that regard, it must be observed that the Court has held that interest received by a property management company on investments, made for its own account, of sums paid by co-owners or lessees cannot be excluded from the scope of VAT, since the interest does not arise simply from ownership of the asset but is the consideration for placing capital at the disposition of a third party (Case C-306/94 Régie Dauphinoise — Cabinet A. Forest v Ministre du Budget [1996] ECR I-3695, paragraph 17).

27Since Article 2(1) of the Sixth Directive excludes from the scope of VAT transactions in which the taxable person is not acting as such, loan transactions, such as those in point in the main proceedings, are subject to VAT only if they constitute either an economic activity of the operator within the meaning of Article 4(2) of the Sixth Directive or the direct, permanent and necessary extension of a taxable activity, without, however, being incidental to that activity within the meaning of Article 19(2) of the directive (see, to that effect, Régie Dauphinoise, paragraph 18).

28Where a holding company makes capital available to its subsidiaries, that activity may of itself be considered an economic activity, consisting in exploiting that capital with a view to obtaining income by way of interest therefrom on a continuing basis, provided that it is not carried out merely on an occasional basis and is not confined to managing an investment portfolio in the same way as a private investor (see, to that effect, Case C-155/94 Wellcome Trust v Commissioners for Customs and Excise [1996] ECR I-3013, paragraph 36; and Case C-230/94 Enkler v Finanzamt Homburg [1996] ECR I-4517, paragraph 20) and provided that it is carried out with a business or commercial purpose characterised by, in particular, a concern to maximise returns on capital investment.

29Moreover, the making by a holding company of loans to subsidiaries to which it supplies administrative, accounting, information technology and general management services cannot be subject to VAT on the ground that it is the direct, permanent and necessary extension of the supply of services within the meaning of the judgment in Régie Dauphinoise. Such loans are neither necessarily nor directly linked to services thus supplied.

30Furthermore, where a holding company merely reinvests dividends received from its subsidiaries and outside the scope of VAT in loans to those subsidiaries, that in no way constitutes a taxable activity. The interest on such loans must, on the contrary, be considered merely as the result of ownership of the asset and is therefore outside the system of deductions.

31It falls to the national court to ascertain whether, in the main proceedings, the loan transactions at issue meet, in accordance with the criteria set out in paragraphs 26 to 30 of this judgment, the requirements for subjection to VAT.

32Therefore, the answer to the question referred to the Court for a preliminary ruling must be that Article 19 of the Sixth Directive is to be interpreted as meaning that the following must be excluded from the denominator of the fraction used to calculate the deductible proportions:

— share dividends paid by its subsidiaries to a holding company which is a taxable person in respect of other activities and which supplies management services to those subsidiaries, and — interest paid by the subsidiaries to the holding company on loans it has made to them, where the loan transactions do not constitute, for the purposes of Article 4(2) of the Sixth Directive, an economic activity of the holding company.

Costs

33The costs incurred by the Belgian 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 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 (First Chamber),

in answer to the question referred to it by the Tribunal de Première Instance, Tournai, by judgment of 31 March 1999, hereby rules:

Article 19 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 is to be interpreted as meaning that the following must be excluded from the denominator of the fraction used to calculate the deductible proportions:

— share dividends paid by its subsidiaries to a holding company which is a taxable person in respect of other activities and which supplies management services to those subsidiaries, and

— interest paid by the subsidiaries to the holding company on loans it has made to them, where the loan transactions do not constitute, for the purposes of Article 4(2) of the Sixth Directive, an economic activity of the holding company.

Wathelet Jann Sevón

Delivered in open court in Luxembourg on 14 November 2000.

R. Grass M. Wathelet

Registrar President of the First Chamber

OPINION OF ADVOCATE GENERAL FENNELLY delivered on 4 April 2000 *

Introduction

1The present reference concerns the calculation of VAT deductions from tax charged on management and technical-advice services provided by mixed holding companies, i.e. companies that hold shares as well as carrying out taxable transactions, to their subsidiaries. Do dividends paid by the latter have the effect of reducing the deductions proportionately? All those who have submitted observations to the Court are ad idem in asking for clarification of the problematic proposition enunciated by the Court in Polysar 1t hat the maintenance of shareholdings in companies would be regarded as economic activity 'where the holding is accompanied by direct or indirect involvement in the management' of such companies.

I — The background

2Floridienne SA and Berginvest SA (hereinafter 'the applicants') are industrial-hold ing companies. 2 In addition to holding

* Original language: English.

shares, the applicants are involved in the management of the companies in which they hold shares by providing taxable services to their subsidiaries, such as management, technical assistance, accounting and advisory services. It would appear from uncontested information provided by the applicants to the Court that such services were also provided during the relevant period to former subsidiaries and to certain other companies with which the group did business. Furthermore the applicants have advanced certain sums by way of loans to the subsidiaries or to some of them but not, it seems, to other companies. Consequently, the applicants receive dividends on their shares and interest on their loans. They have claimed the right to deduct from the (output) VAT which they charge in respect of the services provided to their subsidiaries the entirety of the (input) VAT paid by them in the price of goods and services provided to them.

3The Collectors of VAT for Tournai and Verviers, respectively, issued orders against each of the companies requiring payment of additional VAT in the sums of BEF 13 812 839 and BEF 17 598 876. The said Collectors assert that deductions could properly have been made only for the proportion that the receipts from taxable services bore to the total turnover of the applicants' taxable services plus dividend and interest income. Following upon actions brought by the applicants for annulment of these orders, as well as for damages, the Tribunal de Première Instance (Court of First Instance), Tournai, Belgium (hereinafter 'the national court') has referred the following question to the Court for a preliminary ruling:

'Must share dividends and interest on loans always be excluded from the denominator of the fraction used to calculate the deductible proportion, even where the company receiving such dividends and interest has involved itself in the management of the undertakings paying them, save in the exercise of its rights as shareholder?'

4The national court has described the applicants' involvement in the management of the subsidiaries as follows:

'[T]hey carry out other activities on behalf of their subsidiaries, such as management and technical assistance, financing and advising, and they are directly involved in the management of the companies in which they hold shares, some of its managers being on the boards of those companies. In connection with their activities providing services to their subsidiaries, the applicants carry out taxable transactions, giving rise to the right to make deductions in respect of taxes imposed on goods and services supplied to them (input taxes).'

II — Observations and analysis

(i) Income from dividends

5Although findings of fact are exclusively a matter for the national court, it is important to note, immediately, that the findings contained in the order for reference suggest that the relationships between the applicants and their subsidiaries are governed by objective legal measures, such as contracts for the provision of services and the appointment of managers to serve on the boards of the subsidiaries.

6The applicants claim that the receipt of dividends and interest amount to simple enjoyment of the fruits of investment and do not constitute 'economic activity' within the scope of Community VAT. These receipts should not, therefore, be taken into account when calculating permitted deductions. Belgium relies essentially for its contrary view on the participation of the applicants in the management of their subsidiaries. Such activity changes the nature of the receipts into the fruits of an extended economic activity which in principle is subject to VAT but exempt by virtue of Article 13B(d)(5) of the Sixth Directive. In order to avoid infringing the principle of neutrality, the dividends must be included, at least partially, in the relevant denominator. At the hearing, counsel for the applicants denied that the national court had made any definite finding that the applicants had involved themselves in the management of their subsidiaries, apart from providing taxable services or exercising rights of nomination which they enjoyed as shareholders. In the alternative, he contested Belgium's view that the receipt of dividends could be regarded as the remuneration for an activity which was to be regarded as taxable but exempt pursuant to Article 13B(d)(5). 4

7It is necessary to consider the principal relevant provisions of the Sixth VAT Directive.

8The central crux of the case is the meaning of the term 'economic activity'. As appears from Article 4 of the Sixth Directive, that term defines the scope of the Community VAT system. Article 4(1) of the Sixth Directive provides that a 'taxable person' is to 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'. Article 4(2) goes on to provide:

'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'' (emphasis added).

In addition, Article 4(3) permits Member States also to 'treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in paragraph 2 ...', before mentioning, in particular, certain transactions relating to buildings or building land.

9The limitation of the scope of VAT to 'economic activity' means, to give the most obvious example, that an individual who carries on a trade or profession in his own name must keep his personal and business affairs separate. He may not make VAT deductions in respect of his private purchases. Where he diverts business goods or services to his private use, he may have to pay VAT on them. 6

10Furthermore, as is clear from the case-law of the Court, upon which the applicants place particular reliance, the notion of 'economic activity' does not encompass the enjoyment of the fruits of the simple ownership of investments, such as shares and bonds or debentures.

11In Poly sar, the Court was concerned with a claim by a pure holding company that dividend income received from its holdings of shares should be regarded for VAT purposes as having been obtained in the pursuit of an economic activity. Recalling its dictum in Van Tiem as to the wide scope of VAT, the Court stated that 'it does not follow from that judgment ... that the mere acquisition and holding of shares in a company is to be regarded as an economic activity, within the meaning of the Sixth Directive, conferring on the holder the status of a taxable person'. 8 The Court explained this interpretation of the scope of the principle expressed in Van Tiem in the following terms: 9

'[T]he mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property.'

12In Wellcome Trust, the Court was even more explicit. It took the same view in respect of the extremely substantial investment activities of a charitable trust consisting 'essentially in the acquisition and sale of shares and other securities with a view to maximising dividends and capital yields...'. 0 In Hamas & Helm the 'mere acquisition and holding of bonds, activities which are not subservient to any other business activity, and the receipt of income therefrom' were also 'not to be regarded as economic activities conferring on the person concerned the status of a taxable person'.

13In none of these three cases did the taxpayer carry out any taxable transactions. Each had sought treatment as a taxable person by virtue of its investment activities so as to be able to exercise a right to deduct VAT inputs. Consequently no issue arose about the apportionment of VAT deductions as no deductions were possible.

14The Court had to address the calculation of deductible proportions in Sofitam. The system of deductions is, of course, central to the very nature of the Community VAT regime. Its objective is to ensure that the economic burden of VAT is borne only by the consumer. Traders, as taxable persons, are entitled to deduct VAT paid on goods and services they have purchased from the VAT paid by them to the revenue authorities on their taxable transactions and to pass the remaining burden on to their customers in the form of the price charged. This is reflected in Articles 17 to 20 of the Sixth Directive which are designed 'to relieve the trader entirely of the burden of the VAT payable or to be paid in the course of all his economic activities'.

15Article 17(1) declares the general principle of a 'right to deduct ...'. The material part of Article 17(2) states that:

'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 ... .'

16In order to be deductible, therefore, the input VAT must have been paid on 'goods and services used for the purposes of his taxable transactions ...' (emphasis added). This important and necessary precondition acts as a primary filter against abuse, at least where inputs can readily be related to the corresponding outputs.

17The present case is, however, directly concerned with the interpretation of Articles 17(5) and 19(1) of the Sixth Directive. The first two paragraphs of Article 17(5) provide:

'As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person.'

Article 19(1) provides:

'The proportion deductible under the first subparagraph of Article 17(5) shall be made up of a fraction having:

— as numerator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions in respect of which value added tax is deductible under Article 17(2) and (3),

— as denominator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which value added tax is not deductible. The Member States may also include in the denominator the amount of subsidies, other than those specified in Article 11A(1)(a).

The proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next unit.'

18Belgium claims that the applicants should be permitted to make deductions pro rata according to the proportion that the turnover of their taxable transactions bears to their total turnover, including dividends and interest received from their subsidiaries. The Commission has argued in its written observations that the Sixth Directive contains no rule regarding the method of taking account of income relating to private activities outside the scope of the Directive and that Member States are, accordingly, free to decide on the deductibility of VAT inputs relating to such activities.

19I have serious doubts about the correctness of the Commission's suggestion. If Member States chose to permit deduction of VAT in respect of purely private activities, which would amount in reality to reimbursement in most cases, there would potentially be a very serious loss of VAT revenue, a small percentage of which, it must be recalled, is paid to the Community budget. It would amount to relieving the consumer from the burden of VAT, which would be contrary to a central tenet of the system. In any event it does not arise on the facts of this case.

20The first part of the response to the more relevant argument of the Belgian State and to the question posed by the national court is to be found in Sofitam. Sofitam, to use the expression employed by Advocate General Van Gerven in his Opinion in that case, was a 'mixed holding company', like the applicants in the present case. 6 It had receipts from share dividends and from taxable transactions. France took the same view as is now taken by Belgium in this case, to wit that Sofitam should be allowed to deduct 'only up to the percentage resulting from the ratio between the amount of its taxable receipts and the annual amount of its total receipts, including the dividends which it had received'. Sofitam raised directly, therefore, the issue of the interpretation of Article 19(1) of the Sixth Directive. However, unlike in the present case, there was no suggestion that Sofitam was involved in any way in the management of its subsidiaries. In those circumstances, the Court ruled that as 'the receipt of dividends is not the consideration for any economic activity ... it does not fall within the scope of VAT... [and that] dividends resulting from holdings fall outside the deduction entitlement'. It concluded that:

'Consequently, dividends must be excluded from the calculation of the deductible proportion referred to in Articles 17 and 19 of the Sixth Directive, if the objective of wholly neutral taxation ensured by the common system of VAT is not to be jeopardised.'

Finally, the Court stated explicitly that the 'share dividends received by an undertaking which is not subject to VAT in respect of the whole of its transactions are to be excluded from the denominator of the fraction used to calculate the deductible proportion'.

21It follows to my mind that the dividends involved in this case should similarly be excluded, unless the management activities of the applicants in relation to their subsidiaries call for a different interpretation of Article 19(1). It is this possibility that is central to the present case. In Polysar, the Court, having ruled that the investment activities of a pure holding company did not amount to 'economic activities', stated that it would be 'otherwise where the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired, without prejudice to the rights held by the holding company as shareholder'.

22The situation contemplated by this qualification did not arise on the facts of Polysar or on those of any of the later cases. In Wellcome Trust and Harnas & Helm, the Court mentioned, by reference to Article 13B(d)(5) of the Sixth Directive, that 'transactions ... effected as part of a commercial share-dealing activity or in order to secure a direct or indirect involvement in the management of the companies in which the holding has been acquired' might fall within the scope of VAT. In the latter case the Court added that such transactions would 'constitute the direct, permanent and necessary extension of the taxable activity'. In each case, the Court cited, without comment, its Polysar statement.

23However, this language, i.e. the reference to extensions of taxable activity, suggests rather that the Court had in mind its judgment in Régie Dauphinoise-Cabinet A. Forest v Ministre du Budget. Régie was involved principally in the management of property. It managed rented property on behalf of the owners and acted as a manager of condominiums. It received advances from the owners, which were paid into a bank account operated by Régie, which then invested them, by way of diverse treasury placements, with financial institutions on its own account. Régie apparently, however, became the owner of the sums invested and was entitled to retain the interest earned on the placements, albeit subject to a contractual obligation ultimately to repay the relevant principal amounts. In reality, therefore, as the applicants contended at the hearing, Régie's remuneration from its additional investment activities was limited to the interest received.

24The Court accepted that the placements by Régie with financial institutions could 'be regarded as services supplied to those institutions, consisting in the loan of money for a fixed period, duly remunerated by the payment of interest' and, moreover, that 'unlike the receipt of dividends by a holding company ... interest received by a property management company on investments made for its own account of sums paid by co-owners and lessees cannot be excluded from the scope of VAT, since the interest does not arise simply from the ownership of the asset, but is the consideration for placing capital at the disposition of a third party'. The Court was nevertheless careful to distinguish the activities of an undertaking like Régie from simple 'placements made with banks by the manager of a condominium' who was not 'acting as a taxable person'. Accordingly, it concluded that:

'... in the case at issue in the main proceedings, the receipt, by such a manager, of interest resulting from the placement of monies received from clients in the course of managing their properties constitutes the direct, permanent and necessary extension of the taxable activity, so that the manager is acting as a taxable person in making such an investment.'

25At this point, it is apparent that the Court has identified two types of situation as coming potentially within the Polysar qualification, namely share-dealing operations and active management of property. However, each of these can be independently justified by reference to the terms of the Sixth Directive. Transactions in shares are explicitly covered by the wording of an exemption (Article 13B(d)(5), quoted in footnote 3 above), while Article 4(2) covers 'the exploitation of tangible or intangible property...'. Advocate General Van Gerven in his Opinion in Polysar drew a careful distinction between the latter type of activity and simple investment when pointing out that both Rompelman and Van Tiem 'were concerned not only with an investment, that is to say the acquisition of property ... but also with the property acquired subsequently being made available to a third party for consideration (in the former case by the letting of the apartment and in the latter by the grant of building rights over the plot)'. He then distinguished between the mere acquisition of property, on the one hand, and its being made available, on the other, for the purposes of determining whether such property has been economically exploited for VAT purposes. The part of his Opinion which is particularly pertinent to the present case also casts the most light on the proper interpretation of the Polysar judgment and is worthy of full citation:

'The question remains whether liability to tax may be inferred from the other activities of a holding company. The national court has pointed out that Polysar's activities are concerned solely with the holding of shares in subsidiary companies. It seems to me that such activities, which are undertaken in the exercise of shareholders' rights, do not constitute "economic activities" within the meaning of the directive. The exercise of those rights includes, for instance, participation in the general meeting of the subsidiary's shareholders, the exercise of the right to vote at the meeting and the possibility of influencing company policy thereby and, where appropriate, involvement in the decision appointing the company's directors or officers and/or apportioning the subsidiary's profits, as well as the receipt of any dividends declared by the subsidiary or the exercise of shareholders' preferential rights or options.

In addition to the aforesaid activities which a holding company carries on as a shareholder in other companies, there are activities which, like any other company, it carries on through its organs and which, in so far as they are conducted within the company (in its relations with the shareholders and the company's organs) also cannot be regarded as "economic activ ities", within the meaning of the Sixth Directive. Those activities include the administration of the holding company, the making up of the annual accounts, the organisation of the general meeting, the decision to spend the holding company's profits and to declare (and possibly pay out) dividends.

Nor, in my view, is there any question of economic activities independently carried on within the meaning of Article 4(1) of the Sixth Directive in the case of activities which the holding company, or persons acting in its name, carries out in its capacity as director or officer of a subsidiary company. A director or officer of the company does not act on his own behalf but only binds the (subsidiary) company whose instrument he is; in other words, where he acts in the exercise of his duties under the company instruments, there is no question of his acting "independently". In that regard, his actions must be equated with those of an employee who, as Article 4(4) of the Sixth Directive expressly states, does not act "independently".'

26It follows from this passage that, contrary to the view advanced by Belgium in this case, the mere appointment by a holding company of directors or officers, and I would say also managers, of a subsidiary company does not alter the nature of the relationship from the VAT point of view. In general, a holding company does not, by exercising its rights as shareholder, 'exploit' its 'intangible property' in its shares in the sense of Article 4 of the Sixth Directive. As Advocate General Van Gerven noted in respect of such a holding company, 'there are activities which, like any other company, it carries on through its organs and which, in so far as they are conducted within the company (in its relations with the shareholders and the company's organs), also cannot be regarded as "economic activities"...'. The Advocate General did not, however, deal with the suggestion implicit in the national court's question in the present case that the provision of management and other services to a subsidiary, even pursuant to taxable transactions (and I presume contractual relationships), leads to a different result. I do not believe it does. To my mind, the implication of Advocate General Van Gerven's remarks regarding acting 'in the exercise of ... duties under the company instruments' are equally applicable to objective contractual relationships such as those involved in this case between a parent and subsidiary.

27The applicants pointed to some anomalies which would flow from treating the share dividend income of the parent companies as 'economic activities' when the latter supplied services under contract to its subsidiaries. The level of deductions would vary with the profitability of the latter. Full deduction would be permissible if there were no profits or even if no dividends were declared. A small percentage reduction would apply when large dividends were declared. The situation would again be different if the services were carried out instead by a specially nominated company within the group.

28In short, where the corporate structure is properly respected, dividends paid by a subsidiary to a parent do not consist of 'economic activities'. The situation envisaged by the exception in Polysar cannot in effect arise in any case where the veil of incorporation has not been illegally breached by the parent company. It remains, of course, possible for it to apply to cases where there is no corporate structure, i.e. where an unincorporated body or an individual directly exploits property.

29Finally, on this point, the Commission has suggested, in its written observations, that the dividends could be regarded as constituting consideration, within the meaning of Article 11 of the Sixth Directive, for the provision of management services by the parent to the subsidiaries. Dividends are payable equally in respect of all shares of the same type in a company. In my opinion, it is fundamentally inconsistent with the corporate structure to treat the payment of dividends as furnishing consideration in that sense. It is generally accepted in company law that dividends comprise payments made out of profits to the shareholders in a company. Indeed, the Court expressly stated in Sofitam that 'the receipt of dividends is not consideration for any economic activity within the meaning of the Sixth Directive'. The situation could only be different where, notwithstanding the separate legal personality of the subsidiary, a controlling shareholder has been able to use its shareholding and consequential influence on the management of the subsidiary to extract additional 'payment' for separate taxable services provided by it to that subsidiary. There is nothing in the case-file to suggest that this occurred in the instant case.

30The decisive point is that denial of the right to deduct VAT inputs from VAT paid on directly related outputs would patently contradict a basic tenet of the VAT system. As this would be the consequence of including non-economic activities in the denominator of the fraction prescribed by Article 19(1) of the Sixth Directive, I would recommend that the Court reject such an interpretation of the Directive.

(ii) Interest on loans

31The same result does not automatically follow for the receipt by the applicants in respect of interest on loans to their subsidiaries. The loans at issue do not necessarily partake of the character of investments as was the case with the bonds in Hamas & Helm. In that case, during the relevant period Hamas & Helm held shares and bonds issued in third countries in respect of which it received dividends and interest. The Court held that 'income from the bonds derives from the mere fact of holding them, which entitles the holder to payments of interest' and that '[s]uch interest cannot, therefore, be regarded as a return on an economic activity or transaction carried out by the bondholder, since it derives from the mere ownership of bonds'. However, it appears from the order for reference in this case and from the submissions of the parties that the applicants provide finance on a continuing basis to cover the cash-flow needs of their subsidiaries, which are often not in a position easily to raise finance independently.

32Belgium, supported by the Commission at the hearing, relies on Régie Dauphinoise. The applicants' lending activities — it described them at the hearing as being the financial motors of the group — should be viewed as an extension of their business of providing taxable management services to its subsidiaries. This is contradicted by the applicants who contend, principally, that in lending they merely reinvest, in a manner akin to a private investor, sums received by way of dividend. Alternatively, they suggest that, as the resources used for lending are merely ancillary to the shareholding activity, the interest earned thereon should not be included in the denominator.

33In Harnas & Helm the holding company had also made two ordinary loans to non-related companies. There was nothing in the case-file to indicate that such lending activity occurred other than on a wholly occasional, if not rare, basis. In the present case, it is clear from the order for reference that lending to their subsidiaries is one of the applicants' ongoing activities. It seems to me therefore to be much more akin to the money-management operations considered by the Court in Régie Dauphinoise than to the portfolio-management activities at issue in Wellcome Trust. It is on this basis, essentially, that Belgium argues that the activity should be viewed as being economic.

34However, in Régie Dauphinoise the sums invested were held by Régie, as Advocate General Lenz stated, 'on the basis of its economic activity'. 0 Here it would appear that some, if not all, of the funds lent by the applicants were derived from its dividend income. An analogy with Régie Dauphinoise could only be made if the national court were to conclude that the lending activity was financed largely from the proceeds generated by the applicants' taxable activity of providing services. I agree with the view expressed by Advocate General VerLoren van Themaat that it is 'the nature of the activities in question which is relevant' for determining what constitutes an economic activity and I would reiterate the view I expressed in my own Opinion in Harnas & Helm that:

'Attention should be focused on the economic and commercial substance of transactions that are alleged to constitute an economic activity, as opposed to the formal financial or commercial classification (namely, in this case, as bond or share acquisitions and holdings) of those activities. It follows, in my opinion, that a person who, like the appellant, deals in bonds may only be considered to be carrying on an economic activity if he is pursuing a business or commercial purpose; in this respect he must provide services to his customers as opposed merely to being a consumer of services.'

35In this case, I am of the view, although I confess not without some hesitation, that the lending activities of the applicants lack economic or commercial substance. The mere fact that the aim of the loans from the point of view of the subsidiaries is to avoid having to borrow from credit institutions — lending which, as we are told by Belgium, is often refused due to the inadequacy of the autonomous security which may be offered by subsidiaries in industrial-holding groups — does not suffice to render the applicants' activity commercial. In other words, while financially the lending activity of a bank and that of the applicants vis-à-vis their subsidiaries would differ little, the economic nature of their underlying activities is different. It may be compared with the difference between the activities giving rise to the receipt of a dividend and those giving rise to a rent cheque, to which I alluded in my Opinion in Harnas & Helm. To my mind the lending activity of Harnas & Helm, apart from the fact that it clearly occurred only occasionally, was nevertheless more economic in nature because, unlike the applicants, it furnished loans to third parties.

36My hesitation in making this recommendation derives from the express provision for an exemption from VAT in Article 13B(d)(1) of the Sixth Directive in respect of 'the granting and the negotiation of credit and the management of credit by the person granting it'. This clearly indicates, to my mind, that such activity, when carried on as a business, is to be regarded as constituting 'economic activity'. However, I consider that, for such lending activity to be carried on on an economic basis for VAT purposes, the supposed grantor of credit must engage in the activity in question not only on an ongoing basis, a condition satisfied here, but also for commercial purposes, which, to my mind, are absent where it is clear that the sums lent were lent to subsidiaries within the same corporate group for the purposes of permitting the latter to carry on their commercial activities vis-à-vis third parties. It is clear, especially from the intra-group nature of the loans at issue, that the lending activity of the applicants is not an extension of their taxable service-provision activities but, instead, an extension of their non-taxable investment activities.

(iii) General conclusions

37Consequently, I recommend that share dividends should be excluded from the denominator of the fraction used to calculate the deductible proportions laid down by Article 19(1) of the Sixth Council Directive. Similarly, interest earned on intra-group loans, even if made available on an ongoing basis, should also be so excluded provided, first, that they are furnished from funds derived from income on such share dividends rather than from income derived from a separate taxable activity and, second, that they are made available only to subsidiary companies.

38The result of all this, in so far as Article 19(1) of the Sixth Directive is concerned, is not necessarily that the applicants may deduct all of their VAT inputs. To the extent that the national court is satisfied, notwithstanding the applicants' contention to the contrary, that a not entirely insignificant proportion of those inputs relates to the performance of non taxable transactions connected with the shareholding and lending activities of the applicants, no right to deduct may arise pursuant to Article 17(2) of the Sixth Directive. A taxable person may only deduct that proportion of its inputs which may properly be assigned to its economic activities. Every taxable person is obliged by Article 22(2) of the Sixth Directive to 'keep accounts in sufficient detail to permit application of the value added tax and inspection by the tax authority', while Article 22(4) requires 'every taxable person' to 'submit a return within an interval to be determined by each Member State', which 'may not exceed two months following the end of each tax period', whose duration is, subject to a maximum of a year, to be determined by each Member State, although it may not 'exceed a year'. The taxable person who seeks to exercise the right to deduct in circumstances where some of its VAT inputs may relate to non taxable activities is obliged to establish, to the satisfaction of the relevant tax authorities, the proportion of those inputs which it claims are attributable to taxable transactions and thus capable of being deducted.

39Article 19(1) of the Sixth Directive is, however, inapplicable. It can apply only in court, in the final instance, to determine the cases where taxable but exempt activities extent to which some of the deductible VAT are mixed with taxable ones, since, other inputs claimed by the applicants may in wise, as in this case where the applicants fact have related to the exercise, respec only engage, in my opinion, in taxable and tively, of its non-taxable shareholding non-taxable activities, there is no difference activities and its intra-group lending activ between the numerator and the denomina ities and to exclude those inputs from the tor of the fraction which that provision right of deduction claimed by them. envisages. It is therefore for the national

I II — Conclusion

40It follows, in my view, that the Court should answer the question referred to the Court by the Tribunal de Première Instance, Tournai as follows:

Share dividends should always be excluded from the denominator of the fraction used to calculate the deductible proportions laid down by Article 19(1) 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, where the economic relationship between the company owning the shares and the company in which the shares are held is governed by lawfully adopted legal arrangements including contracts for the provision of services and the nomination by a parent company of persons who carry out the activities of the subsidiary. Furthermore, where one company in a group provides, even on a continuing basis, loan finance to meet the regular borrowing needs of other companies in the same group, that activity does not constitute economic activity and the income from such finance should also be excluded from the denominator of that fraction.

Notes

(1) See Case C-60/90 Polysar Investments Netherlands [1991] ECR I-3111 (hereinafter 'Polysar').

(2) At the material time, Floridienne was the group holding company, while Berginvest, its subsidiary, was tne parent company of the group's plastics subdivision.

(3) This provision requires, in so far as is material in the present case, Member States to exempt from VAT 'transactions, including negotiation, excluding management and safekeeping, in shares, interests in companies or associations, debentures and other securities ...'.

(4) In his view, the receipt of a dividend could not be equated with 'transactions, including negotiation, ... in shares ...' for the purposes of that provision.

(5) 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.

(6) See Articles 5(6) and 6(2) of the Sixth Directive which were discussed recently in Case C-48/97 Kuwait Petroleum [1999] ECR I-2323.

(7) Case C-186/89 [1990] ECR I-4363.

(8) Polysar, cited in footnote 1 above, paragraph 13.

(9) Ibid, (emphasis added).

(10) Case C-155/94 Wellcome Trust v Commissioners of Customs and Excise [1996] ECR I-3013, paragraph 34 (hereinafter 'Wellcome Trust').

(11) Case 80/95 Hamas & Helm v Staatssecretaris van Financiën [1997] ECR I-745 (hereinafter 'Hamas & Helm').

(12) Ibid., paragraph 20.

(13) Case C-333/91 Sofitam v Ministre Chargé du Budget [1993] ECR I-3513 (hereinafter 'Sofitam').

(14) Case 268/83 Rompelman v Minister van Financien [1985] ECR 655, paragraph 19 (hereinafter 'Rompelman'), Case 50/87 Commission v France [19881 ECR 4797, paragraph 15 and Sofitam, loc. cit., paragraph 10.

(15) See the case-law cited in footnote 14 above.

(16) Paragraph 12 of his Opinion (emphasis in original). The Court described it more generally as 'a holding company'; see paragraph 3.

(17) Sofitam, paragraph 3.

(18) Advocate General Van Gerven pointed out (paragraph 12 of his Opinion) that '[a]ccording to the available information, as well as managing its share portfolio, Sofitam pursues ancillary activities that are subject to VAT'.

(19) Paragraph 13.

(20) Paragraph 14.

(21) Paragraph 15.

(22) Paragraph 14. This statement was later cited at paragraph 12 of the judgment in Sofitam.

(23) As regards Sofitam, see the discussion in paragraph 20 and the accompanying footnote 16 above.

(24) Paragraphs 35 and 16 of the respective judgments.

(25) Case C-306/94 [1996] ECR I-3695 (hereinafter 'Régie Dauphinoise').

(26) Paragraph 16.

(27) Paragraph 17.

(28) Paragraph 18.

(29) Paragraph 18 (emphasis added).

(30) Polysar, loc. cit., footnote 1 above, paragraph 5 of the Opinion (original emphasis).

(31) Ibid.

(32) Opinion of Advocate General Van Gerven, paragraph 6.

(33) Ibid.

(34) The applicants point out in their written observations that, with effect from 1 January 1995, the management services in question have been provided by specialised subsidiaries. Moreover, counsel for the applicants pointed out at the hearing, without being contradicted by either the Commission or Belgium, that in certain Member States, notably the United Kingdom, the members of a corporate group can opt for consolidated VAT treatment, in which case the central issue raised by the present case would not arise because the VAT inputs of the parent would be regarded as part of the deductible inputs of the group.

(35) In Irish law, for example, under S. 45 of the Companies Amendment Act 1983, distributions or dividends in all registered companies may only be made from the company's accumulated realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated realised losses, so far as not previously written-off in a reduction or reorganisation of capital, i.e. current profits and any profits carried forward, less current losses and any losses carried forward. The link between profits and dividends clearly also underlies company-law provisions that have been adopted by the Community legislature, as may be illustrated by Council Directive 82/121/EEC of

(15) February 1982 on information to be published on a regular basis by companies the shares of which have been admitted to official stock-exchange listing, OJ 1982 L 48, p. 26. Article 5(4) of that Directive provides that: 'Where the company has paid or proposes to pay an interim dividend, the figures must indicate the profit or loss after tax for the six-month period and the interim dividend paid or proposed'.

(36) Cited in footnote 13 above, paragraph 13. The Court thus agreed with the Commission's observations in that case to the effect that 'dividends do not constitute consideration ... for an activity subject to VAT and still less for an activity exempt from VAT'; see paragraph 13 of the Opinion of Advocate General Van Gerven. In its oral observations in the present case, the Commission accepted that it would be very difficult to determine the proportion of dividends which constituted such consideration.

(37) Cited in footnote 11 above.

(38) Ibid., paragraph 18.

(39) Cited in footnote 25 above.

(40) Paragraph 20 of his Opinion in Régie Dauphinoise.

(41) See his Opinion in Case 89/81 Staatssecretaris van Financiën v Hong Kong Trade [1982] ECR 1277, p. 1293 (emphasis in original).

(42) Paragraph 24.

(43) Ibid., paragraph 30.

(44) See paragraph 16 above and paragraph 53 of my Opinion in Harnas & Helm.