C-16/00 Cibo Participations

JUDGMENT OF THE COURT (First Chamber)

27 September 2001 *

In Case C-16/00,

REFERENCE to the Court under Article 234 EC by the tribunal administratif de Lille (France) for a preliminary ruling in the proceedings pending before that court between

Cibo Participations SA

and

Directeur regional des impôts du Nord-Pas-de-Calais,

on the interpretation of Article 4(1) and (2), Article 13B(d) and Article 17(2)(a) and (5) 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: C. Stix-Hackl,

Registrar: D. Louterman-Hubeau, Head of Division,

after considering the written observations submitted on behalf of:

— Cibo Participations SA, by M. Pourbaix, avocat,

— the French Government, by K. Rispal-Bellanger and S. Seam, acting as Agents,

— the Commission of the European Communities, by E. Traversa, C. Giolito and H. Michard, acting as Agents,

having regard to the Report for the Hearing,

after hearing the oral observations of Cibo Participations SA, the French Government and the Commission at the hearing on 14 December 2000,

after hearing the Opinion of the Advocate General at the sitting on 6 March 2001, gives the following

Judgment

Legal context and the dispute

1By judgment of 6 January 2000, received at the Court on 19 January 2000, the tribunal administratif de Lille (Administrative Court, Lille) referred to the Court for a preliminary ruling under Article 234 EC three questions on the interpretation of Article 4(1) and (2), Article 13B(d) and Article 17(2)(a) and (5) 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, hereinafter 'the Sixth Directive').

2Those questions were raised in proceedings between Cibo Participations SA ('Cibo') and the Directeur régional des impôts du Nord-Pas-de-Calais (Regional Director for Taxes, Nord-Pas-de-Calais) concerning the question whether, and if so, to what extent, a holding company may deduct value added tax ('VAT') charged on services purchased in the context of the acquisition of shareholdings in its subsidiaries.

Relevant 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. Under Article 4(1) of the Sixth Directive any person who independently carries out any economic activity specified in Article 4(2) is a taxable person. 'Economic activities' are defined in Article 4(2) as comprising all activities of producers, traders and persons supplying services including the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis.

4Article 13B(d)(5) of the Sixth Directive provides as follows:

'Without prejudice to other Community provisions, Member States shall exempt...:

(d) the following transactions:

(5) transactions, including negotiation, excluding management and safe keeping, in shares, interests in companies or associations, debentures and other securities, excluding:

— documents establishing title to goods,

— the rights or securities referred to in Article 5(3)'.

5Article 17 of the Sixth Directive, headed 'Origin and scope of the right to deduct', provides, in paragraph 2 (a), that '[i]n 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... value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person'.

6As regards goods and services used by a taxable person both for transactions in respect of which VAT is deductible and for transactions in respect of which it is not deductible, the first subparagraph of Article 17(5) of the Sixth Directive provides that 'only such proportion of the value added tax shall be deductible as is attributable to the former transactions'. The second subparagraph of Article 17(5) states that '[t]his proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person'.

7Article 19(1) and (2) of the Sixth Directive provides:

'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....'

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

8Cibo is a holding company which owns significant shareholdings in three undertakings specialising in bicycles. It was created by the company Compagnie d'importation des laines ('CIL'), its majority shareholder.

9It is apparent from the judgment of the Administrative Court, Lille, that Cibo has challenged before that court a demand to pay VAT arising from the refusal of the tax authorities to allow Cibo to deduct VAT, for the period from 2 November 1993 to 31 December 1994, in respect of the supply of various services for which it was invoiced by third parties in connection with the acquisition of shares in its subsidiaries. The services in question included the auditing of the companies, assistance with the negotiation of the purchase price of the shares, organising the take-over of the companies and legal and tax services.

10In support of its application for deduction of VAT, Cibo has pointed out that its chairman became the chairman of the three subsidiaries, that it provides services to those subsidiaries against payment, that CIL makes available, against payment, qualified staff to work in its subsidiaries in general, administrative, financial, commercial and technical management, and that the subsidiaries were invoiced for those services on a flat-rate basis of 0.5% of their turnover. Cibo maintains that it is thus involved in the management of its subsidiaries and that, consequently, the expenditure linked to its acquisition of shares falls within the scope of VAT as general expenses, given that it pertains to the holding company's general business.

11According to the national court, the French tax authorities reply that Cibo derives most of its turnover from the receipt of dividends. Moreover, it conducts no commercial transactions in its own name and the companies within the group remain legally independent. Apart from its financial role, Cibo does no more than act as consultant and direct group policy, in respect of which it receives remuneration. The French authorities submit that, consequently, Cibo is neither directly nor indirectly involved in the management of its subsidiaries. The expenditure arising from its acquisition of shareholdings has no connection with the services which it provides to its subsidiaries. It merely relates to its ownership of shares and receipt of dividends, which fall outside the scope of VAT.

12In the event that Cibo were nevertheless to be regarded as being involved in the management of its subsidiaries, the French tax authorities maintain that the dividends must be associated with the company's economic activity and thus with its income falling within the scope of VAT, but that, given that they are exempted in accordance with Article 13B(d) of the Sixth Directive, a pro-rata deduction should be made.

13Those were the circumstances in which the Administrative Court, Lille, resolved to stay proceedings and refer the following questions to the Court of Justice for a preliminary ruling:

'1. What are the criteria for establishing "involvement"? Can it be inferred from the provision of paid services or the running of a group of companies by its holding company, or de facto management precluding independence on the part of a subsidiary, or some other factor?

2. Where there is involvement, does the receipt of dividends remain outside the scope of value added tax for any reason other than economic activity, in that such receipts are not the consideration for the supply of goods or services or, having regard to the fact that expenditure is incurred in connection with the acquisition of shares the direct purpose of which is to enable participation in economic activity, do dividend receipts fall within the scope of value added tax and, if so, are they exempt under Article 13B(d)(1) of the Sixth Directive or taxable?

3. If the receipt of dividends does remain outside the scope of value added tax, what are the implications for the right to deduct:

— does no right remain to deduct tax on expenditure incurred in acquiring shares, given that that expenditure does not relate to a taxable transaction, — or is deduction allowed under the heading of general costs?'

The questions referred for a preliminary ruling

The first question

14By its first question, the national court essentially asks what are the criteria for establishing whether the involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity within the meaning of Article 4(2) of the Sixth Directive.

Observations submitted to the Court

15Cibo argues that the acquisition of shares in an undertaking may entail involvement in the management of the undertaking and thus amount to an economic activity falling within the scope of VAT in two situations. The first is where essentially all the share capital is acquired and the shareholder takes on responsibility for its subsidiary's destiny, has a hand in its management and appoints its directors, albeit without encroaching on its legal personality. In such a case, the shareholder will most likely be prompted to provide its subsidiary with services against payment. The second situation is similar to the first, except that the holding company does encroach upon the normal running of the subsidiary by providing de facto management.

16The French Government's opinion on the matter is that involvement means the exercise of a decisive influence on the management of a subsidiary. If the decisions of a subsidiary are dictated by an undertaking which pursues a similar or complementary company object because it has, in law or in fact, a majority of the voting rights, that implies involvement. Involvement may also be established on the basis of a body of evidence derived from analysing, subject to review by the court having jurisdiction in taxation matters, the legal, financial, company and administrative relations of the undertakings concerned. The simple fact that services are provided to a subsidiary against payment does not establish involvement.

17The Commission maintains that the proper approach to the questions referred for a preliminary ruling must proceed from a consideration of how the transactions may be defined in terms of Article 4 of the Sixth Directive, read together with Article 2 thereof. It observes that Cibo is a mixed holding company inasmuch as, in addition to managing its portfolio, it carries out distinct advisory and managerial tasks for its subsidiaries, for which it receives remuneration. It is necessary to determine, for each item of expenditure incurred by such a holding company, whether the item in question is connected with transactions falling outside the scope of the Sixth Directive, or with transactions which do fall within that scope but are exempt, or with transactions which fall within the directive's scope and are not exempt.

Grounds

Findings of the Court

18The Court has consistently held that Article 4 of the Sixth Directive must be interpreted as meaning that a holding company whose sole purpose is to acquire holdings in other undertakings and which does not involve 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 (Case C-60/90 Polysar Investments Netherlands [1991] ECR I-3111, paragraph 17, and Case C-142/99 Floridienne and Berghwest [2000] ECR I-9567, paragraph 17).

19It is clear from case-law that that conclusion is based, amongst other things, on the finding that the mere acquisition and holding of shares in a company is not to be regarded as an economic activity, within the meaning of the Sixth Directive, conferring on the holder the status of a taxable person. The 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 (see the judgments in Case C-333/91 Sofitam [1993] ECR I-3513, paragraph 12, and in Case C-80/95 Hamas & Helm [1997] ECR 1-745, paragraph 15).

20However, 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, and Floridienne and Berginvest, paragraph 18).

21It is clear from paragraph 19 of the judgment in Floridienne and Berginvest that direct or indirect involvement in the management of subsidiaries must be regarded as an economic activity within the meaning of Article 4(2) of the Sixth Directive where it entails carrying out transactions which are subject to VAT by virtue of Article 2 of that directive, such as the supply by a holding company such as Cibo of administrative, financial, commercial and technical services to its subsidiaries.

22The answer to the first question referred for a preliminary ruling must therefore be that the involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity within the meaning of Article 4(2) of the Sixth Directive where it entails carrying out transactions which are subject to VAT by virtue of Article 2 of that directive, such as the supply by a holding company to its subsidiaries of administrative, financial, commercial and technical services.

The third question

23By its third question, which it is appropriate to consider before the second, the national court essentially asks whether a holding company may deduct VAT charged on expenditure incurred in respect of various services obtained in connection with the acquisition of a shareholding in a subsidiary.

Observations submitted to the Court

24Cibo argues that a company that is involved in the management of its subsidiaries generates taxable receipts from the services which it provides to its subsidiaries. It states that it is clear from the judgment in Case C-4/94 BLP Group [1995] ECR I-983, which concerned a mixed holding company that had disposed of shares in a subsidiary, that VAT charged on services provided in the context of such a transaction may not be deducted in so far as the transaction constitutes an exempt transaction and the services have a direct and immediate link with it. The purchaser of shares who, as purchaser, carries out no taxable or exempt transaction, ought therefore to be able to deduct VAT on services of the same type, which would fall under the heading of general expenses.

25The French Government takes the view that, since an undertaking which acquires, holds or disposes of shares in another undertaking in the management of which it is directly involved, is a taxable person for the purposes of VAT by virtue of Articles 2 and 4 of the Sixth Directive, expenditure incurred in connection with the acquisition of such shareholdings must be regarded as relating to the general business of the undertaking, which is to carry out transactions in respect of which VAT is deductible and to receive exempt dividends in respect of which it is not deductible.

26The Commission submits that there is no right of deduction of tax chargeable on expenditure incurred in connection with the acquisition of shares in so far as such expenditure does not relate to any transaction falling within the scope of VAT.

Findings of the Court

27It should be observed at the outset 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. The common system of VAT consequently ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT (Case C-98/98 Midland Bank [2000] ECR I-4177, paragraph 19, and Case C-408/98 Abbey National [2001] ECR 1-1361, paragraph 24).

28Article 17(5) of the Sixth Directive, in the light of which Article 17(2) must be interpreted, lays down the rules applicable to the right to deduct VAT where the VAT relates to input transactions used by the 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', limiting the right of deduction to that portion of the VAT which is attributable to the former transactions. The use of the words 'for transactions' in Article 17(5) shows that, in order to give rise to the right to deduct under paragraph 2, the goods or services acquired must have a direct and immediate link with the output transactions in respect of which VAT is deductible, and that the ultimate aim pursued by the taxable person is irrelevant in this respect (see BLP Group, paragraphs 18 and 19, Midland Bank, paragraph 20, and Abbey National, paragraph 25).

29According to settled case-law, Article 2 of the 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, hereinafter 'the First Directive') and Article 17(2), (3) and (5) of the Sixth Directive must be interpreted as meaning that, in principle, the existence of a direct and immediate link between a particular input transaction and a particular output transaction or transactions in respect of which VAT is deductible is necessary before the taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement (Midland Bank, paragraph 24, and Abbey National, paragraph 26).

30It should also be borne in mind that, according to the fundamental principle which underlies the VAT system, and which follows from Article 2 of the First Directive and Article 2 of the Sixth Directive, VAT applies to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components (Midland Bank, paragraph 29, and Abbey National, paragraph 27).

31It follows from that principle, as well as from the rule that, in order to give rise to the right to deduct, the goods or services purchased must have a direct and immediate link with the output transactions in respect of which VAT is deductible, that there was a right to deduct the VAT borne by those goods or services because the expenditure incurred in acquiring them was a component of the cost of those output transactions. The expenditure must therefore form part of the costs of the output transactions in respect of which VAT is deductible which use the goods and services acquired {Midland Bank, paragraph 30, and Abbey National, paragraph 28).

32Clearly, there is no direct and immediate link between the various services purchased by a holding company in connection with its acquisition of a shareholding in a subsidiary and any output transaction or transactions in respect of which VAT is deductible. The amount of VAT paid by the holding company on the expenditure incurred for those services does not directly burden the various cost components of its output transactions in respect of which VAT is deductible. That expenditure does not form part of the costs of the output transactions which use the services.

33On the other hand, the costs of those services are part of the taxable person's general costs and are, as such, cost components of an undertaking's products. Such services therefore do, in principle, have a direct and immediate link with the taxable person's business as a whole (see BLP Group, paragraph 25, Midland Bank, paragraph 31, and Abbey National, paragraphs 35 and 36).

34In this connection, it is clear from the first paragraph of Article 17(5) of the Sixth Directive that, where a taxable person uses goods and services in order to carry out both transactions in respect of which VAT is deductible and transactions in respect of which it is not, he may deduct only that proportion of the VAT which is attributable to the former.

35The answer to the third question referred for a preliminary ruling must therefore be that expenditure incurred by a holding company in respect of the various services which it purchased in connection with the acquisition of a shareholding in a subsidiary forms part of its general costs and therefore has, in principle, a direct and immediate link with its business as a whole. Thus, if the holding company carries out both transactions in respect of which VAT is deductible and transactions in respect of which it is not, it follows from the first paragraph of Article 17(5) of the Sixth Directive that it may deduct only that proportion of the VAT which is attributable to the former.

The second question

36By its second question, the national court seeks, essentially, to establish whether the receipt of dividends falls within the scope of VAT.

Observations submitted to the Court

37Cibo argues that the receipt of dividends can never fall within the scope of VAT as defined by the Sixth Directive. Nor does it matter, in its submission, whether or not the holding company in question involves itself in the management of its subsidiaries. Firstly, dividends are not the consideration for any given act or transaction performed by the shareholder and are unconnected with the business of management that may be undertaken by the shareholder in a case of involvement. Secondly, dividends are merely a consequence of the ownership of shares.

38The French Government submits that the receipts of a holding company, and in particular dividends, fall within the scope of VAT where they are derived from shareholdings in an undertaking in whose management the holding company is involved. Such receipts are necessarily derived from the exploitation of property for the purpose of obtaining income therefrom on a continuing basis within the meaning of Article 4(2) of the Sixth Directive. The fact that the receipt of dividends is, by nature, contingent is irrelevant.

39Nevertheless, whilst dividend receipts do fall within the scope of VAT, they are exempt under Article 13B(d)(5) of the Sixth Directive. Thus, given that they fall within the scope of VAT but do not amount to transactions in respect of which VAT is deductible, they should be included solely in the denominator used for calculating the deductible proportion under Article 17(5) and Article 19(1) of the Sixth Directive.

40According to the Commission, dividend receipts cannot be regarded as consideration for management undertaken by a holding company where there is no real, direct link between the two (see Case C-16/93 Tolsma [1994] ECR I-743, paragraphs 13 and 14). In a case such as that of the main proceedings, there is no such direct link.

Findings of the Court

41The Court has already had occasion to hold 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, and Floridienne and Berginvest, paragraph 21).

42Certain 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, and Floridienne and Berginvest, paragraph 22).

43In 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, which is necessary if the dividends are to constitute consideration for the services, does not exist even where the services are supplied by a shareholder who is paid dividends (Floridienne and Berginvest, paragraph 23).

44In the circumstances, it is appropriate to emphasise that, since the receipt of dividends does not fall within the scope of VAT, dividends paid by subsidiaries to their holding company which is a taxable person in respect of other activities and which supplies management services to those subsidiaries must be excluded from the denominator of the fraction used to calculate the deductible proportion under Article 19 of the Sixth Directive (Floridienne and Berginvest, paragraph 32).

45The answer to the second question is therefore that the receipt of dividends does not fall within the scope of VAT.

Costs

Costs

46The costs incurred by the French 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.

Operative part

On those grounds,

THE COURT (First Chamber),

in answer to the questions referred to it by the tribunal administratif de Lille by judgment of 6 January 2000, hereby rules:

1. The involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity within the meaning of Article 4(2) 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 it entails carrying out transactions which are subject to value added tax by virtue of Article 2 of that directive, such as the supply by a holding company to its subsidiaries of administrative, financial, commercial and technical services.

2. Expenditure incurred by a holding company in respect of the various services which it purchases in connection with the acquisition of a shareholding in a subsidiary forms part of its general costs and therefore has, in principle, a direct and immediate link with its business as a whole. Thus, if the holding company carries out both transactions in respect of which value added tax is deductible and transactions in respect of which it is not, it follows from the first subparagraph of Article 17(5) of the Sixth Directive 77/388 that it may deduct only that proportion of the value added tax which is attributable to the former.

3. The receipt of dividends does not fall within the scope of value added tax.

Wathelet Jann Sevón

Delivered in open court in Luxembourg on 27 September 2001.

M. Wathelet R. Grass

President of the First Chamber Registrar

OPINION OF ADVOCATE GENERAL STIX-HACKL delivered on 6 March 2001

I — Introduction

1In the present case, the tribunal administratif de Lille (Administrative Court, Lille) has referred to the Court the question of the extent to which, under 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 (hereinafter 'the Sixth Directive'), a holding company is entitled to deduct the input tax on costs which it has incurred in the course of acquiring stakes in undertakings.

II — Facts and main proceedings

2The applicant in the main proceedings, the public limited company Cibo Participations (hereinafter 'Cibo'), is a holding company. It was founded by its majority shareholder, Compagnie d'importation des laines, which intended to create a coherent group of complementary undertakings in the wool sector by acquiring stakes in undertakings.

3At the root of the proceedings before the national court lies a demand sent to Cibo for the payment of additional VAT, resulting from the tax authorities' refusal to allow it to deduct input tax for the period from 2 November 1993 to 31 December 1994 charged on the supply of various services, for which it was invoiced by third parties, in connection with the acquisition of stakes in undertakings, such as the auditing of businesses, negotiations as to price, the mounting of the takeover of companies, legal and tax services and the acquisition of shares in the capital of companies. For its services, Cibo received a flat rate of 0.5% of the turnover of its subsidiaries.

4The French tax authorities pointed out that Cibo derived most of its turnover from dividend income (in 1993 and 1994, 99.32% and 92.07% respectively of total receipts), while the rest consisted of fees for the services it provided to its subsidiaries. The holding company did not have any turnover from carrying out economic activities in its own name.

5By its judgment of 6 January 2000, the tribunal administratif de Lille decided to refer to the Court of Justice for a preliminary ruling the following three questions concerning the requirements to be met for a deduction of input tax under the Sixth Directive:

'1. What are the criteria for establishing "involvement"? Can it be inferred from the provision of paid services or the running of a group of companies by its holding company, or de facto management precluding independence on the part of the subsidiary, or some other factor?

2. Where there is "involvement", does the receipt of dividends remain outside the scope of value added tax for any reason other than economic activity, in that such receipts are not the consideration for the supply of goods or services, or, having regard to the fact that expenditure is incurred in connection with the acquisition of shares the direct purpose of which is to enable participation in economic activity, do dividend receipts fall within the scope of value added tax and, if so, are they exempt under Article 13B(d)(1) of the Sixth Directive or taxable?

3. If the receipt of dividends does remain outside the scope of value added tax, what are the implications for the right to deduct:

— does no right remain to deduct tax on expenditure incurred in acquiring shares, given that that expenditure does not relate to a taxable transaction,

— or is deduction allowed under the heading of general costs?'

III — Legal framework

6Under Article 2(1) of the Sixth Directive, '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.

Under Article 4(1), 'taxable person' means 'any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.' Under Article 4(2), 'economic activities' comprise all activities of producers, traders and persons supplying services as well as, '[t]he exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis'.

Article 13B provides that specified activities are to be exempted from VAT. Under Article 13B(d)(5), these include 'transactions, including negotiation, excluding management and safekeeping, in shares, interests in companies or associations, debentures and other securities, excluding documents establishing title to goods [and] the rights or securities referred to in Article 5(3)'.

Article 17 regulates the origin and scope of the right to deduct. Under Article 17(2), a taxable person is entitled to make a deduction only in respect of expenditure on goods and services used for the purposes of his taxable transactions, in the amount of the value added tax due or paid in respect of goods and services supplied to him by another taxable person.

Article 17(5) lays down how to deal with deductions for goods and services that are used not only for transactions granting the right to deduct but also for transactions that do not give rise to such a right. Subparagraph 1 of Article 17(5) provides that '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'. Under subparagraph 2, this proportion is to 'be determined, in accordance with Article 19, for all the transactions carried out by the taxable person'.

Article 19 governs the calculation of the deductible proportion. Under Article 19(1), the proportion is a fraction that has as its numerator the total amount of turnover attributable to transactions in respect of which VAT is deductible. The denominator is the sum of the numerator and the turnover attributable to transactions in respect of which VAT is not deductible. VAT is to be deducted from turnover both times in this calculation.

Article 19(2) provides by way of derogation from Article 19(1) that certain turnover is to be left out of account, such as turnover attributable to transactions specified in Article 13B(d) in so far as they are incidental transactions.

IV — The first question

7By its first question, the national court asks what criteria must be satisfied for there to be 'involvement' of a holding company in the management of its subsidiaries.

Arguments of the parties

8Referring to Articles 4 and 13 of the Sixth Directive, Cibo states that these provisions clearly distinguish between activities in the sense of 'economic activities' and other activities, and that this is decisive for the question of the right to deduct.

Cibo also refers to a series of judgments in which the Court has ruled on the question of the classification of a holding company. It is clear from this case-law that, in principle, a holding company does not carry out any economic activity and is therefore not a taxable person, unless it involves itself in the management of its subsidiaries. However, the Court has hitherto not defined the concept of 'involvement'. Cibo submits that in this connection the concept of 'de facto management' should not be a criterion. Under French law, this is applied to persons who actually run an undertaking but not to those who are merely entitled to run it as a matter of law.

Even if de facto management displays in effect all the features of 'involvement', it represents only the final stage of such 'involvement', especially as it can result in the loss of the separate legal personality of the subsidiary. In Cibo's view, an investor can find himself in different situations depending on the purpose and extent of his acquisition of shares.

In this connection, the following two forms of equity participation entailing 'involvement' correspond to the concept, referred to in the question of the national court, of 'running a group of companies', which is applied as a criterion in French tax law in the field of wealth tax (l'impôt de solidarité sur la fortune): 4

— The first form covers the case in which the shareholding amounts to practically the whole share capital and the shareholder actively participates in running the business, thereby involving itself in its management. This generally results in the shareholder providing various services to the subsidiary undertakings in return for a fee.

— The second form corresponds to the case of the most extensive shareholding, namely where the shareholder is incomplete control of the subsidiary undertaking and 'involves' itself in its running as its de facto manager.

In both these cases, the acquisition of shares is an economic activity within the scope of the Sixth Directive, because it is possible, in fact or in law, for the holding company to involve itself in the management of its subsidiary undertakings to a greater extent than usual shareholder rights would permit.

9The French Government states first of all that, in its opinion, it is to be inferred a contrario from the Court's settled case-law that the acquisition, ownership and transfer of shares as well as the receipt of dividends fall within Article 4(2) of the Sixth Directive if those activities are accompanied by direct or indirect involvement in the management of the companies whose shares they are. 'Involvement' means a decisive influence on the management of the undertaking in question. Influence on an undertaking's management sufficient to amount to 'involvement' may be presumed where the holding company in fact or in law has a majority of the voting rights in the undertaking. Such influence can also be inferred from various features of the legal, financial, administrative and company relationships between the holding and subsidiary companies, such as control of decisions, similarity of business objectives, appointment of management personnel and provision of services in return for a fee.

10The Commission refers to the case of Floridiennne, 5 which was still pending at the time of its written observations, and to the Opinion in that case of Advocate General Fennelly, who did not define the 'concept of involvement' as such, but examined whether or not the holding company itself carried out economic activities.

According to the Commission, the present question is not to be answered by praying in aid a particular concept of 'involvement' alien to the Sixth Directive — a matter upon which it therefore expresses its view in the alternative only — but by assessing the activities in question in the light of Article 4 of the Sixth Directive in conjunction with Article 2.

On the definition of 'involvement', the Commission notes with regard to the case-law of the Court, first, that Poly sar concerned a pure holding company, whereas in the present case the holding company is mixed, not only managing its shareholdings but also providing further services to its subsidiaries in return for a fee. It follows that, in answering the present question, it is necessary precisely to define the point from which the holding company no longer acts merely as the owner of shares but carries out an economic activity. As regards activities that are linked to the mere exercise of the rights of a shareholder and cannot amount to 'involvement' in management, the Commission refers to the activities listed by Advocate General Van Gerven in point 6 of his Opinion in Polysar. 7

As to the issue of what might be included in the concept of 'involvement', the Commission points out that, in the judgment in Wellcome Trust, having a majority shareholding appears to have been regarded as a decisive factor in favour of 'involvement'. However, the judgment in Polysar, which concerned a wholly-owned subsidiary, gainsays this view.

The Commission concludes that it is very difficult to reconcile the concept of 'involvement' with the exercise of an economic activity within the meaning of the Sixth Directive. The real problem to be solved in the case of mixed holding companies is to determine the type of activity to which an expense must relate. Once the activities outside the scope of the Sixth Directive are identified, it is necessary, as regards activities falling within its scope, only to distinguish between exempt and taxable transactions when calculating the deductible proportion.

Assessment

11It follows from paragraph 19 of the judgment in Floridienne 8 that 'involvement... 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... of administrative, accounting and information technology services' by the holding company to its subsidiaries.

Therefore, the only criterion for determining whether a holding company is taxable is whether it carries out activities within Article 2 or economic activities under Article 4(2) of the Sixth Directive.

12It follows that a pure holding company, whose activity is limited to the acquisition and holding of shares in companies and the exercise of the shareholder rights that thereby accrue to it, cannot become a taxable person under the Sixth Directive by virtue of any influence, in whatsoever form, it exercises over its subsidiaries. Thus, whether a holding company is taxable cannot depend on whether it leads the group of companies or influences its management, nor on whether it has a controlling influence on the management of the undertaking.

13Therefore, the arguments of Cibo and of the Commission are to be accepted in so far as the distinction between economic activities within the meaning of Article 4(2) of the Sixth Directive and activities that are not economic ones in that sense is decisive for the question of the right to deduct input tax. The right to deduct is only available to a taxable person, and Article 4(1) provides that this status depends in turn on the exercise of economic activities under Article 4(2).

14It must accordingly be examined, first, whether Cibo carries out economic activities which qualify it as a taxable person and which then entitle it, depending on the circumstances, to deduct input tax.

15As the Commission rightly points out, the Court considered this question in Floridienne.

In paragraph 17 of the judgment, it was observed first that, in accordance with the Court's settled case-law, a holding company whose sole purpose is to acquire holdings in other undertakings and does not 'involve' itself directly or indirectly in the management of those undertakings, without prejudice to its rights as a shareholder, does not acquire the status of taxable person and has no right to deduct tax under Article 17 of the Sixth Directive. That conclusion is based 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. 9

As was stated in paragraph 18 of the judgment, referring to the judgment in Polysar, 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'.

The forms of 'involvement' in the management of subsidiaries that are listed in paragraph 19 of the judgment in Floridienne include examples of activities for the purposes of Article 2 of the Sixth Directive. In theory, any economic activity within the meaning of Article 4(2) of the Sixth Directive may, in so far as it entails carrying out transactions subject to VAT by virtue of Article 2 of the Sixth Directive, be 'involvement'.

16Therefore, where a holding company does not just own shares, but in addition provides services to its subsidiaries in return for a fee — in which case it is ex hypothesi a mixed holding company — it becomes a taxable person in connection with those economic transactions, because such activities are, in contrast to the mere acquisition and ownership of shares, to be regarded as economic activities within the meaning of the Sixth Directive.

17Finally, it is to be noted that it cannot be for the Court to provide an exhaustive list of all conceivable (economic) activities that may in principle fall within Article 2 or 4(2) of the Sixth Directive. Rather, it is for the national court to determine whether the criteria provided by the Court are applicable to the actual facts of the case before it.

ľolystír,

18Thus, the answer to the first question referred by the national court should, in my view, be that there is 'involvement' of a holding company in its subsidiary where, in addition to exercising its shareholder rights, the holding company also carries out for its subsidiary economic activities within the meaning of Article 4(2) of the Sixth Directive, entailing the carrying out of activities which are subject to value added tax under Article 2 of the Sixth Directive.

V — The second question

19By its second question, the national court asks whether the receipt of dividends falls within the scope of VAT and whether in that case such receipts are exempt from tax by virtue of Article 13B(d)(5) of the Sixth Directive.

Arguments of the parties

20Cibo argues that the receipt of dividends can never fall within the scope of the Sixth Directive because, irrespective of any 'involvement', they are to be regarded not as consideration for an economic activity but simply as the consequence of the mere ownership of shares.

21On the other hand, the French Government argues in substance that dividends fall within the scope of VAT where there is 'involvement', because they represent the result of the economic activity of acquiring and holding shares. However, while dividends are in principle subject to VAT, they are exempt under Article 13B(d)(5) of the Sixth Directive.

22The Commission essentially argues that, in the absence of a sufficient direct link between the activities of the holding company and the receipt of dividends, it is not possible to regard dividends as the consideration for economic activities. They are accordingly not payment for services which the holding company provides to its subsidiaries and which are subject to tax under Article 2 of the Sixth Directive.

Assessment

23As Cibo and the Commission rightly state, according to the case-law of the Court the receipt of dividends by a holding company that 'involves' itself in the management of its subsidiaries can fall within the scope of the Sixth Directive only if the dividends may be regarded as consideration for economic activities, which presupposes a direct link between the activity carried out and the consideration received. 1

24The Court has already held in Sofi-12 tam that dividends are not consideration for an economic activity, that they therefore do not fall within the scope of the Sixth Directive and that dividends resulting from shareholdings consequently fall outside the deduction entitlement.

25As regards the submission of the French Government, according to which, if the acquisition of shares were an economic activity within the meaning of Article 4(2) of the Sixth Directive, it would be necessary to establish whether there was a direct link between that activity and the receipt of dividends, it is sufficient to refer to the judgment in Floridienne.

26The Court held in Floridienne that, in view of the fact that, because of certain features, the amount of dividends depends partly on unknown factors and 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'.

27The answer to be given to the second question is accordingly, in my view, that the receipt of dividends distributed by a subsidiary to a holding company falls outside the scope of the Sixth Directive, because the dividends do not amount to consideration for transactions involving the supply of goods or services. Nor, therefore, can they be exempt from tax by virtue of Article 13B(d)(5) of the Sixth Directive.

VI — The third question

28The third question referred by the national court concerns the consequences for deduction of input tax if the receipt of dividends falls outside the scope of the Sixth Directive. The national court suggests two possibilities: first, deduction of the tax on the costs of acquiring the shares is prohibited; and second, deduction is

l allowed under the heading of 'general costs'.

Arguments of the parties

29Cibo refers first to the case-law of the Court which indicates that the receipt of dividends neither gives rise to a right to deduct input tax nor leads to the loss of one. A holding company that 'involves' itself in the management or running of its subsidiaries carries out an economic activity and therefore has the right to deduct tax, in proportion to its taxable and non taxable activities. Referring to the judgment in BLP Gron/), Cibo argues that deduction is possible except in the case of exempt transactions and that, where goods are acquired in the course of economic activities, the costs of acquisition fall into the category of 'general costs'. These are passed on in the sale price. For undertakings that 'involve' themselves in the management or running of their subsidiaries, the acquisition of the subsidiaries represents the first stage of a possible merger of the undertakings in the group in the future and is thus an economic activity. Tax on these costs of acquisition is therefore deductible.

30According to the French Government, the third question need not be answered, given the answer which in its view must be given to the second question. The costs arising for an undertaking which 'involves' itself in the management or running of a subsidiary when it acquires shares in that subsidiary relate to the general activity of the undertaking. It follows from Article 17(5) and Article 19(1) of the Sixth Directive that dividends in respect of which VAT is not deductible may appear only in the denominator of the fraction. As the dividends are directly, permanently and necessarily connected to the economic activity of the undertaking, there is moreover no question of incidental transactions within the meaning of Article 19(2) of the Sixth Directive, which could be left out of the calculation.

31The Commission, on the other hand, proceeds on the basis that no deduction is possible in the case of the costs of acquiring shares, that is to say costs that do not relate to a taxable transaction. Since Article 17 of the Sixth Directive makes no provision in respect of transactions arising from an economic activity outside the scope of the Directive, it is for the Member States to determine the method by which the deduction is prohibited. Finally, the Commission considers that the concept of 'general costs' is alien to the Sixth Directive. What is instead decisive is whether the costs relate to taxable, exempt or non-taxable activities of the undertaking. However in the case of Cibo, it is not apparent that the costs of acquiring the stakes in its subsidiaries reappear in the services that it provides to its subsidiaries.

Assessment

32As regards the deduction of input tax in respect of costs that arise on acquiring shares, it must first be noted that the question referred by the national court only relates to the case where receipts of dividends fall outside the scope of the Sixth Directive. Non-taxable transactions within the meaning of the Sixth Directive are thus at issue.

33According to Article 17(2) of the Sixth Directive, a taxable person is entitled to deduct input tax in so far as 'the goods and services are used for the purposes of his taxable transactions'. Article 17(2) thus sets out the conditions under which input tax may be deducted. The prohibition against deduction is derived from an a contrario interpretation. From Article 17(2) it follows a contrario that for transactions other than those specified in the provision (that is to say for exempt and non-taxable transactions), there is no right to deduct.

34This also gives expression to the intention of the Community legislature to retain in the Sixth Directive the exclusion, provided for in Article 11(2) of the Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value added tax, under which deduction is precluded in the case of non-taxable transactions.

35Finally, the exclusion of non-taxable transactions from the right to deduct is consistent with the principles of the value added tax system in Community law. In accordance therewith, the scope of the right to deduct should correspond as far as possible to the sphere of the undertaking's business activity. Thus, the exclusion of the right to deduct for non-taxable transactions appears to be consistent with the system of tax.

36As the Court has consistently held, the right to deduct arises only when there is a direct and immediate link with taxable transactions.

In the case of Midland Bank, which likewise concerned expenditure on services in connection with the acquisition of shares, the Court held that the right to deduct input tax presupposed that, 'the expenditure incurred in obtaining [the goods or services] was part of the cost components of the taxable transactions'.

37However, the costs that Cibo incurred in acquiring the shares are, in the absence of a direct and immediate link with taxable transactions, rather 'part of the taxable person's general costs' and 'are, as such, components of the price of an undertaking's products'.

38The legal position is nevertheless different if Cibo can prove, by means of objective evidence, that its costs are part of the cost components of a transaction giving rise to a right to a deduction.

39Thus, the answer to the third question referred by the national court should, in my view, be that the receipt of dividends falls outside the scope of the Sixth Directive and that the deduction of input tax in respect of costs for the acquisition of shares is excluded in the absence of a direct and immediate link with taxable transactions, unless the taxable person proves by means of objective evidence that that expenditure forms part of the cost components of a transaction giving rise to a right to deduct.

VII — Conclusion

40On the basis of these considerations, I propose to the Court that the questions referred by the national court should be answered as follows:

(1) There is 'involvement' of a holding company in its subsidiary where, in addition to exercising its shareholder rights, the holding company also carries out for its subsidiary economic activities within the meaning of Article 4(2) 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, entailing the carrying out of activities which are subject to value added tax under Article 2 of the Sixth Directive.

(2) The receipt of dividends distributed by a subsidiary to a holding company falls outside the scope of the Sixth Directive, because the dividends do not amount to consideration for transactions involving the supply of goods or services. Nor, therefore, can they be exempt from tax by virtue of Article 13B(d)(5) of the Sixth Directive.

(3) If the receipt of dividends falls outside the scope of the Sixth Directive, the deduction of input tax in respect of costs for the acquisition of shares is excluded in the absence of a direct and immediate link with taxable transactions, unless the taxable person proves by means of objective evidence that that expenditure forms part of the cost components of a transaction giving rise to a right to deduct.

Notes

(1) Original language: German.

(2) OJ 1977 L 145, p. 1.

(3) Case C-60/90 Polysar Investments Netherlands [1991] LCR I-3111, paragraphs 13 and 14; Case C-333/91 Sofitam [ 1993] LCR I-3513. paragraph 12; Case C-155/94 Well-cume Trust [1996] HCR I-3013, paragraph 35; and Case C-80/95 Harnas & Helm [1997] LCR I-745, paragraphs 15 and 16.

(4) Under this criterion, holding companies that restrict themselves to the standard exercise of shareholder rights arc distinguished from those that in effect run their group, participate actively in the management and control of their subsidianes and supply them with various services, in particular administrative and legal services.

(5) Case C-142/99 Floridiemie and Bert-invest [20001 ECR I-9567.

(6) Cited in footnote 3.

(7) Cited in footnote 3; see p. I-3126.

(8) Cited in footnote 5.

(9) The Court refers in this connection to Polysar, cited in footnote 3, paragraph 17, and Sofitam, cited in footnote 3, paragraph 12.

(10) cited in footnote 3. paragraph LI.

(11) See Floridienne, cited in footnote 5, paragraph 20 et seq.

(12) Cited in footnote 3, paragraph 13.

(13) The Court lists various features of dividends in paragraph

(22) of this judgment (cited in footnote 5). For example, the existence of distributable profits is generally a prerequisite of paying a dividend and payment is thus dependent on the company's year-end results. Furthermore, the proportions in which tne dividend is distributed are determined by reference to the type of shares held.

(14) F oridienne paragraph 23.

(15) Case C- 4/94 BI.P Group |1995| ECR 1-98.1

(16) In this connection, the French Government refers to the judgment in Case C-306/94 Régie dauphinoise [1996] ECR I-3695, paragraph 22.

(17) See also, to this effect, Case C-291/92 Armbrecht [1995] ECR 1-2775, paragraph 27 et seq.

(18) OJ, English Special Edition 1967, p. 16. CIBO PARTlCIPATlONS

(19) Bulletin or the European Communities, supplement 11/73, p. 18.

(20) Case 165/86 lutiem [1988] F.CR 1471, paragraph 14.

(21) Case C-98/98 Midland Bank [2000] KCR I-4177, paragraph 20, and BIJ' Crimp cited in footnote 15, paragraph

(18) et seq.

(22) Midland Bank cited in footnote 21, paragraph 30.

(23) Ibid., paragraph 31.

(24) Ibid., paragraph 32.