C-17/01 Sudholz

JUDGMENT OF THE COURT (Fifth Chamber)

29 April 2004 *

In Case C-17/01,

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

Finanzamt Sulingen

and

Walter Sudholz,

on the validity of Articles 2 and 3 of Council Decision 2000/186/EC of 28 February 2000 authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth Directive (77/388/EEC) 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 2000 L 59, p. 12),

* Language of the case: German.

THE COURT (Fifth Chamber),

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

Advocate General: L.A. Geelhoed, Registrar: M.-F. Contet, Principal Administrator,

after considering the written observations submitted on behalf of:

— the German Government, by W.-D. Plessing, assisted by J. Sedemund, Rechtsanwalt,

— the Netherlands Government, by H.G. Sevenster, acting as Agent,

— the Council of the European Union, by K. Borchers and A.-M. Colaert, acting as Agents,

— the Commission of the European Communities, by E. Traversa and K. Gross, acting as Agents, having regard to the Report for the Hearing

after hearing the oral observations of the German Government, represented by W.-D. Plessing, assisted by T. Lübbig, Rechtsanwalt, of the Council, represented by K. Borchers and A.-M. Colaert, and of the Commission, represented by K. Gross, at the hearing on 10 July 2002,

having regard to the order of 12 December 2002 reopening the oral procedure,

after hearing the oral observations of the German Government, represented by W.-D. Plessing, assisted by T. Lübbig, of the United Kingdom Government, represented by K.P.E. Lasok QC, of the Council, represented by K. Borchers and A.-M. Colaert, and of the Commission, represented by K. Gross, at the hearing on 30 January 2003,

after hearing the Opinion of the Advocate General at the sitting on 24 October 2002,

after hearing the Opinion of the Advocate General at the sitting on 13 March 2003,

gives the following

Judgment

By order of 30 November 2000, received at the Court Registry on 15 January 2001, the Bundesfinanzhof (Federal Finance Court) referred to the Court for a preliminary ruling under Article 234 EC three questions on the validity of Articles 2 and 3 of Council Decision 2000/186/EC of 28 February 2000 authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth Directive (77/388/EEC) 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 2000 L 59, p. 12).

Legal context and the dispute

2 Those questions were raised in proceedings between Finanzamt Sulingen (Sulingen Tax Office) (hereinafter 'the Finanzamt') and Mr Sudholz relating to the amount of value added tax (hereinafter 'VAT') chargeable on the purchase of a passenger car used by Mr Sudholz partly for business and partly for private purposes.

Legal background

Community legislation

3 Article 17(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 (OJ 1977 L 145, p. 1), as amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18) (hereinafter 'the Sixth Directive') states:

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

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;'.

4 Article 27(1) to (4) of the Sixth Directive provides:

'1. The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the amount of tax due at the final consumption stage.

2A Member State wishing to introduce the measures referred to in paragraph 1 shall inform the Commission of them and shall provide the Commission with all relevant information.

3The Commission shall inform the other Member States of the proposed measures within one month.

4The Council's decision shall be deemed to have been adopted if, within two months of the other Member States being informed as laid down in the previous paragraph, neither the Commission nor any Member State has requested that the matter be raised by the Council.'

5On 28 February 2000, the Council adopted Decision 2000/186 authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth Directive.

6The fifth and ninth recitals in the preamble to Decision 2000/186 state:

'(5) The second [derogating] measure ... is intended to limit to 50% a taxable person's right under Article 17(2) [of the Sixth Directive] to deduct VAT in respect of all expenditure on vehicles not used solely for business purposes, and also not to charge the VAT due on passenger cars used for private purposes; this ceiling on a taxable person's right to deduct VAT is justified by the proven difficulty of actually verifying the breakdown between business and private expenditure on this type of good and by the consequent likelihood of tax evasion or abuse; in addition such [a] measure will allow a more simplified system of taxation of the private use of vehicles.

(9) The authorisation to apply these derogating measures should therefore limit their period of validity so that this ends with the entry into force of the above proposed Directive, but not later than 31 December 2002 if that Directive is not yet in force by then; ... .'

7Article 2 of Decision 2000/186 provides:

'By way of derogation from Article 17(2) of Directive 77/388/EEC, as amended by Article 28f of that Directive, and from Article 6(2)(a) of that Directive, the Federal Republic of Germany is hereby authorised to limit to 50% the right to deduct the VAT charged on expenditure on vehicles not used exclusively for business purposes and not to treat as supplies of services for consideration the use for private purposes of vehicles belonging to a taxable person's business.

The provisions of the first paragraph shall not apply where a vehicle represents a taxable person's current assets or where such a vehicle is used up to a maximum of 5% for private purposes.'

8The first paragraph of Article 3 of Decision 2000/186 states:

'This Decision shall apply as from 1 April 1999.'

National legislation

9Paragraph 15 (1b) of the Umsatzsteuergesetz 1999 (German Law of 1999 on turnover taxes) (hereinafter 'the UStG') states:

'Amounts of input tax charged on the purchase or manufacture, importation, acquisition within the Community, hire or operation of vehicles within the meaning of Paragraph 1b(2) which are also used for the private purposes of the trader or for other non-business purposes shall be deductible only at the rate of 50%'.

10The Bundesfinanzhof states that the word 'vehicles' within the meaning of Paragraph 1b(2) of the UStG includes passenger cars.

11Paragraph 27(3) of the UStG states:

'Paragraph 15(lb) of the UStG and ... shall be applied for the first time to vehicles purchased or manufactured, imported, acquired within the Community or hired after 31 March 1999'.

The main proceedings and the questions referred

12Mr Sudholz runs a painting business. In April 1999, he purchased a passenger car for DEM 55 086.21, plus a sum equivalent to 16% of that price by way of VAT, amounting to DEM 8 813.79. He allocated the car to his business and used it as to 70% for business purposes and as to 30% for non-business purposes.

13In his VAT return for April 1999, Mr Sudholz claimed the whole amount of the VAT charged on the purchase of the vehicle, and not part only of it. In that regard, he took the view that Paragraph 15(1b) of the UStG, under which he could only deduct 50% of the input tax paid, infringed Community law. That provision came into force on 1 April 1999, and applies to vehicles purchased after 31 March 1999.

14In its turnover-tax prepayment decision for April 1999, the Finanzamt allowed a deduction in respect of only 50% of the input VAT paid.

15The Finanzgericht granted the application brought before it by Mr Sudholz on the ground that he was entitled to rely on the more favourable rules contained in Article 17 of the Sixth Directive. That article permits the taxable person to deduct from the tax which he is liable to pay the whole of the input tax charged on expenditure incurred for the purposes of his taxable transactions.

16The Finanzamt appealed on a point of law before the Bundesfinanzhof, relying on Article 2 of Decision 2000/186.

17The Bundesfinanzhof notes that 70% of the use made by Mr Sudholz of the vehicle in question was for business purposes. Because the vehicle was purchased after 31 March 1999, it was subject to Paragraph 15(lb) of the UStG, adopted in accordance with Decision 2000/186, and accordingly could only give rise to a deduction of 50% of the tax charged on its purchase.

18As the Bundesfinanzhof nevertheless had doubts as to whether Decision 2000/168 was compatible with Community law, it decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:

'1. Is Article 2 of Council Decision 2000/186/EC of 28 February 2000 authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth Directive (77/388/EEC) on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment invalid because the procedure prior to the adoption of the decision did not meet the criteria laid down in Article 27 of Directive 77/388/EEC?

2. Is the first paragraph of Article 3 of Decision 2000/186/EC, under which the decision is to have retroactive effect from 1 April 1999, valid?

3. Does Article 2 of Decision 2000/186/EC meet the substantive requirements to be applied to such an authorisation, and do any objections to the validity of that provision arise as a consequence?'

The first question

19By its first question, the national court is essentially asking whether Decision 2000/186 is invalid because the procedure prior to the adoption of that decision was irregular.

20According to the national court, the first potential ground of irregularity arises from the fact that Decision 2000/186 followed the adoption of the derogating measures by the German authorities. The decision adopted by the Council under Article 27 of the Sixth Directive was an enabling decision, which must necessarily precede any national measures taken under it.

21It must be noted in that regard that although the German version of Article 27 of the Sixth Directive uses the verb 'ermächtigen', which means 'habiliter' [enable] in French, most of the other linguistic versions use a term such as 'authorise', which does not necessarily require that the authorisation from the Council precede the measures adopted by the Member State concerned.

22It must also be pointed out that Article 27 specifies various stages in the procedure leading to the adoption of a decision by the Council, and requires in particular that the Member State concerned inform the Commission of its desire to introduce a derogating measure, but that no time-limit is laid down as regards the timing of the adoption by the Council of its decision.

23It must accordingly be held that the wording of Article 27 of the Sixth Directive does not preclude the Council's decision being adopted a posteriori. The decision is not invalid solely by reason of the fact that it was adopted after the derogating measure.

24The national court mentions a second potential ground of irregularity in relation to Decision 2000/186, namely the fact that the Federal Republic of Germany did not publish its request for authorisation.

25It is sufficient to note in that regard that there is no basis for inferring such a requirement for publication of the request for authorisation from the wording of Article 27 of the Sixth Directive. Under that article, a Member State is required only to inform the Commission and provide it with all relevant information relating to the measures envisaged, and it is the Commission which is to inform the other Member States.

26The national court suggests a third potential ground of irregularity in relation to Decision 2000/186, that the statement of reasons on which it is based is defective. It notes in that regard that the reasons stated by the Council for that decision include, in the fifth recital in the preamble, a statement that one of the objectives of Article 15(1b) of the UStG is to simplify the system of taxation of the private use of vehicles, although the Federal Republic of Germany did not expressly refer to such an objective in its request.

27It must be pointed out that the objectives underlying a request for authorisation to introduce a measure which derogates from the Sixth Directive are important. Only two objectives are specified in Article 27(1) of that directive, namely simplification of the procedure for charging VAT and the prevention of tax evasion or avoidance. The measures relating to simplification are subject to the condition laid down in the second sentence of Article 27(1) of the Sixth Directive.

28In order to establish whether, in the statement of reasons in Decision 2000/186, the Council went beyond the objectives specified by the Federal Republic of Germany in its request, it is necessary to consider the wording of that request.

29It is apparent from the information provided to the Court by the German Government and by the Council that the German authorities based their request of 11 November 1998 on the fact that it is not always easy to ascertain the proportion of the taxable person's expenditure which relates to professional use of the vehicle and that which relates to private use. Furthermore, in their letter of 19 February 1999, those authorities supplemented their request by stating that tax inspectors are faced with an extremely high verification workload and that they cannot rely purely on returns submitted by taxable persons to the revenue authorities.

30In those circumstances, it must be held that the Council was entitled to treat the terms of the request for authorisation made by the German authorities as meaning that it was directed specifically at simplifying the procedures relating to returns and verification of VAT and not only at preventing tax evasion and avoidance. It follows that the Council did not go beyond the wording of that request in the statement of the reasons on which Decision 2000/186 was based.

31In the light of the foregoing considerations, the answer to the first question must be that consideration of the procedure prior to the adoption of Decision 2000/186 has disclosed no irregularity such as to affect the validity of that decision.

The second question

32By its second question, the national court asks whether Article 3 of Decision 2000/186, under which the authorisation is to have retroactive effect, is valid.

33In that regard, it should be pointed out that in general the principle of legal certainty precludes a Community measure from taking effect from a point in time before its publication. It may exceptionally be otherwise where the purpose to be achieved so demands and where the legitimate expectations of those concerned are duly respected (Case 98/78 Racke [1979] ECR 69, paragraph 20, and Case C-110/97 Netherlands v Council [2001] ECR I-8763, paragraph 151).

34Moreover, as the Court has repeatedly held, Community legislation must be certain and its application foreseeable by those subject to it (Case C-301/97 Netherlands v Council [2001] ECR I-8853, paragraph 43). That requirement of legal certainty must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which they impose on them (see Case 326/85 Netherlands v Commission [1987] ECR 5091, paragraph 24).

35It is therefore necessary to ascertain whether Decision 2000/186, which came into force with effect from 1 April 1999, that is to say on a date prior to that of its publication on 4 March 2000, is none the less justified by the purpose which it seeks to achieve and whether the legitimate expectations of those concerned have been respected.

36As regards the purpose of Decision 2000/186, none of the recitals in the preamble to it suggests that it would have been necessary for it to incorporate a provision giving it retroactive effect.

37With respect to the legitimate expectations of those concerned, such as Mr Sudholz, it must be pointed out that if the taxable person chooses to treat goods used both for business and private purposes as business goods, the VAT due as input tax on the acquisition of those goods is in principle wholly and immediately deductible (see, inter alia, Case C-97/90 Lennarti [1991] ECR I-3795, paragraph 26, and Case C-269/00 Seeling [2003] ECR I-4101, paragraph 41). In the absence of any provision empowering the Member States to limit the right to deduct, that right must be exercised immediately in respect of all the taxes charged on transactions relating to inputs (see, inter alia, Lennartz, paragraph 27, and Case C-37/95 Ghent Coal Terminal [1998] ECR I-1, paragraph 16).

38Therefore, so long as a national derogating measure authorised by the Council under Article 27 of the Sixth Directive had not been adopted, those concerned, such as Mr Sudholz, were entitled to believe that they could deduct the whole of the tax charged on the purchase of their passenger car.

39The measure enacted by the German authorities is dated 24 March 1999 and imposes a limit on the deduction of input VAT paid on passenger cars purchased after 1 April 1999. Nevertheless, it is not disputed that that measure had not yet been authorised by the Council on the date on which it was adopted. It follows that the limit on permitted deductions under that measure did not comply with Article 27(1) of the Sixth Directive on the latter date and that those concerned were entitled to continue to believe that the rule that the whole of the VAT could be deducted was applicable.

40Inasmuch as Article 3 of Decision 2000/186 provides for the retroactive application of Paragraph 15(1b) of the UStG, it is clear that it authorises the introduction of a national law which may infringe the legitimate expectations of those concerned. The Court has already held that a national legislative amendment retroactively depriving a taxable person of a right to deduct which he has derived from the Sixth Directive is incompatible with the principle of the protection of legitimate expectations (Case C-62/00 Marks & Spencer [2002] ECR I-6325, paragraph 45).

41By permitting the retroactive application of Paragraph 15(1b) of the UStG, Article 3 of Decision 2000/186 accordingly infringes the principle of the protection of legitimate expectations and must therefore be declared to be invalid.

42The argument of the German authorities that the Council's authorisation was not given timeously because of delays on the Commission's part in processing the request submitted by the Federal Republic of Germany does not justify the retroactive nature of Decision 2000/186.

43The answer to the second question must therefore be that Article 3 of Decision 2000/186 is invalid in that it provides for the authorisation granted by the Council to the Federal Republic of Germany to have retroactive effect from 1 April 1999.

The third question

44By its third question, the national court asks whether Decision 2000/186, and in particular Article 2 thereof, infringes the substantive requirements under Article 27(1) of the Sixth Directive and whether the decision is invalid for that reason.

45Since Decision 2000/186 authorises a measure which derogates from the general principle that VAT is deductible, a strict approach is required to the question of its compatibility with the conditions laid down under Article 27(1) of the Sixth Directive (see, inter alia, Case C-63/96 Skripalle [1997] ECR I-2847, paragraph 24).

46In order to do so, it is necessary to determine whether the flat-rate limit on permitted deductions, set at 50% of the amount paid by way of input VAT, could be considered necessary and appropriate for the attainment of the objectives which Decision 2000/186 pursues and as least likely to affect the objectives and principles of the Sixth Directive (see Joined Cases C-177/99 and C-181/99 Ampafrance and Sanofi [2000] ECR I-7013, paragraph 43).

47At paragraph 30 of this judgment, it was stated that the objectives pursued by Decision 2000/186 comprised, pursuant to the request submitted by the German authorities, not only the need to combat tax evasion and avoidance, but also the simplification of the procedures for charging VAT.

48According to the Commission, that decision is not necessary and appropriate for the attainment of the first objective referred to, that is to say the prevention of tax evasion and avoidance, and infringes the principle of proportionality in that a taxable person, such as Mr Sudholz, who uses his passenger car as to 70% for business purposes, and can prove that he does so, is nevertheless permitted to deduct only 50% of the amount of the input VAT paid on the purchase of the vehicle.

49The Commission submits, relying on paragraph 56 of the judgment in Ampafrance and Sanofi, that where there is no risk of tax evasion or avoidance in such a case, the need to prevent those risks cannot serve to justify restricting the taxable person's right to deduct to 50%. The limit imposed is therefore disproportionate.

50The facts underlying the Ampafrance and Sanofi case related to the right to deduct VAT on expenditure in respect of accommodation, food, hospitality and entertainment.

51It must nevertheless be noted that, unlike the facts underlying the main proceedings, the decision at issue in Ampafrance and Sanofi involved a complete exclusion of the right to deduct and not a flat-rate limit on that right. Moreover, the purpose of that decision was solely the prevention of tax evasion or avoidance, and not the simplification of the procedure for charging VAT. Lastly, the expenditure in question was subject to effective verification by checks on the documents or on the premises for income tax or corporation tax purposes. By contrast, the German authorities have not referred to any method for ensuring effective verification in the main proceedings.

52It must also be noted that in paragraph 62 of the judgment in Ampafrance and Sanofi the Court reserves its position on the question whether other possible methods of preventing tax evasion and avoidance may exist, including imposing a flat-rate limit on authorised deductions, without commenting on their validity.

53With respect to Decision 2000/186, it thus remains to be determined, first, whether the flat-rate limit on the right to deduct VAT is valid.

54In that respect, it is necessary to consider the factors mentioned by the German authorities, which are not contested by either the Commission or the Council, that is to say the difficulty for the taxable person of establishing in advance the proportions of private and business use to which his vehicle will be put, the difficulty, for verification purposes, of proving precisely what use is made of the vehicle, and the discovery of irregularities in almost all cases where verification is carried out.

55These factors disclose a serious risk of tax evasion or avoidance. In those circumstances, the imposition of a flat-rate limit on the right to deduct would appear to be a measure to prevent that risk, while at the same time making verification more straightforward and simplifying the system for charging VAT.

56The second point which arises is whether the limit of 50% is proportionate to the objective pursued.

57In that regard, the German authorities have stated that that percentage corresponds to the average use for private purposes of the vehicles concerned. It also corresponds to the figure applied in other Member States and to the figure put forward by the Commission in its proposal for a Council directive of 17 June 1998 amending Directive 77/388 as regards the rules governing the right to deduct value added tax (OJ 1998 C 219, p. 16).

58The Court notes that the accuracy of the figure stipulated by the German authorities for the average use of vehicles for private purposes has not been challenged. Furthermore, the fact that the same flat-rate limit has been adopted by other Member States and by the Commission in the proposal for a directive referred to above suggests that such a limit is reasonable.

59Moreover, as the 50% limit on deductions of the input VAT paid is an average, the Council took the view that it was necessary to avoid the figure applying to cases involving use below a certain level, that is to say where the use of the vehicle for private purposes does not exceed 5% of its total use. Decision 2000/186 accordingly excludes the application of that limit in those particular cases.

60In the light of those findings, it must be held that the Council was entitled to consider that a measure of the kind at issue in the main proceedings, which limits the right to deduct VAT to 50%, except in the particular cases referred to in the preceding paragraph, constituted a necessary and appropriate means of preventing tax evasion and avoidance, and of simplifying the procedures for charging the tax.

61The fact that, as a result, those persons who intend to use their vehicle as to more than 50% for business purposes cannot deduct a corresponding proportion of the VAT charged on the purchase of their vehicle must accordingly be held to be inherent in the measure for simplification of the procedures for charging VAT.

62Indeed, it must be accepted that a simplification measure implies, by definition, a more general approach than that of the rule which it replaces and thus will not necessarily reflect the exact situation of each taxable person.

63To allow, as the Commission suggests, each taxable person who can show that more than 50% of the use of his vehicle is for business purposes to deduct a corresponding proportion of the VAT charged on the purchase of his vehicle would nullify the desired result of simplification. Such an approach would have the effect of recreating, for all persons claiming to use their vehicle in that way, the difficulties referred to above, that is to say the complexity of correctly assessing the proportion of the private or business use of vehicles, the difficulty of verifying the accuracy of returns and, accordingly, the risk of tax evasion and avoidance.

64It must therefore be held that the measure authorised by Decision 2000/186 does not conflict with the objectives or the principles of the Sixth Directive and observes the principle of proportionality.

65As regards the specific requirement, laid down by the second sentence of Article 27(1) of the Sixth Directive, that a simplifying measure is not to affect, except to a negligible extent, the amount of the tax due at the final consumption stage, additional observations were submitted by the German and United Kingdom Governments and by the Council and the Commission at the hearing which took place on the reopening of the oral procedure.

66The German and United Kingdom Governments and the Council submitted that this requirement fell to be considered generally and not on a case-by-case basis, having regard to the whole VAT payable on passenger cars having mixed uses.

67According to the Commission, the determining factor is whether a significant number of individual cases lead to a material modification of VAT due at the final consumption stage, leading to double taxation of the final consumer.

68It must be held in that regard that, as a simplifying measure is involved, the approach to be taken must be general, as in the case of determining whether the first condition has been fulfilled. Given that the measure in question reflects an average, the number of cases in which more tax is paid by a supplier such as Mr Sudholz than would be payable under the common system of deduction provided for under the Sixth Directive is likely to correspond generally to the number of cases where less tax is paid. The same reasoning applies in so far as the flat-rate deduction scheme may influence the level of prices — and accordingly the basis of assessment for VAT — charged to the final consumers of goods and services supplied by a taxable person, such as Mr Sudholz. The overall effect on VAT payable to the Community in respect of its own resources would thus appear to be negligible.

69Moreover, even in individual cases, the effects on VAT due at the final consumption stage will be limited, given that it is possible for the supplier to apportion the VAT to all the goods sold over the years for which he keeps his vehicle.

70The answer to the third question must accordingly be that Article 2 of Decision 2000/186 meets the substantive requirements of Article 27(1) of the Sixth Directive and is not invalid.

Costs

Costs

71The costs incurred by the German, Netherlands and United Kingdom Governments and by the Council and 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 (Fifth Chamber),

in answer to the questions referred to it by the Bundesfinanzhof by order of 30 November 2000, hereby rules:

1. Consideration of the procedure prior to the adoption of Council Decision 2000/186/EC of 28 February 2000 authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth 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 has disclosed no irregularity such as to affect the validity of that decision.

2. Article 3 of Decision 2000/186/EC is invalid in that it provides for the authorisation granted by the Council of the European Union to the Federal Republic of Germany to have retroactive effect from 1 April 1999.

3. Article 2 of Decision 2000/186 meets the substantive requirements of Article 27(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, as amended by Council Directive 95/7/EC of 10 April 1995 and is not invalid. Jann

Delivered in open court

R. Grass

Registrar Timmermans von Bahr

in Luxembourg on 29 April 2004.

V. Skouris

President

OPINION OF ADVOCATE GENERAL

GEELHOED

delivered on 13 March 2003 (1)

Case C-17/01

Finanzamt Sulingen

v

Walter Sudholz

(Reference for a preliminary ruling from the Bundesfinanzhof)

(Validity of Articles 2 and 3 of Council Decision 2000/186/EC of 28 February 2000 authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes – common system of value added tax: uniform basis of assessment – 50% ceiling on the right to deduct VAT on vehicles not used solely for business purposes – Retroactive authorisation of a national tax measure)

I – Procedure

1By order of 30 November 2000 the Bundesfinanzhof referred for a preliminary ruling three questions concerning the validity of Articles 2 and 3 of Council Decision 2000/186/EC of 28 February 2000 (2) authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes ─ common system of value added tax: uniform basis of assessment (3) (hereinafter: ‘the Sixth Directive’). In response the German Government, the Netherlands Government, the Council and the Commission submitted written observations. At the hearing of the Court on 10 July 2002 the German Government, the Council and the Commission presented their oral arguments. On 24 October 2002 I delivered an opinion in this case.

2By order of 12 December 2002 the Court (Fifth Chamber) decided to reopen the oral proceedings. The parties to the main proceedings, the Member States, the Council of the European Union and the Commission of the European Communities were invited to submit their observations on the following question: What interpretation should be placed on the second sentence of Article 27(1) of the Sixth Directive. In particular, in what way should the no more than negligible effect of the measure be expressed:

– in general terms (in particular in respect of the Community’s own resources from value added tax) and, if so, in accordance with which criteria;

– and/or

– having regard to individual situations and, if so, in accordance with which criteria?

After the proceedings had been reopened the hearing was held on 30 January 2003. The German Government, the United Kingdom Government, the Council and the Commission set out their positions there.

II – Appraisal

3As regards the facts underlying the main proceedings and the applicable Community and national law, I would like to refer to my opinion of 24 October 2002.

4At paragraphs 56 to 59 of the abovementioned opinion, I concluded, on the basis of the case-law of the Court, that the authorisation granted in Article 2 of Decision 2000/186 is invalid since it does not give the taxable person an opportunity to show that there is no tax evasion or avoidance in his case, as the Court specifically requires in its case-law. I also concluded that if the authorisation were also intended to simplify the procedure for charging the tax it would also be contrary to the second sentence of Article 27(1) of the Sixth Directive. At paragraph 60 of my opinion I stated that I regard this provision as a specific case of the principle of proportionality.

5In this supplementary opinion I will limit myself strictly to the question which the Court posed as regards the interpretation of the second sentence of Article 27(1) of the Sixth Directive, namely: ‘Measures intended to simplify [the procedure for charging the tax], except to a negligible extent, may not affect the amount of tax due at the final consumption stage’.

6The particular feature of the VAT, as established in the Sixth Directive, is that it is a tax on consumption which, irrespective of the number of preceding transactions, must be strictly proportional to the price of the goods and services supplied up to the final consumption stage. This fiscal neutrality presupposes that the economic operators must be able, in each link of the production chain, to reclaim the VAT due or paid by them in respect of goods or services supplied (or to be supplied) to them. This right to deduction laid down in Article 17(1)(a) of the Sixth Directive is therefore a core element of the VAT system. Any revocation or restriction of this right deprives VAT of the fiscal neutrality which it seeks to establish.

7It is also in this light that it is necessary to read the second sentence of Article 27(1): ‘[Measures intended to] simplify the procedure for charging the tax, except to a negligible extent, may not affect the amount of tax due at the final consumption stage’.

8At the hearing the Commission argued convincingly, in my view, that a measure intended to simplify the procedure for charging the tax, which has, or can have, the effect of preventing economic operators in the production chain from recovering a significant proportion of the value added tax paid by them in the previous links of the chain, will lead to an increase in their production costs. Depending on the market conditions, such as the price flexibility of the goods or services to be supplied at the final stage, they will attempt to pass on to the final consumer the greatest possible proportion of the tax still chargeable to them. In such a case there is a more than negligible effect on the amount of tax due at the final consumption stage.

9Where there is a flat-rate 50% ceiling on the right to deduct VAT due or paid in respect of the previous links in the production chain, a situation arises whereby an indefinite number of taxable persons are structurally not – any longer – able to deduct in full the ‘input tax’ paid by them. This, as it were, systematically opens up the possibility which the second sentence of Article 27(1) of the Sixth Directive precisely sought to avoid, that is to say that the measure will systematically have a more than negligible effect, although possibly differing from case to case, on the amount of tax due at the final consumption stage.

10The United Kingdom Government countered this argument, stating that an economic analysis of the flat-rate ceiling on the right to deduct input tax at issue can lead to conclusions other than the purely fiscal analysis on which the Commission bases its argument. The possibilities for passing on to the final consumer the non-recoverable proportion of VAT paid in respect of the previous links in the chain will depend on market conditions, such as competition, possible substitutes and price and revenue flexibility. In this connection reference was made to the opinions of Advocates General Mancini and Tesauro in San Giorgo (4) and Comateb (5) which concerned the question whether or not, in the case of applications for reimbursement of tax unduly levied, account has to be taken of the extent to which the excess tax can be passed on.

11Without wishing to cast doubt on the comments of my predecessors – I share their view that in business taxes on goods and services can be passed on in full only in exceptional circumstances – I consider that the United Kingdom Government’s argument is invalid in this context. A flat-rate measure such as that at issue in this case covers a large variety of economic activities which provide a wide range of possible ways of passing on the tax. However, no matter how the possible ways of passing on the tax may differ in a particular case, the systematic effect of the measure is more than negligible on the amount of tax due at the final consumption stage.

12The Community legislature has considered that such an outcome is unlawful since it is disproportionate in relation to the intended objective of the measure, that is to say to simplify the procedure for charging the tax.

13I could limit myself to this finding were it not for the fact that the German and United Kingdom Governments and the Council consider that the primary purpose of the second sentence of Article 27(1) of the Sixth Directive stems from the desire of the Community to safeguard revenues from so-called ‘VAT resources’ which are one of the Community’s own resources. In that respect, they refer in particular to the second recital in the preamble to the Sixth Directive which, they claim, refers, in as many words, to the Council Decision on own resources of 21 April 1970. (6) Therefore, the measures intended to simplify the procedure for charging the tax should be examined primarily in terms of their effects on revenue from VAT charged to the final consumer at the final stage.

14I do not consider this argument convincing. Firstly, the second recital in the preamble to the Sixth Directive contains no specific reference to the second sentence of Article 27(1). Secondly, having regard to the subject-matter and objective of the Sixth Directive, which seeks primarily to create a uniform basis for the common system of VAT, the second recital relates to the entire body of provisions which make up the uniform basis. If is difficult to derive therefrom an argument for the interpretation of Article 27(1), in particular and certainly not if the relevant simplification procedure may have the effect of increasing the tax due at the final stage in two respects: firstly by the amount which cannot be recovered in the chain and, secondly, by the additional tax which is due at the final consumption stage on the higher final price.

15Furthermore, even if this argument is tenable it has been completely overtaken by the developments in the composition of own resources. Since the introduction of the 1988 decision on own resources, (7) which added a ‘fourth own resource’ related to the gross national product (GNP) of the Member States, the significance of VAT own resources to the funding of Community expenditure has diminished considerably both in absolute and relative terms. This trend continued in the 1994 decision on own resources, (8) which reduced the uniform rate of VAT payments from 1.4% to 1%, and in the 2000 decision on own resources. (9) The latter decision provides for a gradual reduction in VAT own resources from 1% in 2000, through 0.75% in 2002, to 0.5% in 2004. It also provides that the base to be taken into account may be at most 50% of the GNP of the Member States.

16Finally, I also note that, according to the case-law of the Court, in the case of tax measures to prevent and combat evasion the principle of proportionality requires that the taxable person be granted an opportunity to furnish proof to the contrary. (10) In the case of measures intended primarily for the benefit of the national administration it is difficult to maintain that the principle of proportionality does not afford the taxpayer such protection. This possibility prevents the taxable person from losing his right to ‘deduct input tax’ stemming from Article 17(2)(a) of the Sixth Directive. It also contributes to the maintenance of the neutrality in respect of the charging of VAT which is sought by the second sentence of Article 27(1).

III – Conclusion

17In the light of the foregoing, I conclude that the questions posed by the Court in paragraph 2 of its order of 12 December 2002 may be answered as follows:

– the second sentence of Article 27(1) of Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes – common system of value added tax: uniform basis of assessment seeks primarily to ensure the neutrality of this tax on consumption at the various stages of the production chain;

– it therefore follows that measures intended to simplify the procedure for charging the tax may not systematically affect the amounts of tax due at the final consumption stage;

– in order also to prevent this, in individual cases the taxable person must demonstrate the extent to which he has claimed the goods and services supplied to him as being for business purposes.

Notes

(1) Original language: Dutch.

(2) OJ 2000 L 59, p. 12.

(3) OJ 1977 L 145, p. 1, most recently amended by Directive 2001/4/EC (OJ 2001 L 22, p. 17).

(4) Opinion of Advocate General Mancini delivered on 27 September 1983 in Case 199/82 San Giorgio [1983] ECR 3595, in particular 3625.

(5) Opinion of Advocate General Tesauro delivered on 27 June 1996 in Joined Cases C-192/95-C‑218/95 Comateb and Others [1997] I-165, paragraphs 21 and 22.

(6) 70/243/ECSC, EEC, Euratom: Council Decision of 21 April 1970 on [the replacement of financial contributions from Member States by the Communities’ own resources] (English Special Edition, 1970 (I) p. 224).

(7) 88/376/EEC, Euratom: Council Decision of 24 June 1988 on the system of the Communities’ own resources (OJ 1988 L 185, p. 24).

(8) 94/728/EC, Euratom: Council Decision of 31 October 1994 on the system of the European Communities’ own resources (OJ 1994 L 293, p. 9).

(9) 2000/597/EC, Euratom: Council Decision of 29 September 2000 on the system of the European Communities’ own resources (OJ 2000 L 253, p. 42).

(10) Cited at paragraphs 58 and 59 of my opinion of 24 October 2002.

OPINION OF ADVOCATE GENERAL

GEELHOED delivered on 24 October 2002 1

I — Introduction

1This reference for a preliminary ruling from the Bundesfinanzhof concerns the validity of Articles 2 and 3 of Council Decision 2000/186/EC of 28 February 2000 2 (hereinafter: 'Decision 2000/186') authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth Directive 77/388/EEC 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'). The national court wishes to ascertain whether Decision 2000/186 is compatible with the Sixth Directive and the general principles of Community law.

II — Legal framework

A — Community law

2 Article 17(2)(a) of Sixth Directive 77/388 provides as follows:

'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.'

3 Article 27 of Sixth Directive 77/388 provides as follows:

'1. The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the amount of tax due at the final consumption stage.

2A Member State wishing to introduce the measures referred to in paragraph 1 shall inform the Commission of them and shall provide the Commission with all relevant information.

3The Commission shall inform the other Member States of the proposed measures within one month.

4 The Council's decision shall be deemed to have been adopted if, within two months of the other Member States being informed as laid down in the previous paragraph, neither the Commission nor any Member State has requested that the matter be raised by the Council.

5 Those Member States which apply on 1 January 1977 special measures of the type referred to in paragraph 1 above may retain them providing they notify the Commission of them before 1 January 1978 and providing that where such derogations are designed to simplify the procedure for charging tax they conform with the requirement laid down in paragraph 1 above.'

4Article 2 of Decision 2000/186 provides that:

'By way of derogation from Article 17(2) of Directive 77/388/EEC, as amended by Article 28f of that Directive, and from Article 6(2)(a) of that Directive, the Federal Republic of Germany is hereby authorised to limit to 50% the right to deduct the VAT charged on expenditure on vehicles not used exclusively for business purposes and not to treat as supplies of services for consideration the use for private purposes of vehicles belonging to a taxable person's business.

The provisions of the first paragraph shall not apply where a vehicle represents a taxable person's current assets or, where such a vehicle is used up to a maximum of 5% for private purposes.'

5Article 3 of Decision 2000/186 provides that:

'This Decision shall apply as from 1 April 1999.

It shall cease to be applicable on the date the Directive on expenditure not giving rise to the right to deduct VAT enters into force or shall expire on 31 December 2002 at the latest.'

B — National law

6Paragraph 15(1) of the Umsatzsteuergesetz (hereinafter: 'the UStG') provides that:

'A trader may deduct the following amounts of input tax:

1. the tax shown separately in invoices within the meaning of Paragraph 14 in respect of goods or services which have been supplied to his business by other traders.'

7Paragraph 15(1)(b) of the UStG provides as follows:

'Amounts of input tax charged on the purchase or manufacture, importation, acquisition within the Community, hire or operation of vehicles within the meaning of Paragraph 1b(2) which are also used for the private purposes of the trader or for other non-business purposes shall be deductible only at the rate of 50%.'

'Vehicles' within the meaning of Paragraph 1b(2) of the UStG include not only passenger cars, but also watercraft and aircraft.

8Under Paragraph 27(3) of the UStG:

'Paragraph 15(1)(b) of the UStG and Paragraph 15a(3)(2) shall be applied for the first time to vehicles purchased or manufactured, imported, acquired within the Community or hired after 31 March 1999.'

III — Facts and procedure

A — The main proceedings

9Mr Sudholz runs a painting business. In April 1999 he purchased a passenger car for DEM 55 086.21, plus turnover tax at 16% amounting to DEM 8 813.79. He assigned that vehicle to his business and used it 70% for business and 30% for non-business purposes.

10In his provisional turnover tax return for April 1999 Mr Sudholz claimed the whole amount of the turnover tax on the purchase of the car as input tax. He takes the view that the revised rules laid down in Paragraph 15(1)(b) of the UStG, under which no more than 50% of the input tax is deductible, infringe Community law.

11As regards the provisional turnover tax return for April 1999, the Finanzamt Sulingen (hereinafter: 'the Finanzamt') decided that under Paragraph 15(1)(b) of the UStG only 50% of the input tax could be deducted.

12Mr Sudholz raised an objection against the decision of the Finanzamt. The Finanzamt rejected that objection and Mr Sudholz brought an action before the Finanzgericht which declared the action well-founded. The Finanzgericht held that Mr Sudholz was entitled to rely on the rules — more favourable to him — laid down in Article 17 of the Sixth Directive and considered that the limitations on the right to deduct input tax were contrary to Community law where — as in this case — limitations to that effect were not provided for before the Sixth Directive entered into force and appropriate authorisation to adopt them had not been issued pursuant to Article 27(1) of that directive at the time of the decision given by the Finanzgericht.

13In its appeal on points of law to the Bundesfinanzhof, the Finanzamt points out that by Decision 2000/186 the Federal Republic of Germany is authorised, pursuant to Article 27 of the Sixth Directive, to limit to 50%, a taxable person's right to deduct VAT in respect of all expenditure on vehicles not used solely for business purposes, in so far as they do not represent the taxable person's current assets and are not used up to a maximum of 5% for private purposes.

14Before the Bundesfinanzhof the Finanzamt claims that the contested judgment should be set aside and the action dismissed. Mr Sudholz contends that the action should be upheld.

B — Observations of the Bundesfinanzhof

15In its order for reference the national court states that in the present case the requirements of Paragraph 15(1 )(b) of the UStG, read in conjunction with Paragraph 27(3) thereof, are fulfilled. Firstly, it is established that Mr Sudholz used the vehicle 70% for business purposes. Since the vehicle was purchased after 31 March 1999, the deduction of the input tax charged on the purchase is limited to 50%. However, the national court is uncertain as to whether Paragraph 15(1) (b) of the UStG is applicable or whether Mr Sudholz is entitled to rely, in support of his claim to a full deduction of the input tax, on Article 17(2) of Sixth Directive because he assigned the vehicle as a whole to his business.

16The national court considers that under the provisions of the directive which are in force, the German Government was entitled to limit the right to deduct only if it had been effectively authorised to do so by the Council. In its view, Article 27 of the Sixth Directive requires an authorisation which must predate the adoption of national rules limiting deduction. However, the Council did not authorise Germany to adopt the measure concerned until 28 February 2000, whilst the Steuerentlastungsgesetz 1999/2000/2002 (by which Paragraph 15 (1) of the UStG was introduced) dates from 24 March 1999.

17There is also an objection to the procedure prior to the decision because the request for authorisation was not published by the German Government. Furthermore, it is claimed that the decision goes beyond that request since the Council additionally bases authorisation on the consideration that such a measure would make it possible to simplify the 'system of taxation of the private use of vehicles'. Consequently, the national court is uncertain as to whether Decision 2000/186 is compatible with Community law.

18Secondly, the national court is also unsure as to whether the retroactive effect of the decision (Article 3(1) of Decision 2000/186 declares that the decision is to apply as from 1 April 1999) is compatible with Community law. The national court recalls that in general the principle of the protection of legitimate expectations precludes a Community decision from being given retroactive effect. It considers that it is not possible to derogate from this principle in the present case because Decision 2000/186 does not explain the need for retroactive effect.

19Finally, the national court raises the question whether decision 2000/186 fulfils the requirements of Article 27(1) in substantive terms. In other words, is the decision necessary and appropriate for the attainment of the specific objective which it pursues and does it have the least possible effect on the objectives and principles of the Sixth Directive?

20In that connection it refers to the reasons stated for Article 2 of Decision 2000/186. It is stated that the ceiling on a taxable person's right to deduct VAT is justified by the proven difficulty of actually verifying the breakdown between business and private expenditure on this type of good and by the consequent likelihood of tax evasion or abuse. In addition, such measure will allow a more simplified system of taxation of the private use of vehicles (fifth recital in the preamble). The sixth recital in the preamble states that the ceiling does not apply to expenditure on vehicles which represent a taxable person's current assets and may not be applied where a vehicle is used up to a maximum of 5% for private purposes. In the seventh recital in the preamble it is therefore inferred that it can thus be ensured that this derogation from the principle of a taxable person's right to deduct all the tax paid in connection with his taxable activities does not go beyond what is needed to prevent tax evasion or avoidance.

21The national court states that the effect of the measure contained in Article 2 of Decision 2000/186 is that a taxable person may not deduct the VAT charged on expenditure on vehicles not used exclusively for business purposes even where he can actually prove that he will use or has used the expenditure in a proportion exceeding 50% for strictly business purposes. The national court considers that this outcome could be contrary to the principle of proportionality. It points out that in its proposal to the Council the Commission expressly allowed the taxable person an opportunity to prove that the vehicles concerned were used for business purposes more than 50% of the time.

C — The questions submitted for a preliminary ruling

22In the light of the foregoing, the Bundesfinanzhof considered it necessary to refer the following questions for a preliminary ruling by an order of 30 November 2000, received at the registry of the Court of Justice on 15 January 2001:

'(a) Is Article 2 of the Council Decision 2000/186/EC of 28 February 2000 authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes — common system of value added tax: uniform basis of assessment invalid because the procedure prior to the adoption of the decision did not meet the criteria laid down in Article 27 of Directive 77/388?

(b) Is the first paragraph of Article 3 of Decision 2000/186, under which the decision is to have retroactive effect from 1 April 1999, valid?

(c) Does Article 2 of Decision 2000/186 meet the substantive requirements to be applied to such an authorisation, and do any objections to the validity of that provision arise as a consequence?'

D — Procedure before the Court

23Pursuant to Article 20 of the Protocol on the EC Statute of the Court of Justice, written observations were submitted by the German and Netherlands Governments, the Council and the Commission. In its written observations the Netherlands Government examined only the first and second question. At the hearing before the Court on 10 July 2002 the German Government, the Council and the Commission presented oral argument in support of the forms of order respectively sought.

IV — Arguments

A — The first question submitted for a preliminary ruling

24In the view of the intervening parties, the first question submitted for a preliminary ruling relates in particular to the interpretation of the word 'authorise' contained in Article 27¹ of the Sixth Directive. They take the view that this word does not mean that authorisation from the Council must precede the adoption of a national measure for derogation from the Sixth Directive. They contend that under Article 27¹ consent can be granted both in advance and retrospectively.

25The German Government claims that according to the earlier version of Article 27, that is to say Article 13 of the Second VAT Directive, the Member State could not adopt any measures for derogation until the period for other Member States entering objections had expired or, where there had been objections, until the Council had adopted a favourable decision. No such prohibition on adopting a national measure for derogation in advance of authorisation therefor is provided for in Article 27. The German Government contends that under Article 27(2) the Member State is merely required to inform the Commission before adopting a particular national measure for derogation. In the present case the German Government informed the Commission of the measure concerned on 11 December 1998. By letter of 19 February 1999 it supplemented this information. By letter of 23 August 1999 it reaffirmed the content of the earlier letters. The German Government considers that it cannot be held responsible for the fact that the Commission postponed the procedure until far beyond 1 April 1999.

26The Commission infers from Article 27 (2) of the Sixth Directive that the authorisation procedure must precede the introduction of the national measures for derogation from the directive. It considers that it is not the date on which the Council adopted its decision which presents a problem as regards compatibility with Community law but the date on which Germany introduced the legal rule contained in Paragraph 15 of the UStG. Therefore, it is the German measure and not Decision 2000/186 that might be contrary to the provisions of Article 27.

27All the intervening parties take the view that Community law, and in particular Article 27, does not require that a Member State publish a request for authorisation. Under Article 27(3), the other Member States are to be informed of the measures which a Member State intends to adopt in derogation of the Sixth Directive. The German Government and the Commission refer to the opinion in Skripalle, 5 in which the Advocate General states that BP Supergas 6 implies that there is no Community-law obligation to publish under Article 27.

28As regards the contention that the decision goes beyond the German request, the Council takes the view that the request from the German Government was also aimed at simplifying the system of taxation. The German Government explained that in the case of VAT deductions in respect of vehicles it is difficult to verify the break down between business and private expenditure. Moreover, the number of cases in which checks must be carried out is enormous. Furthermore, the Council points out that pursuant to Article 250 EC it may act on a proposal from the Commission which constitutes an amendment thereto, provided that the amendments remain within the scope of the original proposal.

B — The second question submitted for a preliminary ruling

29The German Government takes the view that the national court's uncertainty as to the validity of the measures adopted on account of the retroactive effect of Decision 2000/186 is unfounded. In its view, a national rule can just as well be approved retrospectively. Moreover, it contends that a decision of the Council adopted pursuant to Article 27 cannot adversely affect the legitimate expectations of those concerned since such a decision concerns only the Member State and the Community institutions. Furthermore, the taxable persons had an opportunity to take note of the change in the system of tax deduction as a draft law thereon had been published.

30The Netherlands Government considers that the possibility of giving retroactive effect to authorisation granted pursuant to Article 27 is not ruled out per se, provided that a number of conditions that the Court has developed in its case-law are satisfied. One of those conditions is the requirement of necessity, i.e. it is possible to derogate exceptionally from the rule that in general the principle of legal certainty precludes a Community measure from taking effect from a point in time before its publication where the purpose to be achieved so demands and where the legitimate expectations of those concerned are duly respected. 7 In the view of the Netherlands Government, the requirement of necessity is satisfied in this case because the general interest, that is to say counteracting tax evasion and avoidance, can justify the retroactive effect of a Community act. It adds that the prevention and counteracting of tax evasion and avoidance usually require swift action in the form of national measures in the Member States. In that regard the application of retroactive effect to such measures can be necessary to attain the specific objective of general interest. Consequently, it considers that the Council was able to give retroactive effect to the authorisation in the decision.

31The Commission doubts whether it was necessary to give retroactive effect to the authorisation in order to attain the desired objective. The difficulty in verifying the breakdown between business and private use of vehicles has existed since the VAT system was introduced. Therefore, this problem of establishing the right to deduct VAT does not justify giving retroactive effect to the authorisation. As regards protecting the legitimate interests of those concerned, the Commission states that, under Article 17 of the Sixth Directive, the right to deduct arises at the time when the deductible tax becomes chargeable. Since the right to deduct arises at the time when the goods or services are delivered, Mr Sudholz could, in the present case, legitimately expect that he was entitled to deduct in full the input tax payable on the purchase of the car. Although Article 27 of the directive opens up the possibility of restricting the right to deduct input tax, the rights of the persons so entitled cannot be made dependent on a future decision on a request for application of this article. Therefore, the Commission takes the view that Decision 2000/186 adversely affects the legitimate expectations of Mr Sudholz.

32In the view of the Council, Article 3 of Decision 2000/186 is valid and thus the decision has retroactive effect as from the date referred to in Article 3. The Council points out that the German Government submitted the request for authorisation on 11 December 1998 and it was received at the Commission on 8 January 1999. The fact that the decision was not adopted until later is due to the delay in the procedure at the Commission. Like the German Government, the Council recalls that a decision adopted pursuant to Article 27 cannot per se impose an obligation on an individual as it is directed at the Member State. It is for the Member State to ensure that a measure such as that referred to in Article 27 does not adversely affect the legitimate expectations of those concerned.

C — The third question submitted for a preliminary ruling

33The German Government contends that the 50% ceiling on the right to deduct does not apply in all cases and in particular does not do so where a vehicle is used up to a maximum of 5% for private purposes. It acknowledges the problem that where a vehicle is used 80% for business purposes the taxable person can deduct a maximum of 50% and is thereby placed at an economic disadvantage. On the other hand, the taxable person also benefits from the 50% rule where a vehicle is used 10-49% for business purposes. Such effects are typical of flat-rate measures and ceilings.

34In the view of the Commission, Article 2 of Decision 2000/186 is contrary to the principle of proportionality. 8 In its proposal of 13 December 1999 for a Council Decision 9 it proposed, at the request of the German Government, that a flat-rate 50% ceiling on the right to deduct should not apply where a taxable person is able to demonstrate that he usually uses the vehicle for business purposes more than 50% of the time. The Commission emphasises that under Article 27(1) measures intended to simplify the procedure for charging the tax may not, except to a negligible extent, affect the amount of tax due at the final consumption stage.

35The Council considers that Article 2 of the decision is not contrary to the principle of proportionality. In that connection it refers to the Commission proposal to amend the Sixth Directive to limit to 50% the right to deduct the VAT charged on expenditure on vehicles not used exclusively for professional purposes. The German Government's measure is also intended to place a flat-rate 50% ceiling on the right to deduct VAT. It is clear from this proposal that the flat-rate ceiling aimed at combating tax evasion or avoidance is consistent with the principle of proportionality.

V — Appraisal

A — The first question submitted for a preliminary ruling

36The first question concerns procedural requirements. By this question the national court seeks to ascertain whether or not Article 2 of Decision 2000/186 is invalid because the procedure followed prior to its adoption did not comply with Article 27 of the Sixth Directive. There are three aspects in this regard: the term 'authorise' in Article 27(1) of the directive; the fact that the request for authorisation was not published by the Federal Republic; and the question whether or not the authorisation goes beyond the request.

37Article 17(2)(a) of the Sixth Directive lays down the right to deduct VAT in full as the principal rule. Two exceptions thereto are possible. The first possible exception, the so-called 'freezing' (or 'standstill') clause contained in Article 17(6) of the directive, relates to existing laws. Under that provision, the Member States may retain existing exceptions to the principle of full VAT deduction until the measures referred to in that article have been introduced. This possible exception does not apply in the present case. The second exception relates to new laws. Under Article 27(1) of the directive, special measures for derogation from the provisions of the directive are possible where the new measure is intended to simplify taxation or where the measure is intended to prevent certain types of tax evasion or avoidance. The Member State must be authorised to do so by the Council. The procedure to be followed in that respect is laid down in Article 27(2) to (4). A Member State wishing to introduce a measure on the basis of one of the alternatives referred to in paragraph 1 must inform the Commission thereof and provide it with the relevant information (paragraph 2). The Commission in turn must inform the other Member States (paragraph 3). Authorisation can then be granted either by an express decision of the Council or, after a certain period of time, by implicit authorisation (paragraph 4).

38The first aspect raised by the national court relates to whether or not the authorisation must precede the introduction of the relevant measure. The German text of the Sixth Directive uses the word 'ermächtigen' and not the word 'genehmigen'. In Decision 2000/186 both words are used. The use of the word 'ermächtigen' in German indicates that approval must be granted in advance, whilst when 'genehmigen' is used it can also be effected retrospectively. In most language versions a word having the latter meaning is used. The French version of the directive, for example, speaks of 'authori-ser' and not of 'habiliter'. The English and Italian versions, for example, also speak of 'to authorise' and 'autorizzare' respectively.

39As the Council also notes, the adoption of national taxation measures falls within the exclusive competence of the Member State concerned. However, it must ensure that its taxation measures are compatible with Community law. Article 27 of the Sixth Directive does not relate to the authorisation to adopt measures in the field of VAT but to authorisation to adopt measures for derogation from the directive. As is evident from the above paragraph, it is clear that it cannot be inferred from the terminology used in Article 27 in most language versions that such approval must by definition be granted in advance. Nevertheless, it is clear from Article 27(2) that a Member State wishing to introduce measures for derogation must inform the Commission of them and provide it with all relevant information. Consequently, it follows that the (beginning of the) authorisation procedure at any rate must precede the actual introduction of the national measure for derogation. However, this still does not answer the question whether or not authorisation may also be granted after the introduction of the national measure for derogation or, in other words, whether this measure may be introduced pending the outcome of the authorisation procedure. The directive does not expressly prohibit this. If it is assumed that authorisation may also be granted retrospectively, the answer must be in the affirmative. However, I should point out that a Member State which introduces the proposed measure during the authorisation procedure does so entirely at its own risk. At that point no authorisation has been granted and therefore at that point the measure introduced is contrary to Community law and it is by no means certain that this possible infringement will be redressed by authorisation with retroactive effect. Therefore, the pre mature introduction into the national legal system of a measure for derogation by a Member State can constitute an infringement of Community law. However, it does not per se have any effect on the validity of the authorisation decision itself.

40The second procedural aspect concerns the fact that the Federal Republic of Germany did not publish the request for authorisation to introduce measures for derogation. As has been correctly observed by various intervening parties, no such requirement to publish can be inferred from the wording of Article 27 of the Sixth Directive. They refer to the opinion of Advocate General Fennelly in Skripalle. That case related inter alia to whether or not non-publication of a decision authorising measures can affect the validity or effectiveness thereof. The Court did not deal with this question. However, Advocate General Fennelly concluded that there is no requirement to publish such decisions under Article 191(3) of the Treaty (now Article 254 EC) and that Article 27 of the Sixth Directive likewise does not impose, in terms, any obligation to publish an authorisation thereunder. He went on to state that he did not think that non-publication of a Council decision authorising measures reduced either legal certainty or the efficacy of administrative or legal remedies available to the adversely affected taxable person.

41The present case does not relate to the publication of a decision authorising measures which has been published in the Official Journal, in accordance with long-established practice, but to the publication of the request for such authorisation. Nevertheless, I consider that the reasoning followed by Advocate General Fennelly should also be followed by analogy in this case. If no requirement to publish can be inferred from Article 27 of the Sixth Directive as regards decisions to be issued pursuant thereto, the same also applies to requests from the Member States for the issue of such decisions. Under this provision, it is required only that the Commission be informed of the intention and that it in turn then inform the other Member States. In the present case that was done on 8 January 1999 and 11 October 1999 respectively. The other Member States must be informed because they have the right to request that the matter be raised by the Council. Moreover, a provision requiring publication of requests for authorisation would make sense only if a larger circle than that at present were granted some influence over the outcome of the procedure.

42The final aspect of the first question relates to whether decision 2000/186 may go beyond the request. It is claimed that the Federal Republic based its request only on grounds relating to the prevention of tax evasion or avoidance and did not cite the desirability of simplifying taxation.

43The objective of the notification referred to in Article 27(2) of the Sixth Directive and the provision of the relevant information is to enable the Commission and, if necessary, the Council to verify whether the derogating arrangements are within the scope of the objectives referred to in Article 27(1) thereof. Under Article 27(1) of the directive, a clear distinction must be drawn between simplification measures, on the one hand, and measures relating to the prevention of tax evasion and avoidance, on the other. It is clear from the case-law that where a request for authorisation is based on the second alternative, the authorisation cannot extend beyond that purpose. Therefore, the Member State may not rely on the first alternative subsequently, that is to say after the authorisation has been granted. However, this does not prevent the relevant Member State from extending its request during the authorisation procedure by basing it also on the other alternatives set out in Article 27(1). That appears to be so in the present case. Any other view would imply that the Member State concerned has first to withdraw its request in order to submit a fresh request thereafter. That would not be very effective. Furthermore, it consequently follows that where authorisation is requested and granted in respect of both alternatives, the preconditions relating to both alternatives must also be satisfied. Germany has put forward both alternatives (in the course of the authorisation procedure). Therefore, the measure must be justified in respect of both alternatives and satisfy the preconditions thereto. That means that the measure must be proportionate if it is adopted with the aim of combating tax evasion and that, if it is intended also to simplify national laws, it may not affect, except to a negligible extent, the amount of tax due at the final consumption stage.

44The Commission further noted that Community institutions are entitled to examine the request in the light of the criterion of simplification, even if the government concerned has not asked them to do so. It bases this view on the objective of Article 27 of the Sixth Directive which forms part of the chapter relating to simplification procedures. I do not concur with this view. It is for the Member State to decide which alternatives it wishes to put forward to obtain authorisation to adopt a measure for derogation. This is true in particular since the directive draws a clear distinction between the two alternatives for measures for derogation and the associated conditions. Neither the Council nor the Commission may interfere in this discretionary power of the Member State. Therefore, a request for authorisation from a Member State cannot simply be complemented by them. Nor have they done so in the present case because both alternatives were put forward by Germany in the course of the procedure.

45In the light of the foregoing, I conclude that during the procedure prior to the authorisation no irregularities arose which affect the validity of Decision 2000/186.

B — The second question submitted for a preliminary ruling

46This question relates to the retroactive effect of Article 3 of the decision. It is clear from the case-law of the Court that retroactive effect may be given to a Community decision only in exceptional cases, that is to say where the purpose to be achieved so demands and where the legitimate expectations of those concerned are duly respected. 13 These requirements arise from the principles of legal certainty and the protection of legitimate interests.

47Firstly, it should be noted that Article 17 of the Sixth Directive confers rights on taxable persons, that the right to deduct forms a fundamental part of the VAT system, and that this right arises at the time when the deductible tax becomes chargeable. Derogations are permitted only in the cases expressly provided for in the directive and provided that they remain within the substantive and procedural pre conditions laid down therein. 17 Although a taxable person may not therefore legitimately expect that the basis rule — the right to deduct VAT in full — will never be abridged or restricted, he may legitimately expect that, if a particular national measure derogating from this basic rule is introduced, it satisfies the requirements laid down in Article 27 of the directive and in particular that it is based on an authorisation. At the time when Mr Sudholz purchased the vehicle and assigned it to his business — April 1999 — Germany had introduced the national rule limiting the deduction but it was not based on the authorisation required under Article 27(1) of the directive. Since at that time Germany was not authorised to introduce and apply the particular national measure, Mr Sudholz was entitled to rely on the rules contained in Article 17 of the directive which were more favourable to him.

48The question is now whether he may be deprived of this right retrospectively. It follows from the case-law of the Court that the principle of the protection of legitimate expectations precludes the abolition or limitation of a right to deduction conferred on taxpayers by the Sixth Directive.

49In my opinion in Marks & Spencer 8 I summarised the principal features of the Court's case-law on the principle of the protection of legitimate expectations as follows:

'— first of all, the Court has held in a series of judgments that that principle, which stems from the principle of legal certainty, forms part of the Community legal order. The principle requires legal rules to be precise and legal situations and relationships governed by Community law to be foreseeable;

— secondly, individuals cannot legitimately expect that the legal rules applicable to them will not be amended. The Community legislature retains competence to adapt existing legislation to altered economic circumstances and, I would add, to altered political, policy and social views;

— thirdly, individuals may legitimately expect that rights created under existing rules will not be retroactively abridged. Only in very exceptional cases is it possible to derogate from this general principle, for example in the case of overriding economic necessity relating to the management of common organisation of agricultural markets or on grounds of overriding public interest.'

50I should further note that as regards the requirement of necessity the Council stated no grounds at all in its decision for the need to give the decision retroactive effect. The mere consideration that the requested authorisation is designed to prevent evasion and abuse is not sufficient. That is one of the alternatives in respect of authorising a Member State to adopt measures for derogation from the directive. It does not in itself constitute an alternative in respect of giving a decision retroactive effect. As the Commission has correctly observed, the problem of establishing the right to deduct in respect of vehicles used partially for private purposes and partially for business purposes has existed since the directive was introduced. It cannot be inferred from this mere fact that there is thus no compelling need to authorise a Member State to adopt particular rules with retroactive effect.

51Nor do I consider valid the German Government and Council's argument that retroactive effect must be given to the decision because the Commission delayed consideration of the request for authorisation. Even if the Commission has committed a procedural irregularity, such irregularity can never constitute a reason for abridging retroactively the rights which taxable persons may derive from Community law. They have no influence over the course of the authorisation procedure.

52The German Government has also contended that Mr Sudholz is unable to derive rights from Article 27 of the Sixth Directive. It puts forward two arguments in that respect. Firstly, an authorisation decision issued pursuant to Article 27 is merely declaratory in nature. Secondly, this article relates only to relations between the Member States and the Community.

53In the view of the German Government, the possibility of tacit approval by virtue of lapse of time, as provided for in Article 27, indicates that the authorisation decision is purely declaratory in nature. In such a situation the procedure is concluded without a Council decision on which a taxable person could possibly rely. However, I consider, as the Commission also stated at the hearing, that the nature of such approval is constitutive, regardless of whether or not it is tacit. In the absence of such authorisation the Member State may not introduce rules for derogation from the directive. It is thereby established that the authorisation has the effect of amending law because in the absence of such consent the Member State is obliged to comply with Article 17 of the directive.

54The second argument likewise does not hold water. Although the authorisation procedure laid down in Article 27 takes place between the Community and the Member States, the outcome of this procedure can have a considerable effect on the rights which citizens may derive from Article 17 of the Sixth Directive. As stated at paragraph 47 above, the nature of the rights means that they can be amended or limited only by a Council decision taken pursuant to Article 27 of the directive. Therefore, Mr Sudholz has an interest in the decision being taken lawfully and in it conforming in substantive terms with Community law.

55In the light of the foregoing I conclude that giving retroactive effect to Decision 2000/186 breaches the Community-law principles of legal certainty and of the protection of legitimate expectations and that therefore Article 3 of this decision is invalid in so far as it concerns retroactive effect as from 1 April 1999.

C — The third question submitted for a preliminary ruling

56By this final question the national court seeks to ascertain whether Article 2 of the decision satisfies, in substantive terms, the requirements laid down on a measure for derogation. Since the authorisation is based both on the first and the second alternative set out in Article 27(1) of the Sixth Directive, this must be examined separately in respect of each alternative.

57The Court interprets possible applications of Article 27 of the Sixth Directive strictly on the basis of the principle of proportionality.

58In Commission v Belgium the Court pointed to the principle of proportionality by ruling that departures from the measure for charging laid down in the directive are possible only is so far as is strictly necessary for achieving the aim in view, namely the prevention of tax evasion or avoidance. This case-law was subsequently confirmed in Skripalle and Ampafrance and Sanofi. In the latter judgment, which was given after the authorisation at issue in this case had been granted, the Court makes it clear that there is no risk of tax evasion or avoidance where it is evident from objectively verifiable evidence that the expenditure was incurred for strictly business purposes. Although the Court considers that a measure for derogation involving standard amounts is justified under certain circumstances, such a measure is to be regarded as disproportionate if it excludes certain expenditure from the right to deduct VAT without making any provision for the taxable person to demonstrate the absence of tax evasion or avoidance in the relevant case.

59The case of Ampafrance and Sanofi related to a complete exclusion from the right to deduct VAT, whilst the present case concerns a flat-rate ceiling on that right. However, since in both cases the right to deduct is subject to a quantitative restriction — entirely or to a considerable extent — the principie of proportionality requires that in both situations the taxable person must have an opportunity to demonstrate that there is no tax evasion or avoidance in his case.

60The case-law cited above relates to measures for derogation intended to prevent fraud or improper use. In my view, the examination in the light of the principle of proportionality carried out therein also applies to national measures for derogation intended to bring about simplification. The in principle legitimate aim of simplifying the procedure for charging VAT must be weighed up against the limitations on the taxable persons' rights following therefrom. That is also evident from the wording of the final sentence of Article 27(1) of the Sixth Directive. The neutrality rule laid down therein is to be construed as a specific case of the principle of proportionality.

61If the authorisation granted in the present case is examined in the light of the foregoing, it is clear that — in so far as it is intended to combat fraud — it does not make provision for the taxable person to furnish proof to the contrary and thus breaches the principle of proportionality. The absence of such provision results in this measure affecting the amount of tax due at the final consumption stage to more than a negligible extent in all cases in which the taxable person uses a vehicle — considerably — more than 50% for business purposes. The authorisation in question — in so far as it is also intended to simplify the procedure for charging the tax — thus also fails to meet the criterion laid down in the final sentence of Article 27(1) of the Sixth Directive.

62On these grounds, I consider that the authorisation granted in Article 2 of Decision 2000/186 is invalid because it contains a limitation on the rights which taxable persons derive from Article 17(2) (a) of the Sixth Directive which is disproportionate and contrary to Article 27(1).

63For the sake of completeness, I should note that the proposal for a decision authorising a measure for derogation, made by the Commission to the Council, did indeed make provision for the taxable person to demonstrate that the purchased vehicles would be used more than 50% for business purposes. This proposal would thus have met the criteria laid down above. However, the Council amended the Commission proposal in a restrictive sense in precisely this regard by stipulating that the right to deduct VAT would continue to exist only in so far as the persons concerned used vehicles less than 5% for private purposes.

64The Council and the German Government have further observed that the basic rule — the right to deduct VAT in full — is more of an exception than a rule on account of the 'freezing' (or 'standstill') clause contained in Article 17(6) of the directive and the possibility to adopt national measures for derogation pursuant to Article 27. They appear thereby to argue that Germany should be placed in the same position as the other Member States by applying Article 27 in the present case. In addition, they refer to a Commission proposal to amend the Sixth Directive itself which makes provision for a flat-rate deduction in respect of cars which are used partly for business purposes and party for private purposes. By reference to that proposal, it is claimed that the United Kingdom is authorised to place a flat-rate 50% ceiling on the deduction of VAT in respect of such vehicles.

65These arguments confuse the role and position of the Community legislature with that of the Community executive. Within the bounds established by Community law, the Community legislature may adapt secondary Community law at its discretion in accordance with its political and policy views. This is also true of VAT which forms the subject matter of the Sixth Directive. However, the Community executive, which is called upon to apply existing Community legislation, is required to comply with the rules laid down in that legislation. From the point of view of legal certainty the principle of legality must be strictly adhered to, certainly where the rights and obligations of taxable persons are involved. Consequently, a measure which disproportionately limits taxpayers' rights and, furthermore, is contrary to the letter of Article 27 of the Sixth Directive and thus with existing Community law, cannot be justified by reference to possible future legislation.

66I consider irrelevant the reference to the authorisation granted to the United Kingdom, whatever the exact content thereof, since, in my view, it is established that Article 2 of Decision 2000/186 under examination by the Court in this case is contrary to applicable Community law.

67It follows from the answer which I propose that the Court should give to the third question that the decision is invalid in its entirety. Therefore, strictly speaking no answer need be given to the second question. If the Court does not concur with my opinion as regards the third question, it follows from the proposed answer to the second question that Article 3 of the decision is at any rate invalid in so far as it was given retroactive effect as from 1 April 1999.

VI — Conclusion

68Having regard to the foregoing, I propose that the Court should answer the questions referred by the Bundesfinanzhof as follows:

First question: The procedure prior to the adoption of Council Decision 2000/186/EC of 28 February 2000 authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes — common system of value added tax: uniform basis of assessment meets the requirements laid down in Article 27 of Directive 77/388/EEC.

Third question: Article 2 of Decision 2000/186/EC is invalid.

Second question: Article 3 of Decision 2000/186/EC is invalid in so far as it gives retroactive effect to that decision as from 1 April 1999.

Notes

(1) Original language: Dutch.

(2) OJ 2000 L 59, p. 12.

(3) OJ 1977 L 145, p. 1, most recently amended by Directive

(200) 1/4/EC (OJ 2001 L 22, p. 17).

(4) BGBl. I 1999,402.

(5) Opinion of Advocate General Fennelly in Case C-63/96 Skripalle [1997] ECR I-2847.

(6) Case C-62/93 BP Supergas v Greek State [1995] ECR I-1883.

(7) The Netherlands Government refers inter alia to Case C-368/89 Crispoltoni [1991] ECR 3695.

(8) In this connection the Commission refers to Joined Cases C-177/99 and C-181/99 Ampafmnce and Sanofi [2000] ECR I-7013, paragraph 62.

(9) COM/99/690 final.

(10) Cited in footnote 5.

(11) BP Supergas, cited in footnote 6, paragraph 23.

(12) Skripalle, cited in footnote 5.

(13) See, for example, Case 98/78 Racke [1979] ECR 69; Case

(99) /78 Weingut Gustav Decker [1979] ECR 101; and Case C-337/88 SAFA [1990] ECR I-1.

(14) BP Supergas, cited in footnote 6.

(15) See, for example, Ampafrance and Sanofi, cited in footnote 8.

(16) See, for example, C-400/98 Breitsohl [2000] ECR I-4321.

(17) BP Supergas, cited in footnote 6, paragraph 22; and Case

(5) /84 Direct Cosmetics [1985] ECR 617, paragraph 24.

(18) Case C-62/00 [2002] ECR I-6325.

(19) Case 324/82 Commission v Belgium [1984] ECR 1861, paragraph 24.

(20) Case C-63/96 Skripalle, cited in footnote 5.

(21) Joined Cases C-177/99 and C-181/99 Ampafrance and Sanofi, cited in footnote 8.

(22) See the seventh recital in the preamble to Decision

(200) 0/186. In a footnote reference is made to Skripalle. The Council appears thereby to argue that the German measure is consistent with the principle of proportionality.