C-177/99 Ampafrance and Sanofi

JUDGMENT OF THE COURT (Fifth Chamber)

19 September 2000 *

In Joined Cases C-177/99 and C-181/99,

REFERENCE to the Court under Article 177 of the EC Treaty (now Article 234 EC) by the Tribunal Administratif, Nantes (C-177/99) and the Tribunal Administratif, Melun (181/99) (France) for a preliminary ruling in the proceedings pending before those courts between

Ampafrance SA

and

Directeur des Services Fiscaux de Maine-et-Loire (C-177/99)

and between Sanofi Synthelabo, formerly Sanofi Winthrop SA,

and

Directeur des Services Fiscaux du Val-de-Marne (C-181/99),

on the validity of Council Decision 89/487/EEC of 28 July 1989 authorising the French Republic to apply a measure derogating from the second subparagraph of Article 17(6) of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes (OJ 1989 L 239, p. 21),

* Language of the case: French.

THE COURT (Fifth Chamber),

composed of: D.A.O Edward, President of the Chamber, L. Sevón, P.J.G. Kapteyn, H. Ragnemalm and M. Wathelet (Rapporteur), Judges,

Advocate General: G. Cosmas,

Registrar: H.A. Rühl, Principal Administrator,

after considering the written observations submitted on behalf of:

— Ampafrance SA, by J.-C. Bouchard and O. Cortez, of the Hauts-de-Seine Bar,

— Sanofi Synthelabo, by J.-C. Leroy, Financial Director,

— the French Government, by K. Rispal-Bellanger, Head of Subdirectorate in the Legal Affairs Directorate of the Ministry of Foreign Affairs, and S. Seam, Secretary for Foreign Affairs in the same directorate, acting as Agents,

— the Council of the European Union, by J. Monteiro, Legal Adviser, and M.-J. Vernier, of its Legal Service, acting as Agents,

— the Commission of the European Communities, by E. Traversa, Legal Adviser, and H. Michard, of its Legal Service, acting as Agents, having regard to the Report for the Hearing,

after hearing the oral observations of Ampafrance SA, represented by J.-C. Bouchard and O. Cortez, of Sanofi Synthelabo, represented by B. Geneste and O. Davidson, of the Hauts-de-Seine Bar, of the French Government, represented by S. Seam, of the Council, represented by J. Monteiro and M.-J. Vernier, and of the Commission, represented by H. Michard, at the hearing on 27 January 2000,

after hearing the Opinion of the Advocate General at the sitting on 23 March 2000,

gives the following

Judgment

Legal context and the dispute

1By judgments of 3 December 1998 and 11 May 1999, received at the Court on 14 and 17 May 1999 respectively, the Tribunal Administratif (Administrative Court), Melun (C-181/99) and the Tribunal Administratif, Nantes (C-177/99) each referred a question for a preliminary ruling under Article 177 of the EC Treaty (now Article 234 EC) on the validity of Council Decision 89/487/EEC of 28 July 1989 authorising the French Republic to apply a measure derogating from the second subparagraph of Article 17 (6) of the Sixth Directive 77/388/ EEC on the harmonisation of the laws of the Member States relating to turnover taxes (OJ 1989 L 239, p. 21).

2Those questions were raised in two sets of proceedings between first, Ampafrance SA (hereinafter 'Ampafrance') (C-177/99) and, second, Sanofi Winthrop SA, which, following a merger and take-over, became Sanofi on 12 May 1998 and then Sanofi Synthelabo on 18 May 1999 (hereinafter 'Sanofi') (C-181/99) and the tax authorities concerning tax adjustments applied to those companies based on the exclusion of the right to deduct value-added tax (hereinafter 'VAT') on expenditure in respect of accommodation, food, hospitality and entertainment.

Legal background

Community legislation

3According to the second paragraph of Article 2 of First Council Directive 67/227/ EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (OJ, English Special Edition 1967, p. 14, hereinafter 'the First Directive'):

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

4Article 17 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, hereinafter 'the Sixth Directive'), which governs the right of taxable persons to deduct the VAT paid on inputs, provides in paragraph 2(a):

'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'.

5Article 17(6) of the Sixth Directive contains a freezing (or 'standstill') clause, which provides for the retention of national exclusions from the right to deduct VAT which were applicable before the Sixth Directive entered into force, that is before 1 January 1979. That provision is worded as follows:

'Before a period of four years at the latest has elapsed from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of value added tax. Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive comes into force.'

6The Community rules referred to in the first subparagraph of Article 17(6) of the Sixth Directive have still to be adopted, since agreement has not been reached within the Council on the expenditure in respect of which an exclusion from the right to deduct VAT may be contemplated.

7Article 27 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.

2. A 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.

3. The 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. ...'.

National legislation

8In France expenditure in respect of accommodation, food, hospitality and entertainment was gradually excluded from the right to deduct VAT between 1967 and 1979.

9The provisions excluding the right to deduct VAT charged on certain goods and services which were applicable before 1 January 1979, the date on which the Sixth Directive entered into force, were set out in Articles 7 and 11 of Decree No 67-604 of 27 July 1967 (JORF, 28 July 1967, p. 7541, hereinafter 'Decree No 67-604').

10Article 7 of that decree provided:

'The tax on expenditure incurred in order to provide accommodation or lodging for the management and staff of undertakings shall not be deductible.

However, that exclusion shall not apply to the tax on expenditure incurred in order to provide free accommodation at the place of work for employees responsible for the security or supervision of an industrial or commercial complex or a works site.'

11Article 11 of Decree No 67-604 provided:

'The tax on expenditure incurred in order to satisfy the personal needs of the management and staff of undertakings, and in particular the tax on the cost of providing hospitality, food and entertainment, shall not be deductible.

However, that exclusion shall not apply to expenditure in respect of:

Goods which constitute fixed assets and are specially allocated at the actual places of work for the collective satisfaction of the needs of the staff;

Work clothes or protective clothing which an undertaking provides for its staff.'

12Decree No 79-1163 of 29 December 1979 (JORF, 31 December 1979, p. 3333, hereinafter 'Decree No 79-1163'), which was adopted after the Sixth Directive had entered into force, provided that Article 236 of Annex II to the General Tax Code was to be replaced by the following:

'Tax on goods or services used by persons not employed by the undertaking, or by the management or staff of the undertaking, such as accommodation or lodging, the cost of hospitality, food or entertainment or any expenditure directly or indirectly connected with travel or residence shall not be deductible.

However, that exclusion shall not apply to work clothes or protective clothing, premises and equipment provided to staff at the workplace, or to accommodation provided free of charge for security or supervisory staff at the workplace.'

13In its judgment of 3 February 1989 in Compagnie Alitalia (hereinafter 'the judgment in Alitalia'), the Conseil d'État (Council of State) held that Article 25 of Decree No 79-1163 was invalid in that it excluded the right to deduct the VAT on all goods and services used by persons not employed by the undertaking, 'thus disregard [ing] the objective of not extending existing exclusions defined in Article 17(6) of the Sixth Directive'.

14Following the judgment in Alitalia, the French Republic, by letter of 13 April 1989, requested authorisation from the Council pursuant to Article 27(1) of the Sixth Directive to introduce, 'pending the entry into force of the final provisions of Article 17(6) of the Sixth Directive, a derogation from that article in order to introduce into its legislation a provision excluding the deduction of expenditure in respect of accommodation, food, hospitality and entertainment'.

15The French Government stated:

'That special measure is intended to prevent tax evasion and avoidance resulting from the failure to charge [VAT] on expenditure in respect of what by nature constitutes final consumption. The risks of tax evasion and avoidance are significant, since undertakings will be tempted to make supplies, in the form of benefits in kind or gifts, in circumstances which constitute final consumption without charging [VAT], and not to distinguish properly between expenditure incurred for the benefit of management and staff and that incurred for the benefit of persons other than employees.

However, the exclusion would not apply to:

— expenditure incurred by a taxable person in respect of the supply by him of accommodation, meals, food or drink for consideration;

— expenditure on accommodation provided free of charge for security, caretaking or supervisory staff on works, sites or business premises;

— expenditure incurred by a taxable person in carrying out his contractual or legal responsibility towards his customers (for example: expenditure incurred by an airline on accommodation and food for passengers owing to a prolonged stop at an airport)'.

16On 28 July 1989 the Council adopted Decision 89/487. According to the second and third recitals in the preamble,

'... by letter, receipt of which was recorded by the Commission on 17 April 1989, the French Republic requested authorisation to introduce a special measure derogating from the second subparagraph of Article 17(6) of the Sixth Directive;

... certain supplies made to a taxable person concerning in particular his representational expenditure are excluded in France from the right of deduction, in accordance with Article 17(6), second subparagraph, of the Sixth Directive;... this measure is aimed at excluding other expenditure in respect of accommodation, restaurants, hospitality and entertainment from the right to deduct VAT previously charged, in order to prevent tax evasion and avoidance;... the exclusion does not concern expenditure incurred by a taxable person in respect of the supply by him of accommodation, meals, food or drink for consideration, expenditure on accommodation provided free of charge for security, caretaking or supervisory staff on works, sites or business premises, or expenditure incurred by a taxable person in carrying out his contractual or legal responsibility towards his customers.'

17Article 1 of Decision 89/487 provides:

'1. By way of derogation from the second subparagraph of Article 17(6) of the Sixth Directive, the French Republic is hereby authorised, on a temporary basis and until such time as Community rules determining the treatment of expenditure referred to in the first subparagraph of that paragraph come into force, to exclude expenditure in respect of accommodation, food, hospitality and entertainment from the right to deduct value added tax previously charged.

2. The exclusion referred to in paragraph 1 shall not apply to:

— expenditure incurred by a taxable person in respect of the supply by him of accommodation, meals, food or drink for consideration,

— expenditure on accommodation provided free of charge for security caretaking or supervisory staff on works, sites or business premises, — expenditure incurred by a taxable person in carrying out his contractual or legal responsibility towards customers.'

18Following the adoption of Decision 89/487 the French Government, by Article 4 of Decree No 89-885 of 14 December 1989 (JORF, 15 December 1989, p. 15578), amended Article 236 of Annex II to the General Tax Code. That article now reads as follows:

'... As a temporary measure, the value added tax charged on expenditure in respect of accommodation, food, hospitality and entertainment shall be excluded from the right of deduction.

However, that exclusion shall not apply to:

— expenditure incurred by a taxable person in respect of the supply by him of accommodation, meals, food or drink for consideration;

— expenditure on accommodation provided free of charge for security caretaking or supervisory staff on works, sites or business premises;

— expenditure incurred by a taxable person in carrying out his contractual or legal responsibility towards customers'.

The main proceedings

Case C-177/99

19In the course of its commercial activities, Ampafrance incurs expenditure in respect of accommodation, food, hospitality and entertainment. It deducted the VAT charged on expenditure in respect of lodging, food, hospitality and entertainment incurred, both for its staff and for persons other than employees, in June 1993.

20On 30 November 1993 the tax authorities sent Ampafrance a tax demand in the amount of FRF 252 086, corresponding to the VAT deducted in respect of the abovementioned expenditure. That adjustment was based on Article 236 of Annex II to the General Tax Code, which transposed Decision 89/487 into French law and excluded the right to deduct VAT charged on expenditure in respect of accommodation, food, hospitality and entertainment.

21Ampafrance lodged a complaint against that decision. That complaint was rejected by decision of the Maine-et-Loire tax authorities and Ampafrance brought an action against that decision before the Tribunal Administratif, Nantes.

22In its action, Ampafrance sought repayment of the sum which it had paid by way of VAT in respect of its operations in June 1993 and, in the alternative, requested that a reference be made to the Court of Justice for a preliminary ruling on the validity of Decision 89/487.

Case C-181/99

23In 1995 the tax authorities, also acting in reliance on Article 236 of Annex II to the General Tax Code, sent the Choay, Millot Solac and Clin Midy laboratories tax demands in the amounts of, respectively, FRF 260 524 for the Choay laboratory, FRF 661 796 for the Millot Solac laboratory and FRF 635 422 for the Clin Midy laboratory, corresponding to the VAT on expenditure on hospitality for suppliers and customers which they had incurred in November and December 1993 which they had deducted.

24Since the complaints lodged against those demands were rejected by decisions of the Director of Tax Services of Val-de-Marne, Sanofi, which had assumed the rights and obligations of the Choay, Millot Solac and Clin Midy laboratories, brought an action against those decisions before the Tribunal Administratif, Paris. Following the establishment of the Tribunal Administratif, Melun, the case was referred to that court, which had jurisdiction in the districts concerned.

25Before the Tribunal Administratif, Melun, Sanofi maintained, in particular, that Decision 89/487, on which Article 236 of Annex II to the General Tax Code is based, was invalid. In that regard, it put forward five grounds of invalidity, four of which were rejected by the court. By its fifth plea Sanofi maintained that Decision 89/487 infringed the Community principle of proportionality.

The questions referred to the Court

26In Case C-177/99 the Tribunal Administratif, Nantes, decided to stay the proceedings and to refer the following question to the Court:

'Since the resolution of this dispute depends on whether the provisions of the decision of the Council of the European Communities of 28 July 1989 authorising the French Government to derogate from the standstill introduced by Sixth Directive 77/388/EEC of the Council of the European Communities of 17 May 1977 and to extend to third parties exclusions of expenditure on accommodation, food, hospitality and entertainment from the right to deduct tax is compatible, first, with the objectives of the Sixth Directive and in particular Article 27 thereof, which states that "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 and avoidance", and, second, with the principle of proportionality between the tax objective pursued and the means employed; only the answer to that question, the solution of which is not obvious, will enable an assessment to be made of whether the pleas in this application are well founded'.

27In Case C-181/99 the Tribunal Administratif, Melun, held that:

'It is common ground that the temporary authorisation to exclude from the right to deduct tax charged on all expenditure in respect of accommodation, food, hospitality and entertainment borne by a taxable person was not based on a finding of systematic tax evasion or avoidance resulting from such expenditure, but on the presumption arising from the mixed nature of the expenditure which makes it easily open to such abuse. Although the administrative authorities none the less cite as justification for that measure of systematic exclusion [of the right to deduct the VAT charged on such expenditure] the difficulty of putting in place an effective system for verifying the business nature of that expenditure, the deduction of the expenditure from profits subject to corporation tax or income tax, which is allowed under Article 39(5)(b) and (f) of the General Tax Code, is subject to such verification, by checks on the documents or on the premises, by the tax authorities subject to review by the court with jurisdiction in tax matters, the arrangements for which can clearly be transposed, notwithstanding the difference in the conditions of declaration and collection of the taxes in question. The objective pursued could also be achieved by a fixed limit on the amount of deductions authorised. Thus, having regard to the fact that that measure of derogation, which is general and absolute, precludes deduction of the tax charged on expenditure whose strictly business nature is not challenged, there is serious doubt as to whether the derogation granted to the French Republic by [Decision 89/487] is strictly necessary and proportionate to the objectives pursued'.

28It therefore decided to:

'stay proceedings in the application for a refund of the taxes at issue pending a preliminary ruling by the Court of Justice of the European Communities on the validity, in the light of the principle of proportionality, of... Decision [89/487]'.

29By order of the President of the Fifth Chamber of 18 November 1999, the two cases were joined for the purposes of the oral procedure and the judgment.

The questions for the Court

30By the questions which they have referred to the Court, both national courts essentially request the Court to rule on the validity of Decision 89/487.

31Before examining the validity of Decision 89/487, it is appropriate to define its scope.

The scope of Decision 89/487

32The plaintiffs in the main proceedings maintain that it follows from the actual wording of Decision 89/487, which reproduces the French Government's request for a derogation, that the derogation granted is general in scope and aimed at all expenditure in respect of accommodation, hospitality, food and entertainment, without distinguishing between whether it was incurred for the benefit of the management or staff of the undertaking or for that of persons not employed by the undertaking, or between whether it was incurred for business purposes or to satisfy private needs. Consequently, a ruling by the Court that Decision 89/487 is invalid would have the effect of rendering the exclusion of the right to deduct VAT charged on that type of expenditure wholly inapplicable in France.

33The French Government and the Commission contend that even though Decision 89/487, which reproduces the French Government's request for a derogation, is aimed generally at expenditure in respect of accommodation, hospitality, food and entertainment, in reality it is of more limited scope and aimed only at expenditure in respect of accommodation, hospitality, food and entertainment incurred for the benefit of persons not employed by the undertaking. That restrictive interpretation is based on the judgment in Alitalia, where the Conseil d'État held that Article 25 of Decree No 79-1163 was incompatible with Article 17(6) of the Sixth Directive only in so far as it excluded from the right to deduct VAT expenditure in respect of accommodation, food, hospitality and entertainment incurred for the benefit of persons not employed by the undertaking.

34It should be pointed out that, according to the fundamental principle which underlies the VAT system, and which follows from Article 2 of the First and Sixth Directives, VAT applies to each transaction by way of production or distribution after deduction has been made of the VAT which has been levied directly on transactions relating to inputs (Case C-62/93 BP Soupergaz v Greek State [1995] ECR I-1883, paragraph 16). It is settled case-law that the right of deduction provided for in Article 17 et seq. of the Sixth Directive is an integral part of the VAT scheme and in principle may not be limited. That right must be exercised immediately in respect of all the taxes charged on transactions relating to inputs (see, in particular, the judgment in BP Soupergaz, cited above, paragraph 18, and Joined Cases C-110/98 to C-147/98 Gabalfrisa and Others v AEAT [2000] ECR I-1577, paragraph 43). Any limitation on the right of deduction affects the level of the tax burden and must be applied in a similar manner in all the Member States. Consequently, derogations are permitted only in the cases expressly provided for in the directive (judgment in BP Soupergaz, cited above, paragraph 18).

35It is against that background that the Court must assess the scope of Decision 89/487, which was adopted on the basis of Article 27 of the Sixth Directive, which provides that a Member State may be authorised to introduce special measures for derogation from the Sixth Directive in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance.

36That decision authorises the French Republic to derogate from the rules of the Sixth Directive as regards the general principle of the right to deduct VAT set out in Article 17 of that directive.

37In so far as it is based on Article 27 of the Sixth Directive, it must be held that Decision 89/487, notwithstanding the general terms of the derogation granted to the French Republic, authorises the latter to introduce in its national legal order, in relation to expenditure in respect of accommodation, hospitality, food and entertainment, certain exclusions from the right to deduct VAT which were not provided for in its laws when the Sixth Directive entered into force.

38Such an interpretation is based on the wording of Article 27 of the Sixth Directive, which uses the word 'introduce' and must be read in conjunction with the second subparagraph of Article 17(6) of that directive, which authorises Member States to retain the exclusions from the right of deduction provided for under their national laws when the Sixth Directive entered into force.

39In that regard, it must be pointed out that the exclusions from the right to deduct VAT in existence prior to the entry into force of the Sixth Directive were subsequently retained unaltered in French law, which, moreover, extended the exclusion from the right of deduction to certain other situations. In those circumstances, expenditure which was already excluded from the right to deduct VAT pursuant to Decree No 67-604 must be regarded as being covered by the 'standstill' clause in the second subparagraph of Article 17(6) of the Sixth Directive.

40The derogation granted by Decision 89/487 therefore concerns in reality, first, expenditure in respect of accommodation, hospitality, food and entertainment incurred for the benefit of persons not employed by the undertaking, who were not referred to in Decree No 67-604, and, second, the part of the expenditure of the same type incurred for the benefit of the management and staff of the undertaking which was not covered by the exclusion resulting from Decree No 67-604. In that regard, it is significant that Decree No 67-604 excluded from the right to deduct VAT expenditure incurred in order to provide accommodation for the management or staff of the undertaking, without distinguishing between expenditure incurred for business purposes and that incurred to satisfy individual needs, and expenditure in respect of hospitality, food and entertainment incurred to satisfy the individual needs of the management or staff of the undertaking.

41Having defined the scope of the derogation granted by Decision 89/487, the Court will now consider the question of the validity of that decision in the light of the principle of proportionality, as requested by the national courts.

The validity of Decision 89/487

42It should be pointed out at the outset that since the principle of proportionality has been consistently recognised by the Court as forming part of the general principles of Community law (see, in particular, Case 265/87 Schräder v Hauptzollamt Gronau [1989] ECR 2237, paragraph 21), the validity of acts of the Community institutions may be reviewed on the basis of that general principle of law (Case C-27/95 Bakers of Nailsea [1997] ECR I-1847, paragraph 17).

43In order to do so, it is necessary to consider whether the provisions of Decision 89/487 are necessary and appropriate for the attainment of the specific objective which they pursue and whether they have the least possible effect on the objectives and principles of the Sixth Directive.

44Ampafrance and Sanofi, which submit that Decision 89/487 is invalid, maintain, first, that it employs disproportionate means in order to combat tax evasion and avoidance in so far as it introduces a general and systematic exclusion from the right to deduct VAT, based on the presumption of a risk of tax evasion or avoidance based on the mixed (private and business) nature of the expenditure concerned. They contend that it is disproportionate to exclude certain expenditure from the right of deduction on the ground that such exclusion constitutes an anti-tax-evasion or avoidance measure without being required to prove that a risk of tax evasion or avoidance actually exists or allowing the taxable person to demonstrate the absence of tax evasion or avoidance by establishing that the expenditure was indeed incurred for business purposes.

45Ampafrance further states that, in accordance with Case C-63/96 Finanzamt Bergisch Gladbach v Skripalle [1997] ECR I-2847, paragraph 30, the Council could not authorise the introduction of national derogations whose purpose was to attain objectives other than those restrictively listed in Article 27 of the Sixth Directive. In seeking authorisation from the Council to derogate from the rules of the Sixth Directive, the French authorities were not seeking to combat the risks of tax evasion and avoidance, but to put in place a mechanism which would obviate the requirement to check whether certain expenditure was incurred for business purposes or not.

46Ampafrance and Sanofi maintain, second, that Decision 89/487 is incompatible with the principle of proportionality because the objective which it pursues could be attained by other means less detrimental to the principles and objectives of the Sixth Directive. Thus, there are other measures in French law which would allow the tax authorities to deal effectively with the problem of tax evasion and avoidance and which would be less onerous for taxable persons than a general and systematic exclusion from the right to deduct the VAT charged on the expenditure at issue.

47In that regard, the plaintiffs in the main proceedings observe first of all that there was already a provision in French law which had the effect that VAT on expenditure incurred by taxable persons for private purposes was not deductible. Article 230(1) of Annex II to the General Tax Code thus provides that the VAT charged on goods and services which taxable persons acquire or supply to themselves is deductible only if those goods and services are 'necessary' to the business.

48Next, Ampafrance claims that French law incorporates a system for the effective control of the expenditure concerned, namely the system which makes it compulsory to attach a detailed return of general expenditure (Form No 2067) to the annual statement of results. That return includes five categories of general expenditure, including the cost of food and entertainment.

49Then, the plaintiffs observe that, in accordance with the provisions of French law on corporation tax (Article 39.1.1 of the General Tax Code), expenditure in respect of accommodation, food, hospitality and entertainment of a business nature may be deducted from profits before corporation tax is assessed where it is shown that the expenditure was incurred in the interests of the undertaking. It follows from the judgment making the reference in Case C-181/99 that where such expenditure is deducted from taxable profits the tax authorities may verify the business nature of the expenditure, either by examining the relevant documents or by visiting the taxable person's premises, subject to review by the court with jurisdiction in tax matters.

50Last, according to Sanofi, it follows from the fourth recital in the preamble to Decision 89/487 that the authorisation granted to the French Republic to introduce measures derogating from the rules of the Sixth Directive on the right to deduct VAT could be granted only on a temporary basis and until such time as the Community rules determining expenditure not eligible for a deduction of VAT enter into force. The fact that the Council has been unable to adopt the provisions referred to in the first subparagraph of Article 17(6) of the Sixth Directive has caused that temporary situation to endure, in such a way that the derogation has inevitably become disproportionate to the aims which it pursued.

51The French Government, the Council and the Commission dispute those arguments.

52First, the Council and the French Government contend that Decision 89/487 is justified independently of the finding of intended or actual systematic tax evasion or avoidance. By its very nature, expenditure in respect of accommodation, hospitality, food and entertainment can be used as a means of tax evasion and avoidance owing to the risk that final consumption will not be subject to VAT, which is difficult for the authorities to control since it is not easy to determine whether such expenditure was incurred in order to satisfy business or private needs. It is relevant in that regard that the first subparagraph of Article 17(6) of the Sixth Directive provides that under the Community rules to be adopted VAT is in no circumstances to be deductible from expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

53Second, the French Government, the Council and the Commission contend that the exclusion of the right to deduct VAT charged on expenditure in respect of accommodation, hospitality, food and entertainment is not a disproportionate means in the light of the objective of combating tax evasion and avoidance defined in Article 27 of the Sixth Directive since, in the present case, the exclusion of the right of deduction was expressly limited to situations in which there were genuine risks of tax evasion and avoidance, which correspond to situations in which it is impossible to determine whether the expenditure was of a business or a private nature.

54The French Government and the Commission claim, on that point, that in their request for a derogation the French authorities limited the exclusion from the right to deduct VAT to expenditure in respect of which there is a serious risk of tax evasion and avoidance, since they requested that the authorisation to exclude the right to deduction should not apply to three situations in which such a risk of tax evasion or avoidance does not exist. On the basis of the same arguments, the Council submits that Decision 89/487, which reproduces the French Government's request word for word, satisfies the requirements formulated by the Court concerning proportionality between the means employed and the objectives pursued.

55Last, according to the Council and the French Government, exclusion from the right to deduct the VAT charged on the expenditure referred to in Decision 89/487 is a necessary means of effectively attaining the objective pursued. The Council acknowledges that other means might have been contemplated, such as limiting authorised deductions to a fixed amount. The Council does not consider that method to be effective, however, since it could either have a minimum impact on the taxable person's situation where the amount is fixed at a very low level or fail to attain the objective pursued in the opposite case of a very high amount. The French Government claims that the exclusion of the right to deduct VAT charged on expenditure in respect of accommodation, hospitality, food and entertainment is necessary for attaining the objective of combating tax evasion and avoidance defined in Article 27 of the Sixth Directive, since no other satisfactory means which exists would allow the nature of the expenditure in question to be checked.

56As regards the argument that the exclusion of the right of deduction is justified by the fact that it is impossible to control effectively the business or other nature of the expenditure at issue and that it is therefore designed to combat tax evasion and avoidance, it should be pointed out that it may prove difficult to distinguish between the private element and the business element of expenditure such as that relating to accommodation, food, hospitality and entertainment, even where it is incurred in connection with the normal operation of the undertaking. It cannot be disputed that there may be a risk of tax evasion or avoidance justifying special measures of the type which Member States may be authorised to introduce pursuant to Article 27 of the Sixth Directive. However, that risk does not exist where it follows from objective evidence that the expenditure was incurred for strictly business purposes.

57For that reason, the arguments put forward by the French Government, the Council and the Commission and set out in paragraphs 53 and 54 of this judgment cannot be accepted. The fact is that, notwithstanding the three exceptions referred to in Article 1(2), Decision 89/487 authorises the French Republic to deny traders the right to deduct the VAT charged on expenditure which they are able to show to be of a strictly business nature.

58It follows that the application of the system of exclusion of the right of deduction authorised by Decision 89/487 may have the effect that undertakings are unable to deduct the VAT charged on business expenditure which they have incurred and that VAT is thus charged on certain forms of intermediate consumption, contrary to the principle of the right to deduct VAT, which ensures the neutrality of that tax.

59As regards the necessary nature of the requested exclusion of the right to deduct, it must be pointed out, first, that Decision 89/487 does not state the reasons for which the derogation requested by the French Government was necessary to prevent certain tax evasion or avoidance.

60Second, it should be observed that in order for a Community measure concerning the VAT system to be compatible with the principle of proportionality, the provisions which it embodies must be necessary for the attainment of the specific objective which it pursues and have the least possible effect on the objectives and principles of the Sixth Directive.

61A measure which consists in excluding as a matter of principle all expenditure in respect of accommodation, hospitality, food and entertainment from the right to deduct VAT, which is a fundamental principle of the VAT system established by the Sixth Directive, although appropriate means less detrimental to that principle than the exclusion of the right of deduction in the case of certain expenditure can be contemplated or already exist in the national legal order, does not appear to be necessary in order to combat tax evasion and avoidance.

62Although it is not for the Court to comment on the appropriateness of other means of combating tax evasion and avoidance which might be contemplated, including limiting authorised deductions to a fixed amount or introducing a control modelled on that employed in connection with income tax or corporation tax, it must be pointed out that, as Community law now stands, national legislation which excludes from the right to deduct VAT expenditure in respect of accommodation, hospitality, food and entertainment without making any provision for the taxable person to demonstrate the absence of tax evasion or avoidance in order to take advantage of the right of deduction is not a means proportionate to the objective of combating tax evasion and avoidance and has a disproportionate effect on the objectives and principles of the Sixth Directive.

63Consequently, the answer to the questions referred by the Tribunal Administratif, Nantes, and the Tribunal Administratif, Melun, must be that Decision 89/487 is invalid.

Limitation of the temporal effects of the judgment

64At the hearing, the French Government referred to the possibility that, in the event that the Court should rule that Decision 89/487 was contrary to the principle of proportionality, it might limit the temporal effects of the present judgment.

65In support of that request, the French Government referred to the legitimate expectation which it was entitled to entertain as to the compatibility with Community law of Decision 89/487. In that regard, it observes that it complied with the framework prescribed in Article 27 of the Sixth Directive and first obtained an endorsement from the Commission and then a decision from the Council authorising the French authorities to apply, by way of derogation and pending the adoption of the harmonised system on exclusions from the right to deduct VAT, an exclusion of the right of deduction concerning expenditure in respect of accommodation, food, hospitality and entertainment incurred for the benefit of persons not employed by the undertaking. The Commission's endorsement and the Council decision led the French Government to entertain unfounded hopes that Decision 89/487 was compatible with Community law.

66It should be observed that it is only exceptionally that the Court may, in application of the general principle of legal certainty inherent in the Community legal order, be moved to restrict for any person concerned the opportunity of relying upon the provisions thus interpreted with a view to calling in question legal relationships established in good faith. As the Court has consistently held, such a restriction may be allowed only in the actual judgment ruling upon the interpretation sought. In determining whether or not to limit the temporal effect of a judgment it is necessary to bear in mind that although the practical consequences of any judicial decision must be weighed carefully, the Court cannot go so far as to diminish the objectivity of the law and compromise its future application on the ground of the possible repercussions which might result, as regards the past, from a judicial decision (judgments in Case 24/86 Blaizot v University of Liège and Others [1988] ECR 379, paragraphs 28 and 30, and Case C-163/90 Administration des Douanes et Droits Indirects v Legros and Others [1992] ECR I-4625, paragraph 30).

67As regards the present references for a preliminary ruling, it should be observed that this is the first time that the principle of legitimate expectations has been invoked by a Government in support of a request to limit the temporal effects of a judgment. That principle, which is the corollary of the principle of legal certainty (judgments in Case C-63/93 Duff and Others v Minister for Agriculture and Food, Ireland, and the Attorney General [1996] ECR I-569, paragraph 20, and Case C-107/97 Rombi and Arkopharma [2000] ECR I-3367, paragraph 66), is generally relied upon by individuals (traders) in a situation where they have legitimate expectations created by the public authorities (see, for example, the judgment in Duff and Others, cited above, paragraph 22, and the case-law cited there). As the Advocate General observes in point 83 of his Opinion, the principle of legitimate expectations cannot be relied on by a Government in order to avoid the consequences of a decision of the Court declaring a Community provision invalid, since it would jeopardise the possibility for individuals to be protected against conduct of the public authorities based on unlawful rules.

68In any event, even though in the present case the Commission and the Council endorsed the French authorities' request to derogate from the rules of Article 17 of the Sixth Directive for reasons associated with the fight against tax evasion and avoidance, the case-law of the Court clearly requires that secondary law must comply with the general principles of law, and in particular the principle of proportionality (see, in that regard, the judgments in Case 114/76 Bela-Mühle v Crows-Farm [1977] ECR 1211, paragraph 7, and Case C-361/96 Grandes Sources d'Eaux Minérales Françaises v Bundesamt für Finanzen [1998] ECR I-3495, paragraph 30). In particular, the Court has already held that a measure based on Article 27 of the Sixth Directive and designed to prevent tax evasion or avoidance could not derogate from a principle laid down in the Sixth Directive, except within the limits strictly necessary for attaining that objective (see, in that regard, Case 324/82 Commission v Belgium [1984] ECR 1861, paragraph 29), and was therefore required to observe the principle of proportionality.

69In the present case the French authorities largely contributed to the determination of the content of Decision 89/487, which reproduced word for word their request for a derogation (points 9 and 10 of the letter of 13 April 1989), with the effect that there were authorised, as a special measure intended to prevent tax evasion and avoidance, to exclude the exclusion from the right of deduction the VAT paid on inputs even where the expenditure concerned is demonstrably of a strictly business nature. In those circumstances, the French authorities could not fail to be aware that, by its content, Decision 89/487 was not compatible with the principle of proportionality and, consequently, cannot argue that they could reasonably believe that that decision was valid.

70In those circumstances, it is not appropriate to limit the temporal effects of the present judgment.

Costs

Costs

71The costs incurred by the French Government, 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 proceedings, a step in the action pending before the national courts, the decision on costs is a matter for that courts.

Operative part

On those grounds,

THE COURT (Fifth Chamber)

in answer to the questions referred to it by the Tribunal Administratif, Melun, by judgment of 3 December 1998 and by the Tribunal Administratif, Nantes, by judgment of 11 May 1999, hereby rules:

Council Decision 89/487/EEC of 28 July 1989 authorising the French Republic to apply a measure derogating from the second subparagraph of Article 17(6) of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes is invalid.

Edward Sevón Kapteyn

Ragnemalm Wathelet

Delivered in open court in Luxembourg on 19 September 2000.

R. Grass D.A.O. Edward

Registrar For the President of the Fifth Chamber

Opinion of Mr Advocate General Cosmas delivered on 23 March 2000. - Ampafrance SA v Directeur des services fiscaux de Maine-et-Loire (C-177/99) and Sanofi Synthelabo v Directeur des services fiscaux du Val-de-Marne (C-181/99). - References for a preliminary ruling: Tribunal administratif de Nantes and Tribunal administratif de Melun - France. - VAT - Deduction of tax - Exclusion of the right of deduction - Entertainment costs - Proportionality. - Joined cases C-177/99 and C-181/99. European Court reports 2000 Page I-07013

I - Introduction

1By these questions referred for a preliminary ruling under Article 234 EC (formerly Article 177 of the EC Treaty) by the Tribunaux Administratifs (Administrative Courts) of Nantes and Melun (France), the Court is invited to examine the problem of the legality of Council Decision 89/487/EEC of 28 July 1989 (hereinafter `Decision 89/487') (1) authorising the French Republic to apply a measure derogating from the second subparagraph of Article 17(6) 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 (hereinafter `the Sixth Directive'). (2)

II - Facts and procedure

A - Case C-177/99

2In the course of its business activities Ampafrance SA (hereinafter `Ampafrance') incurs sundry expenditure on accommodation, food, hospitality and entertainment both for its staff and for third parties. It therefore attempted to deduct the full amount of the value added tax (VAT) on expenditure of this kind for June 1993. The tax authorities did not approve this deduction and invoked Article 236 of Annex II to the French General Tax Code (Code Général des Impôts, hereinafter `the CGI'), which transposes into national law Council Decision 89/487 at issue in this case. Ampafrance brought an action before the Tribunal Administratif de Nantes, seeking a refund of the sum it had been required to pay in respect of VAT to the tax authorities, because it had not been allowed to deduct the tax relating to the aforementioned expenditure incurred in respect of its staff and third parties.

3In the order for reference the national court states as follows:

`The resolution of this dispute depends on whether the provisions of the Decision [89/487/EEC] of 28 July 1989 of the Council of the European Communities authorising the French Government to derogate from the standstill clause introduced by Sixth Directive 77/388/EEC of the Council of 17 May 1977 and to extend to third parties exclusions of expenditure on accommodation, food, hospitality and entertainment from the right to deduct tax are compatible, first, with the objectives of the Sixth Directive and in particular Article 27 ... and, second, with the principle of proportionality between the tax objective pursued and the means employed. Only the answer to that question, the solution of which is not obvious, will enable an assessment to be made of whether the pleas in this application are well-founded. It is necessary to stay proceedings in the action brought by Ampafrance pending the preliminary ruling by the Court of Justice of the European Communities on the question set out above.'

4In the light of the foregoing considerations, the national court decided to stay proceedings pending a preliminary ruling by the Court of Justice on the question set out in the grounds in the order for reference.

B - Case C-181/99

5The company Sanofi Winthrop SA, which became, following mergers, first Sanofi on 12 May 1998 and then Sanofi-Synthelabo on 18 May 1999 (hereinafter `Sanofi'), brought an action before the national court against the Director of Tax Services of Val-de-Marne on the following grounds: the competent tax authorities had not approved the deduction of VAT relating to expenditure incurred in November and December 1993 to provide hospitality for suppliers and clients by the Choay Clin Midy and Millot Solac laboratories, whose rights and obligations had been taken over by the applicant. The resolution of the dispute required an examination of the legality of Decision 89/487, on which the current provisions of Article 236 of Annex II to the CGI were based.

6The national court (Tribunal Administratif de Melun), after holding that `... although this court can assess the validity of a measure adopted by an institution of the European Union, it cannot declare it to be invalid. It is therefore necessary, pursuant to Article 177 of the Treaty establishing the European Economic Community, to stay proceedings ... pending a preliminary ruling by the Court of Justice of the European Communities on the validity, in the light of the principle of proportionality, of the abovementioned Decision of 28 July 1989 of the Council of the European Communities', stayed its consideration of the action for a refund of the additional taxes imposed and the respective penalties, until the Court of Justice of the European Communities had given a ruling on the abovementioned question.

III - The legal background of the two cases under consideration

A - Relevant provisions of the Sixth Directive

7Article 17 of the Sixth Directive concerns the origin and scope of the right to deduct VAT. Under paragraph 2:

`In so far as the goods and services are used for the purpose of his taxed 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 ...'.

8Article 17(6) of the Sixth Directive contains a standstill clause which provides for the retention of national exclusions of the right to deduct VAT which were applicable before the Sixth Directive came into force, that is to say, before 1 January 1979:

`Before a period of four years at the latest has elapsed from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of value added tax. Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive came into force.'

9Those provisions are a consequence of the fact that the Council did not draw up an exhaustive list of the goods, services and, generally, the activities for which deduction of VAT must be excluded under the provisions of the Sixth Directive. It should be remembered that, in the statement of reasons accompanying its Proposal for the Sixth Council Directive, (3) the Commission points out that certain items of expenditure, even when incurred in connection with the normal operation of a business, are also intended to meet private needs. Therefore, apportionment between the `private' part and the `business' part of the expenditure in question cannot be accurately verified. For that reason the proposal concerning Article 17(6) of the Sixth Directive states that the right to deduct VAT is excluded in respect of expenditure on accommodation, meals, food, drink, passenger cars and cars used for the purpose of entertainment, as well as expenditure on entertainment and luxuries. That proposal was not accepted and, consequently, the provision of the Sixth Directive in question, in its present form, merely states that the Council will resolve the problem within four years and that, in the meantime, the national exclusions will be retained under a standstill clause.

10Moreover, in its Proposal for a Twelfth Directive of 25 January 1983, (4) the Commission formulated specific and detailed rules prohibiting deduction of the tax in respect of expenditure on transport, accommodation, food and drink, and also on hospitality, entertainment and luxuries. That proposal was withdrawn following continual disagreements within the Council and, since then, it has not been possible to adopt common rules concerning the restrictions which must be imposed on the right to deduct VAT. Recently, in a proposal for a directive submitted to the Council on 17 June 1998, (5) the Commission suggested that the deduction of VAT on expenditure on accommodation, food and drink should be restricted to 50%, owing to the dual business and private nature of the expenditure in question. On the other hand, the Commission considered that deduction of VAT should be excluded in respect of expenditure on luxuries, amusements or entertainment, because such expenditure is not of a strictly business nature.

11Under Article 27 of the Sixth Directive:

`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.

2. A 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.

3. The 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 they conform with the requirement laid down in paragraph 1 above.'

B - National tax law

12Articles 7 and 11 of Decree No 67-604 of 27 July 1967 (6) provided as follows:

Article 7: `The tax on expenditure incurred in order to provide accommodation or lodging for the management and staff of undertakings shall not be deductible.

However, that exclusion shall not apply to the tax on expenditure incurred in order to provide free accommodation at the place of work for employees responsible for the security or supervision of an industrial or commercial complex or a works site.'

Article 11: `The tax on expenditure incurred in order to satisfy the personal needs of the management and staff of undertakings, and in particular the tax on the cost of providing hospitality, food and entertainment, shall not be deductible.

However, that exclusion shall not apply to expenditure in respect of:

Goods which constitute fixed assets and are specially allocated at the actual places of work for the collective satisfaction of the needs of the staff;

Work clothes or protective clothing which an undertaking provides for its staff.'

13After the Sixth Directive came into force, that is, after 1 January 1979, Decree No 79-1163 of 29 December 1979 (7) was adopted. Article 25 of that Decree replaced Article 236 of the CGI with the following provision:

`Tax on goods or services used by persons not employed by the undertakings or by the management or staff of the undertaking, such as accommodation or lodging, the cost of hospitality, food or entertainment or any expenditure directly or indirectly connected with travel or residence shall not be deductible.

However, that exclusion shall not apply to work clothes or protective clothing, premises and equipment provided to staff at the workplace, or to accommodation provided free of charge for security or supervisory staff at the workplace.'

14The French Conseil d'État (Council of State), in its judgment of 3 February 1989 in the Alitalia case, held that Article 25 of the 1979 Decree did not comply with Community law in that it excluded the right to deduct the VAT on goods and services used by persons not employed by the undertaking; it considered that the exclusion in question was not covered by the standstill clause in Article 17(6) of the Sixth Directive and was, therefore, contrary to that directive.

15The adoption of Council Decision 89/487 was followed by the promulgation of Decree No 89-885 of 14 December 1989 (8) which reformulated Article 236 of Annex II to the CGI giving it its present form:

`... As a temporary measure, the value added tax charged on expenditure in respect of accommodation, food, hospitality and entertainment shall be excluded from the right of deduction.

However, that exclusion shall not apply to:

1. Expenditure incurred by a taxable person in respect of the supply by him of accommodation, meals, food or drink for consideration;

2. Expenditure on accommodation provided free of charge for security, caretaking or supervisory staff on works, sites or business premises;

3. Expenditure incurred by a taxable person in carrying out his contractual or legal responsibility towards customers.'

C - Impugned Council Decision 89/487

16Following the judgment annulling Article 25 of the 1979 Decree, the French authorities asked the Council to approve national derogations from the general system of the Sixth Directive, on the basis of Article 27 thereof. In particular, they asked for permission to prohibit deduction of VAT on expenditure on accommodation, restaurants, hospitality and entertainment.

17In the preamble to Decision 89/487, the Council had regard to the fact that `this measure is aimed at excluding other expenditure in respect of accommodation, restaurants, hospitality and entertainment from the right to deduct VAT previously charged, in order to prevent tax evasion and avoidance'.

18Article 1 of Decision 89/487 provides:

`1. By way of derogation from the second subparagraph of Article 17(6) of the Sixth Directive, the French Republic is hereby authorised, on a temporary basis and until such time as Community rules determining the treatment of expenditure referred to in the first subparagraph of that paragraph come into force, to exclude expenditure in respect of accommodation, food, hospitality and entertainment from the right to deduct value added tax previously charged.

2. The exclusion referred to in paragraph 1 shall not apply to:

- expenditure incurred by a taxable person in respect of the supply by him of accommodation, meals, food or drink for consideration,

- expenditure on accommodation provided free of charge for security, caretaking or supervisory staff on works, sites or business premises,

- expenditure incurred by a taxable person in carrying out his contractual or legal responsibility towards customers.'

IV - Case-law of the Court of Justice

19Before analysing the various components of the reply to the questions referred for a preliminary ruling in this case, it is necessary to consider the focal points of the interpretation placed on Articles 17 and 27 of the Sixth Directive in the case-law of the Court of Justice.

A - Article 17 of the Sixth Directive

20The Court has taken care, first of all, to make it clear that the right to deduct VAT payable on goods and services used for the purpose of carrying out other taxable transactions, within the limits defined by Article 17 of the Sixth Directive, is one of the foundations of the Community tax structure, because it is directly linked to the basic principles of tax neutrality (9) and equality of treatment in tax matters.

21In particular, in its judgment in Commission v France, (10) the Court declared that `from the features of VAT ... it may be inferred ... that the deduction system is meant to relieve the trader entirely of the burden of VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures that all economic activities, whatever their purpose or results, provided that they are then subject to VAT, are taxed in a wholly neutral way.' (11) Consequently, `in the absence of any provision empowering the Member States to limit the right of deduction granted to taxable persons, that right must be exercised immediately in respect of all the taxes charged on transactions relating to inputs.' (12) In other words, the Court attaches particular importance to the total and immediate nature of the deduction of VAT for which Article 17 of the Sixth Directive provides. (13)

22In this connection, it is relevant to refer to the Court's judgment in Intiem, (14) which stated that the VAT deduction system established by the Sixth Directive must be applied `in such a way that its scope corresponds as far as possible to the sphere of the taxable person's business activity.' (15) On the basis of that premiss, the Court held that the right of deduction of VAT paid on goods which, although sold to the taxable person in order to be used exclusively in his business, were physically delivered to his employees, could not be excluded. (16)

23The Court had the opportunity to confirm that decision in its judgment in BP Supergas. (17) First of all, it reiterated that `the fundamental principle which underlies the VAT system, and which follows from Article 2 of the First and Sixth Directives, is that VAT applies to each transaction by way of production or distribution after deduction has been made of the VAT which has been levied directly on transactions relating to inputs'. (18) Regarding the right of deduction provided for in Articles 17 et seq. of the Sixth Directive, the Court declared that this right `is an integral part of the VAT scheme and in principle may not be limited. The Court has consistently held ... that the right of deduction must be exercised immediately in respect of taxes charged on transactions relating to inputs. Any limitation on the right of deduction affects the level of the tax burden and must be applied in a similar manner in all the Member States. Consequently, derogations are permitted only in the cases expressly provided for in the Directive.' (19)

24The standstill clause in Article 17(6) of the Sixth Directive is considered to be such a derogation from the general deduction rule. Nevertheless, in two recent judgments, the Court has refused to interpret this exception strictly and has thereby accorded the Member States considerable latitude.

25In particular, in the case of Commission v France, (20) the question was raised as to whether the national exclusion, referred to above, of the right of deduction was to be limited to expenditure which is not strictly business expenditure, that is to say, which is incurred by the taxable person for goods and services which are not absolutely essential for the operation of his business. The Court did not endorse the strict approach for which the Commission argued. It held that the relevant provision of the Sixth Directive `authorises the Member States to retain national rules which deny taxable persons the right to deduct VAT on means of transport which constitute the very tool of their trade.' (21)

26The Court followed the same line of argument in the case of Royscot and

Others, (22) which concerned, as did Case C-43/96 Commission v France, the compatibility with Community law of national derogations which prohibited the deduction of VAT on the purchase of motor cars. The Court held that it followed from the wording of the disputed standstill clause `which is clear and unambiguous, that Article 11(4) authorised Member States to exclude from the right of deduction even expenditure which is strictly business-related ...'. (23) Consequently, the discretion conferred on the Member States is especially wide; the only restriction imposed on the national authorities is that they may not `exclude all and any goods and services from the system of the right of deduction ...'. (24)

27Another aspect of that judgment is also significant. The Commission had maintained that a Member State might lose the right to retain exclusions of the right of deduction, based on the standstill clause contained in Article 17 of the Sixth Directive, if it had subsequently amended its national law so as to render the clause in question inapplicable. (25) The Court did not give an express reply to this assertion; from its attitude it may be deduced a contrario that it considered either that, in the case pending before it, the disputed amendments of national law had not undermined the standstill clause, or that amendments made to the national rules after the introduction of the clause do not justify the Member States losing their rights under the clause. In any event, however, the Court did not deal in depth with the matter of the effects, with regard to application of the standstill clause, of subsequent amendments to domestic law. (26)

28To understand the approach taken by the Court regarding the interpretation of Article 17(6) of the Sixth Directive it is necessary to bear in mind that the Member States and the Community institutions are unable to agree which expenditure does not give a right to deduct VAT. (27) The difficulties which emerged when the disputed provisions of the Sixth Directive were drawn up and the continued failure of the Council, even after the four-year period fixed in the Directive had expired, (28) to take steps to resolve the matter, were invoked both by the Court and the Advocate General in the case of Commission v France (29) and by the Advocate General in Royscot. (30) Since the Community legislator in the matter has not managed to formulate the appropriate provisions which would have made it possible to remove the standstill clause in Article 17, it is not for the Court to assume the role of the legislator by proposing that the clause should be interpreted strictly.

B - Article 27 of the Sixth Directive

29So far as concerns Article 27 of the Sixth Directive, which provides that the Council may authorise any Member State to introduce special national measures for derogation from the directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance, the case-law of the Court of Justice has, to date, been as follows:

30First of all, the judgment in Commission v Belgium (31) clearly showed that the opportunity given to the national authorities to retain divergent or to introduce new legislation authorised only those derogations which were necessary to achieve the expressly stated aims of Article 27, that is, to simplify the tax and to prevent tax evasion and avoidance. In that judgment, the Court held that, since Belgium had not proved that the disputed national measures concerning car taxation were necessary to prevent tax evasion or avoidance, it had failed to fulfil its obligations under Community law.

31Subsequently, in its judgment in Direct Cosmetics I, (32) the Court pointed out that the derogations provided for in Article 27 of the Directive were by way of exceptions. National legislation which diverges from the rules of the Sixth Directive, pursuant to Article 27(5), cannot be interpreted widely. Subsequent amendments to that legislation which extend the scope of application of the national rules derogating from the Sixth Directive are compatible with Community law only if they are approved by the Council in accordance with the provisions of Article 27(2) of the Sixth Directive.

32In Direct Cosmetics and Laughtons Photographs, (33) the Court was invited to review the validity of a Council decision authorising the adoption of special national measures derogating from the Sixth Directive. The Court examined the legality of the Council decision approving the measures in the light of the criteria laid down in Article 27 of the Sixth Directive, the principle of proportionality and the basic principles of the Directive. After declaring that the notification made by the Member State concerned to the Commission, in accordance with Article 27(2) of the Sixth Directive, referred in `sufficient' detail to the needs which the measure in question was intended to meet and that it contained all the essential elements to enable the aim pursued to be identified, (34) the Court finally held that the measures approved by the Council decision were not disproportionate to the aim pursued, (35) whilst acknowledging the `freedom of action' that the measures would confer on the competent authorities `to make use of that measure in cases in which its application is considered appropriate.' (36)

33That case-law also served as a basis for the judgment in BP Supergas, (37) according to which national measures derogating from the Sixth Directive `do not accord with Community law unless they remain within the limits of the objectives referred to in Article 27(1) and have also been notified to the Commission and impliedly or expressly authorised by the Council in the circumstances specified in paragraphs (1) to (4) of Article 27.' (38)

34Lastly, in the Skripalle case, (39) the Court was invited to define the scope of application of the authorisation granted by the Council to Germany, under Article 27 of the Sixth Directive, to adopt a special measure derogating from the provisions of that directive so far as concerns supplies of services for consideration between associated persons. In its judgment, the Court states that `national derogating measures designed to prevent the evasion or avoidance of tax must be strictly interpreted' and may not derogate from the general rules of the Sixth Directive `except within the limits strictly necessary for achieving that aim.' (40) The Court considered to what extent those conditions were satisfied in the case and, although acknowledging that there may be a risk of evasion or avoidance between family members or associated persons, said that there is no such risk `where the objective facts show that the taxable person has acted properly.' (41) On these grounds the Court limited the scope of application of the authorisation granted to Germany by the Council.

35From the case-law analysed above, it appears that the Court has traced the following guidelines with regard to the question at issue. The deduction of VAT payable on goods and services at an intermediary stage, before other transactions subject to VAT are carried out, under Article 17 of the Sixth Directive, is an important element of the Community VAT scheme, which is directly linked to the fundamental principle of tax neutrality. Therefore, exceptions to the application of that general rule, which are the consequence in particular of the possibility afforded under Article 27 of the Sixth Directive of introducing further derogations from the general scheme of the Directive, must, in principle, be interpreted strictly. However, the latitude for derogation which the Member States are given by virtue of the possibility, under the standstill clause in Article 17(6) of the Sixth Directive, of retaining exclusions from VAT deduction introduced before that directive came into force, is, according to the Court's case-law hitherto, particularly extensive, inasmuch as it applies to any expenditure, irrespective of whether or not it is business expenditure; a limit is imposed on the above national power to exclude VAT deduction only in the extreme circumstances of a Member State ultimately excluding almost all goods and services from the right of deduction scheme.

V - Subject-matter of Decision 89/487

36Before examining the legality of Decision 89/487, it is necessary to establish its specific subject-matter. According to Ampafrance, the derogation granted by the Council to the French Republic covers all accommodation, restaurant, hospitality and entertainment expenditure, regardless of the status of the person in respect of whom the taxable person has incurred the expenditure. On the other hand, the French Government maintains that, given the context of the national legal system, Decision 89/487 can only apply to the exclusion from the right to deduct VAT on expenditure incurred in respect of third parties outside the company concerned. The Commission seems to support this view. Sanofi and the Council do not deal with this point in their observations.

A - Arguments of the parties

37Ampafrance first of all sets out its view of the applicable tax law in France. It considers that the original scheme, which was introduced by the aforementioned 1967 Decree, excluded from the right to deduct VAT only expenditure incurred to meet the private needs of the management and staff of undertakings. The 1979 Decree extended the exclusion from the right to deduct to all expenditure relating to accommodation, restaurants, hospitality and entertainment, without drawing any distinction between whether they benefited the management and staff of the undertakings or third parties as well. Nor does the 1979 Decree draw any distinction between items of expenditure depending on whether or not they are of a business nature. Ampafrance also points out that, in its judgment of 3 February 1989 in the Alitalia case, the French Conseil d'État held that the exclusion of the right to deduct VAT payable on the expenditure at issue, which the taxable person had incurred for the benefit of third parties, was incompatible with Community law. So far as concerns this kind of expenditure, Ampafrance deduces from the case-law of the Conseil d'État (42) prior to the Alitalia judgment that VAT could be deducted, under the 1967 Decree, when the expenditure was incurred for the benefit of the management and staff of the undertaking, if it was proved that it was of a business nature. From the case-law of the Conseil d'État, Ampafrance draws the conclusion that it has never been disputed that taxable persons may deduct VAT on expenditure directly linked to their business activity. It believes that this is why the French authorities initiated the procedure established in Article 27 of the Sixth Directive, in order that the Council would allow them to exclude from the right to deduct VAT any expenditure relating to accommodation, food, hospitality and entertainment, whether of a business nature or not.

38Ampafrance relies on the above interpretation, which it suggests in connection with the tax scheme in force in France since 1967, to support its argument that Decision 89/487 at issue in this case covers all expenditure relating to accommodation, restaurants, hospitality and entertainment, not only that which taxpaying companies incur in respect of third parties. Ampafrance maintains that, since the French Republic had kept the 1967 Decree in force, the standstill clause in Article 17 of the Sixth Directive allowed it to exclude from the right to deduction of VAT only expenditure incurred to meet the private needs of the management and staff of an undertaking. The fact that, in the Alitalia judgment, the Conseil d'État questioned the compatibility with Community law only of those provisions of the 1979 Decree which apply to expenditure incurred for the benefit of third parties, cannot be construed - according to Ampafrance - as an indication that the general exclusion from the right to deduction of VAT on expenditure incurred for the benefit of the employees of the taxpaying company, as was provided for by the 1979 Decree and is still applicable, is covered by the standstill clause in Article 17 of the Sixth Directive and is therefore compatible with Community law. In any event, Ampafrance considers that the 1979 Decree repealed the 1967 Decree; the French Republic had therefore lost the opportunity to invoke the standstill clause at the time it initiated the procedure under Article 27 of the Sixth Directive. Ampafrance draws the conclusion that the logical consequence of this is that the authorisation conferred by the Council in Decision 89/487 could only apply to all expenditure relating to accommodation, food, hospitality and entertainment.

39Sanofi took the same view during the hearing. It maintained that the subject-matter of the impugned decision included all expenditure relating to accommodation, restaurants, hospitality and entertainment, irrespective of the status of the person for whose benefit it was incurred.

40On the other hand, the French Government claims that the subject-matter of Decision 89/487 is manifestly narrower than as described by the applicants in the main action. In this connection it cites the judgment given by the French Conseil d'État in the Alitalia case, from which it infers a contrario that the general exclusion from the right to deduction of VAT on expenditure relating to accommodation and so forth for the management and staff of taxpaying companies, an exclusion which had already been introduced by the 1967 Decree, was covered by the standstill clause in Article 17(6) of the Sixth Directive and was not, therefore, contrary to Community law. After the Alitalia judgment, and in order to tackle the specific problem of the tax treatment of expenditure incurred by companies for the benefit of third parties, the French Republic decided to take advantage of the opportunity offered to it by Article 27(1) of the Sixth Directive and submitted a request to the Commission. The French Government maintains that, as a consequence, given the context in which the request was submitted to the Community institutions, the subject-matter of Decision 89/487 is confined to excluding from the right to deduct VAT on expenditure relating to accommodation, food, hospitality and entertainment only cases in which the expenditure is incurred by the taxpaying companies for the benefit of third parties.

41In this respect the Commission explains that the derogation from the general provisions of the Sixth Directive which was introduced by Decision 89/487 relates to Article 17(2) of the Sixth Directive, not Article 17(6) as inadvertently stated in Decision 89/487. According to the Commission, the request submitted by the French authorities referred to Article 17(2) of the Sixth Directive and consisted in the amendment of the current national legislation towards extending the exclusion from the right to deduction of VAT particularly in respect of expenditure incurred by taxpaying companies for the benefit of third parties. The Commission maintains that that narrow interpretation of Decision 89/487 is based only on the judgment of the Conseil d'État in the Alitalia case, in which it held that the extension of the national scheme of exclusions from the right to deduct VAT was contrary to Community law only in so far as it concerned the specific category of expenditure incurred for the benefit of third parties.

42At the hearing the parties attached great importance to the problem of specifying from which provisions of the Sixth Directive the French Republic sought the authorisation to derogate granted to it by Decision 89/487. The Commission again argued that Article 17(2) was involved, not Article 17(6) as inadvertently indicated in the text of the decision. The French Government and the Council considered that the derogation in question was perfectly correct and, in any event, concerned both Article 17(2) and Article 17(6) of the Sixth Directive. The applicants in the main proceedings pointed out that, since the text of Decision 89/487 referred to Article 17(6) of the Sixth Directive, the Commission could not maintain that that was merely an oversight. In so far as it authorises the introduction of derogations from Article 17(6), Decision 89/487 was invalid.

B - My view of the problems raised above

(a) The provisions of the Sixth Directive in respect of which Decision 89/487 authorised derogation

43First of all, I shall examine whether Decision 89/487 related to the provisions of Article 17(6) of the Sixth Directive and/or those of Article 17(2). I am of the opinion that the first of these propositions cannot be upheld. The question might be raised, first of all, of what the introduction of derogations from the standstill clause in the second subparagraph of Article 17(6) consists in. A probable explanation is that Decision 89/487 authorised the French Republic to extend the scope of the standstill clause in question by introducing exclusions from the right to deduct VAT going beyond those provided by national law at the time the Sixth Directive came into force. In that case, however, it cannot be a question of extending the subject-matter of the standstill clause, since the problem which arises in France is not that pre-existing legislation is being retained but that new national provisions, which are contrary to the content of the Sixth Directive, are being introduced. Those national provisions do not run counter to the standstill clause in Article 17(6) of the Sixth Directive; they are merely not covered by the clause in question. They do, however, conflict with the provisions of Article 17(2), and that is why it was necessary to apply to the Council for the authorisation provided for in Article 27. It is therefore contrary to the rationale of the Sixth Directive to rely on Article 27 of that directive in order to introduce national derogations from the standstill clause. Article 27 gives the Member States the opportunity to derogate from the provisions of the Sixth Directive by adopting new measures, not by retaining provisions which were in force before that directive was adopted. Such provisions are, in any case, covered by the standstill clause in Article 17(6), although it is not necessary for them to be approved by the Council under the procedure established in Article 27 of the Sixth Directive. Accordingly, the reference to Article 17(6) in Decision 89/487 is obviously incorrect and the Commission is right in pointing out that the exclusions from the right to deduct VAT proposed by the French Republic necessarily came under Article 17(2).

44The question then arises whether the incorrect reference to Article 17(6), instead of to Article 17(2), renders Decision 89/487 defective and, consequently, invalid, as the applicants in the main proceedings claim, or whether it constitutes an imperfection in Decision 89/487 that can be remedied, which is the view taken by the Commission. The truth is that, throughout the procedure which culminated in Decision 89/487, the French Government, in the request it made under Article 27 of the Sixth Directive, the Commission, in the proposal it submitted to the Council (COM(89) 346 final, of 10 July 1989), and the Council, in its decision, seem to have erred in law concerning the provisions of the Sixth Directive in respect of which authorisation to derogate was being sought. The French Republic's request relates to Article 17(6); the Commission's proposal and Decision 89/487 also refer to that provision. It may therefore be claimed that Decision 89/487 is unlawful because its legal subject-matter is incorrect.

45However, I consider that this would be too stringent a solution. I do not think that the fact that the parties who cooperated in the adoption of the Community act in question defined the relevant legal context incorrectly is sufficient to justify an automatic and irrevocable declaration that the act is unlawful. On the other hand, it is expedient to determine whether the applicable provisions of Community law have been observed in this case, irrespective of whether the reference made to them in the body of Decision 89/487 is correct or not. In particular, the fundamental question which arises is whether the French Republic could use the legal procedure prescribed by Article 27 of the Sixth Directive to introduce national provisions contrary to the provisions of the Sixth Directive, even if that Member State and the Community institutions which granted the relevant authorisation mistakenly believed that those national provisions were contrary to Article 17(6) of the Sixth Directive rather than Article 17(2). It need only be pointed out that the exclusions from the right to deduct VAT which the French Republic submitted for the Council's approval were certainly not contrary to Article 17(6) of the Sixth Directive, but to Article 17(2).

(b) The scope of the exclusion from the right to deduct VAT authorised by Decision 89/487

46It remains to be determined whether the exclusion from the right to deduct VAT on expenditure relating to accommodation, food, hospitality and entertainment, authorised by Decision 89/487, covers all such expenditure, irrespective of the status of the persons for whose benefit it has been incurred, or whether it applies only to expenditure incurred for the benefit of third parties. I shall take as a starting point for this analysis the letter in which the French Republic requested that Article 27 of the Sixth Directive be put into effect in order to introduce national provisions derogating from the general provisions of the Sixth Directive. Both the French Government and the Commission refer to this letter and consider that its indirect consequence was that the request for authorisation made by the French Republic to the Council concerned only expenditure relating to accommodation, food, hospitality and entertainment incurred for the benefit of third parties.

47I consider that the reasoning of the French authorities, as expressed in their letter of 13 April 1989 to the Commission, contains a fundamental contradiction. Firstly, they imply that, under national law, the exclusion from the right to deduct VAT on the expenditure in question, relating to the staff and management of companies, is based on the aforementioned 1967 Decree which, in principle, is covered by the standstill clause in Article 17(6) of the Sixth Directive; on the other hand, the exclusion from the right to deduct VAT on expenditure of the same kind incurred by companies for the benefit of third parties, especially after the judgment given by the Conseil d'État in the Alitalia case, does not seem to have a legal basis in the national legislation prior to the Sixth Directive. Secondly, the French Republic's request for authorisation to derogate from the rules of the Sixth Directive under Article 27 is formulated in such a way as to include all expenditure relating to accommodation, food, hospitality and entertainment, whether incurred for the management and staff of undertakings or for third parties. To sum up, from the content of the aforementioned letter sent by the French Republic to the Commission, although it appears that the French Republic considers that the exclusion from the right to deduct VAT, at least for expenditure for the management and staff of undertakings, is covered by the standstill clause, it nevertheless requests that Article 27 be applied to all national legislation regarding exclusion from the right to deduct VAT on expenditure relating to accommodation, food, etc., without distinguishing between staff, management, and third parties.

48As regards Decision 89/487 itself, it should be pointed out that its scope of application is clearly defined. It excludes from the right to deduct VAT all expenditure `in respect of accommodation, food, hospitality and entertainment', irrespective of the status of the person for whose benefit the company incurs it. In other words, the Community legislature allows derogations from the generally accepted rules of Article 17 of the Sixth Directive in connection with the expenditure in question generally.

49The question arises whether, as the French Republic and, indirectly, the Commission maintain, Decision 89/487, correctly interpreted, applies only to cases of exclusion of the right to deduct VAT on expenditure incurred for the benefit of third parties and not for the benefit of the staff or management of the company, in view of the fact that the latter category of expenditure is already covered by national provisions which fall under the standstill clause in Article 17(6) of the Sixth Directive. I am unable to endorse the proposed solution which I have just described. It is tantamount to recognising the possibility of interpreting the content of an act of the Community institutions in the light of national law in a way that is contrary to its wording. Indeed, the wording of Decision 89/487 leaves no room for doubt with regard to its conceptual scope; it provides the French Republic with the opportunity to exclude from the right to deduct VAT all expenditure in respect of accommodation, food, hospitality and entertainment, irrespective of the status of the persons for whose benefit it is incurred and irrespective of whether the expenditure is closely or loosely connected with the business activity of the taxable person. To accept the position that Decision 89/487, despite its clarity, does not apply to all the cases described in its provisions, but only to some of them, having regard to the national legislation previously in force, first of all undermines the very foundations of the Community legal order, because it makes the interpretation of a Community rule subject to the circumstances and specific features of national law. It also infringes the fundamental principle of legal certainty, inasmuch as it allows a rule to be interpreted in a sense which conflicts with its wording, misleading those concerned as regards its scope of application. In any event, in accordance with the general legal principle nemo auditur propriam turpitudinem allegans, the French Republic cannot seek an interpretation contra legem of Decision 89/487.

50Finally, it should be pointed out that the position in French law invoked by the French Republic is anything but clear. The judgment of the Conseil d'État in the Alitalia case merely gave indications - which may be rebutted - that exclusion from the right to deduct VAT on the expenditure at issue, incurred for the benefit of the management and staff of an undertaking, an exclusion for which the 1979 Decree made provision, was covered by the standstill clause, by means of the earlier 1967 Decree. Moreover, it is not clear whether the passage in Decision 89/487 which authorises exclusion from the right to deduct VAT on `expenditure in respect of accommodation, food, hospitality and entertainment' is identical in sense to the content of Articles 7 and 11 of the 1967 Decree, under which, on the one hand, `the tax on expenditure incurred in order to provide accommodation or lodging for the management and staff of undertakings shall not be deductible', and, on the other, `the tax on expenditure incurred in order to satisfy the personal needs of the management and staff of undertakings, and in particular the tax on the cost of providing hospitality, food and entertainment, shall not be deductible'. Leaving aside the difference in wording, the question arises as to whether the provisions of the 1967 Decree in question preclude the deduction of VAT in respect of the expenditure in question, even when it is of a strictly business nature. (43) If that is not accepted, (44) that is, if it is considered that VAT may be deducted in respect of business expenditure, even in the light of the 1967 Decree, the scope of application of the 1967 Decree becomes narrower than that of Decision 89/487, since it does not exclude the right in general to deduct VAT in respect of such expenditure. Of course, the question of the scope of the national legislation and, more particularly, of the 1967 Decree does not fall within the jurisdiction of the Court of Justice but of the national court. However - to return to the premiss on which I have based my argument - it would be contrary to the very essence of Community law to confer on a national court jurisdiction to determine the content of a Community act by way of an interpretation of its national law.

51In the light of the foregoing, I believe that it would not be right to attempt to restore the meaning of Decision 89/487 through French law and to reformulate the content of the decision to the effect that it authorises the French Republic to exclude certain expenditure from the right to deduct VAT only in cases in which the expenditure is incurred for the benefit of persons outside the taxpaying company, and not when it relates to the management and staff. I therefore take the view that the impugned decision covers both of the aforementioned categories of expenditure, as its wording clearly indicates. The question of establishing which tax scheme is applicable in France, if Decision 89/487 is ultimately held to be contrary to Community law, is a different matter. I shall come back to this question - in so far as it concerns the implementation of the Sixth Directive - only if, after assessing the legality of Decision 89/487, I have doubts as to its validity.

VI - The legality of Council Decision 89/487

A - Arguments of the parties

(a) Ampafrance

52Ampafrance maintains that Decision 89/487 is contrary to the objectives of Article 27(1) of the Sixth Directive and does not satisfy the requirements of the principle of proportionality.

53As far as concerns the objectives of Article 27, these are only to simplify the procedure for charging the tax and to prevent certain types of tax evasion and avoidance. In its request, the French Government relied on the second of those objectives, that is to say, tackling tax evasion and avoidance. For its part, the Council, in accordance with the consistent case-law of the Court of Justice, (45) could not authorise the introduction of national derogations intended to achieve objectives other than those exhaustively listed in the provision of the Sixth Directive in question. However, according to Ampafrance, the exclusion from the right to deduct VAT at issue here is not based on the intention to penalise certain types of tax evasion or avoidance, but is founded on the `presumption' of a risk of tax evasion or avoidance arising from the `dual' nature (private and business) of the expenditure concerned. Consequently, the French authorities were not seeking to take action against the risks exhaustively listed by the Sixth Directive, but to establish a mechanism which would make it possible for them no longer to have to examine whether or not certain expenditure was business expenditure. Indeed, Ampafrance points out that expenditure on hospitality for business purposes may be deducted in France from the profits subject to corporation tax, under Article 39.1.1 of the CGI, if it is shown that it has been incurred in the interests of the company. According to Ampafrance, that observation is enough to establish that there is no actual risk of tax evasion or avoidance linked to deduction on expenditure in respect of hospitality. Furthermore, Ampafrance believes that Decision 89/487 was adopted in a way that constituted an abuse of the process prescribed by Article 27 of the Sixth Directive; firstly, it seeks to introduce an additional exclusion from the right to deduct VAT, which had been proposed and then rejected when the Sixth Directive was adopted; secondly, it constituted an indirect attempt to avoid the impact under national law of the judgment of the Conseil d'État in the Alitalia case, (46) which annulled certain provisions in the 1979 Decree.

54So far as concerns the principle of proportionality, Ampafrance submits that the contested provisions of Decision 89/487 introduce a general and systematic exclusion from the right to deduct VAT, without the need to show that there really is a risk of tax evasion or avoidance. Accordingly, in so far as they create an irrebuttable presumption that an exclusion from the right to deduct VAT is possible even when it is shown that there is no risk at all for the levying of the tax, the Community provisions in question are disproportionate to the objective pursued. Furthermore, according to Ampafrance, there are other measures in French law which would enable the tax authorities to deal effectively with the problem of tax evasion and avoidance. For example, Article 230(1) of Annex II to the CGI provides that VAT charged on goods and services which taxable persons acquire or obtain for themselves is deductible only if those goods and services are `necessary' to their business activity. The strict application of that rule would be enough to ensure fiscal legality and to make it possible to carry out effective tax inspections. Moreover, as Ampafrance points out, in French law there is an effective system for inspecting the expenditure concerned; it imposes the obligation to submit a detailed statement of general expenses with the fiscal year's results. Lastly, Ampafrance infers from the judgment in Case 324/82 Commission v Belgium (47) that the national measures to prevent tax evasion or avoidance may derogate from the general scheme of the Sixth Directive only within the limits which are strictly necessary to achieve that objective. Since there are measures which are less onerous for taxable persons than a general and systematic exclusion from the right to deduct VAT on the expenditure at issue, this exclusion is incompatible with Community law.

55To sum up, Ampafrance considers that Decision 89/487 does not fulfil the requirements of the principle of proportionality because it introduces, in a general and absolute way, an irrebuttable presumption of the existence of a risk of tax evasion and avoidance without the tax authorities having to show proof of the risk and without the taxable person being able to adduce evidence in rebuttal, although under French law there are less restrictive measures for dealing with this kind of situation.

(b) Sanofi

56Sanofi's observations have a similar basis: after having explained why the question referred for a preliminary ruling, which disputes the validity of an act of the Community institutions, is admissible, it concentrates its analysis on the issue of proportionality. It maintains that Decision 89/487 does not satisfy the requirements of the principle of proportionality because the objective pursued by the decision could be achieved by other means less prejudicial to the objectives of the Sixth Directive. It also believes that the case pending has similarities with Case 324/82 Commission v Belgium, (48) in which the Court held that national provisions derogating wholly and systematically from the rules of the Sixth Directive were disproportionate to the objective pursued. Furthermore, according to Sanofi's observations, the statement of reasons for Decision 89/487 is very brief and consequently does not explain why the derogation proposed by the French Republic had to be authorised. Those omissions in its statement of reasons mean that the proportionality of the decision adopted cannot be reviewed, and Decision 89/487 is therefore unlawful.

57Furthermore, Sanofi also refers to the corporation tax provisions in French law and points out that expenditure relating to accommodation, food, hospitality and entertainment is deductible from the taxable amount; in other words, so far as concerns corporation tax specifically, the possibility of deducting the expenditure in question is not considered by the French legislature as automatically constituting tax evasion or avoidance. Consequently, the introduction of an irrebuttable presumption of tax evasion or avoidance constitutes a disproportionate measure for protecting fiscal legality, inasmuch as this could have been ensured by an effective, specific inspection of the expenditure concerned. Sanofi believes that such a form of effective inspection is provided by Article 230 of Annex II to the CGI, under which any expenditure which is not incurred in the `interest' of the company may not be subject to a deduction in respect of VAT.

58Lastly, Sanofi puts forward two further arguments: first, it refers to the national law of a large number of Member States, under which the expenditure in question is deductible; it does not, therefore, understand the difficulties in controlling tax evasion and avoidance to which the French Government has referred and which the Council has conceded do exist. Secondly, it points out that the derogation at issue, which Decision 89/487 authorised the French Republic to introduce, is provisional in nature; nevertheless, the Council's inability to adopt the measures envisaged in the first subparagraph of Article 17(6) of the Sixth Directive is perpetuating that temporary situation and inevitably makes the derogation disproportionate to the objective pursued. In the light of the above considerations, Sanofi proposes that the Court should declare Decision 89/487 invalid.

(c) French Government

59The French Government points out, first, that the fundamental objective of the VAT system is to tax final consumption, not intermediate consumption which takes place in the course of another taxable activity. (49) However, in the case of certain categories of expenditure, it is not always easy to establish whether it is incurred to meet business or private needs, which is the criterion for establishing whether the consumption is final or intermediate. This difficulty suffices to pave the way for tax evasion or avoidance on the part of taxable persons, as the Commission has already pointed out in its proposals for the Sixth and Twelfth Directives. (50) This is also the reason why Article 27(1) of the Sixth Directive provided for the possibility of adopting special derogating measures to deal with the risk of tax evasion or avoidance. That being the case, in view of the risks of tax-free final consumption, particularly in respect of expenditure on accommodation, food, hospitality and entertainment, and of the difficulty in distinguishing between business and private expenditure, the French Government considers that Decision 89/487, at issue in this case, is wholly compatible with the objective defined in Article 27 of the Sixth Directive.

60The French Government also draws attention to the fact that, for the same reasons, most of the Member States implement similar measures. With regard specifically to its own case (France), it maintains that the judgment of the Conseil d'État in the Alitalia case (51) created a significant risk of tax evasion and avoidance on the part of undertakings and made it more difficult to monitor the purpose of the expenditure at issue, in so far as it encouraged undertakings to incur ever higher expenditure for the benefit of third parties.

61As regards the principle of proportionality, the French Government considers that Decision 89/487 meets the requirements of the principle, as set out in the case-law of the Court. It recalls in particular the view taken by the Court in its judgment in Molenheide and Others, (52) in which it held that `in accordance with the principle of proportionality, the Member States must employ means which, whilst enabling them effectively to attain the objective pursued by their domestic laws, are the least detrimental to the objectives and the principles laid down by the relevant Community legislation.' The French Government maintains that exclusion from the right to deduct VAT in respect of expenditure in relation to accommodation, food, hospitality and entertainment, for which Decision 89/487 provides, is limited to cases in which there is an actual risk of tax evasion or avoidance and which relate to circumstances in which it is impossible to determine whether the expenditure in question is of a business or private nature; on the other hand, Article 1(2) of Decision 89/487 lists the cases in which, because the expenditure in question is of a business nature, VAT may be deducted.

62According to the French Government, the exclusion from the right to deduct VAT, which is at issue in this case, is necessary since there are no other satisfactory means of monitoring the nature of the expenditure in question. For example, it is not possible to establish, from the receipts issued in the name of a company, the persons for whose benefit the expenditure has been incurred. Furthermore, to allow the relevant sums to be deducted on the basis of information supplied by the company itself would have the undesirable result of multiplying the legal and extralegal disputes relating to the real nature of the expenditure in question.

63The French Government also takes the view that a comparison of the situation before the Court in this case and the system in force in France, as regards corporation tax, is irrelevant, owing to the fundamental differences between that tax and VAT. VAT is a tax on final consumption and is based on a mechanism which ensures the neutrality of the tax; VAT deductions apply exclusively to expenditure incurred for the purpose of taxed operations. On the other hand, corporation tax and income tax are calculated on income or net profits, that is to say, gross sums from which the expenditure necessary to acquire the income or profits is deducted. Moreover, the French Government would consider arbitrary a solution which authorised the deduction of VAT on company expenditure on accommodation, food, hospitality, and so forth up to a certain amount. In any event, the French Government points out that the proportionate nature of Decision 89/487 has been the subject of an extensive review by the Commission and the Council, which fully satisfies the requirements of case-law.

64At the hearing, the French Government requested that the Court, if it ultimately held that Decision 89/487 was unlawful, should limit the effects of its judgment by declaring the decision invalid ex nunc; it based this request on the need to protect the legitimate expectations of the French authorities with respect to the lawfulness of the decision.

(d) Commission

65The Commission recalls the case-law of the Court of Justice relating to the application of the principle of proportionality in connection, specifically, with Article 27 of the Sixth Directive. It deduces from this that it would be contrary to Community law to impose restrictions on the right to deduct VAT in circumstances in which, first, it has been objectively proved that no tax evasion or avoidance can be attributed to the taxable person and, secondly, the restrictions introduced do not comprise derogations that are absolutely necessary in order to prevent the risk of tax evasion or avoidance. As regards the specific nature of the expenditure referred to in Decision 89/487, the Commission points out that the Sixth Directive excludes, in any event, the right to deduct VAT in respect of expenditure `which is not strictly business expenditure, such as that on luxuries, amusements or entertainment'. (53) It also refers to its proposal for the Sixth Directive, in which it pointed out that it was difficult, if not impossible, to distinguish between the business part and the private part of the expenditure in question.

66The Commission concludes, in the light of the foregoing considerations, that it was fully entitled to accept the reasons given by the French authorities that there was, in this case, a significant risk of breach of the VAT rules: companies are likely to incur expenditure, in the form of gifts or other benefits in kind, from which VAT should not be deducted because it is not connected to their activities, without its being established to what extent such expenditure relates to the company's management and staff or to third parties. Furthermore, the French authorities themselves have specified the circumstances in which there is no risk of tax evasion or avoidance and have omitted them from the exclusions from the right to deduct VAT; these are the circumstances listed in Article 1(2) of Decision 89/487.

67The Commission also points out that the temporary derogation authorised by Decision 89/487 applies, in actual fact, to circumstances in which there is a serious risk of tax evasion or avoidance. It considers that the risk is sufficiently proven, even though the statement of reasons for the decision is succinct. It refers, in particular, to certain specific cultural features of France, where some transactions are concluded `between the fruit and the cheese', which explains why other Member States, in which such matters are conducted very differently, have not provided for similar exclusions. The Commission adds that the disputed prohibition authorised by the Council has the advantage of clarity, simplicity and legal certainty, for both businesses and tax authorities. Consequently, the Commission maintains that the measures covered by Decision 89/487 are warranted and satisfy all the requirements of the principle of proportionality, that is to say, they are necessary, appropriate and proportionate, in the strict sense of the word.

68However, the Commission believes that the national authorities, when called upon to implement the general and vague measure approved by Decision 89/487, must carry out a specific review of tax situations, so as to distinguish the cases in which there is a genuine risk of tax evasion or avoidance from those in which it is possible to establish objectively that certain expenditure relating to accommodation, food, hospitality and entertainment is strictly business expenditure and is eligible for a deduction of VAT.

(e) Council

69In its observations, the Council argues that Decision 89/487 is lawful. It considers that the decision is justified because it is difficult, if not impossible, to ascertain effectively the nature (business or otherwise) of the expenditure in question. Moreover, according to the Council, the Community legislature's compliance with the principle of proportionality is apparent in the fact that Article 1(2) of Decision 89/487 stipulates the circumstances in which VAT on the expenditure in question may be deducted in so far as it is objectively proved that it is connected with the business activity of the company. The Council also points out that, under the provisions of the Sixth Directive, VAT is deductible only in respect of expenditure which is strictly business expenditure, which excludes VAT relating to expenditure on what might be described as `luxuries'. It also considers that Decision 89/487 is justified irrespective of whether it is established that there is an intention on the part of the taxable person to evade or avoid tax or whether there is tax evasion or avoidance. The mere fact that the nature of the expenditure concerned enables it to be used as a potential means of evading or avoiding tax, which is difficult for the tax authorities to monitor, is enough to justify the provisions in question. It is not certain that the use of another method of dealing with the problem, such as imposing a fixed limit on the amount of the deductions, would be more consistent with the objective of the Directive, that is, deduction of VAT on intermediate business expenditure; such a method might create discrimination between economic operators, which might result in a distortion of competition.

B - My view of the problems set out above

70First of all, I do not dispute that the combating of tax evasion and avoidance is a legitimate and important aim of any tax authority seeking to implement the objectives of the Sixth Directive and the proper working of the VAT mechanism. If that were not the case, the risk that taxation on final consumption might be evaded would be contrary to the very philosophy of the tax system in question.

71In that connection, the Community legislature provided for a fundamental distinction between expenditure of a strictly business character and that which is unconnected with the taxpayer's business activity, and has expressly excluded expenditure on luxuries, amusements or entertainment from the right to deduct VAT. Only strictly business expenditure may be considered to relate to goods or services `used [by the taxpayer] for the purposes of his taxable transactions', within the meaning of Article 17(2) of the Sixth Directive, and is therefore eligible for a deduction of VAT.

72That is where the problem lies in this case. There is, of course, expenditure which it is very difficult to categorise as business or other expenditure. Expenditure relating to accommodation, food, hospitality and entertainment, on which this analysis is concentrated, presents the greatest degree of difficulty in this respect, since its connection with a company's business activity is not clear, which may well facilitate tax evasion or avoidance. Indeed, this is why it has not been possible to adopt an overall legislative solution to the problem at Community level, as is evidenced by the difficulties encountered during the preparation of the Sixth and Twelfth Directives. (54) Even more so, for some of this expenditure it may well be impossible in practice to separate business expenditure entitled to deduction of VAT from private benefits which are subject to tax, when only a total exclusion from the right to deduct VAT makes it possible to safeguard the public interest, namely penalising certain kinds of unlawful conduct on the part of taxable persons. It should be pointed out, once again, that the proper working of the VAT mechanism developed by Community tax legislation obviously requires action to counteract any kind of tax evasion or avoidance; the Community legislature recognises this necessity when it allows the Member States to request and obtain from the Council authorisation to adopt, under Article 27 of the Sixth Directive, special measures for derogation from the general provisions of that directive in order to `prevent certain types of tax evasion or avoidance.'

73From the foregoing observations, it seems clear that the contested provisions of Decision 89/487 prima facie follow the logic of Article 27 of the Sixth Directive, inasmuch as they serve the objectives described in that article. However, it cannot necessarily be concluded from those observations that the provisions in question are in keeping with the overall objectives of the Sixth Directive and may be incorporated into the regulatory system which that directive creates. The problem is a consequence of the fact that, if the right to deduct VAT is excluded in respect of all expenditure on accommodation, food, hospitality and entertainment, with the sole exception of the three situations listed in Article 1(2) of Decision 89/487, it is excluded in respect of expenditure which may be shown to have a genuine connection with the production process of undertakings, that is to say, strictly business expenditure. Ampafrance cites the example of the expenditure incurred by a company in respect of hospitality for commercial representatives or customers when presenting its products for sale; it is indisputable that, up to a certain point, that expenditure is directly connected to the company's activities and cannot be regarded as final consumption.

74As a result, it is not impossible for the unqualified application of the system to exclude the right to deduct VAT introduced by Decision 89/487 to lead to the exclusion of the right to deduct VAT relating to company business expenditure; nor is that possibility disputed by those parties which maintain that the Community act under examination is lawful. In that way, however, the attempt to rectify a problem created by a possible malfunctioning of the procedure for charging VAT (risk of tax evasion or avoidance), has, at the same time, an adverse and equally serious effect on that tax system, since it subjects to the tax certain forms of intermediate consumption, contrary to the fundamental principle of tax neutrality. I think that, if the Sixth Directive is correctly interpreted and implemented, a tax mechanism problem cannot be resolved by resorting to a solution which is just as problematical from the point of view of compatibility with the fundamental rules governing the operation of the mechanism in question. In any event, an exclusion from the right to deduct VAT as wide and unqualified as the one at issue here is contrary to the objectives of that directive and upsets the balance of the provisions it contains. By that I mean that Article 27 of the Sixth Directive cannot be used as a weapon with which to undermine one of the bases of that directive, namely tax neutrality.

75In that connection, it is not irrelevant from a legal point of view that the contested Community provisions amount to the adoption of an irrebuttable presumption in respect of a given category of tax charges. In my view, the introduction of a presumption of that kind raises questions as to its compatibility with the fundamental rules of the Community legal order. The principle of the rule of law, the maintenance of equal treatment in tax matters and the guarantee of full and effective judicial protection - notions which are receiving greater and greater emphasis nowadays in the legal system constructed by the Community - are hardly compatible with the idea of introducing irrebuttable presumptions designed to provide a legal solution to specific problems such as the legal classification, from a tax point of view, of a category of expenditure. It is no accident that there is a tendency, in the national legal systems of the Member States, to consider `legal axioms' of this kind anticonstitutional. (55) Indeed, it is not certain that they are compatible with the principles of the European Convention on Human Rights, observance of which is expressly imposed by the EC Treaty. (56) Furthermore, there are indications in its case-law that the Court of Justice does not view the phenomenon of irrebuttable presumptions very favourably. (57)

76To these considerations may be added others concerning the principle of proportionality. It must be pointed out that the possibility of considering that the abovementioned irrebuttable presumptions are consistent with the general objectives of the Sixth Directive and do not by their nature raise any other issue of legality from a Community point of view has no bearing on the appraisals made with regard to the principle of proportionality. Irrespective of the manner chosen to resolve the problems at issue, it is necessary, if the legality of Decision 89/487 is to be upheld, for its provisions to be deemed necessary and appropriate to the achievement of the specific objective pursued and for them to affect the objectives and principles of the Sixth Directive as little as possible. (58)

77The method consisting of a general and unqualified exclusion of the right to deduct VAT in respect of a category of expenditure already seems problematical in the light of the principle of proportionality. The three exceptions to the general exclusion from the right to deduct VAT listed in Article 1(2) of Decision 89/487 do not prove - although there have been submissions to the contrary - that the French Republic, the Commission and the Council examined all the circumstances in which expenditure on accommodation, food, hospitality and entertainment constitutes strictly business expenditure, thus restricting the prohibition in paragraph 1 to what is absolutely essential to prevent tax evasion and avoidance. Furthermore, the statement of reasons for Decision 89/487, even when analysed in the light of the letter which the French Republic sent to the Council asking for the contested derogation, does not make it possible to understand the reasoning of the Community legislature when it excluded from the right to deduct VAT all the circumstances described in Article 1(1) of Decision 89/487, since they involved a risk of tax evasion or avoidance, and when it allowed VAT to be deducted in the circumstances listed in paragraph 2 of the same article. Moreover, it does not adequately explain why the prohibition in paragraph 1 is the only effective means of achieving the aim pursued, namely, to remedy situations of tax evasion or avoidance. More generally, the flaws in the statement of reasons for Decision 89/487 could alone constitute valid grounds for annulment.

78However, irrespective of the formal defect in the statement of reasons which I have just mentioned, I think that there are, in any event, strong grounds for believing that the national and Community authorities could effectively protect the public interest, which is to combat tax evasion and avoidance, by adopting measures with a less detrimental effect on the general system of the Sixth Directive. I do not have in mind the introduction of a provision under which the deduction of VAT in respect of expenditure on accommodation, food, hospitality and entertainment would be allowed only up to a given percentage of that expenditure; it is not absolutely certain that this would be the most effective solution. However, it might be possible to introduce a rebuttable presumption concerning the non-business nature of the expenditure concerned, a presumption which the taxable persons could negate by furnishing sufficient proof.

79Furthermore - and this is particularly important - French tax law provides for the opportunity to prove that expenditure of the same kind is business expenditure, in the context of corporation tax. I believe that some of the parties were wrong to maintain that the example taken from the corporation tax regime in force in France is not relevant to the case. The risk of tax evasion or avoidance resulting from the classification of certain expenditure on accommodation, food, hospitality and entertainment as expenditure linked to business activity, followed by its deduction from taxable income, profits, goods or services, is generally the same in the case of income tax or corporation tax as in the case of VAT. Consequently, it is not a logical consequence for the tax authorities, in the first case, to allow the expenditure concerned to be deducted from the taxable profits or income and, in the second case, to prohibit the deduction of VAT in respect of goods or services, on the ground that this distinction is dictated by the need to combat certain kinds of tax infringements.

80I do not, therefore, understand why it was necessary to formulate such an unqualified prohibition particularly for that specific category of expenditure, a prohibition which leaves taxable persons no latitude to furnish proof to the contrary, since the risk of tax evasion or avoidance which might be inherent in the deduction of the amounts concerned could be counteracted by milder means: for example, by a strict application of Article 230 of Annex II to the CGI, under which VAT may not be deducted in respect of any expenditure which is not incurred in the `interest' of the company, or even by adopting stricter provisions of a similar content, particularly for the category of expenditure at issue.

81In the light of all the foregoing conclusions, I consider that Council Decision 89/487 at issue here was not adopted in a manner consistent with the requirements of the fundamental principle of proportionality.

82Before concluding this part of my analysis, I think it is necessary to examine one of the Commission's submissions to the effect that the disputed provisions of Decision 89/487 are, in principle, consistent with Community law; however, when the national authorities implement them, they must specifically consider the extent to which each item of expenditure on accommodation, food, hospitality and entertainment is in fact unconnected with the taxable activities of the company and therefore comes under the heading of tax evasion or avoidance. The fact of the matter is that the Commission is trying to salvage the legality of the provisions in question by giving them an interpretation contra legem, which is not, however, possible. The provisions of Decision 89/487 expressly and absolutely exclude the deduction of VAT in respect of a certain category of expenditure without at the same time providing for any verification as to whether or not it is business expenditure and whether it represents a real danger to the proper working of the VAT system. That is the only possible interpretation of the provisions in question, taken directly from their wording, which is clear. Consequently, since, in accordance with the foregoing analysis, those provisions are contrary to the general system introduced by the Sixth Directive and to the principle of proportionality, they become inapplicable in the national and Community legal system.

83In that regard, I am called upon to examine the request made orally by the French Government concerning the limitation of the effects of the Court's judgment on the illegality of the Council decision at issue here. I think that this request should be denied for two reasons. Firstly, it is not possible, in my view, for a Member State to invoke the principle of protection of legitimate expectations in order to avoid the consequences of a judicial decision establishing the invalidity of a Community act. Such a solution does not flow from the principle of legal certainty, as happens in certain cases in which individuals entertain legitimate expectations created by the public authorities; rather it undermines the fundamental principles of legal certainty and the rule of law, since that solution deprives citizens of the possibility of effective protection against actions which, although taken by the administrative authorities in good faith, are based on illegal rules of law. Secondly, the principle nemo auditur propriam turpitudinem allegans means that the French Government may not escape the consequences of a judgment establishing the invalidity of Decision 89/487, since it contributed itself, by its request to the Council and in its general attitude, to the adoption of the decision the unlawful content of which is at issue.

84However, in order to reply to the question referred for a preliminary ruling, it is not enough to express a negative conclusion with regard to the legality of Decision 89/487. As I have observed in previous points in my analysis, (59) establishing that Decision 89/487 has irreparable flaws and is invalid raises the question as to the tax law applicable to the disputes in question. Owing to the fact that the current national legislation, as set out in the French Decree of 14 December 1989, (60) now has no legal basis once it is established that Decision 89/487 is invalid, it is necessary to apply - in so far as they are not incompatible with Community law - the provisions designated by the national law in accordance with its own rules. (61)

85From the point of view of Community law, it remains to reply to the question concerning the way in which the standstill clause in Article 17(6) of the Sixth Directive will be applied again, if indeed it may be applied again. As has already been pointed out, (62) the clause concerned related, in France, to Decree No 67-604 of 1967. However, could the fact that the cases previously covered by the 1967 Decree (63) also came within the field of application of Decision 89/487 be interpreted as meaning that the Decree had already ceased to be applicable when the French Republic requested the adoption of Decision 89/487, and that, if Decision 89/487 is removed from the body of applicable Community tax law provisions, the French Republic will then be prevented from reinvoking the 1967 Decree and, by extension, the standstill clause in Article 17 of the Sixth Directive?

86I think that this question should be answered in the negative. The French Republic introduced a special tax system excluding a given category of expenditure from the right to deduct VAT; this system was set out in the 1967 Decree. The provisions concerned were not affected either by the adoption of Decree No 79-1163 of 1979, amending the previous legislation, or by Decree No 89-885 of 1989, which followed Decision 89/487. The French Republic merely tried to extend the system of exclusions in question in a way which - as emerges from the foregoing analysis - is contrary to the requirements of the Sixth Directive. This shows that it was the firm intention of the French authorities to retain the initial exclusions from the right to deduct VAT and not to abandon the idea of using the standstill clause in Article 17 of the Sixth Directive. For that reason, I believe that, if Decision 89/487 is declared invalid, the effect will not be to deprive the French Republic of the advantages it has already gained from application of the standstill clause in question. Furthermore, it should be pointed out that the actions taken by that State hitherto cannot be regarded as prejudicing legal certainty.

87Finally, in order to help the national court, I think it is appropriate to offer the following clarification. To give an appropriate ruling in the pending cases, it is necessary to determine the precise field of application of the exclusions from the right to deduct VAT which the 1967 Decree had introduced. Did the exclusions relate only to expenditure on accommodation, food, hospitality and entertainment which was not business expenditure, as Ampafrance maintains, or did they comprehensively cover certain expenditure, whether or not it was business expenditure, as appears to be inferred from a literal interpretation of the provisions in question? Of course, this problem falls exclusively within the jurisdiction of the national court.

88For my part, I would merely recall the aforementioned case-law of the Court of Justice, (64) according to which the discretion enjoyed by a Member State which wishes to retain, by virtue of the standstill clause in Article 17 of the Sixth Directive, the exclusions from the right to deduct VAT which were applicable before the Directive came into force, is particularly wide; the exclusions may also relate to expenditure which is strictly business expenditure. However, that weakens the principle of tax neutrality and the logic underlying the tax system of the Sixth Directive. This gives rise to the following inconsistency: although Community law provides, in principle, for the deduction of VAT on the business expenditure incurred by companies, that deduction may be excluded by national provisions which predate the Sixth Directive. However, that inconsistency, which clearly is not conducive to improving the Community and national tax system, can be eliminated only if the Council adopts legislative measures in respect of the problem at issue.

VII - Conclusion

Conclusion

89In the light of the above, I propose that the Court reply as follows to the questions referred for a preliminary ruling:

Council Decision 89/487/EEC of 28 July 1989 authorising the French Republic to apply a measure derogating from the second subparagraph of Article 17(6) of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes, is unlawful.

(1) - OJ 1989 L 239, p. 21.

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

(3) - Bulletin of the European Communities, supplement 11/73.

(4) - COM (82) 870 final (OJ 1983 C 37, p. 8).

(5) - COM (98) 377 final (OJ 1998 C 219, p. 16).

(6) - JORF of 28 July 1967, p. 7541.

(7) - JORF of 31 December 1979, p. 3333.

(8) - JORF of 15 December 1989, p. 15578.

(9) - As regards the principle of tax neutrality, see Case 268/83 Rompelman [1985] ECR 655; Case C-110/94 Inzo [1996] ECR I-857; and Case C-37/95 Ghent Coal Terminal [1998] ECR I-1, which are cited by Ampafrance.

(10) - Case 50/87 Commission v France [1988] ECR 4797.

(11) - Ibidem, paragraph 15. Emphasis added.

(12) - Ibidem, paragraph 16.

(13) - Ibidem, paragraph 19. In that judgment the Court ultimately held that the French fiscal system, which, for undertakings that let immovable property which they had acquired or had built, limited the right to deduct value-added tax paid on inputs where the amount of the proceeds of the letting of such immovable property was less than one fifteenth of its value, was contrary to the applicable Community tax rules.

(14) - Case 165/86 Intiem [1988] ECR 1471.

(15) - Ibidem, paragraph 14.

(16) - It must be pointed out, however, that Article 17 cannot be interpreted so widely as to extend the right to deduct VAT to circumstances or economic activities which do not fall clearly within the scope of that article. For example, in Case C-4/94 BLP Group [1995] ECR I-983, the Court held that, `to give the right to deduct under paragraph 2, the goods or services in question must have a direct and immediate link with the taxable transactions, and ... the ultimate aim pursued by the taxable person is irrelevant in this respect' (paragraph 19). Accordingly, except in the cases expressly provided for by the Community directives relating to VAT, `where a taxable person supplies services to another taxable person who uses them for an exempt transaction, the latter person is not entitled to deduct the input VAT paid, even if the ultimate purpose of the transaction is the carrying out of a taxable transaction' (paragraph 28).

(17) - Case C-62/93 BP Supergas [1995] ECR I-1883.

(18) - Ibidem, paragraph 16.

(19) - Ibidem, paragraph 18.

(20) - Case C-43/96 Commission v France [1998] ECR I-3903.

(21) - Paragraph 18 of Case C-43/96 Commission v France, cited in footnote 21.

(22) - Case C-305/97 Royscot and Others [1999] ECR I-6671.

(23) - Ibidem, paragraph 23.

(24) - Ibidem, paragraph 24.

(25) - See paragraph 19 of the Court's judgment in Royscot, cited in footnote 23: `During the hearing, the Commission submitted that it follows from the judgment in Case C-43/96 Commission v France [1998] ECR I-3903 that the United Kingdom had in fact been initially authorised to retain the exclusions from the right of deduction in question. However, the Commission argues, the United Kingdom lost that right following an amendment of national law which was contrary to the standstill clause in Article 17(6) of the Sixth Directive.'

(26) - However, I should mention two other judgments of the Court of Justice which relate to the matter of the interpretation of the standstill clauses in the Sixth Directive. In Case C-74/91 Commission v Germany [1992] ECR I-5437, the German Government had invoked the transitional provisions of Article 28(3) of the Sixth Directive, which authorise the Member States to continue to exempt certain activities from VAT by way of derogation from the common provisions contained in the Sixth Directive, and under which, the German Government contended, German legislation governing the taxation of travel agencies ought to be considered compatible with Community law. However, the Court held that, since Germany had not, and did not deny that it had not, maintained, for the various transactions performed by travel agencies, the general VAT scheme applicable before the Sixth Directive came into force, but had adopted a special tax scheme, it could no longer rely on the standstill clause. In other words, according to the judgment in question, it is possible, in certain circumstances, for a Member State to lose the benefit of the advantages to which it is entitled under a standstill clause in the Sixth Directive if it has amended its original legislation, that is, the legislation in whose favour the standstill clause could have operated.Nevertheless, in its more recent judgment in Case C-136/97 Norbury Developments [1999] ECR I-2491, which also concerned the interpretation and application of the standstill clause in Article 28(3)(b) of the Sixth Directive, the Court took care to concede that it was possible for Member States to retain the advantages provided by the standstill clause if, by a subsequent measure, they only partly amended the national scheme which was in force prior to the adoption of the Sixth Directive. It observed that to construe a standstill clause narrowly, to the effect that a Member State may maintain the legal system existing at the time of the adoption of the Sixth Directive, but may not limit its scope or abolish it, even only partially, would have adverse effects for the uniform application of the Sixth Directive (see paragraph 20 of the judgment in Norbury Developments).It is evident from the aforementioned judgments that, where a Member State has applied a standstill clause in the Sixth Directive to retain the national legislation adopted before the Sixth Directive came into force, it may introduce amendments or limitations to that legislation, on condition, however, that those amendments are not in breach of the fundamental principle of legal certainty. An example of such an extreme case would be where a Member State has obviously abandoned its legislation applicable before the Sixth Directive came into force, particularly by drawing up new legislation, and then invokes the standstill clause to revive the provisions originally applicable. Apart from that case, however, the powers conferred on the Member States by the standstill clause are not necessarily withdrawn from them merely because they have amended the national scheme which has been retained by virtue of the clause.

(27) - See points 9 and 10 of this Opinion.

(28) - The first subparagraph of Article 17(6) of the Sixth Directive. I should say that, in my opinion, such inefficiency may justify an action against the Council under Article 232 EC.

(29) - Paragraph 19 of the judgment in Case C-43/96 Commission v France, cited in footnote 21, and paragraphs 14 to 19 of the Opinion delivered in that case by Advocate General Jacobs.

(30) - Points 74 to 77 of the Opinion delivered by Advocate General Léger in Case C-305/97 Royscot and Others, cited in footnote 23.

(31) - Judgment in Case 324/82 Commission v Belgium [1984] ECR 1861.

(32) - Case 5/84 Direct Cosmetics v Commissioners of Customs and Excise [1985] ECR 617.

(33) - Joined Cases 138/86 and 139/86 Direct Cosmetics and Laughtons Photographs v Commissioners of Customs and Excise [1988] ECR 3937 (hereinafter `Direct Cosmetics II').

(34) - Ibidem, paragraph 36.

(35) - Ibidem, paragraph 48.

(36) - Ibidem, paragraph 44.

(37) - Cited in footnote 18.

(38) - Ibidem, paragraph 22.

(39) - Case C-63/96 Skripalle [1997] ECR I-2847.

(40) - Ibidem, paragraph 24.

(41) - Ibidem, paragraph 26.

(42) - It invokes, in particular, the judgments of 9 July 1977 in Chaussures Myris and 13 February 1980 in SA Locafrance.

(43) - See, above, the arguments developed on this point by Ampafrance and the case-law of the Conseil d'État to which that party refers (point 37 of this Opinion).

(44) - That solution is also supported by a literal interpretation of the 1967 Decree, from which it seems clear that, although the accommodation expenses of the management and staff of undertakings are excluded altogether from the right to deduct VAT, the other, related expenditure (food, entertainment, etc.) is excluded only if it is incurred in connection with the `private needs' of the workers.

(45) - See the judgment in Skripalle, cited in footnote 40, paragraph 30.

(46) - See point 14 above.

(47) - Cited in footnote 32.

(48) - Cited in footnote 32.

(49) - The French Government refers Case C-165/88 ORO Amsterdam Beheer [1989] ECR 4081, paragraph 20.

(50) - See points 9 and 10 of this Opinion.

(51) - See point 14 above.

(52) - Joined Cases C-286/94, C-340/95, C-401/95 and C-47/96 [1997] ECR I-7281, paragraph 46.

(53) - The second subparagraph of Article 17(6) of the Sixth Directive.

(54) - See points 9 and 10 of this Opinion.

(55) - In this case, I shall merely cite the example of Greece, where the Simvoulio tis Epikratias (Council of State), although it had initially considered irrebuttable tax presumptions to be constitutional in certain circumstances (StE 434/1983, EDD 1984, 75), has finally held that a tax presumption of the existence of an income is compatible with constitutional rules if `that presumption is rebuttable as a matter of law ... and the party concerned still has the opportunity to show that he received an income lower than that resulting from the presumption' (StE 1694/1900, NoV 39, p. 153, ToS 1990, p. 493, DD 1990, p. 1189). Legal theory always adopted a negative attitude towards irrebuttable presumptions: see, by way of illustration, Bei, `Ôá áìÜ÷çôá ôåêìÞñéá åßíáé áíôéóõíôáãìáôéêÜ' (Irrebuttable presumptions are unconstitutional), D. 9, p. 761; Kypraios, `Ôá áíôéóõíôáãìáôéêÜ áìÜ÷çôá ôåêìÞñéá ôïõ Í. 820/9978' (The unconstitutional irrebuttable presumptions of Law No 820/9978), DFN 1980, p. 679; Paulopoulos, `Ç áíáäñïìéêüôçôá ôùí öïñïëïãéêþí íüìùí' (The retroactive nature of tax laws), DFN 1991, p. 1733, 1740, and Dellis, `Ç óõíôáãìáôéêüôçôá ôïõ áíôéêåéìåíéêïý ðñïóäéïñéóìïý ôïõ öïñïëïãçôÝïõ åéóïäÞìáôïò' (The constitutionality of objective determination of taxable income), DFN 1996, p. 841.

(56) - Even though the Strasbourg Court did not deal specifically with the matter of irrebuttable tax presumptions, it appears that the adoption of this kind of presumption is contrary to the right to bring an action before an independent and impartial legal authority, in order to obtain a `fair hearing', a right guaranteed by Article 6(1) of the ECHR, which has been interpreted in the well-known judgments of 29 April 1988 in Belilos, Series A No 132; 17 January 1970 in Delcourt, Series A No 11; and 25 March 1983 in Minelli, Series A No 62. Moreover, it is no accident that the same court has equated certain fiscal penalties imposed by the administrative authorities to the `criminal charges' of Article 6 of the Convention.

(57) - Case C-208/88 Commission v Denmark [1990] ECR I-4445 and Case C-367/88 Commission v Ireland [1990] ECR I-4465. In those judgments the Court held to be contrary to existing Community law a national measure introducing an allowance for beer imported in the personal luggage of travellers, but limited to a certain amount; the Court considered that the contested measure raised an irrebuttable presumption that the importation had a commercial character and was thereby contrary to the provisions of Council Directive 69/169/EEC of 28 May 1969 on the harmonisation of provisions laid down by law, regulation or administrative action relating to exemption from turnover tax and excise duty on imports in international travel (OJ, English Special Edition 1969 (1), p. 232). As Advocate General Darmon pointed out in his Opinion in the abovementioned cases, `Compliance with Directive 69/169 ... therefore involves on-the-spot verification of a practical nature on the part of the national authorities, which may make it possible for the non-commercial nature of an importation of a seemingly large number of litres of beer to be taken into consideration. ... In fact, it seems that the customs authorities of the Member States are quite capable of organising some degree of appropriate verification. As the Commission acknowledged at the hearing, it seems reasonable, and in conformity with the Directive, for customs officers to be able to presume that over and above a certain quantity an importation has a commercial character, without barring a traveller altogether from furnishing proof to the contrary. The issue here is the difference which exists between laying down a mandatory rule, which precludes consideration of specific situations, and laying down ... a quantitative criterion which permits a presumption to be raised without, however, preventing it from being rebutted. ... Accordingly, there would seem to be some scope for an orderly application of the Directive which does not go too far and seek to achieve the impossible, namely verification of each individual case, and which does not undermine the very core of the Community system ...' (points 18 and 19).

(58) - See point 34 of this Opinion.

(59) - See point 47 of this Opinion.

(60) - See point 15 of this Opinion.

(61) - It should be noted, however, that if the 1989 Decree is set aside, it will be necessary to revive the immediately previous legislation, the 1979 Decree, which applies only in so far as it is not incompatible with the rules of the Sixth Directive; this means that the solution adopted by the Conseil d'État in the Alitalia judgment (cited in point 14 above) again acquires significance.

(62) - See point 12 of this Opinion.

(63) - I refer to my analysis in points 45 et seq. of this Opinion.

(64) - See points 24 et seq. of this Opinion.