C-181/78 Van Paassen

Legal context and the dispute

2 A Member State has adopted a system after entering into the consultations to such as that referred to in the fourth which reference is made in Article 16 paragraph of Point 2 "Regarding of the directive, even though it has Article 4" of Annex A to Directive not defined the concept of an underNo 67/228/EEC if it has laid down taking otherwise than as "any person in its legislation that turnover tax shall who independently carries on be levied inter alia on the supply of business".

goods and services by undertakings,

In Joined Cases 181 and 229/78

REFERENCES to the Court under Article 177 of the EEC Treaty by the Hoge Raad [Supreme Court] of the Netherlands for a preliminary ruling in the proceedings pending before that court (in Case 181/78) between

Ketelhandel P. van Paassen B.V., Wateringen (Netherlands)

and

Staatssecretaris van Financiën [Secretary of State for Finance] / Inspecteur der Invoerrechten en Accijnzen [Inspector of Customs and Excise], The Hague,

and (in Case 229/78) between

Minister van Financiën [Minister for Finance], The Hague,

and

Denkavit Dienstbetoon B.V., Voorthuizen (Netherlands),

on the interpretation of the Second Council Directive (No 67 /228/EEC) of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value-added tax (Official Journal, English Special Edition 1967, p. 16) in particular Article 4 thereof and Point 2 "Regarding Article 4" of Annex A thereto, VAN PAASSEN v STAATSSECRETARIS VAN FINANCIËN THE COURT composed of: H. Kutscher, President, J. Mertens de Wilmars and Lord Mackenzie Stuart (Presidents of Chambers), P. Pescatore, M. Sørensen, A. O'Keeffe and A. Touffait, Judges,

Advocate General: G. Reischl Registrar: A. Van Houtte

gives the following JUDGMENT

Facts and Issues The facts of the case, the course of the procedure and the observations submitted pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the EEC may be summarized as follows:

I — Facts and procedure

Article 4 of the Second Directive on the harmonization of turnover taxes provides:

" 'Taxable person' means any person who independently and habitually engages in transactions pertaining to the activities of producers, traders or persons providing services, whether or not for gain".

The expression "independently" is defined in Point 2 "Regarding Article 4" of Annex A as follows:

"This expression also makes it possible for each Member State not to consider as separate taxable persons, but as one single taxable person, persons who, although independent from the legal point of view, are, however, organically linked to one another by economic, financial or organizational relationships. Any Member State intending to adopt such a system shall enter into the consultations mentioned in Article 16".

The following provisions are made for those consultations:

"Where a Member State must, in accordance with the provisions of this Directive, enter into consultations, it shall refer the matter to the Commission in good time, having regard to the application of Article 102 of the Treaty".

The Netherlands introduced the measures provided for in the Directive by means of the Turnover Tax Law 1968 [Wet op de Omzetbelasting 1968] Article 7 of which provides that: " 'Undertaking' means any person who independently carries on business".

This concept of an "undertaking", involving also the concept of a "single entity for tax purposes", lies at the root of the two cases which the Hoge Raad has referred to the Court.

In Case 229/78, Minister van Financiën v Denkavit Dienstbetoon B.V., the following facts are common ground: As from 1973 Denkavit Dienstbetoon B.V., which was formed in 1964 and whose objects include trade in cattle, bought and sold calves in the capactiy of a commission agent on behalf of Denkavit Nederland B.V.. The main activity of the latter company is the production and sale of milk for calves. The two companies are managed by the same persons, and they both belong to a group of some 20 companies whose shares are held by two family groups (Buys and Pesch). Thus Denkavit Dienstbetoon B.V. (hereinafter referred to as "the Company") bought new-born calves from cattle dealers in its own name but on behalf of Denkavit Nederland B.V., and it sold calves fattened by Denkavit Nederland B.V. to third parties. In the tax period 1973 to 1974, the Company — regarding itself as a separate undertaking pursuant to Article 3 (5) of the Law of 1968, which provides that "goods . . . which are supplied through a commission agent or similar undertaking ... shall be deemed to be supplied to and then by that undertaking" — paid turnover tax of 4°/o on the turnover net of tax, which represents 3.85% of the gross selling price including tax, and it deducted input tax of 4.25% of the purchase price in accordance with the Law. Thus the Company claimed and obtained repayment of an amount equal to the difference between 4.25% and 3.85% of the prices at which it had effected the purchases and sales in question.

The Inspecteur took the view that this repayment was not justified, and imposed an additional assessment contending that he did not consider the Company to be a separate undertaking

2066 within the meaning of the Law. In reliance upon Article 3 (5) of the Law, the Company lodged an objection dated 11 May 1976 against this assessment. The Inspecteur rejected this objection by a decision of 24 June 1976, against which the Company brought an appeal before the Gerechtshof [Regional Court of Appeal] Amsterdam, which upheld the appeal in Judgment No 1298/76 of 5 October 1977. On 20 December 1977 the Minister van Financiën [Minister for Finance] appealed against this judgment on a point of law to the Hoge Raad [Supreme Court of the Netherlands], which by a judgment of 11 October 1978 asked the Court of Justice, pursuant to Article 177 of the EEC Treaty, to give a ruling on four questions concerning the interpretation of the Second Council Directive on the harmonization of turnover taxes:

"1. Has a Member State adopted a system such as that referred to in Point 2 'Regarding Article 4' of Annex A to the Second Directive, if it has laid down by a Law that turnover tax shall be levied interalia on the supply of goods and services by undertakings and if the concept of an undertaking is not subsequently defined in that Law more closely than as 'any person who independently carries on business', while from the preparatory stages of the Law prior to its coming into force it is clear that the concept of an undenaking can also cover a combination of persons who, although independent from the legal point of view, are, however, organically linked to one another by economic, financial and organizational relationships?

2. If Question 1 is answered in the negative: Are the national courts nevertheless at liberty, in applying the Law, to interpret the concept of an undertaking in the aforesaid manner as intended by the national legislature?

VAN PAASSEN v STAATSSECRETARIS VAN FINANCIËN

3 If Question 1 is answered in the affirmative: Did the Netherlands enter into the consultations to which reference is made in Point 2 'Regarding Article 4' of Annex A to the Second Directive?

4 If Question 3 is answered in the negative: What are the consequences for the national courts of this lack of consultation? In particular, are they at liberty, in applying the Law, to interpret the concept of an undertaking in the aforesaid manner as intended by the national legislature?".

In Case 181/78, Ketelhandel P. van Paassen B.V. v Staatssecretaris van Financiën [Secretary of State for Finance], the following facts are common ground: Ketelhandel P. van Paassen B.V. (hereinafter referred to as "van Paassen") carries on trade in boilers. It bought its boilers from Circula N.V., Stiens, (hereinafter referred to as "Circula") which was declared insolvent. Through its wholly-owned subsidiary S.K.S. Siller en Jamart N.V., van Paassen owned all the shares in Circula.

In September and October 1971, van Paassen had deducted as input tax the tax included in the price of the boilers sold to it by Circula. After an investigation, the Inspecteur sent van Paassen on 20 December 1973 an additional assessment concerning the amount of the tax which, in his opinion, had been wrongfully deducted because van Paassen and Circula were to be regarded as a "single entity for tax purposes". Van Paassen lodged an objection, which the Inspecteur rejected on 29 November 1974 again on the ground that the two companies constituted -a "single entity for tax purposes".

Following the appeal brought by van Paassen on 24 January 1975, the Second Chamber of the Tariefcommissie [administrative court of last instance in revenue matters] on 1 February 1977 upheld the Inspecteur's decision. Van Paassen appealed on a point a law, and by a judgment of 6 September 1978 the Hoge Raad asked the Court of Justice, pursuant to Article 177 of the EEC Treaty, to give a preliminary ruling on the same four questions as in the preceding case.

The judgments referring the cases were lodged at the Registry of the Court of Justice on 13 October and 11 September 1978 respectively.

Written observations were submitted pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the EEC by the two companies (hereinafter referred to as "the Companies"), the Government of the Netherlands, the Commission of the European Communities and the Government of the Federal Republic of Germany.

By an order of 13 December 1978 the Court decided to join the cases for the purpose of the procedure.

Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry.

II — Observations submitted pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the EEC

Question 1

The Companies maintain that it follows from the provisions of the Second Directive at issue that Article 4 thereof lays down a fundamental rule, to which Point 2 of Annex A provides an exception. Thus everyone is in principle a separate taxable person, and a Member State can introduce the system of the "single entity for tax purposes" only by expressly applying the special, exceptional provision laid down in Point 2 of Annex A. In reliance upon the case-law of the Court of Justice (in particular the judgments in Cases 94/77 Fratelli Zerbone [1978] ECR 99; 79/72 Commission v Italy [1973) ECR 667; 52/75 Commission v Italy [1976] ECR 277; 123/76 Commission v Italy [1977] ECR 1449; 38/77 Enka [1977] ECR 2203; and 95/77 Commission v Netherlands [1978] ECR 863) the Companies submit that the binding nature of directives on the Member States has been acknowledged, and that therefore the Member State in the present case may regard persons who are linked to one another as a single taxable person only if:

— it formally proposed to adopt such a system;

— it entered into the consultations mentioned in Article 16, and the Commission did not raise any objection to the adoption of the proposed system;

— and finally, it expressly adopted such a system.

According to the three conditions laid down in the Directive, the Netherlands had to make express legal provision for any additional system which might have been specially adopted.

Furthermore, the Companies consider that the Netherlands Law at issue must

2068 in no circumstances be interpreted in terms of the concept of an undertaking contained in the old Netherlands Law of 1954 but only in terms of the Directive, having regard to its binding nature demonstrated above.

If interpretation were in terms of the old Netherlands Law, it would necessarily lead a priori to a divergent interpretation in the different Member States. Through the Directive, the concept of an "undertaking" in Article 7 (1) of the present Law was automatically given a new content.

The Companies continue their line of argument by reference to German legislation, which made express provision for the "Organschaft" [single entity for tax purposes] in a separate paragraph. Thus the conclusion must be drawn that where there is no express provision on the single entity for tax purposes — such as that contained in Article 2 (2) (2) of the German Umsatzsteuergesetz [Turnover Tax Law] — as is the case with the Netherlands Law, it must be deemed that no system such as that referred to in Point 2 "Regarding Article 4" of Annex A to the Directive, has in fact been adopted.

Finally, the Companies submit that the Netherlands did not even legally propose to adopt a system involving the single entity for tax purposes, since the consultations provided for in Article 16 of the directive did not take place, and that therefore the question should be answered as follows:

"A Member State may adopt a system such as that referred to in Point 2 'Regarding Article 4' of Annex A to the Second VAT Directive only under the conditions as to substance and as to form VAN PAASSEN v STAATSSECRETARIS VAN FINANCIEN which are laid down in that Directive. In the circumstances described by the national court making the reference, such a system cannot be held to have been adopted".

The Commission takes the view that the Second Directive left the Member States a wide area of discretion, and that the institution of the single entity for tax purposes appears to be a long standing concept in Netherlands case-law and theoretical writing. Therefore it does not seem necessary for the concept of an undertaking appearing in Article 7 (1) of the Turnover Tax Law 1968 to be defined expressly as is done in Point 2 of Annex A to the directive.

The Commission also points out the Sixth Council Directive on the harmonization of legislation of Member States concerning turnover taxes (No 77/388/ EEC, Official Journal 1977 No L 145, p. 1) which empowers Member States to opt expressly for the German system of the "Organschaft", which constitutes an exception to the normal system. In that case it is therefore no longer a question of a broad interpretation of the general concept of a taxable person. Consequently, the Commission considers that Question 1 should be answered as follows:

"It can be acknowledged that the Kingdom of the Netherlands has adopted a system in accordance with Article 4 of and Point 2 'Regarding Article 4' of Annex A to the Second Directive on VAT, even though only the preparatory stages of the Turnover Tax (VAT) Law 1968 show that the definition of the concept of an 'undertaking' in Article 7 (1) of that Law also covers a combination of persons who, although independent from the legal point of view, are, however, organically linked to one another by economic, financial and organizational relationships".

The Netherlands Government makes the preliminary observation that Case 181/78 concerns the retroactive levying of turnover tax in respect of periods in 1971; and that since in its judgment of 2 February 1977 the Hoge Raad has already held that the common value-added tax system defined in the Second Council Directive did not come into force until 1 January 1972, it may well be asked whether the questions raised in the present case merit any attention.

The Netherlands Government answers the first two questions very briefly, by insisting on the need to maintain in its entirety the principle of the single entity for tax purposes, because it constitutes a firmly established concept in the practice of the levying of value-added tax, and expresses the view that the Second Directive in no way prevents that principle from being retained in force.

The Government ofthe Federal Republic ofGermany draws the Court's attention to the fact that this question raises complex problems which may result from the relatively broad powers of interpretation of the courts in certain Member States. Thus, having regard to the possibilities for the interpretation of vague legal concepts, the Government of the Federal Republic of Germany takes the view that preliminary consultations cannot be contemplated, because it would be neither reasonable nor practical to enter into consultations on the possible interpretations conceivable in theory which might be developed by subsequent case-law but which at the time of enactment of the law were still entirely uncertain or not even foreseeable.

Question 2

The Companies rely on the theory of the direct effect of directives in order to answer this question.

After recalling the principles developed by the Court in the course of its case-law (Case 34/73 Variola [1973] ECR 981; Case 9/70 Franz Grad [1970] ECR 825; Case 41/74 Yvonne Van Duyn [1974] ECR 1337; Case 51/76 VNO [1977] ECR 113; and Case 38/77 Enka [1977] ECR 2203, cited above) they apply them to the Second Directive, and conclude that the national court must establish whether the national measure in question exceeds the Member States' margin of discretion. Finally, they recall that in Case 111/75 (Mazzalai [1976] ECR 657) Mr Advocate General Reischl stressed that "the value-added tax Directive ... is intended to bring about the widest possible harmonization of the law on value-added tax. It is therefore to be assumed that the Directive uses the most precise concepts possible and is designed to be as complete as possible"; and that the Court of Justice held in Case 51/76 (VNO, cited above) that the interpretation, in general terms, of an expression appearing in the VAT Directive could not be left to the discretion of each Member State.

Consequently, the concept of an "undertaking" must be interpreted strictly according to the provisions of the Directive, and since — as was shown in the answer to Question 1 — the special system in Point 2 "Regarding Article 4" of Annex A was not adopted, the principle of the single entity for tax purposes cannot be applied. All the more

2070 so as that principle deprives undertakings of the power to deduct input tax for which provision is made in Article 11 of the Directive and is one of the essential components of the VAT system.

Therefore the Companies conclude that the provisions of the Directive, which have direct effect, give the taxable person the right to deduct input tax in respect of his purchases. That right can be restricted only when, in accordance with Point 2 "Regarding Article 4" of Annex A to the Directive, the Member State has adopted special rules in that connexion for the single entity for tax purposes. As those special rules have not been adopted — if Question 1 is answered in the negative — there is. nothing to prevent the exercise of the right to deduct input tax in respect of transactions with linked undertakings, and the national court is obliged to protect the rights which individuals derive from the provisions of that Directive. Therefore the answer should be the following:

"It follows from the binding legal nature of the Second VAT Directive and the direct effect of the relevant provisions of that directive that persons who are linked to one another by economic, financial or organizational relationships must — in the absence of a system such as that referred to in Point 2 'Regarding Article 4' of Annex A — be regarded as separate taxable persons within the meaning of Article 4 and the national courts are not at liberty to interpret the concept of an undertaking in any other manner".

The Commission merely states that, as VAN PAASSEN v STAATSSECRETARIS VAN FINANCIEN follows from its observations on Question 1, Article 4 of the Second Council Directive of 11 April 1967, interpreted in the light of Point 2 of Annex A thereto, allows the principle of the single entity for tax purposes to be used in the field of turnover taxes; and it proposes that this question should be answered as follows:

"The Netherlands courts may interpret the concept of an undertaking in the manner indicated in Question 1 as intended by the national legislature, since that concept is not contrary to the provisions of the Second Council Directive of 11 April 1967 concerning VAT".

Question 3

The Companies Are of the opinion that Questions 3 and 4 must also be dealt with if Question 1 is answered in the negative and Question 2 in the affirmative.

Before giving a direct answer to the question raised, the Companies analyse the case-law of the Court concerning the consultation procedures under the Treaty, and above all the interpretation of Article 102 of the EEC Treaty given by the Court in Case 6/64 (Costa v ENEL [1964] ECR 585) in which it declined to hold that Article 102 had direct effect. However, they consider that, although Article 16 of the Directive refers to Article 102 of the EEC Treaty, there is otherwise no reason to assume that the consultation procedure within the framework of the Directive has the same optional nature — at least as regards individuals — as that referred to in Article 102 of the Treaty.

Examination of the wording of Article 16 shows that it contains a concrete consultation procedure which does not leave the Member States any discretion regarding the circumstances in which it must be applied. Moreover, in the field of harmonization, the Court has held (Case 33/70 SACE [1970] ECR 1213) that directives have legal consequences for individuals.

Consequently, the Companies take the view that even though Article 16 of the Directive refers to Article 102 of the EEC Treaty, it is none the less necessary to examine the consultation procedure within the framework of the binding law of directives; and this opinion is confirmed by the case-law of the Court (Case 5/77 Tedeschi v Denkavit [1977] ECR 1555; Case 5/73 Balkan Import [1973] ECR 1092; Case 31/74 Galli [1975] ECR 47).

On the basis of the principles thus defined, the Companies submit that three conditions must be fulfilled before the consultation procedure can be regarded as having been lawfully applied:

(a) The Member State must have expressly referred to the Commission the problem for which consultation is required, and expressly pointed out that it is a question of consultations of the kind concerned.

(b) The Commission — in accordance with the second sentence of Article 102 (1) of the EEC Treaty — must have consulted the other Member States and recommended to the Member State concerned measures as may be appropriate to avoid any distortion.

(c) It must be clearly apparent to those coming under the law that the consultation procedure has in fact been applied, and this must then emerge for example from the preparatory stages of the law in question.

According to the Companies, the importance of express and correct application of the consultation procedure is obvious: first, because the Commission can thus carry out its task; secondly, because every taxpayer must be able to check whether the tax provisions which impose a duty on him have been adopted legally, hence in accordance with the consultation procedure.

The preparatory stages do not reveal anything regarding the consultation procedure, which, in the Companies' submission, is in itself contrary to the fundamental requirement of publicity. The Netherlands Government merely sent the draft law to the Commission without pointing out to the Commission that it specifically wished to consult it over the adoption of a system such as that referred to in Point 2 "Regarding Article 4" of Annex A to the Directive; the Commission does not appear to have made any observation concerning such a system; and those coming under the law were not able to establish whether the consultation procedure had been correctly applied in relation to this specific problem.

Consequently the Companies argue that the mere fact of sending a draft law to the Commission can clearly not replace a consultation procedure on a specific partial problem, because the Commission cannot be required itself to discover from a draft law which is sent to it the points on which consultations are desired. Furthermore, in this way the Member States could in fact evade their obligations to enter into consultations by merely sending the Commission every draft law. In the present case it is also very important to note that the text of the draft law contained absolutely no rule on

2072 the single entity for tax purposes (see Article 7 (1) of the Law) so that the Commission was not able to ascertain that in that case a problem subject to the consultation procedure might arise.

As this appears to be confirmed by the case-law of the Court of Justice (Case 48/72 Haecht II [1973] ECR 77; Case 71/74 Frubo [1975] ECR 563; Case 61/77 Commission v Ireland[1978] ECR 417; Case 28/77 Tepea v Commission [1978] ECR 1391) the answer should therefore be the following:

"The Netherlands did not enter into the consultations to which reference is made in Point 2 'Regarding Article 4' of Annex A to the Second VAT Directive".

The Commission states that the Netherlands Government sent it three letters concerning the preparatory stages and publication of the Law of 1968 relating to VAT (which letters it produces as an annex to its statement of observations) and expresses the view that those letters can hardly be regarded as due consultations for the purposes of Article 16 of the Second Directive, since the State concerned did not precisely and expressly point out the provisions of the Directive which made consultations mandatory or the draft measure or the Community rules to which the draft measure provided exceptions. However, in the present case the Commission is of the opinion that the wording of Article 16 of the Second Directive is not very clear as regards a Member State's obligation to enter into consultations where it does not expressly adopt a system involving the single entity for tax purposes but retains in force an existing traditional system, and that therefore the answer should be that:

VAN PAASSEN v STAATSSECRETARIS VAN FINANCIËN "The Netherlands did not effectively enter into the consultations preliminary to the adoption of the system mentioned in the fourth paragraph of Point 2 'Regarding Article 4' of Annex A as they were required to do by Article 16 of the Second Directive on VAT. However, it may be doubted whether that consultation procedure was mandatory in this case".

The Netherlands Government observes that it informed the Commission several times, and as the Commission never indicated that that correspondence did not satisfy the obligation to enter into consultations, it thus fulfilled its obligation to enter into consultations, all the more so as in its submission that obligation is not subject to any rule as to form. Finally, it refers to the statement lodged by the Commission in Case 126/78, Spoorwegen, in which the Commission takes the view that, even if the consultation procedure has not been carried out in due form, the formal defect which results from this nevertheless appears insufficient in itself to justify a finding that the national measure is invalid.

The Government ofthe Federal Republic ofGermany observes first that the Court has already held that such questions of fact are inadmissible within the framework of proceedings for a preliminary ruling brought under Article 177 of the Treaty (Case 51/74 P.J. Van der Hulst's Zonen [1975] ECR 79); next that the Netherlands Government has already entered into consultations (the three letters); and that thus the question raised should be changed, because in fact it is intended to ascertain whether the consultations — which have been carried out — were carried out in accordance with the provisions of the fourth paragraph of Point 2 of Annex A to the Second Directive.

After pointing out that — since the Second Directive did not enter into force until 1 January 1972 — it is doubtful whether its provisions concerning the consultation procedure apply in the present case, the Government of the Federal Republic of Germany analyses the development of the consultation procedure in the course of the different drafts and amendments of the Commission and the Council, and, comparing it with the procedure provided in Article 13, it draws the following conclusion:

"The consultation procedure to which reference is made in Article 16 of the Second Directive on turnover tax can in no case go beyond the conditions laid down in Article 102 of the Treaty; it merely represents a less elaborate 'preliminary stage' which may possibly lead to a subsequent procedure under Article 102."

The Government of the Federal Republic of Germany considers that it follows that Member States in principle fulfil their obligation to enter into consultations under Article 16 of the Second Directive on turnover tax by sending the necessary information to the Commission and, should the need arise, by answering supplementary questions by the Commission.

Thus the answer to Question 3, if it is held to be admissible, should be that:

"A Member State fulfils the requirements pertaining to the obligation to enter into consultations in accordance with the fourth paragraph of Point 2 of Annex A to the Second Directive on turnover tax if it sends the Commission all the information necessary to enable it to assess the legislative measure which it is proposed to adopt. For this purpose, communication of a draft law may suffice in certain cases, if the draft law, accompanied if necessary by a statement of the grounds on which it is based, allows an assessment to be made of the necessity for the procedure under Article 102".

Question 4

The Companies propose the following answer, in reliance on the binding nature and the direct effect of the directive which — in their submission — they have proved above:

"So long as the prescribed consultations have not taken place, the special system provided for in Point 2 'Regarding Article 4' of Annex A to the Second VAT Directive cannot be legally adopted.

In these circumstances, the national courts are not at liberty to consider persons who are linked to one another by economic, financial or organizational relationships as a single taxable person".

Finally, the Companies examine the consequences for Netherlands law in the field of turnover tax.

If the argument — defended by the Companies — that there is no single entity for tax purposes were upheld; the consequence would be satisfactory from all points of view, because the result would be application of the VAT system in accordance with the fundamental rules laid down in that connexion by the Second VAT Directive.

On the other hand, if the argument in favour of the single entity for tax purposes were upheld, the consequences would be unsatisfactory:

— first, because that rule was never expressed in writing in the Law;

— secondly, because the old system of the single entity for tax purposes, designed for a multi-stage turnover tax system, would lead to an increase in the tax burden by preventing input tax from being deducted on purchases in certain cases;

2074 — thirdly, because that additional tax burden, which is unforeseeable for the taxpayer, does not conform with the system introduced by the Second Directive since it is contrary to the protection which the constitutions of all the Member States give taxpayers against tax burdens which do not result clearly and foreseeably from the law itself;

— fourthly, the argument of expediency, according to which the Netherlands need the concept of the single entity for tax purposes in order to counteract certain consequences which they consider undesirable, cannot be upheld, on the one hand, because this is no reason to exempt a Member State from obligations arising from a directive and, on the other, because even if correct levying of tax is in fact wholly or partly jeopardized by abnormal transactions between linked undertakings, that risk can be removed in the Netherlands by use of the concept of fraus legis along the lines of the possibility offered in Germany by Article 42 of the Abgabenordnung [Order on Levies] (abuse of the legal possibilities for arranging transactions) and in France by Article 1649, quinquies B, of the Code General des Impôts [General Tax Code] ("abus de droit"); afortiori as both of the present cases concern ordinary transactions.

The Commission doubts whether any formal defect which may result from the failure to consult the Commission can in itself entail the invalidity of the national system, and proposes that the question should be answered as follows:

"The national courts can interpret the concept of an undertaking in the manner intended by the national legislature, provided that they remain within the VAN PAASSEN v STAATSSECRETARIS VAN FINANClËN margin of discretion left to the national authorities for the implementation of the Second Council Directive of 11 April 1967 concerning VAT".

The Government ofthe Federal Republic ofGermany considers that this question exclusively concerns the consequences which a possible breach of the duty to enter into consultations may have for the effects of internal law. It repeats Articles 13 and 16 of the directive, and points out that the procedure provided for in Article 16 was not to receive any binding effect whereas that provided in Article 13 was reinforced by the introduction of a blocking effect [Sperrwirkung]. This fact in itself seems to show that a breach of the duty of consultation laid down in Article 16 cannot alter the effects of national measures, and that thus individuals have no rights which the national courts are obliged to protect.

In the submission of the Government of the Federal Republic of Germany, this view is confirmed by the case-law of the Court of Justice on Articles 102 and 93 of the EEC Treaty (Case 6/64 Costa v ENEL, cited above) and on Article 115 of the EEC Treaty (Case 27/78, not yet published, and Case 62/70 Bock [1971] ECR 897, at p. 917). And since moreover Articles 93, 115 and even 102 are more precise and more binding — because the Commission may decide with binding effect, or at least recommend on the basis of the consultations which have been entered into, that the national measure shall be amended or abolished — it would hardly be consistent with the structure of the Treaty if mere failure to enter into consultations which do not lead to a formal procedure ending in a recommendation by the Commission were in itself to entail the invalidity of the legislative measure under consideration.

The Government of the Federal Republic of Germany goes on to show that even in national law a defect in the legislative procedure makes the law void only where there is a clear breach of the constitution (cf. Bundesverfassungsgericht [Federal Constitutional Court] E 34,9). In Community law Article 173 of the EEC Treaty stipulates that only infringement of an essential procedural requirement entails the unlawfulness of the legislative provision.

Furthermore, if the procedural defect could alter the effects of the national law, there would no longer be any legal certainty for the individual, because he must be certain that a law of this kind will not be declared invalid on the grounds of failure to enter into consultations which in general do not have to be published and therefore cannot be verified.

Finally, the Government of the Federal Republic of Germany states that in principle the Member States retain sovereignty in matters of taxation, and that in this connexion it cannot be ignored that tax measures are an indispensable instrument of economic policy, which in principle comes within the area reserved to the Member States under the Treaty.

Consequently, the Government of the Federal Republic of Germany proposes that the answer to Question 4 should be that "breach of the duty to enter into consultations under the fourth paragraph of Part 2 of Annex A to the Second Directive on turnover tax does not give rise to rights for individuals which the national courts must protect".

III — Oral procedure European Communities, represented by its Agent, B. Baeyens, presented oral Denkavit Diensbetoon B.V., represented argument at the hearing on 20 March by Mr Hijweege, the Government of the 1979.

Federal Republic of Germany, represented by A. Deringer and The Advocate General delivered his J. Sedemund, and the Commission of the opinion at the hearing on 8 May 1979.

Decision

Grounds

1By judgments dated 6 September and 11 October 1978, which were lodged at the Court Registry on 11 September 1978 and 13 October 1978, the Hoge Raad of the Netherlands referred several questions for a preliminary ruling under Article 177 of the EEC Treaty on the interpretation of certain provisions of the Second Council Directive (No 67/228/EEC) of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value-added tax (Official Journal, English Special Edition 1967, p. 16) in particular Article 4 thereof and Point 2 "Regarding Article 4" of Annex 4 thereto.

2These questions arise in two cases between a company and the Netherlands Ministry for Finance, which imposed an additional assessment to turnover tax on each of the two companies concerned on the grounds that did not have the capacity of an "undertaking", because although independent from the legal point of view they were both linked to third companies by economic, financial and organizational relationships and therefore constituted with those companies a "single entity for tax purposes" and consequently could not bring value-added tax into their internal transactions with those third companies, and that the companies had wrongfully recovered input tax.

3In order to resolve this issue, the national court submitted four identical questions in each of the Joined Cases. The first and third of them are very closely connected, and should therefore be dealt with together.

VAN PAASSEN v STAATSSECRETARIS VAN FINANCIEN

4In its first question, the national court asks whether "a Member State has adopted a system such as that referred to in Point 2 'Regarding Article 4' of Annex A to the Second Directive, if it has laid down by a Law that turnover tax shall be levied inter alia on the supply of goods and services by undertakings and if the concept of an undertaking is not subsequently defined in that Law more closely than as 'any person who independently carries on business', while from the preparatory stages of the Law prior to its coming into force it is clear that the concept of an undertaking can also cover a combination of persons who, although independent from the legal point of view, are, however, organically linked to one another by economic, financial and organizational relationships", and in the third, if Question 1 is answered in the affirmative, it asks whether "the Netherlands entered into the consultations to which reference is made in Point 2 'Regarding Article 4' of Annex A to the Second Directive". This question is in effect an extension of Question 1, because if Question 3 is answered in the negative this would threaten to deprive an affirmative answer to Question 1 of any effect, since the provision referred to in Question 3 requires a Member State to consult the Commission when it is contemplating the adoption of the system of a single entity for tax purposes.

5In order to answer these questions, it is first necessary to state that Article 2 of the Second Directive makes "the supply of goods and the provision of services within the territory of the country by a taxable person against payment" subject to value-added tax — as from 1 January 1972, the date on which the Member States were to implement the provisions of the said Directive — and that Article 4 defines a "taxable person" as "any person who independently and habitually engages in transactions pertaining to the activities of producers, traders or persons providing services, whether or not for gain".

6The expression "independently" is defined in the fourth paragraph of Point 2 "Regarding Article 4" of Annex A — an integral part of the Second Directive by virtue of Article 20 thereof — as meaning that it "makes it possible for each Member State not to consider as separate taxable persons, but as one single taxable person, persons who, although independent from the legal point of view, are, however, organically linked to one another by economic, financial or organizational relationships".

7It is accepted by the national court that the system thus described, known as the "single entity for tax purposes", traditionally formed part of the internal legal order of the Netherlands before the introduction of the VAT system and that "from the preparatory stages of the Turnover Tax Law 1968 before it came into force it is clear that the legislature wished to give the concept 'undertaking' as described in Article 7 (1) of the Law no other content" (judgment of the Hoge Raad of 6 September 1978 in the van Paassen case).

8According to Point 2 "Regarding Article 4" of Annex A that system could be expressly allowed, in national legislation introducing the provisions of the Directive relating to VAT into its internal legal order, provided that the Member State entered into the consultations mentioned in Article 16 of the Second Directive.

9Therefore the question is whether the measures adopted by the Netherlands Government to introduce the provisions of the Directives on VAT into its internal legal order were brought to the attention on the Commission in accordance with the requirements of Article 16.

10Article 16 does not lay down any particular procedure from the point of view of the form of the reference to the Commission, but it does require that such reference should be made "in good time", that is to say that the Commission should be given a reasonable period of time to examine the documents sent to it, that it should know the purpose for which the Member State has sent them to it and that they should contain complete information enabling the Commission — in accordance with Article 101 of the Treaty — to find that a difference between the provisions laid down by law, regulation or administrative action in Member States is distorting the conditions of competition in the common market and that the resultant distortion needs to be eliminated.

11The correspondence sent to the Commission by the Netherlands Government concerning the preparatory stages and publication of the Netherlands Turnover Tax Law 1968 comprises three letters:

(1) a letter of 3 November 1967 transmitting "the Draft Law, the statement of the grounds on which it was based and annexes, in connexion with the provisions of the Council Directives of 11 April 1967",

(2) a letter of 24 April 1968 transmitting amendments to the Draft Law, stating that the communication is "in connexion with the provisions of the Council Directives of 11 April 1967", and VAN PAASSEN v STAATSSECRETARIS VAN FINANCIËN

(3) a letter of 16 July 1968 sending the Commission a copy of the "Staatsblad 329" [Official collection of laws, regulations and statutory instruments, No 329], in which the Law of 28 June 1968 was published, and expressly stating that, "this communication is intended to satisfy the provisions of the Council directives which provide for a consultation procedure in a certain number of cases in which the Member State concerned must refer the matter to the Commission in good time"; the letter listed a certain number of particular points in respect of which consultations were requested, but the question raised in this case — exemption from VAT under the system of the single entity for tax purposes — did not appear in that list.

However it must be noted that:

(1) Although the expression "consultations" was used only in the last letter, the sole purpose of all this correspondence was to satisfy the obligation to enter into consultations, since no provision in the Directives required any transmission of national texts to the Commission except in relation to requests for consultations.

(2) The Commission received complete information concerning the Netherlands legislation enacted in the field of VAT since it was sent the Draft Law, the amendments thereto, the definitive text and the statement of the reasons on which it was based, which was very detailed inter alia as to the concept of an "undertaking" which' covers that of a single entity for tax purposes (Annexes to the Reports of the Second Chamber, 1967/1968-9234, No 3, p. 31, right-hand column, penultimate paragraph).

(3) The matter was referred to the Commission in good time, since the last reference was made in July 1968 whilst the Directive did not have to be implemented until 1 January 1972, and the Commission therefore had more than three years to make any necessary observations to the Netherlands Government.

12It must therefore be found that, having regard to the terms of Article 16 of and Point 2 "Regarding Article 4" of Annex A to the Second Directive, the Government of the Netherlands fulfilled the obligations imposed by the Directive in order to retain the system of the single entity for tax purposes in force in its legislation.

13Therefore the answer to Questions 1 and 3 should be that a Member State has adopted a system such as that referred to in the fourth paragraph of Point 2 "Regarding Article 4" of Annex A to the Second Directive if it has laid down in its legislation that turnover tax shall be levied interalia on the supply of goods and services by undertakings, after entering into the consultations to which reference is made in Article 16 of the directive, even though it has not defined the concept of an undertaking otherwise than as "any person who independently carries on business".

14Questions 1 and 3 of the national court having been answered together in the affirmative, there is no need to answer Questions 2 and 4.

Costs

Costs

15The costs incurred by the Governments of the Netherlands and the Federal Republic of Germany and by the Commission of the European Communities, which submitted observations to the Court, are not recoverable. Moreover, as these proceedings are in the nature of a step in the actions pending before the Hoge Raad, the decision on costs is a matter for that court.

Operative part

On those grounds,

THE COURT,

in answer to the questions referred to it by the Hoge Raad by judgments dated 6 September and 11 October 1978, hereby rules:

A Member State has adopted a system such as that referred to in the fourth paragraph of Point 2 "Regarding Article 4" of Annex A to the Second Directive if it has laid down in its legislation that turnover tax shall be levied inter alia on the supply of goods and services by undertakings, after entering into the consultations to which reference is made VAN PAASSEN v STAATSSECRETARIS VAN FINANCIEN

in Article 16 of the directive, even though it has not defined the concept of an undertaking otherwise than as "any person who independently carries on business".

Kutscher Mertens de Wilmars Mackenzie Stuart Pescatore Sørensen O'Keeffe Touffait Delivered in open court in Luxembourg on 12 June 1979.

A. Van Houtte

Registrar H. Kutscher

President OPINION OF MR ADVOCATE GENERAL REISCHL DELIVERED ON 8 MAY 1979 1 MrPresident, Members ofthe Court,

On 11 April 1967 the Council, on the basis of Articles 99 and 100 of the EEC Treaty, adopted the First and Second Directives on the harmonization of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value-added tax (Directives Nos 67/227/EEC and 67/228/EEC, Official Journal, English Special Edition 1967, p. 14 and p. 16). As a result of those Directives for harmonization, cumulative multi-stage taxes were to be abolished and a common system of value-added tax introduced in all Member States as soon as possible and in any event not later than 1 January 1970, which date was subsequently postponed

1 — Translated from the German.

to 1 January 1972 by the Third Directive on value-added tax.

Pursuant to the Second Directive the Kingdom of the Netherlands adopted on 28 June 1968 a law for the replacement of the existing turnover tax by a system of value-added tax, which entered into force on 1 January 1969 (Wet op de Omzetbelasting 1968, Staatsblad 329).

The parties to the main action which is at the root of the joined cases before the Court disagree as to whether the concept of a taxable undertaking used in that law is compatible with the Second Council Directive on the harmonization of turnover tax, which provides in Article 4:

" 'Taxable person' means any person who independently and habitually engages in transactions pertaining to the

OPINION OF MR ADVOCATE GENERAL REISCHL

DELIVERED ON 8 MAY 1979 ¹

Mr President,

Members of the Court,

On 11 April 1967 the Council, on the basis of Articles 99 and 100 of the EEC Treaty, adopted the First and Second Directives on the harmonization of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value-added tax (Directives Nos 67/227/EEC and 67/228/EEC, Official Journal, English Special Edition 1967, p. 14 and p. 16). As a result of those Directives for harmonization, cumulative multi-stage taxes were to be abolished and a common system of value-added tax introduced in all Member States as soon as possible and in any event not later than 1 January 1970, which date was subsequently postponed to 1 January 1972 by the Third Directive on value-added tax.

Pursuant to the Second Directive the Kingdom of the Netherlands adopted on 28 June 1968 a law for the replacement of the existing turnover tax by a system of value-added tax, which entered into force on 1 January 1969 (Wet op de Omzetbelasting 1968, Staatsblad 329).

The parties to the main action which is at the root of the joined cases before the Court disagree as to whether the concept of a taxable undertaking used in that law is compatible with the Second Council Directive on the harmonization of turnover tax, which provides in Article 4:

‘“Taxable person” means any person who independently and habitually engages in transactions pertaining to the activities of producers, traders or persons providing services, whether or not for gain.’

The expression ‘independently’ is defined inter alia in Point 2 ‘Regarding Article 4’ of Annex A as follows:

‘The expression “independently” is intended in particular to exclude from taxation wage-earners who are bound to their employer by a contract of service. This expression also makes it possible for each Member State not to consider as separate taxable persons, but as one single taxable person, persons who, although independent from the legal point of view, are, however, organically linked to one another by economic, financial or organizational relationships. Any Member State intending to adopt such a system shall enter into the consultations mentioned in Article 16’.

Article 16 provides:

‘Where a Member State must, in accordance with the provisions of this Directive, enter into consultations, it shall refer the matter to the Commission in good time, having regard to the application of Article 102 of the Treaty’.

Article 7 (1) of the Netherlands Turnover Tax Law 1968, in accordance with the said Article 4, provides:

‘“Undertaking”’ — (comment: therefore liable to taxation) — ‘means any person who independently carries on business’.

It appears nevertheless from the preparatory stages of the Turnover Tax Law 1968 that the Netherlands legislature intended to give the expression ‘undertaking’ no other meaning than that which case-law and commentators gave it under the previous taxation practice. According to the latter the expression could also cover a combination of persons who, although independent from the legal point of view, are organically linked to one another by economic, financial and organizational relationships. This construction of the so-called entity for tax purposes is the subject of the two cases which have led to the references for a preliminary ruling.

The facts of Case 181/78, Ketelhandel P. van Paassen B.V. Staatssecretaris van Financiën, are as follows:

The Besloten Vennootschap met beperkte Aansprakelijkheid Ketelhandel P. van Paassen B.V., plaintiff in the main action, carries on trade in steam and heating boilers. Through its subsidiary S.K.S. Siller en Jamart N.V., whose sole shareholder it is, it held all the shares in N.V. Circula, of Stiens, which until its liquidation in 1972 made boilers and supplied them to the party concerned, invoicing an amount in respect of value-added tax.

In September and October 1971 the plaintiff deducted that value-added tax under Articles 15 and 2 of the Turnover Tax Law 1968 as input tax. N.V. Circula, however, did not, prior to its liquidation, pay over the turnover tax which it included in its account to the plaintiff in 1971.

The Inspecteur der Invoerrechten en Accijnzen, the defendant in the main action, felt obliged to make an additional assessment in respect of the input tax deducted because in his view the two companies were to be considered as a single entity for tax purposes with the result that no turnover tax was payable on the deliveries and to that extent the tax included in Circula's account had been wrongly deducted. In its appeal against that assessment the plaintiff took the view that in 1971 it did not control Circula financially, organizationally and economically in such a way that the two companies could be regarded as one undertaking within the meaning of Article 7 (1) of the Law. After the Inspecteur had reduced the corrective assessment — the amount in question is now only Hfl 44034,01 — but otherwise rejected the appeal, Van Paassen brought the matter before the Tariefcommissie, which by judgment of 1 February 1977 confirmed the Inspecteur's assessment.

The plaintiff appealed on a point of law against that decision to the Hoge Raad of the Netherlands, which by judgment dated 6 September 1978 stayed the proceedings and referred the following four questions under Article 177 of the EEC Treaty for a preliminary ruling on the interpretation of the Second Council Directive on the harmonization of turnover taxes:

Has a Member State adopted a system such as that referred to in Point 2 “Regarding Article 4” of Annex A to the Second Directive, if it has laid down by law that turnover tax shall be levied inter alia on the supply of goods and services by undertakings and if the concept of an undertaking is not subsequently defined in that Law more closely than as “any person who independently carries on business”, while from the preparatory stages of the Law prior to its coming into force it is clear that the concept of an undertaking can also cover a combination of persons who, although independent from the legal point of view, are, however, organically linked to one another by economic, financial and organizational relationships?

2If Question 1 is answered in the negative: Are the national courts nevertheless at liberty, in applying the law, to interpret the concept of an undertaking in the aforesaid manner as intended by the national legislature?

3If Question 1 is answered in the affirmative: Did the Netherlands enter into the consultations to which reference is made in Point 2 “Regarding Article 4” of Annex A to the Second Directive?

4If Question 3 is answered in the negative: What are the consequences for the national courts of this lack of consultation? In particular, are they at liberty, in applying the Law, to interpret the concept of an undertaking in the aforesaid manner as intended by the national legislature?’

The facts of Case 229/78, Minister van Financiën v Denkavit Dienstbetoon B.V. are as follows:

The Besloten Vennootschap Denkavit Dienstbetoon B.V., which carries on trade in cattle, was concerned in 1973 and 1974 mainly with the purchase and sale of calves for Denkavit Nederland B.V. which produces and sells milk for calves from the same address and also engages in the fattening of calves. The shares of both companies are held by the same shareholders. The companies are directed by the same persons.

Cooperation between the two companies takes the form of Denkavit Dienstbetoon B.V. buying calves as commission agent in its own name but for the account of Denkavit Nederland B.V. Again as commission agent it sells to third parties the calves which Denkavit Nederland B.V. has fattened.

Since on the basis of Article 3 (5) of the Turnover Tax Law 1968 it considered itself an independent undertaking in its capacity as commission agent, it paid turnover tax of 4 % on its turnover net of tax in respect of the sale of new-born calves to Denkavit Nederland B.V. and fattened calves to third parties, that is 3,85 % of the gross selling price. On the other hand, on its purchases of new-born calves from third parties and fattened calves from Denkavit Nederland B.V. it deducted, on the basis of Article 15 of the Turnover Tax Law 1968, input tax of 4,25 % of the purchase price. In its turnover tax declaration it therefore claimed repayment of the, in its view, overpaid turnover tax representing the difference between 4,25 % and 3,85 % of the prices at which it had effected the said purchases and sales. This claim was allowed.

The Inspecteur der Invoerrechten en Accijnzen, Amersfoort, took the view that Denkavit Dienstbetoon B.V. was not an undertaking within the meaning of the Turnover Tax Law 1968 and that it could not be regarded as a commission agent within the meaning of Article 3 (5) of that Law and he therefore imposed an additional assessment of Hfl 655707 for the period from 1973 to 1974. By notice dated 24 June 1976 he rejected the objection which Denkavit Dienstbetoon B.V. made against this. Denkavit Dienstbetoon brought an action in respect of that notice before the Gerechtshof, Amsterdam, which by judgment dated 5 October 1977 allowed the claim.

The Minister for Finance, The Hague, appealed on a point of law against that judgment to the Hoge Raad of the Netherlands, which by a judgment dated 11 October 1978 stayed the proceedings and referred to the Court of Justice the same four questions as in Case 181/78 for a preliminary ruling under Article 177 of the EEC Treaty.

Before I deal with the substance of these questions it seems appropriate to make certain preliminary remarks as to the admissibility of the requests for a preliminary ruling.

1In the main actions the question is apparently whether the concept of a taxable undertaking within the meaning of the Netherlands Turnover Tax Law is compatible with the relevant provisions of the Second Council Directive on value-added tax. The special nature of the cases in point lies in the fact that although the relevant Article 7 of the Netherlands Turnover Tax Law, which was adopted in execution of the said Directive; agrees in its wording with the corresponding Article 4 of the Directive, its practical effect is not the same. According to Netherlands case-law and doctrine, persons who, although legally independent, are linked to one another by economic, financial and organizational relationships are traditionally treated together as one taxable undertaking. This legal concept of the socalled single entity for tax purposes was intended by the Netherlands legislature to be retained in the Turnover Tax Law 1968, without however its being expressly stated in the law, as was done for example in the German turnover tax law, which expressly mentions the corresponding concept of the ‘Organgesellschaft’.

Point 2 ‘Regarding Article 4’ of Annex A to the Second Council Directive on value-added tax allows the adoption of such a rule and simply provides that in such a case the consultation provided for in Article 16 shall take place. That rule of Community law is the subject of the first and third questions from the court making the reference.

In this connexion I do not need especially to stress that factual questions are inadmissible in the context of a reference for a preliminary ruling under Article 177 of the EEC Treaty (see judgment of 23 January 1975 in Case 51/74 P. J. van der Hulst's Zonen v Produktschap voor Siergewassen [1975] 1 ECR 79) and that the Court does not have jurisdiction in the context of such proceedings to interpret provisions of national law or to rule on their possible incompatibility with Community law. However, in the context of the interpretation of Community law, it may provide the national court with the criteria enabling it to deal with the action before it, in particular as regards any incompatibility of national provisions with Community rules, or to interpret in accordance with Community law a law adopted in execution of a directive (cf. judgments of 23 November 1977 in Case 38/77, Enka B.V. v Inspecteur der Invoerrecbten en Accijnzen, Arnhem [1977] 2 ECR 2203; and of 20 May 1976 in Case 111/75, Impresa Costruzioni comm. Quirino Mazzalai v Ferrovia del Renon [1976] 1 ECR 657).

Accordingly the first question must be understood as meaning that the national court wishes to know whether the provision of Point 2 ‘Regarding Article 4’ of Annex A to the Second Council Directive allow the introduction of the concept of a single entity for tax purposes only if it is expressly mentioned in the law or whether the intention to introduce such a concept may be inferred from the preparatory stages of the law.

The third question according to its wording seeks a decision on an issue of fact which, as the Government of the Federal Republic of Germany in particular points out, is strictly inadmissible. However, in my view the national court is not concerned with a finding as to whether the Netherlands Government entered into any form of consultation in accordance with the obligations arising from the Second Council Directive on value-added tax,. but whether consultations of the kind such as the Netherlands Government entered into satisfy the requirements of the fourth paragraph of Point 2 of Annex A to the Second Council Directive, that there shall be consultations as mentioned in Article 16. In my view there is no objection to the question so interpreted.

2A further objection, which must also be dealt with as a preliminary matter, is made by the Netherlands Government and by the Government of the Federal Republic of Germany. Both Governments point out that the system of value-added tax particularized in the Second Council Directive had to be introduced only on 1 January 1972 and therefore they doubt whether the Member States were bound before then by the provisions of the Directive. They further point out that in Case 181/78 the measure imposing the taxation, which forms the subject-matter of the main action, occurred in 1971 and had already become definitive when the said directive entered into force.

Those objections obviously concern the problem of the relevance of this question to a decision in the case, that is the question whether the interpretation of the Council Directive with which we are concerned is material in connexion with facts such as the present. In my opinion, and let me say this immediately, there can be no doubt about this. As the Court is aware, the Council adopted the First and Second Directives on value-added tax on 11 April 1967. The First Directive provides that the Member States shall replace their system of turnover taxes' by the system of value-added tax described. Closely related to this, the Second Council Directive governs the structure and detailed rules for the application of the common system of value-added tax. Shortly thereafter both Directives were published in the Official Journal of the European Communities and notified to the Member States. Pursuant to the second paragraph of Article 191 of the EEC Treaty they took effect upon such notification.

The date mentioned in the First Directive, by which at the latest the Directive was to be translated into national law, must be distinguished from this date of entry into force. In this respect the second paragraph of Article 1 of the First Directive provides:

‘In each Member State the legislation to effect this replacement shall be enacted as rapidly as possible, so that it can enter into force on a date to be fixed by the Member State in the light of the conjunctural situation; this date shall not be later than 1 January 1970’.

That date was postponed to 1 January 1972 by the Third Directive on value-added tax.

The date when the particular national laws on turnover tax were to enter into force .does not alter the fact that the principles and conditions of the system of value-added tax contained in the Council Directives, having regard to their objective of bringing about as farreaching as possible a harmonization of the value-added tax law to be introduced, were to become binding on the Member States when the Directives took effect, that is at the time of the preparatory stages of the laws relating to value-added tax. Their interpretation is therefore also necessary for a decision in the main action.

After those preliminary remarks on admissibility I can now discuss the questions themselves.

1On the first question the companies take the view that the interpretation of the Netherlands Turnover Tax Law of 1968 should be undertaken not on the basis of the concept of an undertaking contained in the former Netherlands law but only on the basis of the Directive in view of the mandatory nature of the latter. The basic rule, however, apparent from Article 4 of the Second Council Directive is that in principle every undertaking is taxable. They claim that a Member State may introduce the principle of a ‘single entity for tax purposes’ only if it makes use of the special provision by way of derogation contained in Point 2 of Annex A. From the binding effect of the directive vis-à-vis the Member States and from this combination of rule and exception the companies infer that a Member State may treat persons who at law are independent but who are organically linked to one another by economic, financial or organizational relationships, as a single taxable undertaking only if it intends formally to adopt such a system, if it has entered into the consultations provided for in Article 16, if the Commission has raised no objections to the adoption of the proposed system and if the Member State, finally, has introduced such a system expressly. In the absence of express rules such as those of the German Organgesellschaft it may be concluded that no rule within the meaning of Point 2 of Annex A to the Directive has in fact been adopted. Further, it is said to be apparent from the lack of the prescribed consultations that the adoption in law of a single entity for tax purposes was not even intended.

These last two arguments do not convince me. First, it cannot be concluded from the failure to hold consultations or from incomplete consultations that the adoption of the legal concept of a single entity for tax purposes was not intended. Further, we learn from the Hoge Raad, on the basis of documents relating to the preparatory stages of the law, that the Netherlands legislature certainly intended to retain the single entity for tax purposes in the Turnover Tax Law of 1968. This Court is bound by that finding, since it has no jurisdiction in a reference for a preliminary ruling to interpret national law.

I can find nothing in the wording or in the underlying objective of the relevant provisions which could confirm the view of the companies with regard to the relationship of rule and exception. It is apparent from the wording that the adoption of the appropriate rule need be neither formally intended nor expressly undertaken. Further in my view Article 4 of the Directive does' not stand in a relationship of rule and exception to Point 2 of Annex A. As appears from the preamble to the Second Directive the Council considered it necessary to provide for a rather large number of special provisions covering interpretation, derogations and certain detailed application procedures which have been included in the said Annex A and are part of the Directive. In particular, it was necessary to take account of the fact that terms contained in Community law and requiring interpretation, such as for example the concept of ‘independent’, should not be subject to interpretation by the Member States, in order that a uniform application of the system of value-added tax might be assured. Therefore the Council considered itself obliged to hold as a rule of interpretation at Point 2 of Annex A, that the Member States are at liberty in determining liability to tax to look beyond independence from the point of view of law at the position in fact. This rule of interpretation, which is part of the Directive and thus partakes of its binding nature, gives the Member States in fact a wide discretion, as the Commission, the Netherlands Government and the Government of the Federal Republic of Germany point out. Thus it is not apparent from the meaning and purpose of the Directive that adoption of an appropriate system requires a formal measure, of whatever kind. For the introduction of a ‘single entity for tax purposes’ within the meaning of Point 2 of Annex A it is sufficient for the legislature conclusively to have expressed that it intends to introduce such a legal concept.

2Since the result is that the first question must be answered in the affirmative I do not consider it necessary to deal with the second question.

3I can therefore turn to answering the third question, relating to the substance and scope of the consultations to be entered into in accordance with Article 16 of the Second Directive on value-added tax.

First, I must say something about the obligatory nature of the consultation procedure provided for in Article 16 of the Second Directive. I find this necessary because the Commission takes the view that the said article is not very clear in respect of the obligation on a Member State to consult where such Member State does not expressly introduce a rule concerning the single entity for tax purposes but retains an already existing, established rule and that therefore it may be doubted in this case whether consultation is mandatory.

This view, however, conflicts with the very wording of Point 2 of Annex A to the Directive. The reference therein to the intention to adopt a system obviously means the enactment of a law by a Member State in implementation of the Directive. If it is intended to introduce the concept of a single entity for tax purposes into such a law then it is still intended to adopt such a system and it is irrelevant whether it already existed or not. Therefore it may be assumed that the consultation provided for in Article 16 is mandatory if the adoption of such a system in the law implementing the Directive is intended.

As we have heard, the Permanent Representation of the Kingdom of the Netherlands accredited to the European Communities informed the Commission in three letters of the proposed law and referred generally to the provisions of the Council Directives on the harmonization of legislation of Member States concerning turnover taxes. The draft law and the documents relating to the preparatory stages were forwarded. Only in the last letter enclosing the turnover tax law which had already appeared in the Staatsblad was there a general reference to the consultation procedure prescribed and mention of the article which stipulated such procedure. There was no reference in any of the three letters to the introduction of the single entity for tax purposes, which, as we have seen, is not apparent from the wording.

The companies and the Commission therefore in my view rightly doubt whether this information satisfies the requirement in Point 2 of Annex A to the Second Council Directive that there shall be the consultations mentioned in Article 16.

Even agreeing with the Netherlands and German Governments that the consultations laid down there need not fulfil any special formal requirements, nevertheless it cannot be denied that the substance and scope of the consultations required must be closely related to the objective which the consultations are to serve.

The objective of consultations within the meaning of Article 16 of the Directive can only be to inform the Commission of the adoption of a particular system and to give it the possibility of considering whether it exceeds the discretion allowed the Member States and thus distorts the conditions of competition between the Member States and renders subsequent further harmonization more difficult. This objective, in my opinion, is apparent from the reference to Article 102 of the EEC Treaty. Accordingly Article 16 is intended simply to ensure that the Commission can as a result of such consultations where necessary initiate the procedure under Article 102 of the EEC Treaty if there is danger of distortion of competition. It follows from the preventive nature of the last-mentioned provision that consultation must in principle take place before the relevant system is adopted and this also follows, moreover, from the wording of the provision in Point 2 of Annex A, to the effect that a Member State intending to adopt such a system shall enter into consultations.

In order for the Commission to fulfil its task it is however necessary that the particular State should at least specify the provision of the directive requiring consultation, the Community provisions from which the draft derogates and the derogation in the draft itself. This is especially necessary if the wording of the draft law corresponds fully with the particular Communitv provision but its content departs therefrom.

As we learn from the documents in the case, not until its letter of 16 July 1968, with which it sent the law which had already been printed in the Staatsblad, did the Netherlands Government specifically mention that it was undertaking consultations within the meaning of the Second Council Directive, at the same time listing a number of articles in relation to which consultation was necessary. It is significant that neither Article 7 of the Netherlands Turnover Tax Law, which is in issue, nor the relevant provisions of the Directive are mentioned.

In conclusion, therefore, I disagree with the Netherlands and the German Governments and agree with the companies and the Commission that the correspondence conducted by the Netherlands Government does not satisfy the requirements of the fourth paragraph of Point 2 of Annex A to the Second Council Directive that there shall be the consultations mentioned in Article 16 of the directive.

4I can therefore now deal with the fourth question, relating to the legal consequences for the effectiveness of the national law of failure to comply with the duty to consult.

Examination of the first question has shown that the rule of interpretation in Point 2 of Annex A gives the Member States a discretion in determining a ‘taxable person’ within the meaning of Article 4 of the Second Council Directive. If they keep within the framework laid down by the Directive there can be no objection to the law in substance and the sole question which arises is whether such a system is made ineffective if there has been no proper consultation as required.

As we know there are a number of provisions in Community law requiring such consultation procedures. Article 102 of the EEC Treaty, which is expressly mentioned in Article 16 of the Second Council Directive, provides that where there is reason to fear that the adoption or amendment of a provision laid down by law may cause distortion of the conditions of competition, the Member State shall consult the Commission. Regarding the interpretation of that provision the Court has already stated in Case 6/64 Costa v ENEL (judgment of 15 July 1964 [1964] ECR 583) that the States have undertaken an obligation to the Community which binds them as States, but which does not create individual rights which national courts must protect.

The companies take the view that although Article 16 of the Directive refers to Article 102 of the EEC Treaty it is not to be inferred that the consultation procedure provided for in the Directive, like the procedure of Article 102 of the EEC Treaty, does not create individual rights. Article 16 of the Directive, in contrast to Article 102 of the EEC Treaty, is said to make consultation mandatory and to leave the Member States no discretion. In their view, having regard to the case-law of the court on the direct effect of directives, such effect, which the national courts have to respect, must be attributed to the directive in question. Accordingly, so long as the consultations provided for have not taken place the national courts must not treat persons linked to one another by economic, financial or organizational relationships as a single taxable person.

The Government of the Federal Republic stresses, on the other hand, that the case-law on Article 102 of the EEC Treaty is especially significant since Article 16 of the Second Council Directive on value-added tax, according to its objectives which are apparent inter alia from the documents relating to the preparatory stages, provides simply a more tentative preliminary to a possible procedure under Article 102 of the EEC Treaty.

In my view these observations on the direct effect of the Second Council Directive need concern us no further. In the present case it is solely a question of interpreting the Directive as to the consequences of failure to comply with the obligation to consult. From the objective of the consultation it is apparent that the procedure is only a ‘preliminary’ to a possible subsequent procedure under Article 102 of the EEC Treaty. This is moreover apparent from the history of the directive to which the Government of the Federal Republic refers. I have no objection to reference to the documents relating to the preparatory stages since the obligation to consult concerns only the legal relations between the Commission and the Member States, who were aware of such documents, and does not effect the interests of individuals. If infringement of the obligation to consult imposed on the Member States by Article 102 of the EEC Treaty does not have to be considered by national courts this is all the more the case for the consultation laid down by the Directive.

For the same reason I can hardly see how a breach of the obligation to consult can, as the companies think, conflict with the basic requirement of publication which is prescribed in the interests of individuals.

It is similarly unnecessary to deal with the consequences alleged by the companies to result for the Netherlands Turnover Tax Law from the adoption of the concept of a single entity for tax purposes, since the Second Council Directive on value-added tax in any event allows such a concept to be adopted. Compliance or non-compliance with the obligation to consult does not alter the matter.

For the following reasons in my view non-compliance with the obligation to consult cannot lead to a breach of the Treaty by the national law adopted in implementation of the Directive.

Regard must be had to the fact that Article 173 of the EEC Treaty indicates that only the infringement of an essential procedural requirement renders a legal measure unlawful.

Apart from the meaning and objective of the consultation upon which I have already given my opinion, the question whether the obligation to consult under Article 16 of the Second Council Directive is an essential procedural requirement can best be answered by a systematic comparison of that article with other provisions, which also contain rules regarding consultation.

Article 13, for example, of the same Directive stipulates that should a Member State consider that, in exceptional cases, special measures should be adopted, it shall so inform the Commission and the other Member States. The sixth paragraph of the article then stipulates that the State concerned may not apply the proposed measures until the period for entering objections has expired or after a particular procedure has been implemented. Again, Article 93 (3) of the Treaty provides for the Commission to be informed. The last sentence thereof is to the effect that the Member State concerned shall not put its proposed measures into effect until the procedure has resulted in a final decision of the Commission.

These examples convince me that whenever implementation of the consultation procedure is intended to have such decisive effect upon the national power to legislate that the national measure may not be taken without such consultation, this must be mentioned in the particular provision regarding consultation. If this is not done then the infringement of the particular procedural requirement is not so essential as to render the national measure unlawful.

Moreover, I find this conclusion to be confirmed by the observation of the Commission on this question. The Commission also doubts that such a defect of form as that arising from lack of consultation can render the national system unlawful.

I therefore propose that the questions should be answered as follows:

1The adoption of the concept of a single entity for tax purposes pursuant to Point 2 ‘Regarding Article 4’ of Annex A to the Second Council Directive of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes does not require that the particular Member State should mention such a system expressly in the law. It is sufficient if such an intention is clearly apparent from the preparatory stages of the law which is passed in implementation of the Directive.

2A Member State does not satisfy the requirements as to consultation referred to in Article 16 of the said Directive if, when notifying the draft law, it fails to mention the provision of the directive requiring consultation, the Community provisions from which the draft derogates and the derogation in the draft itself. This applies in particular if the wording of the draft law corresponds to the particular provision of Community law but in fact derogates therefrom by way of its content.

3Individuals before national courts cannot rely on the fact that the consultations required by the fourth paragraph of Point 2 of Annex A in conjunction with Article 16 of the Directive have not been properly undertaken. On the other hand, it is for the national courts to decide whether the content of a national measure exceeds the discretion given to the Member States by the Directive.

¹ Translated from the German.