C-184/04 Uudenkaupungin kaupunki

JUDGMENT OF THE COURT (First Chamber)

30 March 2006*

In Case C-184/04,

REFERENCE for a preliminary ruling under Article 234 EC from the Korkein hallinto-oikeus (Finland), made by decision of 16 April 2004, received at the Court on 19 April 2004, in the proceedings brought by

Uudenkaupungin kaupunki,

THE COURT (First Chamber),

composed of P. Jann, President of the Chamber, K. Schiemann (Rapporteur), N. Colneric, J.N. Cunha Rodrigues and E. Levits, Judges,

Advocate General: C. Stix-Hackl, Registrar: H. von Holstein, Deputy Registrar,

having regard to the written procedure and further to the hearing on 22 June 2005,

* Language of the case: Finnish.

after considering the observations submitted on behalf of:

— Uudenkaupungin kaupunki, by M. Pikkujämsä, asianajaja,

— the Finnish Government, by T. Pynnä and E. Bygglin, acting as Agents,

— the Italian Government, by I.M. Braguglia, acting as Agent, and P. Gentili, avvocato dello Stato,

— the Commission of the European Communities, by L. Ström van Lier and I. Koskinen, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 15 September 2005,

gives the following

Judgment

Grounds

1The reference for a preliminary ruling concerns the interpretation of the second subparagraph of Article 13(C), the second subparagraph of Article 17(6) and Article 20 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), as amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18) (‘the Sixth Directive’).

2In essence, it raises the question whether, in the light of the Sixth Directive, adjustment of the deduction of input value added tax (‘VAT’) paid in respect of capital goods should be permitted where immovable property has first been used in non-taxable activity and then in taxable activity after the right of option within the meaning of Article 13(C) of the Sixth Directive has been exercised.

3The reference has been made in the course of an appeal on a point of law brought by Uudenkaupungin kaupunki (the town of Uusikaupunki, ‘Uusikaupunki’) against a decision of the Helsingin hallinto-oikeus (Helsinki Administrative Court), by which the latter dismissed Uusikaupunki's appeal against two decisions taken by the Lounais-Suomen verovirasto (South-West Finland Tax Office) on applications submitted by Uusikaupunki for the adjustment of deductions and a refund of VAT.

Legal context

The SixthDirective

4Article 5(6) and (7) of the Sixth Directive reads as follows:

‘6. The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration. However, applications for the giving of samples or the making of gifts of small value for the purposes of the taxable person's business shall not be so treated.

7 Member States may treat as supplies made for consideration:

(a) the application by a taxable person for the purposes of his business of goods produced, constructed, extracted, processed, purchased or imported in the course of such business, where the value added tax on such goods, had they been acquired from another taxable person, would not be wholly deductible;

(b) the application of goods by a taxable person for the purposes of a non-taxable transaction, where the value added tax on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with subparagraph (a);

(c) except in those cases mentioned in paragraph 8, the retention of goods by a taxable person or his successors when he ceases to carry out a taxable economic activity where the value added tax on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with subparagraph (a).’

5Article 6(2) and (3) of the Sixth Directive provides:

‘2. The following shall be treated as supplies of services for consideration:

(a) the use of goods forming part of the assets of a business for the private use of the taxable person or of his staff or more generally for purposes other than those of his business where the value added tax on such goods is wholly or partly deductible;

(b) supplies of services carried out free of charge by the taxable person for his own private use or that of his staff or more generally for purposes other than those of his business.

Member States may derogate from the provisions of this paragraph provided that such derogation does not lead to distortion of competition.

3. In order to prevent distortion of competition and subject to the consultations provided for in Article 29, Member States may treat as a supply of services for consideration the supply by a taxable person of a service for the purposes of his undertaking where the value added tax on such a service, had it been supplied by another taxable person, would not be wholly deductible.’

6Under Article 13(B)(b) of the Sixth Directive, Member States are to exempt the letting of immovable property from VAT. Under Article 13(C) of that directive, Member States may allow taxpayers a right of option for taxation in cases of letting of immovable property. According to the second subparagraph of that Article 13(C), however, Member States may restrict the scope of that right of option and are to fix the details of its use.

7Article 17 of the Sixth Directive, entitled ‘Origin and scope of the right to deduct’, provides:

‘1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2. 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;

…

6. 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.’

8The 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.

9Article 18(1) and (2) of the Sixth Directive lays down certain rules governing the exercise of the right to deduct. Article 18(3) provides in that regard that the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of Article 18(1) and (2) are to be determined by the Member States.

10Article 20 of the Sixth Directive, entitled ‘Adjustments of deductions’, contains the following provisions:

‘1. The initial deduction shall be adjusted according to the procedures laid down by the Member States, in particular:

(a) where that deduction was higher or lower than that to which the taxable person was entitled;

(b) where after the return is made some change occurs in the factors used to determine the amount to be deducted, in particular where purchases are cancelled or price reductions are obtained; however, adjustment shall not be made in cases of transactions remaining totally or partially unpaid and of destruction, loss or theft of property duly proved or confirmed, nor in the case of applications for the purpose of making gifts of small value and giving samples specified in Article 5(6). However, Member States may require adjustment in cases of transactions remaining totally or partially unpaid and of theft.

2. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured. The annual adjustment shall be made only in respect of one-fifth of the tax imposed on the goods. The adjustment shall be made on the basis of the variations in the deduction entitlement in subsequent years in relation to that for the year in which the goods were acquired or manufactured.

By way of derogation from the preceding subparagraph, Member States may base the adjustment on a period of five full years starting from the time at which the goods are first used.

In the case of immovable property acquired as capital goods, the adjustment period may be extended up to twenty years.

…

4. For the purposes of applying the provisions of paragraphs 2 and 3, Member States may:

— define the concept of capital goods,

— indicate the amount of the tax which is to be taken into consideration for adjustment, — adopt any suitable measures with a view to ensuring that adjustment does not involve any unjustified advantage,

— permit administrative simplifications.

5. If in any Member State the practical effect of applying paragraphs 2 and 3 would be insignificant, that Member State may, subject to the consultation provided for in Article 29, forego application of these paragraphs, having regard to the need to avoid distortion of competition, the overall tax effect in the Member State concerned and the need for due economy of administration.

...’

11Article 29 of the Sixth Directive set up an ‘Advisory Committee on value added tax’, composed of representatives of the Member States and of the Commission, which is empowered to examine questions concerning the application of the Community provisions on VAT.

Nationallegislation

12The provisions relating to the tax treatment of the letting of immovable property are contained in Paragraphs 27 to 30 of the VAT Law (Arvonlisäverolaki, Law No 1501 of 30 December 1993, the ‘AVL’). Under the first subparagraph of Paragraph 27 of that law, VAT is not payable on the letting of immovable property. The first subparagraph of Paragraph 30 of the AVL gives taxable persons a right of option for taxation of letting of immovable property where the property is used by the State or is continuously used for an activity giving the right to deduct, that is to say, in taxable activity.

13Under Paragraph 33 of the AVL, work carried out in connection with a new building or the restoration of immovable property is regarded as a supply for private use even if the economic operator sells the property or puts it to a use other than one giving the right to deduct, where the service provision or the acquisition of the immovable property has given rise to deduction or the service itself has been provided in connection with an activity giving the right to deduct.

14The provisions relating to the right to deduct are contained in Paragraphs 102 to 118 of the AVL. Under point (1) of the first subparagraph of Paragraph 102 of that law, which concerns the general right to deduct, a taxable person may deduct the tax payable on goods or services he acquires from another taxable person for the purposes of taxable activity. Under Paragraph 106 of the AVL, which concerns the right to deduct in connection with building services, if an owner of a property has applied to become liable to VAT pursuant to Paragraph 30 of the AVL he may in principle make the deduction referred to in Paragraph 102 of the law in respect of services or goods which he has acquired for the purposes of the taxable letting of that property.

15It is not possible, however, to deduct VAT on immovable property investments made prior to exercising the option to become liable to tax unless that option has been exercised within six months of bringing the property into use. The AVL does not allow deductions in respect of restoration, new building or acquisition of a property to be revised or adjusted to the taxpayer's advantage if the application to become liable to tax has been submitted after the abovementioned period has expired, where the property was initially brought into use in connection with an activity exempt from VAT before being used in taxable activity.

The main proceedings and the questions referred for a preliminary ruling

16Uusikaupunki renovated a building which it owns and let space in it to the Finnish State, one part from 1 June 1995 and the other part from 1 September 1995. From 31 August 1995, Uusikaupunki also let an industrial building which it had built to an undertaking liable to VAT. The costs for both projects included VAT amounting to FIM 2 206 224.

17On 4 April 1996 Uusikaupunki applied to the Turun lääninverovirasto (Turku Province Tax Office) under Paragraph 30 of the AVL to become liable to VAT with respect to the letting of the two properties at issue in the main proceedings. The tax authority approved that application with effect from the date on which the application was made, since the application had not been made within six months of bringing the property into use, as laid down in Paragraph 106 of the AVL.

18By two applications, dated 8 September 1998 and 30 March 2000, Uusikaupunki applied to the Lounais-Soumen verovirasto, under Article 20 of the Sixth Directive, for adjustment of the tax deductions and a refund of part of the VAT paid in connection with building and restoration work for the years 1996 to 1999. The sum applied for was FIM 1 651 653, plus interest at the statutory rate.

19By decisions dated 3 May 2000, the Lounais-Suomen verovirasto rejected those applications on the grounds that deduction of VAT paid in connection with building and restoration work was possible under Paragraph 106 of the AVL only if the option to become liable to that tax had been exercised within six months of the properties being brought into use.

20Uusikaupunki brought an unsuccessful appeal before the Helsingin hallinto-oikeus for those decisions to be set aside. The appellant in the main proceedings then appealed against that judgment to the Korkein hallinto-oikeus (Supreme Administrative Court).

21The Korkein hallinto-oikeus is uncertain whether the conditions to which the AVL makes the deduction of VAT subject are contrary to the Sixth Directive in so far as Finnish law does not permit adjustment of deductions of VAT in connection with the letting of a property where that property was initially brought into use in nontaxable activity before being used in taxable activity unless the application for the letting to become liable to tax was submitted within six months of the property being brought into use.

22According to the referring court, there is no doubt that Uusikaupunki acted as a taxable person with regard to the acquisitions made in respect of the new building and restoration work in question, and that those acquisitions were made for the purposes of the appellant's economic activity.

23It was in those circumstances that the Korkein hallinto-oikeus decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:

‘(1) Is Article 20 of [the Sixth Directive] to be interpreted as meaning that the adjustment of deductions in accordance with that article is mandatory for Member States in the case of capital goods unless it follows otherwise from Article 20(5)?

(2) Is Article 20 of the [Sixth] Directive to be interpreted as meaning that the adjustment of deductions in accordance with that article is applicable even where the capital goods, in this case immovable property, were first used in non-taxable activity, in which case an initial deduction could not have been made at all, and only later in taxable activity during the adjustment period?

(3) May the second subparagraph of Article 13(C) of the [Sixth] Directive be interpreted as meaning that a Member State may restrict the right to deduct for acquisitions relating to immovable property investments in the manner laid down in the Finnish Arvonlisäverolaki, where the right to deduct is excluded altogether in situations such as the present one?

(4) May the second subparagraph of Article 17(6) of the [Sixth] Directive be interpreted as meaning that a Member State may restrict the right to deduct for acquisitions relating to immovable property investments in the manner laid down in the Finnish Arvonlisäverolaki, where the right to deduct is excluded altogether in situations such as the present one?’

The first question

24First, according to the structure of the system introduced by the Sixth Directive, input taxes on goods or services used by a taxable person for his taxable transactions may be deducted. The deduction of input taxes is linked to the collection of output taxes. Where goods or services acquired by a taxable person are used for purposes of transactions that are exempt or do not fall within the scope of VAT, no output tax can be collected or input tax deducted. However, where goods or services are used for the purposes of transactions that are taxable as outputs, deduction of the input tax on them is required in order to avoid double taxation.

25The period laid down in Article 20 of the Sixth Directive for adjustment of deductions makes it possible to avoid inaccuracies in the calculation of deductions and unjustified advantages or disadvantages for a taxable person where, in particular, changes occur in the factors initially taken into consideration in order to determine the amount of deductions after the declaration has been made. The likelihood of such changes is particularly significant in the case of capital goods, which are often used over a number of years, during which the purposes to which they are put may alter. The Sixth Directive therefore provides for an adjustment period of five years, extendable to 20 years in the case of immovable property, with varying deductions staggered over the whole period.

26The system of adjustment of deductions is an essential element of the system introduced by the Sixth Directive in that its purpose is to ensure the accuracy of deductions and hence the neutrality of the tax burden. Article 20(2) of the Sixth Directive concerning capital goods, which are relevant in the main proceedings, is moreover drafted in terms which leave no doubt as to its binding nature.

27It also follows from settled case-law that limitations on the right of deduction, and hence adjustments to deductions, must be applied in a similar manner in all the Member States and derogations are permitted only in the cases expressly provided for in the Sixth Directive (see, to that effect, Case C-97/90 Lennartz [1991] ECR I-3795, paragraph 27). The fact that Article 20(5) of the Sixth Directive lays down very specific conditions that must be met in order for a Member State to be able, by way of derogation, to refrain from applying Article 20(2) strengthens the binding nature of the latter provision. It should be noted in this connection that there was disagreement at the hearing, between the Finnish Government and the Commission, over whether the committee set up under Article 29 of the Sixth Directive had been consulted, as provided for in Article 20(5) of that directive, and what the outcome had been. However, the purpose of the questions referred by the national court is clearly not to ascertain whether the conditions for applying that derogation are met in the present case.

28As regards the Finnish Government's argument that Article 20(4) of the Sixth Directive allows Member States to define the term ‘capital goods’ and that the provision of building services need not necessarily be covered by that term, suffice it to say the Finnish Government acknowledges that that term has not been defined in Finnish law, since the procedure laid down in Article 20(2) to (5) of the Sixth Directive has not been transposed into national law. It is clear from the Court's caselaw that a Member State which has failed to transpose the provisions of a directive into national law cannot rely, as against Community citizens, upon limitations that might have been laid down on the basis of those provisions (see, to that effect, Joined Cases C-6/90 and C-9/90 FrancovichandOthers [1991] ECR I-5357, paragraph 21, and Case C-142/04 Aslanidou [2005] ECR I-7181, paragraph 35).

29Moreover, contrary to what the Finnish Government contends, the adjustment of deductions of input tax under Article 20 of the Sixth Directive is not merely an alternative to applying Articles 5(6) and 6(2) of that directive, which concern the taxing of applications and services effected by a taxable person for his private use, and so Member States do not have a choice between transposing either the adjustment mechanism or the mechanism for making applications for private use liable to tax since both are mandatory.

30Although Article 20, on one hand, and Articles 5 and 6, on the other hand, are, according to their wording, liable to apply in principle in a situation where goods, the use of which is eligible for deduction, are then put to a use which is not eligible for deduction, and even though the two mechanisms have the same economic effect in that situation (see, to that effect, Joined Cases C-487/01 and C-7/02 Gemeente LeusdenandHolinGroep [2004] ECR I-5337, paragraph 90), that is not the case in the reverse situation, which is relevant here in the main proceedings, where goods the use of which is not eligible for deduction are then put to a use which is so eligible. Eligibility for adjustment of deductions for the benefit of a taxable person, which is relevant in the second situation, may only be based soley on the provisions of Article 20 of the Sixth Directive and not on those of Articles 5 and 6 of that directive. In such situations, application of the provisions of Article 20 of the Sixth directive is therefore essential, irrespective of the application under national law of Articles 5 and 6 thereof.

31Contrary to what the Finnish Government contends, even in situations where goods are put to another use, changing from a use that is eligible for deduction to a use that is not eligible for deduction, and where there is, as a consequence, a risk that the provisions of those articles might overlap, this does not give rise to any conflict that would justify not implementing the procedure for adjustment of deductions laid down in Article 20 of the Sixth Directive.

32At the hearing the Finnish Government cited the example of a property which after being acquired in taxable activity, is put, one year after its acquisition, to use in nontaxable activity for the next four years. That Government observes that in principle both Article 20 of the Sixth Directive, on one hand, and Articles 5(6) and 6(2) of that directive, on the other hand, are applicable in such a situation, but that application of those articles leads to different and irreconcilable outcomes. Under Article 20(2) of the Sixth Directive, adjustment of the deduction of VAT on the purchase price from the second year onwards results in keeping the deductible tax at one fifth of the purchase price, a fraction which corresponds to the property's first year of use. Application of Articles 5(6) and 6(2) of the Sixth Directive, by contrast, results in taxation of the full value of the property at the time of the change in its use.

33In that regard, it should be noted immediately that Articles 5(6) and 6(2) apply only where the goods concerned are put to private use, not where the goods are put to another use in non-taxable activity.

34The applicability of each of the provisions in question will depend on whether the taxable person has decided to use the property in question permanently for his private use or rather envisages the possibility of using it in future for the purposes of his business and therefore decides to keep it as one of the assets of that business. In the first case, Articles 5(6) and 6(2) of the Sixth Directive will apply, and in the second case, Article 20 of the directive will apply. The fact that it is possible for a taxable person to choose whether or not to integrate into his business, for the purposes of applying the Sixth Directive, part of an asset which is given over to his private use follows from settled case-law (see, in particular, Case C-291/92 Armbrecht [1995] ECR I-2775, paragraph 20, and Case C-434/03 Charles and Charles-Tijmens [2005] ECR I-7037, paragraph 23). In the example cited by the Finnish Government, there is therefore no real conflict.

35In the light of the foregoing considerations, the answer to the first question must be that Article 20 of the Sixth Directive must be interpreted as meaning that, subject to the provisions of Article 20(5) thereof, it requires Member States to make provision for adjustment of VAT deductions on capital goods.

The second question

36The second question seeks to determine whether the fact that the relevant activity was originally non-taxable and deductions were therefore totally excluded has any impact on that adjustment.

37As the Advocate General observed in points 36 and 37 of her Opinion, application of the adjustment mechanism depends on the existence of a right to deduct based on Article 17 of the Sixth Directive.

38Pursuant to Article 17(1) of the Sixth Directive, which is entitled ‘Origin and scope of the right to deduct’, the right to deduct VAT arises at the time when the deductible tax becomes chargeable. Consequently, only the capacity in which a person is acting at that time can determine the existence of the right to deduct (Lennartz, paragraph 8).

39The Court has also held that the use to which capital goods are put merely determines the extent of the initial deduction to which the taxable person is entitled under Article 17 of the Sixth Directive and the extent of any adjustments in the course of the following periods, but does not affect whether a right to deduct arises. It follows that the immediate use of the goods for taxable supplies does not in itself constitute a condition for the application of the system of adjustment of deductions (Lennartz, paragraphs 15 and 16).

40Lastly, contrary to what the Italian Government contends, adjustment of the deduction under Article 20 of the Sixth Directive also applies necessarily where alteration of the right to deduct depends on a deliberate choice on the part of the taxpayer, such as exercise of the option provided for in Article 13(C) of the Sixth Directive. Exercise of that option has no effect on the inception of the right to deduct, which, as stated above, is governed by Article 17(1) of the Sixth Directive. Since the letting of a property is taxable after the option to become liable to tax has been exercised, an adjustment of the deductions becomes necessary in order to avoid double taxation of the input costs, irrespective of the fact that that taxation is the consequence of a deliberate choice by the taxpayer.

41Article 18(3) of the Sixth Directive, cited by the Italian Government, is irrelevant in this connection since that paragraph concerns a situation in which a taxpayer has not made deductions which he was entitled to make, which cannot be the case before the option provided for in Article 13(C) of the Sixth Directive has been exercised. As the extent of the initial deduction was nil, it is only after exercising that option that the taxpayer's right to deduct acquires a genuine value which may be subject to deduction.

42The answer to the second question must therefore be that Article 20 of the Sixth Directive must be interpreted as meaning that the adjustment provided for therein is also applicable where the capital goods were first used in non-taxable activity that was not eligible for deduction and were then used in activity, subject to VAT during the adjustment period.

The third question

43By its third question, the referring court is seeking in essence to ascertain whether the second subparagraph of Article 13(C) of the Sixth Directive must be interpreted as meaning that a Member State which gives its taxable persons the right to opt for taxation of the letting of a property is permitted to exclude deduction of VAT on immovable property investments made before that right of option is exercised, where the application for that option has not been made within six months of the property being brought into use.

44As stated in paragraph 24 above, according to the structure of the system introduced by the Sixth Directive, it must be possible for input taxes on goods or services used by a taxable person for his taxable transactions to be deducted. Therefore, since under the first subparagraph of Article 13(C) of the Sixth Directive it is possible for taxable persons to opt for taxation of the letting of immovable property, the exercise of that option must lead not only to taxation of the letting but also to deduction of the relevant input taxes on the property concerned.

45The Member States are of course free to lay down the procedural requirements under which a right of option may be exercised, which includes the possibility of providing that taxation will be effective only after the application has been made and that only after that date will deduction of input taxes be possible (Case C-269/03 Vermietungsgesellschaft Objekt Kirchberg [2004] ECR I-8067, paragraph 23). However, such rules must not result in restricting the right to deduct in connection with taxable transactions where the right of option has been properly exercised in accordance with those rules. In particular, application of national procedural rules must not result in restricting the period in which deductions may be made to a period that is shorter than that laid down in the Sixth Directive for the adjustment of deductions.

46Moreover, restricting deductions in connection with taxable transactions after the right of option has been exercised would affect, not the ‘scope’ of the right of option, referred to in the second subparagraph of Article 13(C) of the Sixth Directive, but the consequences of exercising that right. That provision does not therefore permit Member States to restrict the right to deduct provided for in Article 17 of the Sixth Directive or the need to adjust such deductions under Article 20 of that directive.

47The answer to the third question must therefore be that the second subparagraph of Article 13(C) of the Sixth Directive must be interpreted as meaning that a Member State which gives its taxable persons the right to opt for taxation of the letting of a property is not permitted by that provision to exclude deduction of VAT on immovable property investments made before that right of option is exercised, where the application to exercise that option has not been made within six months of the property being brought into use.

The fourth question

48By this last question, the referring court is asking in essence whether Article 17(6) of the Sixth Directive must be interpreted as meaning that a Member State which gives its taxable persons the right to opt for taxation of the letting of a property is permitted to exclude deduction of VAT on immovable property investments made before that right of option is exercised, where the application to exercise that option has not been made within six months of the property being brought into use.

49Analysis of the origin of Article 17(6) of the Sixth Directive shows that the option given to Member States by the second subparagraph of that provision applies only to maintaining exclusions from deduction with regard to categories of expenditure defined by reference to the nature of the goods or services acquired rather than by reference to the use to which they are put or the way in which they are used (see, to that effect, Case C-305/97 RoyscotandOthers [1999] ECR I-6671, paragraphs 21 to 25).

50As the Advocate General observed in point 79 of her Opinion, it is apparent that point (1) of the first subparagraph of Paragraph 102 of the AVL expressly provides that in certain circumstances it is possible to deduct VAT on immovable property investments, such as building costs and purchases related to such property. The exclusion in question relating to costs incurred before the option to become liable to VAT is exercised does not therefore fall within the derogation provided for in the second subparagraph of Article 17(6) of the Sixth Directive.

51The answer to the fourth question must therefore be that Article 17(6) of the Sixth Directive must be interpreted as meaning that a Member State which gives its taxable persons the right to opt for taxation of the letting of a property is not permitted by that provision to exclude deduction of VAT on immovable property investments made before that right of option is exercised, where the application to exercise that option has not been made within six months of the property being brought into use.

Limitation of the temporal effect of this judgment

52The Finnish Government has requested the Court, in the event that it does not agree with its line of argument, to limit the temporal effects of the present judgment to the period following its delivery.

53According to settled case-law, the interpretation which, in the exercise of the jurisdiction conferred on it by Article 234 EC, the Court gives to a rule of Community law clarifies and defines, where appropriate, the meaning and scope of that rule as it must be, or ought to have been, understood and applied from the time it was brought into force. It follows that the rule as thus interpreted may, and must, be applied by the courts even to legal relationships which arose and were established before the judgment ruling on the request for interpretation, provided that in other respects the conditions for bringing a dispute relating to the application of that rule before the competent courts are satisfied (see, in particular, Case 24/86 Blaizot [1988] ECR 379, paragraph 27, and Case C-415/93 Bosman [1995] ECR I-4921, paragraph 141).

54Also according to settled case-law, individuals are entitled to obtain repayment of national charges levied in breach of Community provisions (see, in particular, Case 199/82 SanGiorgio [1983] ECR 3595, paragraph 12, and Joined Cases C-192/95 to C-218/95 ComatebandOthers [1997] ECR I-165, paragraph 20).

55It 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 the possibility for any person concerned of relying on a provision it has interpreted with a view to calling in question legal relationships established in good faith. Two essential criteria must be fulfilled before such a limitation can be imposed, namely that those concerned should have acted in good faith and that there should be a risk of serious difficulties (see, in particular, Case C-57/93Vroege [1994] ECR I-4541, paragraph 21, and Case C-402/03 SkovandBilka[2006] ECR I-199, paragraph 51).

56In the present case, it should be noted, as the Advocate General rightly did in point 87 of her Opinion, that the Finnish Government has only mentioned the practical difficulties that would have to be taken into account if the effects of the present judgment were not limited in time.

57It should also be observed in this connection that the Finnish Government stated that it had invoked the derogation provided for in Article 20(5) of the Sixth Directive. The applicability of that provision was, according to its actual wording, conditional, in particular, on the effect of applying the system of adjustment of deductions being ‘insignificant’. Irrespective of whether the consultations provided for in Article 29 of the Sixth Directive took place, there are grounds for finding that the very fact that the Finnish Government invoked Article 20(5) of that directive casts doubt on whether retroactive application of the system of adjustment of deductions would have any serious repercussions.

58Moreover, it may be noted, as has been stated in paragraph 26 above, that Article 20 (2) of the Sixth Directive, concerning adjustment of the deductions in question, is drafted in terms which leave no doubt as to its binding nature. The Finnish Government's argument that the relevant provisions of the Sixth Directive are vague, causing uncertainty regarding their application, must therefore be rejected.

59It is therefore not appropriate to limit the temporal effects of the present judgment.

Costs

Costs

60Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

On those grounds, the Court (First Chamber) hereby rules:

1. Article 20 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, must be interpreted as meaning that, subject to the provisions of Article 20(5) thereof, it requires Member States to make provision for adjustment of deductions of value added tax on capital goods.

2. Article 20 of Sixth Directive 77/388 must be interpreted as meaning that the adjustment provided for therein is also applicable where the capital goods were first used in non-taxable activity that was not eligible for deduction and were then used in activity, subject to value added tax during the adjustment period.

3. The second subparagraph of Article 13(C) of Sixth Directive 77/388 must be interpreted as meaning that a Member State which gives its taxable persons the right to opt for taxation of the letting of a property is not permitted by that provision to exclude deduction of value added tax on immovable property investments made before that right of option is exercised, where the application to exercise that option has not been made within six months of the property being brought into use.

4. Article 17(6) of Sixth Directive 77/388 must be interpreted as meaning that a Member State which gives its taxable persons the right to opt for taxation of the letting of a property is not permitted by that provision to exclude deduction of value added tax on immovable property investments made before that right of option is exercised, where the application to exercise that option has not been made within six months of the property being brought into use.

[Signatures]

OPINION OF ADVOCATE GENERAL STIX-HACKL delivered on 15 September 2005 1

I — Introductory remarks

1In these proceedings, the Korkein hallinto-oikeus (Supreme Administrative Court, Finland) is asking the Court for an interpretation of Sixth Council Directive 77/388/EEC on value added tax 2 (hereinafter ‘the Sixth Directive’), with particular reference to the adjustment of deductions in the case of capital goods in the form of immovable property.

2The question at issue is essentially whether, in the light of the Sixth Directive, an adjustment of the deduction of input tax in respect of capital goods may be allowed in a case where immovable property was first used in non-taxable activity but subsequently in taxable activity.

II — The legal framework

A — TheSixthDirective

3Article 5(6) provides that:

‘The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration. However, applications for the giving of samples or the making of gifts of small value for the purposes of the taxable person's business shall not be so treated.’

4Article 6, entitled ‘Supply of services’, contains the following provisions:

‘2. The following shall be treated as supplies of services for consideration:

(a) the use of goods forming part of the assets of a business for the private use of the taxable person or of his staff or more generally for purposes other than those of his business where the value added tax on such goods is wholly or partly deductible;

(b) supplies of services carried out free of charge by the taxable person for his own private use or that of his staff or more generally for purposes other than those of his business.’

5Article 13, entitled ‘Exemptions within the territory of the country’, contains the following provisions:

‘B. Otherexemptions

Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

…

(b) the leasing or letting of immovable property …

…

C. Options

Member States may allow taxpayers a right of option for taxation in cases of:

(a) letting and leasing of immovable property;

…

Member States may restrict the scope of this right of option and shall fix the details of its use.’

6 Article 17, entitled ‘Origin and scope of the right to deduct’, contains the following provisions:

‘1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2. 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;

…

6Before 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.’

7Article 20, entitled ‘Adjustments of deductions’, contains the following provisions:

‘1. The initial deduction shall be adjusted according to the procedures laid down by the Member States, in particular:

(a) where that deduction was higher or lower than that to which the taxable person was entitled;

(b) where after the return is made some change occurs in the factors used to determine the amount to be deducted, in particular where purchases are cancelled or price reductions are obtained; however, adjustment shall not be made in cases of transactions remaining totally or partially unpaid and of destruction, loss or theft of property duly proved or confirmed, nor in the case of applications for the purpose of making gifts of small value and giving samples specified in Article 5(6). However, Member States may require adjustment in cases of transactions remaining totally or partially unpaid and of theft.

2. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured. The annual adjustment shall be made only in respect of one-fifth of the tax imposed on the goods. The adjustment shall be made on the basis of the variations in the deduction entitlement in subsequent years in relation to that for the year in which the goods were acquired or manufactured.

By way of derogation from the preceding subparagraph, Member States may base the adjustment on a period of five full years starting from the time at which the goods are first used.

In the case of immovable property acquired as capital goods the adjustment period may be extended up to 20 years.

… 5. If in any Member State the practical effect of applying paragraphs 2 and 3 would be insignificant, that Member State may, subject to the consultation provided for in Article 29, forego application of these paragraphs, having regard to the need to avoid distortion of competition, the overall tax effect in the Member State concerned and the need for due economy of administration.’ 3

B — Therelevant national provisions

8The Directive was transposed in Finland by the Arvonlisäverolaki (Finnish Value Added Tax Law) (‘the AVL’). The provisions concerning the taxation of supplies of immovable property are contained in Paragraphs 27 to 30 of the AVL. Under Paragraph 27, first subparagraph, of the AVL, tax is not charged on the sale of immovable property or the grant of a tenancy of land or a dwelling or an easement or a comparable right concerning immovable property. 4 Paragraph 30 provides, as an exception to that provision, that a taxable person may apply to be taxed in respect of a supply of the right to use immovable property.

9Under Paragraph 106 of the AVL, concerning the right to deduct in respect of building services, if an owner of immovable property applies to be taxed pursuant to Paragraph 30, he may make the deduction in respect of services or goods he acquired for the purpose of a taxable supply of property before making the application. It is a condition that the owner of the property has applied to be taxed within a period of six months from bringing the property into use. The right to deduct relates only to new building and restoration of immovable property.

10Under the AVL, the adjustment or other revision to the benefit of the taxpayer of deductions relating to the acquisition of immovable property or new building and restoration work is not possible, and that also applies in a situation such as the present one, in which the application to be made liable to tax was made after the abovementioned date and the property was first used in non-taxable activity and subsequently in taxable activity.

III — Facts, procedure and questions for preliminary ruling

11The town of Uusikaupunki (hereinafter ‘Uusikaupunki’) restored a house which it owned and leased it to the Finnish State, part from 1 June 1995 and part from 1 September 1995. The town also leased an industrial building which it had built to an undertaking which was subject to value added tax.

12Uusikaupunki applied to the South-West Finland regional tax office in accordance with Paragraph 30 of the AVL to be made liable to value added tax on those transactions. The tax office recorded the tax liability as having commenced on the date of the application, 4 April 1996, because the application was made more than six months after the date on which the property had been supplied after completion of the building work.

13By two applications, submitted on 8 September 1998 and 30 March 2000, Uusikaupunki applied to the tax office for reimbursement on the basis of Article 20 of the Sixth Directive of the value added tax contained in the restoration and construction costs for the accounting periods 1996, 1997, 1998 and 1999. The total sum claimed is FIM 1 651 653, including statutory interest.

14The regional tax office rejected Uusikaupunki's applications by decision of 3 May 2000 on the ground that revision of the deductions under Article 20 of the Sixth Directive was not possible. An owner of immovable property who had applied to be made liable to tax under Paragraph 30 of the AVL might, under Paragraph 106 of the AVL, make a deduction in respect of services or goods bought by him for a taxable supply of immovable property before making the application, or deduct the tax paid on the construction service he had himself supplied for that purpose, only if he had applied to be made liable to tax within six months of bringing the property into use.

15Uusikaupunki appealed against the decision of the regional tax office to the Hallintooikeus (Administrative Court) in Helsinki, which dismissed the appeal. Uusikaupunki appealed against that decision to the Korkein hallinto-oikeus (Supreme Administrative Court).

16The point at issue in this case, according to the Korkein hallinto-oikeus, is whether the provisions of the AVL concerning applications to be made liable to tax in respect of a supply of the right to use immovable property conflict with the provisions of the Sixth Directive concerning the right to deduct. To decide the case, the referring court therefore requires an interpretation of the Sixth Directive, in particular Article 20 concerning adjustments of deductions. It considers that the town of Uusikaupunki unquestionably acted in the capacity of a taxable person when it made purchases in connection with the restoration and new construction of the property and that the acquisitions took place for the purposes of the town's economic activity.

17The Korkein hallinto-oikeus accordingly asked the Court of Justice of the European Communities, by order of 16 April 2004 received at the Court Registry on 19 April 2004, to deliver a preliminary ruling in the case pending before it on the following questions:

‘1. Is Article 20 of Directive 77/388/EEC to be interpreted as meaning that the adjustment of deductions in accordance with that article is mandatory for Member States in the case of capital goods unless it follows otherwise from Article 20(5)?

2. Is Article 20 of the Directive to be interpreted as meaning that the adjustment of deductions in accordance with that article is applicable even where the capital goods, in this case immovable property, were first used in non-taxable activity, in which case an initial deduction could not have been made at all, and only later in taxable activity during the adjustment period?

3. May the second subparagraph of Article 13(C) of the Directive be interpreted as meaning that a Member State may restrict the right to deduct for acquisitions relating to immovable property investments in the manner laid down in the Finnish Arvonlisäverolaki, where the right to deduct is excluded altogether in situations such as the present one?

4. May the second subparagraph of Article 17(6) of the Directive be interpreted as meaning that a Member State may restrict the right to deduct for acquisitions relating to immovable property investments in the manner laid down in the Finnish Arvonlisäverolaki, where the right to deduct is excluded altogether in situations such as the present one?’

IV — The first question

18By its first question, the referring court seeks to ascertain whether — unless it follows otherwise from Article 20(5) — the adjustment of deductions in accordance with Article 20(2) of the Sixth Directive is mandatory for Member States in the case of capital goods or whether it is only optional.

19It should be noted in this connection that, according to the referring court's statements in the order for reference, the AVL makes no provision for an adjustment procedure in the case of capital goods.

A — Mainargumentsof the parties

20The Finnish Government takes the view that the possibility of adjusting deductions in accordance with Article 20 of the Sixth Directive is not to be regarded as mandatory, on a number of grounds. First, adjustment in accordance with Article 20 must, it claims, be regarded as an alternative to the provisions contained in Article 5(6) and Article 6 (2) of the Sixth Directive concerning the taxation of supplies of goods and services by a taxable person for his own use. Those two tax mechanisms pursue essentially similar objectives and cannot, moreover, apply to the same situation at the same time. Second, in accordance with Article 20(4) of the Sixth Directive, Member States may define the concept of ‘capital goods’ and there is nothing in the Directive to suggest that construction services must necessarily be included in the concept of ‘capital goods’. Third, Article 20(5) of the Sixth Directive provides Member States with the possibility, in certain circumstances which, it is claimed, obtain in the case of Finland, of not applying the provisions on the adjustment of deductions.

21Uusikaupunki, the Commission and the Italian Government take the view that the provision of an adjustment procedure for capital goods is mandatory under the terms of Article 20 of the Sixth Directive.

B — Assessment

22It should be noted, first, that, in accordance with the third paragraph of Article 249 EC, a directive is binding, as to the result to be achieved, upon each Member State to which it is addressed and, according to settled case-law, the Member States are obliged to adopt all the measures necessary to ensure that the directive is fully effective. 5

23Article 20(2) of the Sixth Directive provides that ‘[i]n the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured’.

24As Uusikaupunki, the Italian Government and the Commission have rightly pointed out, that wording does not permit the conclusion that Member States may dispense with adjustment in the case of capital goods. This is confirmed by the fact that Article 20(5) of the Sixth Directive lays down precise conditions under which a Member State may exceptionally forego application of paragraphs 2 and 3 of that article concerning adjustment in the case of capital goods.

25Moreover, it is impossible to agree with the Finnish Government's argument concerning Articles 5(6) and 6(2) of the Sixth Directive. The fact that, as the Finnish Government pointed out, those provisions of the Sixth Directive on the application of goods or the supply of services for the trader's private use partly pursue the same objectives as adjustment and may in some circumstances relate to the same situation does not mean that a Member State may dispense with adjustment in the case of capital goods. The two provisions do not overlap so completely that they can be regarded as ‘alternative’ mechanisms and overlapping is only conceivable in certain cases of the application of goods or services for ‘own use’.

26In so far as practical problems of application may arise as a result of possible overlapping, as the Finish Government contends, they must be solved with all due regard to the principles underlying the Sixth Directive, such as the principle that value added tax must be levied in a wholly neutral way. In my view, however, such difficulties are not such as to simply release a Member State from the obligation to provide for adjustment in the case of capital goods in accordance with Article 20(2) of the Sixth Directive.

27Moreover, the adjustment of deductions in accordance with Article 20 of the Sixth Directive — in so far as it differs from the rules relating to the taxation of the application or supply of goods or services for private use — is to be regarded as a necessary extension of the right to deduct in accordance with Article 17 of the Sixth Directive, which serves to relieve the trader entirely of the burden of the value added tax payable or paid in the course of all his economic activities and thus ensure that all economic activities are taxed in a wholly neutral way. 6

28In allowing account to be taken, in particular, of changes in the factors originally used to determine the amount to be deducted 7 — particularly important in the case of capital goods that form part of the business assets for a considerable time — the adjustment procedure helps to ensure greater precision in the matter of deduction.

29Lastly, as regards Article 20(5) of the Sixth Directive, the first question is clearly not concerned as such with the issue of whether the conditions for the application of this exceptional provision are fulfilled in the present case.

30In the light of the foregoing considerations, I propose that the answer to the first question should be that Article 20 of the Sixth Directive is to be interpreted as meaning that Member States must provide for the adjustment of deductions in accordance with that article in the case of capital goods unless it follows otherwise from Article 20(5).

V — The second question

31By its second question, the referring court seeks essentially to ascertain whether Article 20 of the Sixth Directive is to be interpreted as meaning that the adjustment is applicable even where the capital goods, in this case immovable property, were first used in non-taxable activity, on which no deduction could have been made, and only later in taxable activity, with the result that the value added tax contained in the capital goods is deductible.

A — Essentialarguments oftheparties

32Uusikaupunki and the Commission take the view that the adjustment of deductions is applicable in the present case. According to the case-law of the Court, in particular the judgment in Lennartz, 8 the decisive factor is whether the goods or services for the capital investment were acquired by a taxable person acting as such. The immediate use of the goods for a taxable activity does not constitute a condition for the application of Article 20(2) of the Sixth Directive. In the present case, the restoration and construction works were undertaken for a taxable person, even if the activities in this connection were originally non-taxable.

33The Finnish Government submits that the judgment in Lennartz9 relates only to a situation in which a Member State applies the adjustment of deductions in accordance with Article 20(2) of the Sixth Directive. The Court did not, however, rule on the question of the applicability of deduction in a situation where in a Member State — as in Finland — only Article 17 concerning the origin and scope of the right to deduct is applied, not Article 20 concerning adjustments of deductions. In these circumstances, it is claimed, the right to deduct must be considered exclusively in the light of the situation obtaining at the time when the services were acquired. If they were acquired for the purposes of a non-taxable activity, there is consequently no right to deduct.

34The Italian Government takes the view that the adjustment of deductions in accordance with Article 20 of the Sixth Directive is not applicable in a situation such as the present one. Member States could exclude such adjustment if the change in the right to deduct arose from a deliberate decision on the part of the taxable person.

B — Assessment

35Attention must first be drawn to the connection between the origin of the right to deduct, on the one hand, and the application of the adjustment of deductions, on the other.

36As the Court has held previously, it is apparent from the scheme of the Sixth Directive and from the actual wording of Article 20(2) that the latter provision does no more than establish the procedure for calculating the adjustments to the initial deduction; it cannot therefore give rise to any right to deduct or convert the tax paid by a taxable person in respect of his non-taxable transactions into tax that is deductible within the meaning of Article 17. 10

37The application of the adjustment mechanism therefore depends on the existence of a right to deduct pursuant to Article 17 of the Sixth Directive.

38Under Article 17(1), the right to deduct arises at the time when the deductible tax becomes chargeable. Under Article 10(2) of the Sixth Directive, the tax becomes chargeable when the goods are delivered or the services are performed. 11

39According to settled case-law, the existence of a right to deduct is determined by whether a person who has acquired goods or services was acting as a taxable person at the time, that is, whether he has acquired the goods for the purposes of his economic activity within the meaning of Article 4 of the Sixth Directive, and that is a question of fact which must be determined in the light of all the circumstances of the case. 12

40In the present case, the referring court considers that in any event Uusikaupunki unquestionably had the construction and restoration work on the capital goods at issue carried out for the purposes of its economic activity as a taxable person.

41It must therefore be concluded that the capacity of taxable person, as a prerequisite for the existence of the right to deduct on which the application of the adjustment mechanism depends, is established.

42Moreover, value added tax paid in respect of goods or services is deductible only in so far as the goods and services are used for the purposes of taxable transactions.13

43In my view, however, the fact that the capital goods on which the construction and restoration work was undertaken were first used in non-taxable activity and only later in taxable activity based on the exercise of the right of option, does not preclude the right to deduct and consequently the application of an adjustment to the initial deduction.

44As the Court held in its judgment in Lennartz, the use to which the goods or services are put, or intended to be put, is to be distinguished from their acquisition by a taxable person acting as such and merely determines the extent of the initial deduction to which the taxable person is entitled under Article 17 and the extent of any adjustments in the course of the following periods. As the Court also held in that judgment, it follows that ‘the immediate use of the goods for taxable or exempt supplies does not in itself constitute a condition for the application of Article 20(2)’. 14

45I therefore assume that in principle adjustment in accordance with that article is applicable even in a situation such as the present one in which capital goods were first used in non-taxable activity and only later in taxable activity, in so far as the initial acquisitions in this connection — that is, the goods and services acquired for the capital goods — were made in the capacity of taxable person. 15

46Since no part of the capital goods in respect of which Uusikaupunki paid value added tax for construction and restoration work was initially used for taxable activities, no deduction was made at first. The subsequent change in the factors initially taken into account in determining the amount to be deducted, namely the use for taxable activities, was then taken into account in accordance with the available statements by way of adjustment, so as to achieve the best possible balance between the scope of the taxable activities and the deduction claimed. This solution is in line with the abovementioned objective of the rules on deduction, namely to relieve the trader entirely of the burden of the value added tax payable or paid in the course of his economic activities and thus ensure that all economic activities are taxed in a wholly neutral way. 16

47If, on the other hand, the adjustment mechanism did not apply in a situation in which capital goods were first used in nontaxable activity and later in taxable activity, the result would be that, contrary to the principle of neutrality, value added tax would effectively be payable more than once on goods and services included in the value of the capital goods.

48In the light of all the foregoing, I propose that the answer to the second question should be that Article 20 of the Sixth Directive is to be interpreted as meaning that the adjustment is applicable even where the capital goods, in this case immovable property, were first used in non-taxable activity, on which no deduction could have been made, and later in taxable activity.

VI — The third question

49The third question should be considered in the light of the fact that deduction of value added tax paid in connection with immovable property investments before an application is made is excluded under the AVL if the application in question is not made within six months.

50The third question is therefore essentially whether the second subparagraph of Article 13(C) of the Sixth Directive is to be interpreted as meaning that a Member State which allows its taxpayers a right of option for taxation on the use of immovable property may exclude altogether the deduction of value added tax paid on immovable property investments before an application is made for the leasing of the property to be taxable, if that application is not made within six months.

A — Essentialarguments oftheparties

51The Finnish and Italian Governments take the view that the second subparagraph of Article 13(C) of the Sixth Directive permits a restriction of the right to deduct in the manner laid down in the Finnish legislation.

52The Finnish Government submits that, in accordance with the wording of the second subparagraph of Article 13(C) of the Sixth Directive, Member States may restrict the right to deduct. In its view, the purpose of the option for taxation is to enable deductions to be made in respect of expenditure relating to immovable property. The fact that Member States may restrict the scope of this right of option necessarily affects the right to deduct in respect of expenditure relating to immovable property.

53The Italian Government considers that the right to opt for taxation does not imply a right to deduct for past acquisitions. In its view, that right applies only to future acquisitions. On the basis of Article 13(C), and in particular Article 18(3), of the Sixth Directive, Member States may nevertheless provide for the right to opt for taxation on the leasing of immovable property to be retroactive but they are not required to do so.

54Uusikaupunki and the Commission take the view that Article 13(C) does not allow Member States to restrict the right to deduct in connection with immovable property investments in such a manner as to exclude it altogether in certain circumstances.

55Uusikaupunki draws a distinction in its interpretation of Article 13(C) of the Sixth Directive between, on the one hand, the possibility for Member States to restrict the scope of the right of option and, on the other, the provision that they may fix the details of its use. In Uusikaupunki's view, the question of the scope of the right of option does not arise in the present case inasmuch as it is not disputed that Uusikaupunki had a right of option and that it exercised it. As to fixing the details of the use of the right of option, that provision does not in its view allow Finland to restrict the right to deduct in such a manner as to exclude it altogether.

56The Commission largely agrees with that view and explains that Articles 17 to 20 of the Sixth Directive apply automatically from the moment a taxable person exercises his right to deduct under national law. In the light of the settled case-law of the Court, Member States may not impose further restrictions on the right to deduct in that case.

B — Assessment

57Title X (Articles 13 to 16) of the Sixth Directive provides for various exemptions including in particular, under Article 13(B) (b), the leasing or letting of immovable property.

58Member States have the power, however, under point (a) of the first subparagraph of Article 13(C), to ‘reintroduce’ liability to tax, by means of a right of option which they may allow their taxpayers to exercise.

59Under the second subparagraph of Article 13(C), Member States may restrict the scope of this right of option and fix the details of its use.

60As the Court has held previously, Member States may, by virtue of this power, allow persons benefiting from the exemptions provided for by the Sixth Directive to waive the exemption in all cases or within certain limits or subject to certain detailed rules. 17

61According to the case-law of the Court, it follows that the Member States have a wide discretion under Article 13(B) and (C) of the Sixth Directive. 18

62In this connection, I think it is important to bear in mind first that the power conferred on Member States under Article 13(C) and the associated discretion are concerned with granting taxpayers the right to opt for or against taxation. 19

63The Commission is therefore right in so far as Article 13(C) concerns taxation and consequently cannot in principle serve as a basis for Member States directly to restrict the scope of other provisions of the Sixth Directive or of rights such as the right to deduct.

64In the present case, I already doubt whether excluding altogether the right to deduct value added tax paid — before the right of option was exercised — on investments in this immovable property, in a situation where six months had passed since the property was brought into use, falls within the power accorded to Member States under the second subparagraph of Article 13 (C) to determine the scope of the right of option or to fix the details of its use.

65It is true that Member States may rule on an application to deduct and provide for an approval process in this connection 20 and that they may also decide that the leasing or letting of the property is to be taxed only after the application has been made and that it may not be treated as a taxable activity retroactively. But excluding altogether, particularly by way of adjustment, the right to deduct value added tax paid on immovable property investments before an application was made is no longer, in my view, related to taxation in cases of letting and leasing of immovable property or with the scope of the right of option or the details of its use.

66Even if it were accepted that this exclusion is to be regarded as a restriction of the scope of the right of option or as a detail of its use within the meaning of the second subparagraph of Article 13(C), care must be taken to ensure that the right to deduct itself is not improperly undermined on the basis of that provision. 21

67It should be noted in this connection that a basic element of the VAT system is that VAT is chargeable on each transaction only after deduction of the amount of the VAT borne directly by the cost of the various components of the price of the goods and services. 22

68In that light, it is in my view within the discretion of a Member State not to allow the right of option for taxation to be exercised retroactively in so far as it is not possible to deduct tax expostfactofor the period before the right of option was exercised. On the other hand, it appears to me to be an excessive restriction of the right to deduct and to be incompatible with the principle of tax neutrality for it not to be at least possible to deduct value added tax paid on immovable property investments before the right of option was exercised in the adjustment period remaining after the exercise of the right of option and within the scope of the adjustment laid down in Article 20(2).

69I therefore propose that the answer to the third question should be that the second subparagraph of Article 13(C) is not to be interpreted as meaning that a Member State which allows its taxpayers a right to opt for taxation of the use of immovable property may exclude altogether the deduction of value added tax paid in respect of immovable property investments before an application is made for the leasing of the property to be taxable, if that application is not made within six months from the bringing into use of the property.

VII — The fourth question

70The fourth question is essentially whether Article 17(6) of the Sixth Directive is to be interpreted as meaning that a Member State which allows its taxpayers a right to opt for taxation of the use of immovable property may exclude altogether the deduction of value added tax paid in respect of immovable property investments before an application is made for the leasing of the property to be taxable, if that application is not made within six months. A — Essentialarguments oftheparties

71The Finnish Government takes the view that the provisions of Article 17(6) of the Sixth Directive allow Member States to restrict the right to deduct in connection with immovable property investments and even, as in the present case under the AVL, to exclude it altogether. It contends that, according to the case-law of the Court, only exclusions which relate generally to all goods or services are incompatible with the Sixth Directive.

72Uusikaupunki and the Commission consider, on the contrary, that Article 17(6) is not applicable in the present case. In their view, the Finnish provisions represent a refusal to adjust deductions in accordance with Article 20 rather than an exclusion of the right to deduct in accordance with Article 17 of the Sixth Directive.

73The Italian Government relies on its observations concerning the second question. According to those observations, Finland grants taxpayers under Paragraph 106 of the AVL a right to deduct which is not provided for in the Sixth Directive. Consequently, Article 17(6) of the Sixth Directive is applicable only in situations involving restriction, not extension, of the right to deduct, and is therefore irrelevant in the present case.

B — Assessment

74Under the second subparagraph of Article 17(6), ‘[u]ntil the above rules come into force, Member States may retain all the exclusions’ provided for under their national laws when the Sixth Directive comes into force. The term ‘exclusions’ in the second subparagraph is thus linked to the first subparagraph of Article 17(6). 23

75That subparagraph provides for the adoption by the Council of rules specifying what expenditure ‘shall not be eligible for a deduction of value added tax’. The second sentence of the subparagraph states that ‘[v]alue added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment’.

76Thus the first subparagraph of Article 17 (6) relates to certain categories or types of expenditure, including — but not limited to — expenditure which is not strictly business expenditure. 24

77It is clear from the legislative history of Article 17(6), first, that as the Commission stated in the explanatory memorandum accompanying its proposal, certain expenditure, even though incurred in the ordinary course of the undertaking's business, would be difficult to apportion between business use and private use; secondly, it should be noted that, when the Sixth Directive was adopted, the Member States were unable to agree on the arrangements applicable specifically to expenditure on passenger transport.25

78The substance of the power conferred on Member States under the second subparagraph of Article 17(6) is therefore that Member States may retain for the time being exclusions of deduction relating to certain kinds of expenditure — namely expenditure covered by the rules to be adopted by the Council in accordance with the first subparagraph of Article 17(6).

Commission and Uusikaupunki — that the ‘exclusion of value added tax’ to which that provision relates is irrelevant in the present case and cannot therefore be invoked to justify excluding tax of the present kind. Under the AVL, immovable property investments or the costs of construction and acquisition in connection with immovable property are not in principle types of expenditure that cannot be deducted. Under point (1) of Paragraph 102(1) of the AVL, investments in connection with immovable property are deductible if the property was acquired for the purposes of a taxable activity and at a time when that activity was being exercised. The complete exclusion in the present case related only to value added tax charged before the application was made in so far as the application to be liable to tax was not made within six months from the bringing into use of the property. Primarily in issue therefore, as explained in my observations on the first three questions, are the rules on adjustment within the meaning of Article 20 of the Sixth Directive and not the rules on deduction of value added tax in accordance with Article 17 of that directive as such.

80In my view, the answer to the fourth question should therefore be that Article 17 (6) of the Sixth Directive is not to be interpreted as meaning that a Member State which allows its taxpayers a right to opt for taxation of the use of immovable property may exclude altogether the deduction of value added tax paid in respect of immovable property investments before an application is made for the leasing of the property to be taxable, if that application is not made within six months.

VIII — Limitation of the temporal effect of the judgment

A — Essentialarguments oftheparties

81The FinnishGovernment asks the Court, should it disagree with its views, to limit the temporal effect of the judgment to the period after its delivery. It cites the unclear nature of the provisions at issue and the practical difficulties that would result from retroactive application. In particular, the Finnish Government stated at the hearing that it had acted in good faith. It pointed out in this connection that the Finnish provisions had been discussed at meetings of the VAT committee in 1995 and that neither the Commission nor other Member States had raised any objections.

82The Commission sees no reason to limit the temporal effect of the judgment. It confirms, however, that the Finnish provisions were discussed at two meetings in 1995. At least some Member States expressed doubts at the meeting as to the compatibility of the Finnish rules on deduction in relation to capital goods. The Finnish Government, it claims, was aware that the Commission considered the Finnish provisions to be inconsistent with the Sixth Directive.

B — Assessment

83In this connection, regard must first be had to the settled case-law of the Court to the effect that the interpretation which, in the exercise of the jurisdiction conferred on it by Article 234 EC, the Court gives to a rule of Community law clarifies and defines the meaning and scope of that rule as it must be or ought to have been understood and applied from the time of its entry into force. It follows that the rule as thus interpreted may, and must, be applied by the courts even to legal relationships which arose and were established before the judgment ruling on the request for interpretation, provided that in all other respects the conditions for bringing a dispute relating to the application of that rule before the competent courts are satisfied. 26

84The Court has consistently held that it is only exceptionally that, in application of a general principle of legal certainty which is inherent in the Community legal order, the Court may decide to restrict the right to rely upon a provision it has interpreted with a view to calling in question legal relations established in good faith. 27

85The Court has taken that step only in quite specific circumstances, where there was a risk of serious economic repercussions owing in particular to the large number of legal relationships entered into in good faith on the basis of rules considered to be validly in force and where it appeared that both individuals and national authorities had been led into adopting practices which did not comply with Community legislation by reason of objective significant uncertainty regarding the implications of Community provisions, to which the conduct of other Member States or the Commission may even have contributed. 28

86For the Court to impose a time-limit, it must therefore be established that there are serious economic repercussions and that those concerned have acted in good faith. 29

87In the present case, it should be noted that the Finnish Government has — only — mentioned the practical difficulties that would arise if the effects of the judgment were not subject to a time-limit; it has, however, failed to demonstrate in detail that the judgment would have serious economic repercussions.

88Moreover, since the Court may impose time-limits on the effects of a judgment only in exceptional circumstances, it would in my view be excessive to accept, on the basis of the vague assurances given in the present case, that the Finnish Government acted in good faith.

89It is impossible, on the basis of the partly contradictory information supplied by the Commission and the submissions of the Finnish Government, which do not resolve these contradictions, to establish with certainty what conclusions were reached as a result of the VAT committee's deliberations. Nor do the minutes of the meeting produced by the Commission on request shed any further light on the point. The only matter that can be established with some degree of certainty is that the contested Finnish provisions were discussed and that some Member States apparently expressed reservations. This may be attributable primarily to the ‘open’ nature of these meetings at which, according to the Commission, various subjects are freely addressed. However, in my view, some clearer evidence is needed than the apparent failure of the Commission or other Member States to raise any objections in such discussions in order to establish that a government believes in good faith that its national provisions comply with Community law. Otherwise, there would be a considerable degree of uncertainty as to the effect of the Court's judgments and that effect would depend in practice on circumstances beyond the Court's control.

90The situation in the present case is thus different from the situation Advocate General Jacobs dealt with in his Opinion in Banca Popolare di Cremona, in which the Member State's good faith was established in particular on the basis of a clearly worded letter signed by the competent Director-General of the Commission. 30

91In my view, there is consequently no reason to limit the temporal effect of the Court's judgment in the present case. 31

IX — Costs

92The costs incurred by the Finnish Government, the Italian Government and the Commission are not recoverable. Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the referring court, the decision on costs is a matter for that court.

X — Conclusion

93In the light of the foregoing, I propose that the Court reply as follows to the questions submitted by the national court:

‘(1) Article 20 of Sixth Council VAT Directive 77/388/EEC is to be interpreted as meaning that Members States must provide for the adjustment of deductions in accordance with that article in the case of capital goods unless it follows otherwise from Article 20(5).

(2) Article 20 of the Sixth VAT Directive is to be interpreted as meaning that the adjustment is applicable even where the capital goods, in this case immovable property, were first used in non-taxable activity, on which no deduction could have been made, and later in taxable activity.

(3) The second subparagraph of Article 13(C) and Article 17(6) of the Sixth VAT Directive are not to be interpreted as meaning that a Member State which allows its taxpayers a right to opt for taxation of the use of immovable property may exclude altogether the deduction of value added tax paid in respect of immovable property investments before an application is made for the leasing of the property to be taxable, if that application is not made within six months from the bringing into use of the property.’

Notes

(1) Original language: German.

(2) 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).

(3) Note on Article 20 of the Sixth Directive: The possibility of extending the adjustment period for immovable property to up to 20 years was introduced for the first time in Council Directive 95/7/EC of 10 April 1995 amending Directive

(77) /388/EEC and introducing new simplification measures with regard to value added tax — scope of certain exemptions and practical arrangements for implementing them (OJ 1995 L

(102) , p. 18). Before that, under the Sixth Directive, it could be extended only up to 10 years.

(4) Under Paragraph 28, first subparagraph, of the AVL, real property means land, buildings and permanent structures or parts thereof.

(5) See, in particular, Case C-478/99 Commission v Sweden[2002] ECR I-4147, paragraph 15, and Case C-233/00 Commission v France [2003] ECR I-6625, paragraph 75.

(6) See, in particular, Case 268/83 Rompelman [1985] ECR 655, paragraph 19, and Joined Cases C-110/98 to C-147/98 GabalfrisaandOthers [2000] ECR I-1577, paragraph 44.

(7) See Advocate General Lenz's Opinion in Case C-306/94 Régie Dauphinoise [1996] ECR I-3695, point 37.

(8) Case C-97/90 Lennartz [1991] ECR I-3795.

(9) Judgment cited in footnote 8.

(10) See Lennartz, cited in footnote 8, paragraphs 11 and 12, and Case C-378/02 Waterschap Zeeuws Vlaanderen [2005] ECR I-4685, paragraph 38.

(11) See, inter alia, Waterschap Zeeuws Vlaanderen, cited in footnote 10, paragraph 31.

(12) See Lennartz, cited in footnote 8, paragraphs 8, 15 and 21, and Waterschap Zeeuws Vlaanderen, cited in footnote 10, paragraphs 31 and 32.

(13) Case C-137/02 Faxworld [2004] ECR I-5547, paragraph 24.

(14) See Lennartz, cited in footnote 8, paragraphs 15 and 16.

(15) Advocate General Jacobs reached a similar conclusion in his Opinion in Lennartz, cited in footnote 8, in which he held that ‘Article 20(2) may operate … even where a taxable person acquires goods initially for the purposes of economic transactions which, under Article 17(2) and (3), do not give rise to the right of deduction (e.g. exempt supplies) but, in subsequent years within the adjustment period, uses the goods for transactions in respect of which VAT is deductible’.

(16) See point 27 above.

(17) Case C-381/97 Belgocodex [1998] ECR I-8153, paragraph 16, and Case 8/81 Becker [1982] ECR 53, paragraph 38.

(18) Belgocodex, cited in footnote 17, paragraphs 16 and 17.

(19) Ibid., paragraph 17.

(20) See, in this connection, Case C-269/03 Objekt Kirchberg [2004] ECR I-8067, paragraph 23.

(21) Ibid, paragraph 24.

(22) See, inter alia, Rompelman, cited in footnote 6, paragraph 16.

(23) See Case C-43/96 Commission v France [1998] ECR I-3903, paragraphs 17 and 18.

(24) See also, in this connection, the Opinion of Advocate General Jacobs in Commissionv France, cited in footnote 23, point 12.

(25) See Commissionv France, cited in footnote 23, paragraph 19.

(79) . I therefore take the view - like the

(26) See, in particular, my Opinion in Joined Cases C-453/02 and C-462/02 Linneweber and Akritidis [2005] ECR I-1131, at point 60, and the judgment in thoses cases, paragraph 41, and the judgments in Joined Cases C-367/93 to C-377/93 Roders and Others [1995] ECR I-2229, paragraph 42, and Case C-347/00 BarreiraPérez [2002] ECR I-8191, paragraph 44.

(27) See, in particular, Case C-104/98 BuchnerandOthers [2000] ECR I-3625, paragraph 39, and Barreira Pérez, cited in footnote 26, paragraph 45.

(28) Case C-184/99 Grzelczyk [2001] ECR I-6193, paragraph 53, and Case C-209/03 Bidar [2005] ECR I-2119, paragraph 69.

(29) See, to that effect, Case C-481/99 Heiniger [2001] ECR I-9945, paragraph 52.

(30) Opinion of Advocate General Jacobs in Case C-475/03 Banca PopolarediCremona, not yet published in the Court Reports, point 80.

(31) There is therefore no need in this case to consider the question of an appropriate time-limit for the temporal effect which Advocate General Jacobs discussed in his Opinion in BancaPopolarediCremona, cited in footnote 30.