C-240/05 Eurodental

JUDGMENT OF THE COURT (Third Chamber)

7 December 2006*

In Case C-240/05, REFERENCE for a preliminary ruling under Article 234 EC from the Cour d'appel (Luxembourg), made by decision of 1 June 2005, received 2005, in the proceedings

Administration de l'enregistrement et des domaines

v

Eurodental Sàrl,

THE COURT (Third Chamber),

composed of A. Rosas, President of the Chamber, A. Borg U. Lõhmus and A. Ó Caoimh (Rapporteur), Judges,

* Language of the case: French.

at the Court on 3 June

Barthet, J. Malenovský, Advocate General: D. Ruiz-Jarabo Colomer, Registrar: M. Ferreira, Principal Administrator,

having regard to the written procedure,

having decided, after hearing the Advocate General, to proceed to judgment without an Opinion,

having regard to the order of 4 May 2006 reopening the oral procedure and further to the hearing on 31 May 2006,

after considering the observations submitted on behalf of:

— the Administration de l'enregistrement et des domaines, by A. Kronshagen, avocat,

— Eurodental Sàrl, by M. Molitor, P. Lopes Da Silva, N. Cambonie and R. Muller, avocats,

— the German Government, by M. Lumma and U. Forsthoff, acting as Agents, — the Commission of the European Communities, by R. Lyal and M. Afonso, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 22 June 2006,

gives the following

Judgment

Legal context and the dispute

1The reference for a preliminary ruling concerns the interpretation of Articles

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 (OJ1977 L 145, p. 1), as amended by Council Directive 91/680/EEC of 16 December 1991 supplementing the common system of value added tax and amending Directive 77/388/EEC with a view to the abolition of fiscal frontiers (OJ 1991 L 376, p. 1) and Council Directive 92/111/EEC of 14 December 1992 amending Directive 77/388/EEC and introducing simplification measures with regard to value added tax (OJ 1992 L 384, p. 47) (‘the Sixth Directive’).

2This reference was made in the course of proceedings between Eurodental Sàrl (‘Eurodental’) and the Administration de l'enregistrement et des domains luxembourgeoise (Luxembourg Land Registration and Estates Department) (‘the competent tax authority’) following the latter's refusal to allow Eurodental, for the accounting periods 1992 and 1993, to deduct the input value added tax (‘VAT’) on the making and repair of dental prostheses where those transactions were carried out for recipients based in Germany.

Legal context

Communitylegislation

3Article 13A(1)(e) of the Sixth Directive provides:

‘Exemptions within the territory of the country

A. Exemptions for certain activities in the public interest

1. 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 such exemptions and of preventing any possible evasion, avoidance or abuse:

…

(e) services supplied by dental technicians in their professional capacity and dental prostheses supplied by dentists and dental technicians’.

4However, under Article 28(3)(a) of that directive:

‘3. During the transitional period referred to in paragraph 4, Member States may:

(a) continue to subject to tax the transactions exempt under Article 13 … set out in Annex E to this Directive’.

5Point 2 of that annex mentions the transactions referred to in Article 13A(1)(e) of the Sixth Directive.

6Article 17 of the Sixth Directive, entitled ‘Origin and scope of the right to deduct’, provided as follows in paragraphs 2(a) and 3 of the version applicable before the entry into force of Directive 91/680:

‘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) [VAT] due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

… 3. Member States shall also grant to every taxable person the right to a deduction or refund of the [VAT] referred to in paragraph 2 in so far as the goods and services are used for the purposes of:

(a) transactions relating to the economic activities as referred to in Article 4(2) carried out in another country, which would be eligible for deduction of tax if they had occurred in the territory of the country;

(b) transactions which are exempt under … Article 15 …;

(c) any of the transactions exempted under Article 13B(a) and (d), paragraphs 1 to 5, when the customer is established outside the Community or when these transactions are directly linked with goods intended to be exported to a country outside the Community.’

7Point 22 of Article 1 of Directive 91/680 inserted into the Sixth Directive, in its original version, Title XVIa, entitled ‘Transitional arrangements for the taxation of trade between Member States’ which comprises, inter alia, Articles 28a to 28f. Directive 91/680 had to be transposed into national law by 1 January 1993.

8Article 28a of the Sixth Directive provides:

‘1. The following shall also be subject to value added tax:

(a) intra-Community acquisitions of goods for consideration within the territory of the country by a taxable person acting as such or by a non-taxable legal person where the vendor is a taxable person acting as such who is not eligible for the tax exemption provided for in Article 24 …

...’

9Article 28bA(1) of the Sixth Directive provides:

‘The place of the intra-Community acquisition of goods shall be deemed to be the place where the goods are at the time when dispatch or transport to the person acquiring them ends.’

10Article 28cA(a), first subparagraph, and Article 28cB(a) of the Sixth Directive provide:

‘A. Exempt supplies of goods

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

(a) supplies of goods, as defined in Article 5 …, dispatched or transported by or on behalf of the vendor or the person acquiring the goods out of the territory referred to in Article 3 but within the Community, effected for another taxable person or a non-taxable legal person acting as such in a Member State other than that of the departure of the dispatch or transport of the goods.

…

B. Exempt intra-Community acquisitions of goods

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

(a) the intra-Community acquisition of goods the supply of which by taxable persons would in all circumstances be exempt within the territory of the country’.

11Article 28f(1) of the Sixth Directive states:

‘1. Article 17(2), (3) and (4) shall be replaced by the following:

"...

3. Member States shall also grant every taxable person the right to the deduction or refund of the value added tax referred to in paragraph 2 in so far as the goods and services are used for the purposes of:

…

(b) transactions which are exempt pursuant to Article ... 28c(A) and (C)”.’

12Prior to 1 January 1993, intra-Community transactions were covered by Article 15 of the Sixth Directive, ‘Exemption of exports and like transactions and international transport’. Paragraphs 1 to 3 and 13 of that article in the version which applied before the entry into force of Directives 91/680 and 92/111 provided:

‘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 such exemptions and of preventing any evasion, avoidance or abuse:

1. the supply of goods dispatched or transported to a destination outside the territory of the country as defined in Article 3 by or on behalf of the vendor;

2. the supply of goods dispatched or transported to a destination outside the territory of the country as defined in Article 3 by or on behalf of a purchaser not established within the territory of the country …;

3. the supply of services consisting of work on movable property acquired or imported for the purpose of undergoing such work in the territory of the country as defined in Article 3, and dispatched or transported out of the territory of that country by the person providing the services or by his customer who is not established within the territory of the country or on behalf of either of them;

…

13. the supply of services including transport and ancillary transactions but excluding the supply of services exempted under Article 13, when these are directly linked to the transit or the export of goods, or to the imports of goods benefiting from the provisions of Articles 14(1)(b) and (c), and 16(1).’

Nationallegislation

Luxembourg legislation

13Article 43(1)(a) and (c) of the Law of 12 February 1979, amending and supplementing the law of 5 August 1969 on value added tax (Mémorial A 1979, p. 186, ‘the Law on VAT’), provided in the version in force before 1 January 1993:

‘The following are [exempted] from [VAT] within the limits and under the conditions to be laid down by Grand-Ducal Regulation:

(a) supplies of goods which are dispatched or transported to destinations abroad by the supplier or by a third party acting on his behalf;

…

(c) supplies of services carried out, in the course of a processing operation, on goods which have been acquired or imported for the purposes of that operation and are dispatched or transported to destinations abroad by the person supplying the services or by a third party acting on his behalf.’

14In the version in force after that date, Article 43, as amended by Article II of the Law of 18 December 1992, amending and supplementing the law of 12 February 1979 on value added tax (Mémorial A 1992, p. 3032), provides in paragraph (1)(d):

‘The following are [exempted] from [VAT] within the limits and under the conditions to be laid down by Grand-Ducal Regulation:

…

(d) supplies of goods, within the meaning of Articles 9 and 12(a) to (e), which are dispatched or transported by the supplier or by a third person acting on his behalf or by the person acquiring the goods or by a third person acting on his behalf outside the territory of the country but within the Community and which are made to another taxable person acting in the course of his business or to a non-taxable legal person in another Member State …’

15Under the second and third indents of Article 44(1)(1) of the Law on VAT:

‘The following are [exempted] from [VAT] within the limits and under the conditions to be laid down by Grand-Ducal Regulation:

…

(1) the following supplies of services and supplies of goods:

…

— services supplied in the legitimate exercise of the profession of dental technician;

— supplies of dental prostheses made by dentists and dental technicians in the legitimate exercise of their professions.’

16Article 49(1) and (2)(a) of the Law on VAT provides:

‘1. The [VAT] charged on goods and services which are used to supply goods and services which are exempt or do not fall within the scope of the tax shall not be deductible.

…

2. Notwithstanding the provisions in paragraph 1, a taxable person is permitted to make a deduction where the goods and services are used for the purposes:

(a) of his transactions, which are exempt under the provisions in Article 43 or in the implementing regulations relating thereto.’

German legislation

17Under the fourth sentence of Paragraph 4(14) of the Law on value added tax (Umsatzsteuergesetz, ‘the UStG’), the exemption for transactions relating to the activities, inter alia, of dentists does not apply to the supply or repair of dental prostheses and orthodontic equipment if the trader has manufactured or repaired them in his business premises.

18Under Paragraph 12(2)(6) of the UStG, those transactions are taxed at a reduced rate.

The main proceedings and the questions referred for a preliminary ruling

19Eurodental is a company established in Luxembourg and is engaged, in essence, in making and repairing dental prostheses for customers based in Germany.

20By decision of 26 March 1997, the competent tax authority refused to permit Eurodental, for the accounting periods 1992 and 1993, to deduct the input VAT charged on goods used to supply goods and services to customers based in Germany on the ground that Article 44 of the Law on VAT takes precedence over Article 43 thereof, in the versions applicable before and after 1 January 1993, with the result that Article 49(2)(a) of that law, which permits deduction of input VAT, does not apply.

21The Tribunal d'arrondissement (Luxembourg) (District Court, Luxembourg), before which Eurodental brought an action for annulment and variation of that decision, held, by judgment of 16 December 2002, that the deduction had been incorrectly refused. After finding that Articles 43 and 44 above each relate to separate transactions, the former concerning transactions which are not meant for the territory of the country, while the latter concerns transactions carried out within the territory of the country, that court held that Article 49 of the Law on VAT authorises the deduction of input VAT for the transactions referred to in Article 43 of that law, in the version applicable before and after 1 January 1993, regardless of the VAT exemption rules applicable within the territory of the country. No provision of national law implies that Article 44 of the Law on VAT takes precedence over Article 43.

22The competent tax authority lodged an appeal against that judgment before the referring court. As it found that the question whether Article 13 of the Sixth Directive takes precedence over Article 28c thereof is not settled by the legislation, the Cour d'appel (Court of Appeal) decided to stay proceedings and refer the following questions to the Court for a preliminary ruling:

‘(1) Does a supply of goods which, when made within a Member State, is exempted by reason of Article 13A(1)(e) of the Sixth Directive … and does not give rise to the right to deduct input tax pursuant to Article 17 of the directive, fall within the ambit of Article 15(1) and (2) of the directive as worded prior to 1 January 1993 or Article 28cA(a), applicable as of 1 January 1993, and thus within the ambit of Article 17(3)(b) of the directive giving rise to the right to deduct input tax when the goods are supplied by an operator established in a Member State of the Community to an operator established in another Member State and when the conditions relating to the application of Article 15(1) and (2) of the directive as worded prior to 1 January 1993 and of Article 28cA(a), applicable as of 1 January 1993, are met?

(2) Does a supply of services which, when made within a Member State, is exempted by reason of Article 13A(1)(e) of the Sixth Directive … and does not give rise to the right to deduct input tax pursuant to Article 17 of the directive fall within the ambit of Article 15(3) as worded prior to 1 January 1993 (no exemptions were laid down for 1993) and thus within the ambit of Article 17(3)(b) of the directive giving rise to the right to deduct input tax when the services are supplied by an operator established in a Member State of the Community to an operator established in another Member State and when the conditions relating to the application of Article 15(3) as worded prior to 1 January 1993 are met?’

The questions referred for a preliminary ruling

23By its two questions, which must be examined together, the national court asks, in essence, whether transactions like the making and repair of dental prostheses which, when they take place within the territory of a Member State, are exempt from VAT as activities in the public interest may give rise to a deduction of input VAT when they are intra-Community transactions.

24It is apparent from the wording of the questions that this order for reference concerns, firstly, supplies of goods and services made before 1 January 1993 and, secondly, supplies of goods made after that date. It does not, on the other hand, relate to supplies of services made after 1 January 1993.

25It must be borne in mind that Article 13A of the Sixth Directive provides for the exemption from VAT of certain activities in the public interest, including, under Article 13A(1)(e), services supplied by dental technicians in their professional capacity and dental prostheses supplied by them.

26Under Article 17(2)(a) of the Sixth Directive, where a taxable person supplies goods or services to another taxable person who uses them for an exempt transaction pursuant to Article 13A of the directive, the latter person is not, as a rule, entitled to deduct the input VAT paid as, in such a case, the goods and services concerned are not used for taxable transactions (see, to that effect, Case 8/81 Becker[1982] ECR 53, paragraph 44, and Case C-302/93 Debouche [1996] ECR I-4495, paragraph 16).

27In the present case, according to the order for reference, it is not disputed, in the main proceedings, that the transactions carried out by Eurodental are covered by those provisions when they take place within the territory of the Member State in which that company is established. By its order for reference, the national court seeks, therefore, solely to establish whether the transactions are still covered by those provisions where they are effected for customers based in another Member State, in this case in Germany.

28As regards transactions of an intra-Community nature, Article 15(1) to (3) of the Sixth Directive, in the version applicable before 1 January 1993, provided for the exemption of supplies of goods and supplies of services relating to goods which were dispatched or transported to a destination outside of the territory of the Member State. As from that date, the exemption of those supplies to another Member State has been provided for in the first subparagraph of Article 28cA(a) of that directive. Under Article 17(3)(b) of the directive, as amended by Article 28f(1) thereof, the deduction of input VAT on such transactions is permitted in the Member State of the departure of the dispatch or intra-Community transport of the goods (see Case C-245/04 EMAGHandelEder [2006] ECR I-3227, paragraph 30).

29However, the competent tax authority submits that the intra-Community transactions at issue in the main proceedings do not give rise to such a right to deduct because Article 13A(1)(e) of the Sixth Directive, which provides for a special exemption, takes precedence over the more general provisions laid down in Articles 15 and 28cA(a) of the directive.

30By contrast, Eurodental submits that, as Article 13 of the Sixth Directive, on the one hand, and Articles 15 and 28c of the directive, on the other hand, have different fields of application, Article 13 cannot take precedence over Articles 15 and 28. It is apparent from the wording of the headings to each of those provisions that Article 13 of the directive is only applicable to transactions carried out within the territory of Member States whilst transactions between Member States are covered, for their part, by Articles 15 and 28c of the directive.

31In that regard, it must be pointed out that, as Eurodental submits, Article 13 of the Sixth Directive relates, according to the wording of its heading, to exemptions ‘within the territory of the country’ whilst, according to the wording of their respective headings, Article 15 of the directive, in the version applicable before 1 January 1993, and Article 28c of the directive, as applicable from that date, relate respectively to ‘exports’ and ‘trade between Member States’.

32However, contrary to Eurodental's submissions, it does not follow that a transaction covered by Article 13 of the Sixth Directive, where it is intra-Community in nature, necessarily, and on that sole ground, falls within the scope of Articles 15 and 28c with the effect that, given the reference made by Article 17(3)(b) of the directive to those provisions, that transaction may give rise to the deduction of input VAT.

33It is only by way of exception that the Sixth Directive provides, in particular in Article 17(3)(b), for the right to deduct VAT on goods or services used for exempt transactions (see, to that effect, Case C-4/94 BLP [1995] ECR I-983, paragraph 23). Therefore, the terms used by the directive in that regard must be interpreted strictly.

34Although Article 17(3)(b) of the Sixth Directive refers generally to the provisions of that directive which provide for the exemption of intra-Community transactions, namely, Article 15 of the directive, for the period before 1 January 1993, and Article 28c, for the period after that date, respectively, clearly that provision does not refer at all to the exemptions provided for in Article 13 of the directive for certain activities.

35On the contrary, before 1 January 1993, Article 15 of the Sixth Directive, to which Article 17(3)(b) referred, expressly excluded, in paragraph 13, the supply of services exempted under Article 13 of the directive when they were directly linked to certain cross-border transactions.

36Furthermore, Article 17(3)(c) of the Sixth Directive specifically grants the right to deduct VAT as regards certain transactions exempted under Article 13B of that directive. As the Commission of the European Communities correctly submits, that provision would have no purpose if the exemptions provided for in Article 13 of the directive were already covered by Article 17(3)(b).

37Therefore, notwithstanding the wording of the headings of the relevant provisions of the Sixth Directive, it is apparent from the examination of their content that the transactions exempted under Article 13 of the directive do not give rise to the right to deduct input VAT even where those transactions are of an intra-Community nature.

38That interpretation, inferred from the wording of the Sixth Directive itself, is borne out by the objective it pursues as well as by its scheme and the principle of fiscal neutrality.

39As regards, firstly, the objective of the Sixth Directive, it must be borne in mind that, under Article 2 of First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (OJ, English Special Edition 1967 (I), p. 14), the principle of the common system of VAT involves the application, in the Community, to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged (order in Case C-395/02 Transport Service [2004] ECR I-1991, paragraph 20).

40As the competent tax authority and the Commission correctly submit, if intraCommunity transactions such as those at issue in the main proceedings were to give rise to the right to deduct input VAT in the Member State of departure, they could be supplied in the Community totally exempt from VAT. Where those transactions are, in any event, exempt in the territory of the Member State of destination under Article 13 of the Sixth Directive, they should, firstly, be exempt in that Member State as intra-Community acquisitions under Article 28cB(a) of the directive and, secondly, they should not give rise to any collection of VAT in the Member State of origin as the input tax would be deducted and, under the first subparagraph of Article 28cA(a) of the directive, no output taxation would take place.

41It is thus apparent from the objective of the common system of VAT and of the transitional arrangements introduced by Directive 91/680 for the taxation of trade between the Member States that a taxable person who benefits from exemption and is consequently not entitled to deduct input tax within the territory of a Member State is not entitled to so either where the transaction concerned is of an intraCommunity nature (see, to that effect, Debouche, paragraph 15).

42That principle is enshrined in Article 17(3)(a) of the Sixth Directive as, under that provision, the right to deduct the VAT relating to a transaction carried out in another country is precluded if that transaction is not eligible for deduction of tax within the territory of the Member State.

43Secondly, as regards the scheme of the Sixth Directive, it must be pointed out that the exemptions provided for in Article 13A, as they benefit only certain activities in the public interest which are listed and described in detail in that provision, are of a specific nature (see, to that effect, Case C-307/01 D'Ambrumenil and Dispute Resolution Services [2003] ECR I-13989, paragraph 54). On the other hand, the exemption for transactions of an intra-Community nature which arises from Article 15 of that directive, for the period before 1 January 1993, and is provided for in Article 28c thereof, for the period after that date, is of a general nature, as it refers in an unspecified manner to economic transactions between the Member States.

44In those circumstances, it is consistent with the scheme of the Sixth Directive that the rules applicable to the specific exemptions provided for in Article 13A of that directive are accorded precedence over the rules applicable to the general exemptions provided for by the directive as regards transactions of an intraCommunity nature.

45Contrary to the submission of the German Government, that finding cannot be called into question by Article 26bG(1) of the Sixth Directive. Even if, as that government submits, it could be inferred from the provisions of that article, which establishes a special tax regime for investment gold, that a Member State cannot disapply the exemption for intra-Community supplies as regards that commodity, although, under certain conditions, it may, in principle, waive the right to apply the exemption provided for by that regime to specific transactions which take place in that Member State, that does not in any way show that the first exemption takes precedence over the second, but at the most confirms that each of those exemptions is subject to its own rules, the wording and purpose of which are different.

46Thirdly and lastly, as regards the principle of fiscal neutrality, it must be recalled that that principle precludes, in particular, treating similar supplies of services, which are thus in competition with each other, differently for VAT purposes (see, to that effect, Case C-498/03 Kingscrest Associates and Montecello [2005] ECR I-4427, paragraph 54).

47If the transactions at issue in the main proceedings gave rise to the right to deduct tax where they were of an intra-Community nature, that principle would not be observed as the same transactions do not give rise to a deduction where they are carried out within the territory of a Member State. Consequently, taxable persons carrying out intra-Community transactions would be treated more favourably than taxable persons effecting domestic transactions (see, to that effect, Debouche, paragraph 19).

48However, the German Government states that, in the case in the main proceedings, since the Federal Republic of Germany applies the transitional arrangements provided for in Article 28(3)(a) of the Sixth Directive in conjunction with point 2 of Annex E of the directive, arrangements which permit it to continue to tax the transactions in question, those transactions could be subject to double taxation as they could be taxed again in that Member State under that provision read in conjunction with the first subparagraph of Article 28a(1)(a) and Article 28bA(1) of the Sixth Directive, whereas the input VAT in Luxembourg could not be deducted. On the other hand, the same transactions, although taxable where they are carried out within the territory of that Member State, give rise to a deduction. It follows from this that taxable persons based in Germany would be treated more favourably than their competitors based in Luxembourg.

49That line of argument, which is disputed by the Commission and the competent tax authority, cannot be accepted.

50It must be borne in mind that the Community system of VAT is the result of a gradual harmonisation of national legislation pursuant to Articles 93 EC and 94 EC. The Court has consistently held that this harmonisation, as brought about by successive directives and in particular by the Sixth Directive, is still only partial (Case C-165/88 ORO Amsterdam Beheer and Concerto [1989] ECR I-4081, paragraph 21).

51Thus, the harmonisation envisaged has not yet been achieved in so far as Article 28(3)(a) of the Sixth Directive authorises the Member States to retain certain provisions of their national legislation predating that directive which would, without that authorisation, be incompatible with the directive (see, to that effect, Case C-36/99 Idéaltourisme [2000] ECR I-6049, paragraph 38).

52Whilst it is true that a Member State which, like the Federal Republic of Germany, retains such provisions in its national legislation does not infringe the Sixth Directive (see, to that effect, Idéaltourisme, paragraph 38), the fact remains that the taxation allowed by Article 28(3)(a) of the directive is not harmonised taxation that is an integral part of the VAT regime as arranged by the Sixth Directive for certain activities in the public interest, but taxation authorised only for a transitional period (see, to that effect, Case C-169/00 Commission v Finland [2002] ECR I-2433, paragraph 34). The objective of Article 28(4) of the Sixth Directive is the abolition of such derogating and transitional arrangements (see, to that effect, Case C-136/97 Norbury Developments [1999] ECR I-2491, paragraph 20, and Idéal tourisme, paragraph 32).

53Clearly, therefore, the particular situation relied on by the German Government in the present case in support of the deduction of input VAT in Luxembourg, a situation which, moreover, has not led the national court to vary its questions according to the system of VAT used in the Member State of destination, results both from the fact that the option, granted by the transitional arrangements, to continue to tax the transactions at issue has not yet been abolished and from the Federal Republic of Germany's decision to opt for such derogating and transitional arrangements, so that that situation is entailed by the fact that VAT has not yet, at this stage, been subject to complete harmonisation by the Community legislature.

54The exceptions provided for in Article 28(3)(a) of the Sixth Directive must be strictly interpreted (see, to that effect, Commissionv Finland, paragraph 34) and their scope cannot therefore be extended to Member States which have complied with the principle enshrined in the Sixth Directive in exempting certain activities in the public interest listed in Article 13 of that directive. It cannot be accepted that the obligation of those Member States not to allow the deduction, under Article 17(2)(a) of the directive, of input VAT on those exempt activities can be affected by the decision of another Member State to opt for derogating and transitional arrangements, particularly because the abolition of those arrangements is the objective of Article 28(4) of the Sixth Directive.

55Such an extension would also be contrary to Article 28(3)(a) of the Sixth Directive since that provision does not permit a Member State which, like the Grand Duchy of Luxembourg, exempts the transaction at issue in accordance with the harmonised system, as is provided for in Article 13 of the directive, to introduce or reintroduce a taxation scheme in respect of that transaction, thus giving rise to the right to deduct input VAT, even for the purpose of remedying a possible distortion of competition undermining the Community principle of equal treatment, which is reflected in the area of VAT by the principle of fiscal neutrality (see, to that effect, Case C-35/90 Commission v Spain [1991] ECR I-5073, paragraphs 8 and 9, and Idéal tourisme, paragraph 33). On the other hand, in view of the transitional nature of the derogating taxation arrangements chosen by the Federal Republic of Germany, there is nothing to prevent it, in accordance with the objective of Article 28(4) of the Sixth Directive, from also deciding to exempt, as generally required by that directive, the transaction in question in order to remove such a distortion of competition (see, to that effect, Idéaltourisme, paragraph 33).

56In that regard, it must, in particular, be emphasised that the fact that maintenance of the derogating and transitional arrangements in question in certain Member States may, in some circumstances, give rise to distortions of competition in Germany, cannot in any way authorise that Member State to create itself distortions of competition to the detriment of the Member States which have transposed the provisions of the Sixth Directive (see, to that effect, Case C-74/91 Commission v Germany [1992] ECR I-5437, paragraph 25). That would be the case here if Eurodental were permitted to deduct VAT in Luxembourg, since, in such a situation, domestic transactions in that Member State, which do not give rise to the right to deduct input VAT, would be treated less favourably than intra-Community transactions which originated there.

57As regards the particular situation relied on by the German Government, it is therefore for the Community legislature to do everything necessary to establish the definitive Community system of exemptions from VAT and thereby to bring about the progressive harmonisation of national VAT laws, which is the only means of abolishing the distortions of competition stemming from the existence of the derogating and transitional arrangements permitted by the Sixth Directive (see, to that effect, Case C-305/97 RoyscotandOthers[1999] ECR I-6671, paragraph 31, and Idéaltourisme, paragraph 39).

58Consequently, the answer to the questions asked must be that a transaction which is exempted from VAT within the territory of a Member State under Article 13A(1)(e) of the Sixth Directive does not give rise to the right to deduct input VAT pursuant to Article 17(3)(b) of that directive, even when it is an intra-Community transaction, and regardless of the system of VAT applicable in the Member State of destination. Costs

59Since 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 (Third Chamber) hereby rules:

A transaction which is exempted from value added tax within the territory of a Member State under Article 13A(1)(e) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 91/680/EEC of 16 December 1991 supplementing the common system of value added tax and amending Directive 77/388/EEC with a view to the abolition of fiscal frontiers and Council Directive 92/111/EEC of 14 December 1992 introducing simplification measures with regard to value added tax, does not give rise to the right to deduct input value added tax pursuant to Article 17(3)(b) of that directive, even when it is an intra-Community transaction, and regardless of the system of value added tax applicable in the Member State of destination.

[Signatures]

Notes

(13) A(1)(e), 15(1) to (3), 17(3)(b) and 28cA(a) of Sixth Council Directive 77/388/EEC

OPINION OF ADVOCATE GENERAL RUIZ-JARABO COLOMER delivered on 22 June 20061

I — Introduction

1The Sixth Directive on value added tax 2 (hereinafter ‘VAT’) allows national exemptions under which there is no right to deduct input tax, in addition to exemptions for certain intra-Community transactions in respect of which there is that right of deduction.

2The Luxembourg Cour d'Appel (Court of Appeal) asks whether an economic activity which, when it is carried out within a Member State, is exempt and does not give rise to a right of deduction, must be treated the same way when it extends across the borders of that State.

3The question which has been referred for a preliminary ruling focuses attention on the relationship between the exemptions for certain domestic activities, set out in Article 13 of the Sixth Directive, and those laid down for transactions between States by Article 15, as regards the supply of goods and services before 1 January 1993, and by Article 28c, 3 as regards the supply of goods and services after that date.

4In particular, the Cour d'Appel seeks to ascertain whether, in the case of the manufacture and repair of dental prostheses in Luxembourg, activities which are eligible for that tax privilege, input tax may be deducted when the customers are based in Germany.

II — The Sixth Directive

A — Exemptions within the territory of the country

5The Sixth Directive provides that the following are subject to tax: the supply of goods or services 4 effected for consideration within the territory of the country by any person who carries out independently the activities of a producer, trader, or a person supplying services, including the activities of the professions (Articles 2(1) and 4(1) and (2)).

6Title X governs exemptions and the ones which relate to internal transactions are listed in Article 13, part A of which lists, amongst certain activities in the public interest, ‘the services supplied by dental technicians in their professional capacity and dental prostheses supplied by dentists and dental technicians’ (paragraph 1(e)).

7It may be inferred from a converse interpretation of Article 17(1) and (2) that those tax exemptions preclude the deduction of input tax unless the goods or the services are used by a taxable person for the purposes of his taxable transactions.

8Under Article 28(3)(a), Member States were authorised, during the period stipulated in paragraph 4, to subject to tax the transactions exempt under Article 13 and set out in Annex E, point 2 of which refers to Article 13A(1)(e). In accordance with the fourth sentence of Paragraph 4(14) of the Umsatzsteuergesetz 1991 (German Law on value added tax), 5 the exemption for doctors and dentists does not apply to the supply or repair of dental prostheses or orthodontic equipment where an operator manufactures or repairs those goods in his workshop.

B — Exemptionsinrespectofintra-Commu-nitytransactions

1. Before 1 January 1993

9In the original version of the Sixth Directive, intra-Community transactions were treated in the same way as transactions with third countries and were governed by Article 15, the first three paragraphs of which exempted the supply of goods dispatched or transported outside a Member State and the supply of services carried out on those goods. 6

10Article 17(3)(b) authorised the deduction of the tax due in those cases.

2. After 1 January 1993

11Directive 91/680 inserted into the Sixth Directive a new Title XVIa with the heading Transitional Arrangements for the Taxation of Trade between Member States, the aim of which is to facilitate the transition to a definitive system for the taxation of trade within the common VAT system after the abolition of fiscal controls at internal borders as from 1 January 1993. 7

12Under those transitional arrangements, VAT is charged on intra-Community acquisitions of goods for consideration within the territory of the country by a taxable person acting as such or by a non-taxable legal person where the vendor is a taxable person acting as such (first subparagraph of Article 28a(1)(a)).

13The supply of goods ‘dispatched or transported by or on behalf of the vendor or the person acquiring the goods ... effected for another taxable person or a non-taxable legal person acting as such in a Member State other than that of the departure of the dispatch or transport of the goods’ is exempt (Article 28cA(a)). Intra-Community acquisitions of goods the supply of which by taxable persons would be exempt within the country are also exempt (Article 28cB(a)).

14Finally, Article 17(3), as amended by Article 28f(1), provides that input VAT may be deducted where a taxable person uses the goods or services for the purposes of (1) transactions relating to the taxable economic activities, carried out in another country, which would have given rise to the right of deduction if they had been performed within a Member State (subparagraph (a)), and (2) transactions which are exempt pursuant to Article 15 and Article 28cA and C (subparagraph (b)).

III — The main proceedings and the questions referred for a preliminary ruling

15The Luxembourg company Eurodental SARL makes and repairs dental prostheses for customers based in Germany.

16In a decision of 26 March 1997, the Luxembourg administration refused to allow the company to deduct the VAT it had paid on goods used for the supply of goods and services in Germany. The authorities argued that Article 44 (which lays down the exemption for dental technicians) of the Law of 12 February 1979 amending and supplementing the Law of 5 August 1969 on VAT,8 takes precedence over Article 43 (governing the exemption for intra-Community supplies), and that, accordingly, Article 49(2)(a), which authorises the deduction of VAT charged on goods used for the activities referred to in Article 43, was not applicable.

17In a judgment of 16 December 2002, the Tribunal d'arrondissement (District Court) held that the deduction had been incorrectly refused on the ground that Articles 43 and 44 govern different transactions, since the former relates to foreign transactions while the latter relates to domestic transactions. Article 49 applies to the first kind of transaction, irrespective of its nature, from which it follows that no provision stipulates that Article 44 has primacy over Article 43. The Tribunal d'arrondissement took the view that there is always a right of deduction in an intra-Community supply of goods. 9

18The tax administration lodged an appeal, submitting that the interpretation put forward afforded more favourable treatment to the supply of prostheses to Germany than to the supply of prostheses in the Grand Duchy, contrary to the principle of neutrality inherent in the common system of VAT.

19The Cour d'Appel considered that the wording of the legislative texts at issue does not resolve the dispute and it therefore decided to refer the following questions to the Court of Justice for a preliminary ruling:

‘(1) Does the supply of goods which, when effected within a Member State, is exempted by reason of Article 13A(1)(e) of [the] Sixth Directive … and does not give rise to the right to deduct input tax pursuant to Article 17 of the directive, fall within the scope of Article 15(1) and (2) of the directive as worded prior to 1 January 1993 or Article 28cA(a), applicable as of 1 January 1993, and thus within the scope of Article 17(3)(b) of the directive giving rise to the right to deduct input tax, when the goods are supplied by an operator established in a Member State of the Community to an operator established in another Member State and when the conditions relating to the application of Article 15(1) and (2) of the directive as worded prior to 1 January 1993 and of Article 28cA(a), applicable as of 1 January 1993, are met?

(2) Does the supply of services which, when made within a Member State, is exempted by reason of Article 13A(1)(e) of [the] Sixth Directive … and does not give rise to the right to deduct input tax pursuant to Article 17 of the directive fall within the scope of Article 15(3) as worded prior to 1 January 1993 (no exemptions were laid down for 1993) and thus within the scope of Article 17(3)(b) of the directive giving rise to the right to deduct input tax, when the services are supplied by an operator established in a Member State of the Community to an operator established in another Member State and when the conditions relating to the application of Article 15(3) as worded prior to 1 January 1993 are met?’

IV — The procedure before the Court of Justice

20Eurodental, the defendant in the main proceedings, the German Government and the Commission submitted written observations within the time-limit prescribed by Article 23 of the Statute of the Court of Justice.

21None of the parties requested an oral stage and therefore, at the general meeting of 13 December 2005, the Court decided to commence deliberation of the case in accordance with Article 104(4) of the Rules of Procedure, since it took the view that there was no need for an Opinion of the Advocate General.

22During the deliberation, the Third Chamber, to which the case had been assigned, decided on 6 April 2006 to send the case back to the general meeting which, on 25 April, upheld the assignment of the case to that chamber but took the view that an Opinion and an oral hearing were required. The parties were asked to give their opinions in writing on the choice made by the Federal Republic of Germany under Article 28(3)(a) of the Sixth Directive to subject to tax for a transitional period the supply and repair of dental prostheses and orthodontic equipment by professionals established in its territory.

23At the public hearing, which was held on 31 May 2006, the representatives of Eurodental and the Commission presented oral argument.

V — Analysis of the questions referred for a preliminary ruling

24The questions submitted in this case, which may be summarised in the form of a single question, necessitate an examination of the relationship between two kinds of exemptions laid down in the Sixth Directive, that is, the exemptions for certain activities in the public interest, set out in Article 13A(1), and the exemptions in favour of intra-Community transactions. The first question concerns supplies of goods before and after 1 January 1993, while the second refers to supplies of services before that date.

25The dispute has arisen because the business activity concerned in the main proceedings is capable of being caught by the scope of both types of exemption, on account of either its nature (the activity of dental technicians) or the detailed rules applicable to it (intra-Community). However, the effects of the exemptions are different since if the activity is considered to fall within the first type there is no right to deduct input VAT, a right which would arise in the case of the second type.

26The resolution of the dispute requires two examinations: the first, of the exemptions having regard to the neutrality of the tax, the keystone of the system, and the second, of the special, transitional status of intra-Community transactions.

A — Neutrality in exemptions within the territoryofthe country

27VAT is charged on acts of consumption, as an indirect indication of the economic capacity of individuals, an objective which is attained by taxing the activities of traders and professionals who, through the practice of shifting the tax burden, pass on the levy to the final consumer. Thus, a neutral tax is achieved, since it is paid only by the final link in the chain, namely, whoever acquires the goods or uses the service.

28As a result of that structural requirement, persons who participate in an intermediary stage of the process deduct the input tax, as laid down in Article 17(1) and (2) of the Sixth Directive. Anyone who is a taxable person and uses the goods or services for the purpose of his taxable transactions is entitled to deduct the VAT. Accordingly, if a taxable person uses the goods or services in activities which are not subject to tax or are exempt, there is no taxable event and the right of deduction does not arise because there is no tax liability. 10

29In that connection, the Court held in BLP Group11 that, except in the cases expressly provided for, where a taxable person uses, to carry out an exempt transaction, services in respect of which he has paid VAT, he is not entitled to deduct the input tax paid even where the service is used for the purpose of a taxable transaction.

B — TransitionalarrangementsfortheintraCommunitymovement of goods

30In point 11 of this Opinion, I pointed out that the Sixth Directive was amended by Directive 91/680, which aimed to facilitate the transition, following the abolition of fiscal controls at internal borders, to a definitive system for the taxation of intraCommunity trade within the common VAT system involving the taxation of transactions in the Member State of origin. However, since on 31 December 1992 (the day before that abolition of fiscal controls) the conditions required had not been met, the rule that tax must be paid at the place of destination was retained for a period which is still in force. Accordingly, Article 28cA(a) introduced the exemption for the intraCommunity supply of goods, providing that acquisitions of that kind are to be taxed in the Member State of destination.

31In other words, for a temporary period, during the transition to that definitive system, purchases made in the Community by taxable persons or by non-taxable legal persons are taxed on the basis that the taxable event is deemed to have taken place in the Member State to which the goods supplied are dispatched or transported (Articles 28a(1)(a) and 28bA(1) of the Sixth Directive).

32The reasoning behind those provisions is that, where the tax becomes due in the State of destination, it is only possible to guarantee neutrality by allowing whoever pays the tax to pass it on or deduct it because that person does not fulfil the role of final consumer but rather that of a taxable person who uses the goods for transactions which are subject to tax.

33That process of placing intra-Community transactions on an equal footing with domestic transactions entails the removal, for tax purposes, of the cross-border stage, with the result that goods supplied in the country of origin are exempted from VAT (Article 28cA(a)) because the acquisition is subject to payment of tax in the country of destination by a person authorised to deduct input VAT (Article 28aA(a)), so the process of shifting the tax burden continues until it reaches the consumer.

34That explains the reasoning behind Article 17(3)(b), as amended by Article 28f(1), pursuant to which taxable persons may deduct VAT when they use goods or services for the purposes of exempt activities 12 in accordance with Article 28cA, since a person who supplies goods from one Member State to another must be compensated as though he had not existed or participated in the transaction.

C — No conflictof laws

35The logic of the foregoing approach, based on the intra-Community nature of the transaction, would be lost if the exemption under Article 13 of the Sixth Directive related to the type of activity concerned.

36If, in a cross-border supply of goods which is not subject to tax and which would also not be subject to tax if it was purely internal in scope, a taxable person deducted the VAT, that would create an anti-competitive advantage in favour of suppliers from abroad, thereby upsetting the balance sought, 13 the objective of which is not only that the intermediaries should be able to recover the input tax so that the tax burden falls exclusively on the consumer, but also that there should be equal treatment, 14 irrespective of the chain in which each trader is involved and of the Member State from which they operate. 15

37To put it another way, the deduction of VAT which has been passed on from previous stages is permitted in exempt transactions only if they are intra-Community transactions and on no other grounds. Accordingly, it may be concluded that the deduction is not permitted for the exemption referred to in Article 28cB(a), that is, for intra-Community acquisitions of goods the supply of which by taxable persons would be exempted in a Member State unless, pursuant to Article 17(3)(a), those transactions would have given rise to the right to deduct the VAT even though they occurred in the territory of the country.

38Guidance may also be found in Article 17(3)(c) which explicitly confers the right to deduct input tax in the case of specified exemptions laid down in Article 13B when the transaction crosses the borders of the Community. Subparagraph (c) would be superfluous if, as Eurodental and the German Government submit, such exemptions fell directly within the scope of Article 17(3)(b) on the grounds of their international dimension.

39The Commission explains that point with great clarity in its written observations in these proceedings, reasoning that, if it were accorded the right of deduction, Eurodental would have a position of advantage vis-à-vis competitors which participate in the national market and do not have that right, thereby promoting fraud and encouraging companies to move to Member States other than the one in which they actually carry on their activities.

40The German Government rightly argues that, since it opted, under Article 28(3)(a), to make transactions involving dental prostheses subject to tax in Germany, transactions at intra-Community level might be more onerous for consumers in so far as they pay VAT in Germany and there is no right to deduct VAT paid in Luxembourg.16 However, that effect, resulting from the lack of total harmonisation of that indirect tax, is the result of a legitimate choice made by the German authorities which, for a transitional period, have excluded certain activities from the common system, and they must therefore accept the consequences. 17 It is not acceptable to sanction a general breach of the principle of neutrality and of the coherence of the system by relying on a specific national feature which has been freely chosen 18 and which would transfer to the tax authorities of another Member State, in this case those of Luxembourg, the financial burden arising from that unilateral decision.

41The considerations relating to supplies of goods, both before and after 1 January 1993, are also applicable to services supplied before that date, which are referred to in the second question submitted, in the light of the original wording of Articles 15(3) and 17(3)(b) of the Sixth Directive.

42In summary, an exempt intra-Community transaction does not give rise to the right to deduct input tax if, had it been purely domestic in scope, the transaction would also have been exempt on the basis of its nature. 19

VI — Conclusion

43In the light of the foregoing considerations, I propose that the Court reply to the questions referred for a preliminary ruling by the Cour d'Appel, Grand Duchy of Luxembourg, by declaring that:

The supply of goods and services referred to in Article 13A(1)(e) 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 is exempt under that provision, even where it entails intra-Community transactions governed by Article 15(1), (2) and (3) (in the original version and in the one laid down in Directive 91/680/EEC) and Article 28cA(a), but does not thus give rise to the right of deduction laid down in Article 17.

Notes

(1) Original language: Spanish.

(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) That provision was inserted by Council Directive 91/680/EEC of 16 December 1991 supplementing the common system of value added tax and amending Directive 77/388/EEC with a view to the abolition of fiscal frontiers (OJ 1991 L 376, p. 1).

(4) The supply of services constitutes a residual category comprising any transaction which does not constitute a supply of goods (Article 6 of the Sixth Directive).

(5) BGBl. 1991, p. 351.

(6) In the Opinion in Case C-382/02 Cimber Air [2004] ECR I-8379, I observed that ‘[i]nternational goods traffic is governed by the principle of taxation at the place of destination or final consumption. For that reason, if it is wished to avoid the “exportation” of indirect taxes from the country of origin — which would involve double taxation — a system must be agreed for the exemption of foreign transactions’ (point 17).

(7) That objective is set out in the third, eighth and ninth recitals in the preamble to Directive 91/680.

(8) Mémorial A-No 11 of 19 February 1979, p. 186.

(9) The claim put forward by Eurodental was dismissed because the Luxembourg court held that the necessary supporting documents had not been produced.

(10) For an analysis of the system of deducting VAT, see Alguacil Marí, P. and Orón Moratal, G., ‘La deducción en el IVA español y su adecuación a la Sexta Directiva’, Noticias/CEE, numbers 67 and 68, August/September 1990, p. 101. Colmenar Valdés, S., ‘El derecho a la deducción en el IVA’, Revista de Derecho Financiero y Hacienda Pública, number

(157) , 1982, p. 327, argues that, ‘since the deduction of input tax arising in the previous period is functionally linked to the input tax to be paid in the subsequent period, in cases where no tax liability arises it is clear that nor can input tax from the previous period be deducted, since the rationale for the right of deduction no longer exists.’

(11) Case C-4/94 [1995] ECR I-983.

(12) In the main proceedings, the dental technician would be authorised to deduct the input tax on the materials used to make the prostheses since they are used for an exempt activity.

(13) In the case before the Court, a professional who supplies goods outside Luxembourg would be entitled to deduct the VAT charged until his participation, a right which is not granted to a professional operating within his own borders.

(14) Terra, B. and Kajus, J., A Guide to the European VAT Directives, Volume 1, Introduction to European VAT and other indirect taxes, 2006, pp. 418 to 422, explain that the neutrality of VAT is a complex notion comprising a legal aspect, aimed at affording non-discriminatory treatment before the law, a financial aspect, aimed at optimising the choice of production means, and a competitive aspect, aimed at avoiding distortions of the market.

(15) In the judgment in Case C-302/93 Debouche [1996] ECR I-4495, in particular paragraph 19, the Court ruled that an economic operator who carries out exempt activities may not rely on his intra-Community position to claim a refund of tax where he would not have been able to rely on that right within the territory of the country.

(16) In a situation like the one in the main proceedings, a patient in Germany would pay an invoice from the dentist which includes: (a) the material used to make the prosthesis in Luxembourg plus the VAT due (residual VAT); (b) the fees of the dental technician; and (c) the fees of the German dentist. Thus, the financial consequences would be greater for the final consumer if there were no provision for the deduction of residual VAT, from which it follows, in the opinion of the German Government, that the solution is to allow such deduction.

(17) In the judgment in Case C-169/00 Commission v Finland [2002] ECR I-2433, the Court noted in paragraph 32 that the exemptions laid down under Article 28(3) are not part of the common system of VAT.

(18) Only two other Member States — Belgium and Hungary — have chosen the same option.

(19) That was the solution proposed by the Advisory Committee on Value Added Tax, set up under Article 29 of the Sixth Directive, at its 60th meeting which was held on 20 and

(21) March 2000 (TAXUD/1876/00 — Rév. 1, Comité de la TVA, Orientations de la 60e réunion, 20 et 21 mars 2000).