C-243/03 Commission v France

JUDGMENT OF THE COURT (Third Chamber)

6 October 2005 *

In Case C-243/03,

ACTION under Article 226 EC for failure to fulfil obligations, brought on 6 June 2003,

Commission of the European Communities, represented by E. Traversa, acting as Agent, and by N. Coutrelis, avocat, with an address for service in Luxembourg,

applicant,

v

French Republic, represented by G. de Bergues and C. Jurgensen-Mercier, acting as Agents,

defendant,

* Language of the case: French.

supported by:

Kingdom of Spain, represented by N. Díaz Abad, acting as Agent,

intervener,

THE COURT (Third Chamber),

composed of A. Rosas, President of the Chamber, J.-P. Puissochet, S. von Bahr (Rapporteur), J. Malenovský and U. Lõhmus, Judges,

Advocate General: M. Poiares Maduro, Registrar: R. Grass,

having regard to the written procedure,

after hearing the Opinion of the Advocate General at the sitting on 10 March 2005,

gives the following

Judgment

Legal context and the dispute

1By its application, the Commission of the European Communities seeks a declaration from the Court that, by introducing a special rule limiting the deductibility of value added tax ('VAT') on the purchase of capital goods on the ground that they were financed by subsidies, the French Republic has failed to fulfil its obligations under Community law, in particular under Articles 17 and 19 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').

Legal framework

Community legislation

2The second paragraph of Article 2 of First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (OJ, English Special Edition 1967, p. 14), as amended by the Sixth Directive ('the First Directive'), states that '[o]n each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components'.

3Article 11A(1)(a) of the Sixth Directive provides that the taxable amount shall be:

'in respect of supplies of goods and services ... everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies.'

4Article 17(2)(a) of that directive, in the version resulting from Article 28f thereof, provides that, '[i]n 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 ... value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person'.

5Article 17(5) provides that:

As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person.

6Article 19(1) of the Sixth Directive, entitled 'Calculation of the deductible proportion', states that:

'The proportion deductible under the first subparagraph of Article 17(5) shall be made up of a fraction having:

— as numerator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions in respect of which value added tax is deductible under Article 17(2) and (3);

— as denominator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which value added tax is not deductible. The Member States may also include in the denominator the amount of subsidies, other than those specified in Article 11A(1)(a).

…'

National legislation

7Article 271 of the Code general des impôts (General Tax Code) ('the CGI') states that:

'I.1. The value added tax charged on the price elements of a taxable transaction may be deducted from the value added tax applicable to that transaction.

II. 1. In so far as the goods and services are used for their taxable transactions, and provided that VAT is deductible on those transactions, the tax which the persons liable may deduct is [inter alia]:

(a) that which appears on the purchase invoices sent to them by their vendors in so far as the latter were lawfully authorised to include it on those invoices;

8Article 212 of Annex II to the CGI, in the version brought into force by Article 2 of Decree No 94-452 of 3 June 1994 (JORF of 5 June 1994, p. 8143) provides that:

'1. Taxable persons who, in the course of activities within the scope of value added tax, do not carry out exclusively transactions in respect of which value added tax is deductible are authorised to deduct a fraction of the value added charged on goods constituting fixed assets used to perform those activities.

That fraction is equal to the sum of the tax deductible calculated after applying, if appropriate, the provisions of Article 207a, multiplied by the ratio between:

(a) as numerator, the total amount, excluding value added tax, of annual turnover attributable to transactions in respect of which value added tax is deductible including subsidies directly linked to the price of those transactions;

(b) as denominator, the total amount, excluding value added tax, of annual turnover attributable to transactions included in the numerator and to transactions in respect of which value added tax is not deductible, and of all subsidies, including those not directly linked to the price of those transactions.

9The Instruction of 8 September 1994 of the Tax Law Service (Bulletin official des impôts, special number 3 CA-94 of 22 September 1994; 'the Instruction of 8 September 1994') states in Book 2, as regards the rules governing the right to deduct:

'150. The meaning of capital [equipment] subsidy.

It concerns non-taxable subsidies which are, at the time of provision, granted for the financing of a given capital asset.

151. The rules applicable to capital subsidies.

Tax on investments financed by the subsidy can in fact be deducted in normal conditions where the person liable to tax includes the depreciation allowances for the goods either completely or partially financed by this subsidy within the price of its transactions.

If it becomes apparent that the condition relating to the passing-on of the depreciation of these goods in prices has not been respected, the VAT in respect of these same goods cannot be deducted for the proportion of the amount financed by the capital subsidy.

Example:

A capital good with a purchase price of FRF 1 186 000 (including tax), VAT FRF 186 000, is financed partially (20%) by a capital subsidy of an amount of FRF 237 200.

The person liable has not passed on in the price of those taxable transactions the part of the depreciation of the good which corresponds to the part financed by the capital subsidy. Consequently, the tax charged on the good (FRF 186 000) will only be able to be deducted to a maximum of: FRF 186 000 x 80% = FRF 148 800.

Where appropriate and under normal conditions the person liable shall apply the percentage of deduction of the undertaking to the tax thus calculated.'

Pre-litigation procedure

10Following a complaint, the Commission sent a formal letter of notice to the French Government on 23 April 2001 in which it alleged that the French Republic had infringed Articles 17(2) and (5) and 19 of the Sixth Directive, first, by applying a deductible proportion of VAT to all taxable persons, including those who do not carry out taxable transactions in respect of which VAT is deductible ('fully taxable persons') and, second, by limiting, with the scheme for capital subsidies, the right to deduct in cases not provided for by that directive.

11Having not had response to that letter of formal notice within the prescribed period, the Commission issued a reasoned opinion on 20 December 2001 calling on that Member State to take the measures necessary to comply with it within two months of its notification.

12In its letter of reply of 7 January 2002 to the Commission's letter of formal notice, the French Government stated, in particular, that the deductible proportion applied only to taxable persons carrying out, at the same time, taxable transactions and transactions exempt from VAT ('mixed taxable persons') and not to fully taxable persons.

13On 26 June 2002, the Commission sent an additional reasoned opinion in which it dropped its first head of claim based on the application of a deductible proportion for taxable persons, but reiterated the second one, concerning the limitation of the right to deduct VAT charged on goods financed by subsidies.

14Unsatisfied with the French Government's response to that additional reasoned opinion, the Commission decided to bring the present action.

The action

Arguments of the parties

15The Commission alleges that the French Government introduced, in paragraphs 150 and 151 of the Instruction of 8 September 1994, a limitation of the right to deduct VAT not provided for by the Sixth Directive or justified on the basis of Article 2 of the First Directive.

16In that regard, the Commission points out that, as regards mixed taxable persons, under the Sixth Directive the deduction of VAT is restricted to transactions in respect of which VAT is deductible, either by applying an overall proportion to the undertaking as indicated in Article 19(1) of that directive, or where appropriate and if the Member State is so inclined, particularly in order to avoid abuse, in accordance with one of the methods laid down in the third subparagraph of Article 17(5) of that directive (distinct proportions for different fields of activity of the undertaking or direct allocation of a good to a specific activity). Where a Member State applies a deductible proportion, no provision of the Sixth Directive which enables, prior to that application, the taxable amount for VAT purposes to which that proportion applies to be reduced on the basis of the origin of the funds used to acquire a good or of the method of calculation of the price of the taxed transactions carried out by the taxable person concerned.

17As regards fully taxable persons, no provision of the Sixth Directive enables the deduction of VAT on capital goods to be subject to a restriction connected to the origin of the funds used to acquire those goods or the method for calculating the price of the transactions carried out.

18As regards subsidies received by a taxable person, with the exception of Articles 11A (1)(a) and 19, the Sixth Directive does not at any point take into consideration subsidies on the levy of VAT owed by taxable persons. However, it is settled case-law that limitations on the right to deduct are permitted only in the cases expressly provided for by the Sixth Directive (see Case 50/87 Commission v France [1988] ECR 4797, paragraphs 16 and 17, and Case C-62/93 BP Supergas [1995] ECR I-1883).

19As regards the second paragraph of Article 2 of the First Directive, the Commission submits that that provision is no different in content to Article 17(2) of the Sixth Directive.

20The French Government considers that the provisions on capital subsidies, and, in particular, the condition relating to the depreciation of the good merely implement the general conditions governing the right to deduct defined in the second paragraph of Article 2 of the First Directive and adapted by the provisions of Article 17(2) of the Sixth Directive.

21The result of the combined provisions of those two articles is that the right to deduct takes effect when a good is used to carry out activities giving rise to the right to deduct and when the price of the taxable transactions carried out subsequently includes the cost of that good, whether it be financed by a capital subsidy or by some other means of the taxable person.

22According to the French Government, under the Court's case-law only the amount of VAT borne directly by the various cost components of a taxable transaction may be deducted, and in order to give rise to the right to deduct, expenses incurred by a taxable person must have a direct and immediate link with a transaction in respect of which VAT is applicable or a similar transaction (see, in particular, Case 15/81 Schul [1982] ECR 1409, paragraph 10, and Case C-16/00 Cibo Participations [2001] ECR I-6663, paragraphs 31 to 33).

23The French Government also points out that using the option allowed for in Article 19(1) of the Sixth Directive of including capital subsidies in the denominator of the deductible proportion would have the effect of restricting the exercise of the right to deduct in respect of all the expenses incurred by the taxable person, whereas the allocation of those subsidies is necessarily ad hoc in nature.

24In addition, that option is applicable only to mixed taxable persons, and so its use could give rise to significant distortion of competition as between mixed and fully taxable persons.

25The French Government adds that the condition as regards the passing-on of expenditure costs borne by the taxable person in the price of transactions subject to VAT ensures that beneficiaries of non-taxable subsidies do not misuse, to their advantage, the system of deduction of that tax. In that regard, the French Government notes, in particular, that that system can, in so far as it concerns capital goods financed by capital subsidies, be applied so that the input VAT deductible is greater than the output VAT collected.

26The Spanish Government submits that the direct limitation of the right to deduct VAT borne on the acquisition of capital goods financed by subsidies amounts to a concrete application of the principles underlying its inclusion, under Article 19(1) of the Sixth Directive, in the denominator of the deductible proportion of subsidies which do not form part of the taxable amount in accordance with Article 11A(1)(a) thereof. That limitation is, therefore, compatible with Community law and is justified by the rules of the Sixth Directive.

27The Spanish Government also submits that the Member States may apply Article 19 of the Sixth Directive independently of Article 17(5) thereof and that, consequently, they may apply that provision not only to mixed taxable persons, but to all taxable persons.

Grounds

Findings of the Court

28It should be remembered that, according to settled case-law, the right to deduct provided for in Article 17 et seq. of the Sixth Directive is an integral part of the VAT scheme and, in principle, may not be limited. That right must be exercised immediately in respect of all the taxes charged on input transactions. Any limitation of the right to deduct VAT affects the level of the tax burden and must be applied in a similar manner in all the Member States. Consequently, derogations are permitted only in the cases expressly provided for by the Sixth Directive (see, in particular, Commission v France, cited above, paragraphs 15 to 17; BP Supergas, cited above, paragraph 18; and Case C-409/99 Metropol and Stadler [2002] ECR I-81, paragraph 42).

29In that regard, Article 17(1) of the directive provides that the right to deduct shall arise at the time when the deductible tax becomes chargeable and Article 17(2) states that, 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 or paid in respect of goods or services supplied or to be supplied to him by another taxable person.

30As regards mixed taxable persons, under the first and second subparagraphs of Article 17(5) of the Sixth Directive the right to deduct is calculated according to a fixed proportion in accordance with Article 19 thereof. The third subparagraph of Article 17(5) nevertheless permits Member States to authorise other methods for determining the right to deduct listed in that paragraph, in particular determination of a proportion for each sector of business or deduction on the basis of the use of all or part of the goods and services for a specific activity.

31Article HA(1)(a) of the Sixth Directive provides that subsidies directly linked to the price of a good or service are taxable in the same way as that good or service. As regards subsidies which are not directly linked to price, including those at issue in the present case, Article 19(1) of the Sixth Directive provides that the Member States may include them in the calculation of the denominator of the proportion applicable where a taxable person carries out, at the same time, transactions in respect of which VAT is deductible and others which are exempt.

32As the Commission has rightly pointed out, with the exception of those two provisions, the Sixth Directive makes no provision for subsidies to be taken into account in the calculation of VAT.

33However, it should be pointed out that the national provisions at issue make the right to deduct VAT, where the purchase of the good concerned is financed by a subsidy, subject to the condition that the depreciation of that good be passed on in the price of the transactions carried out by the taxable person. That condition is not provided for in the Sixth Directive and thus constitutes a limitation of the right to deduct which is not permitted by that directive.

34In that regard, first, the arguments of the French Government based on the second paragraph of Article 2 of the First Directive must be rejected. That provision merely lays down the principle of the right to deduct, and the conditions applicable thereto are laid down in the provisions of the Sixth Directive. It does not constitute a basis for a limitation of the right to deduct not provided for in those provisions (see Commission v France, cited above, paragraph 23).

35Second, it should be pointed out, as noted by the Advocate General in paragraph 23 of his Opinion, that the Member States are required to apply the Sixth Directive even if they consider it to be less than perfect. It is stated in Case C-338/98 Commission v Netherlands [2001] ECR1-8265, paragraphs 55 and 56, that even if the interpretation put forward by certain Member States better served the aims of the Sixth Directive, such as fiscal neutrality, the Member States may not disregard the provisions expressly laid down in that directive.

36As regards the arguments of the Kingdom of Spain based on Article 19 of the Sixth Directive, it should be noted, first, that that provision is only applicable to mixed taxable persons and, second, that it applies only in the situations which it provides for (see Case C-204/03 Commission v Spain [2005] ECR I-8389, paragraphs 24 and 25).

37It must thus be held that, by introducing a special rule limiting the deductibility of VAT on the purchase of capital goods where they were financed by subsidies, the French Republic has failed to fulfil its obligations under Community law, in particular under Articles 17 and 19 of the Sixth Directive.

Costs

38Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party's pleadings. Since the Commission has applied for costs and the French Republic has been unsuccessful, the latter must be ordered to pay the costs. Pursuant to the first subparagraph of Article 69(4), the Kingdom of Spain, which intervened in the present case, is to bear its own costs.

Operative part

On those grounds, the Court (Third Chamber) hereby:

1. Declares that, by introducing a special rule limiting the deductibility of value added tax on the purchase of capital goods where they were financed by subsidies, the French Republic has failed to fulfil its obligations under Community law, in particular under Articles 17 and 19 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, as amended by Council Directive 95/7/EC of 10 April 1995;

2. Orders the Republic of France to pay the costs;

3. Orders the Kingdom of Spain to pay its own costs.

[Signatures]

OPINION OF ADVOCATE GENERAL

POIARES MADURO 1 delivered on 10 March 2005

Introduction

1In this action, the Commission of the European Communities claims that the Court should declare that, by introducing a special rule limiting the deductibility of value added tax ('VAT') on the purchase of capital goods on the ground that they were financed by subsidies, the French Republic has failed to fulfil its obligations under Community law, in particular, under Articles 17 and 19 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 2 ('the Sixth Directive').

1 — Original language: Portuguese.

2 — OJ 1977 L 145, p. 1.

I — The legal background and the pre-litigation stage

2In the present case, the Court is asked once again to give judgment on the compatibility of French legislation concerning limitations to the right to deduct VAT with the relevant provisions of the Sixth Directive. 3

A — The relevant provisions of Community law

3Article 2 of the First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member 4 States concerning turnover taxes states that 'the principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of

3 — See Case 50/87 Commission v France (1988] ECR 4797. 4 — OJ, English Special Edition 1967, p. 14.

transactions which take place in the production and distribution process before the stage at which tax is charged. On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components ...'.

4Article 17 of the Sixth Directive concerns the origin and scope of the right to deduct. In subparagraph 2 it sets out the general principle that, '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 ... value added tax due or paid in respect of goods or services supplied or to be actions is provided for in Article 17(5) of the Sixth Directive which states:

As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person'.

supplied to him by another taxable person ...' 5.

5The case of taxable persons who carry out both taxable transactions and exempt trans

5 — As amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18).

6Article 19(1) of the Sixth Directive lays down the detailed rules for calculating the deductible proportion as follows:

'The proportion deductible under the first subparagraph of Article 17(5) shall be made up of a fraction having:

— as numerator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions in respect of which value added tax is deductible under Article 17(2) and (3),

— as denominator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which value added tax is not deductible. The Member States may also include in the denominator the amount of subsidies, other than those specified in Article HA(l)(a)'.

7Article HA(l)(a) of the Sixth Directive provides that, so far as concerns transactions carried out within the territory of the country, the taxable amount is:

'in respect of supplies of goods and services ... , everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies'.

B — The relevant provisions of national law

8The provisions of French law, the compatibility of which with the uniform rules of the Sixth Directive is challenged by the Commission, are the result of an administrative instruction of 8 September 1994 of the tax law department ('the instruction').

9Paragraph 151 of the instruction, which is part of Title 2 entitled 'Rules applicable to taxable persons who do not exclusively carry out transactions in respect of which value added tax is deductible' of Book 2 on the right to deduct, specifies that 'tax on investments financed by the subsidy can in fact be deducted in normal conditions where the person liable to tax includes the depreciation allowances for the goods either completely or partially financed by this subsidy within the price of its transactions. If it becomes apparent that the condition relating to the passing on of the depreciation of these goods in prices has not been respected, the VAT in respect of these same goods cannot be deducted for the proportion of the amount financed by the equipment subsidy'.

10Paragraph 150 of the same Title 2 defines equipment subsidies as being 'non taxable subsidies which are, at the time of provision, granted for the financing of a given capital asset'.

C — Pre-litigation procedure

11After receiving a complaint relating to an action concerning a French taxable person who benefited from debt write-offs, the Commission was of the opinion that the French Republic infringed Article 17(2) and (5) as well as Article 19 of the Sixth Directive in so far as the system set up by the instruction for equipment subsidies restricted the right to deduct in cases not provided for by the Sixth Directive. A letter of formal notice was sent to the French Government on 23 April 2001. Not having received a response to this formal notice within the time-limit laid down, the Commission issued a reasoned opinion on 21 December 2001. The French Government's response to the letter of formal notice of 7 January 2002 reached the Commission on 14 January 2002, namely, after the reasoned opinion had already been sent.

12In order to take those observations into account, the Commission issued a further reasoned opinion on 26 June 2002. The French Government responded to this further reasoned opinion by a letter of 21 August 2002 in which it contested the basis of the Commission's complaint and contended that it could be accused of having infringed Articles 17 and 19 of the Sixth Directive. Not agreeing with this analysis, the Commission decided to bring an action before the Court in the present action.

II — Analysis

13Article 17 of the Sixth Directive clearly shows that the only condition in order for a taxable person to be able to deduct VAT is the use of the good for the purposes of its taxable activities. The French provision in dispute adds a prerequisite to the deductibility of VAT in relation to purchasing capital goods financed by subsidies, namely, that the taxable person is to reflect the depreciation allowances of these subsidised capital goods in the price of its input transactions. That is not provided for in the Sixth Directive. The origin of the funds used to obtain the goods or the taxable person's method of calculating prices are alien to the harmonised system of VAT.

14It remains beyond doubt that such a condition relating to the repercussions of the depreciation of these goods on prices actually limits certain subsidised taxable persons' right to deduct and is incompatible with the wording of the Sixth Directive.

15In this respect, according to the Court's settled case-law, 'in the absence of any provision empowering the Member States to limit the right of deduction granted to taxable persons, that right must be exercised immediately in respect of all the taxes charged on transactions relating to inputs. Such limitations on the right of deduction must be applied in a similar manner in all the Member States and therefore derogations are permitted only in the cases expressly provided for in the Directive'. 6

16The only provisions of the Sixth Directive which prescribe the taking into consideration of subsidies on the levy of VAT owed by taxable persons are Article 11A(1) (a) and Article 19.

17Outside of these provisions, the Sixth Directive does not allow any limitation on the right to deduct as regards the granting of subsidies however appropriate or economically justified it may appear. 7

18Instead of following the specific arrangements for limitations as regards calculation of the deductible proportion as defined in Article 19(1) of the Sixth Directive, the French legislature introduced a different limitation which operates even before any application of the deductible proportion and independently of it, which results in a reduction in the amount deductible. Nowhere does the harmonised VAT system prescribe, as a prerequisite for the deductibility of the VAT paid on outputs at the time of purchase of the capital goods financed by subsidies, that the taxable person is to reflect the depreciation allowances for the goods in the price of his transactions subject to VAT on outputs, nor that, in the absence of verification of this condition relating to the passing on of the depreciation of these goods in prices, VAT on these same goods cannot be deducted for the proportion of the amount financed by the equipment subsidy.

19It is not for the national authorities to undertake to alter the sense of clear provisions of law. The provisions of Article 17 of the Sixth Directive clearly specify the conditions giving rise to the right to deduct, the extent of that right and the conditions for its limitation. As the Court has earlier had occasion to declare, 'they do not leave the Member States any discretion as regards their implementation'. 8 In those circumstances, it is a matter of importance that limitations of the right to deduct are to be 9 interpreted strictly which is essential so that they can be applied in a uniform manner in all the Member States. It would be completely contrary to the Sixth Directive's objective of harmonising national laws to allow each Member State to make exceptions or justifications not provided for in the 6 — Case C-37/95 Ghent Coal Terminal [1998] ECR I-1, paragraph 16; Commission v France, cited above, paragraphs 16 and 17, 10 Case C-97/90 Lennartz [1991] ECR I-3795, paragraph 27, and Case C-62/93 BP Soupergaz [1995] ECR I-1883, paragraph 18. 7 — See in particular Advocate General Sir Gordon Slynn's Opinion in Commission v France ([1988] ECR 4811) stating that 'Thus, the directive provides certain options [of limiting the right to deduct] to deal with particular economic circumstances ... There is no power to create a further option however convenient or defensible economically that may appear. Member States must choose between the options laid down in the directive to achieve so far as possible the result they desire'.

text.

8 — BP Soupergaz, paragraph 35.

9 — See in particular Advocate General Jacobs's Opinion in Lennartz, paragraph 79.

10 — See paragraph 15 of the cited conclusions and the case-law cited within.

20The French Republics main argument that this requirement that the effects of depreciation of these goods should be reflected in the prices of its output transactions merely amounts to the implementation of the general conditions of the right to deduct defined in Article 2(2) of the First Directive which, according to the French Republic, Article 17(2) of the Sixth Directive does no more than adapt, cannot be accepted. The Court has already had the 1 opportunity, in Commission v France, 1 to reject this argument also in the context of another limitation to the right to deduct which the French Republic had laid down, finding that Article 2 of the First Directive 'merely lays down the principle of the right to deduction, and the conditions applicable thereto are laid down in the abovementioned provisions [Articles 17 and 20] of the Sixth 12 Directive'.

21The French Government's attempts to justify its position, in particular, the prerequisite that depreciation of these goods should be reflected in prices is not in itself any less unfavourable than the system prescribed in Article 19(1) of the Sixth Directive, lack relevance.

11 — Commission v France, cited in footnote 3.

12 — Ibid-, paragraph 23. See also Sir Gordon Slynn's Opinion in the cited case affirming that 'It follows that the Member State is not entitled to limit the right to deduct if it can prove that the deduction relates to goods and services the cost of which will not be passed on in the price of the taxed transaction'.

22Even if the condition that depreciation must be passed on in prices were to be considered more reasonable or advantageous in general terms for taxable persons than the possibility of restriction offered to the Member States in Article 19(1) of the Sixth Directive, namely to include equipment subsidies in the calculation of the proportion, it would in any case remain a different sort of restriction not provided for in that directive. It would merely be part of an imaginary common VAT system. The action was brought before the Court for the latter to rule on the conformity of the French legislation with the harmonised system of the Sixth Directive and not on the conformity of this legislation with another virtual VAT system which might be better.

23In this respect, the Court has pointed out that the Member States are required to apply the Sixth Directive even if they consider it to be perfectible. Thus, the Court 13 held in Commission v Netherlands that, 'it is true that the solution thus imposed by the wording of Article 17(2) (a) of the Sixth Directive may not appear fully consistent with the purpose of that provision and with certain objectives pursued by the Sixth Directive, such as fiscal neutrality and the avoidance of double taxation. The fact remains, however, that, in the absence of intervention by the Community legislature, the system for deduction of VAT which it has created, as defined by the Sixth Directive,

13 — Case C-338/98 Commission v Netherlands [2001] ECR I-8265, paragraphs 55 and 56.

does not provide any basis for a right tion of this right beyond the cases expressly entitling taxable persons to deduct VAT ... provided for by the Sixth Directive. or enable any detailed rules for the application of such a right to be established'. This reasoning is valid whether it be the case of a piece of national legislation which sets up a more favourable system of deduction for

24For the reasons given above, it must be taxable persons or whether it be the case of a held that the French Republic has failed to piece of legislation which limits the recogni fulfil its obligations under Community law.

III — Conclusion

25In light of the foregoing considerations, I suggest that the Court should declare as follows:

By introducing a special rule limiting the deductibility of value added tax on the purchase of capital goods on the ground that they were financed by subsidies, the French Republic has failed to fulfil its obligations under Community Law, and in particular Articles 17 and 19 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.