C-25/07 Sosnowska

JUDGMENT OF THE COURT (First Chamber)

* 10 July 2008

In Case C‑25/07,

REFERENCE for a preliminary ruling under Article 234 EC by the Wojewódzki Sąd Administracyjny we Wrocławiu (Poland), made by decision of 11 December 2006, received at the Court on 25 January 2007, in the proceedings

Alicja Sosnowska

v

Dyrektor Izby Skarbowej we Wrocławiu Ośrodek Zamiejscowy w Wałbrzychu,

THE COURT (First Chamber),

composed of P. Jann, President of Chamber, A. Tizzano (Rapporteur), A. Borg Barthet, M. Ilešič and E. Levits, Judges,

* Language of the case: Polish.

I ‑ 5142 Advocate General: J. Mazák, Registrar: B. Fülöp, Administrator,

having regard to the written procedure and further to the hearing on 22 November 2007,

after considering the observations submitted on behalf of:

— Ms Sosnowska, by M. Sworobowicz, doradca podatkowy,

— the Polish Government, by E. Ośniecka‑Tamecka, H. Majszczyk and M. Jarosz, acting as Agents,

— the Commission of the European Communities, by K. Herrmann and D. Trian‑ tafyllou, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 26 February 2008,

I ‑ 5143 gives the following

Judgment

Legal context and the dispute

1This reference for a preliminary ruling concerns, first, the interpretation of the third paragraph of Article 5 EC, read in conjunction with 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. 1), as amended by 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 (OJ 1977 L 145, p. 1) (‘the First VAT Directive’) and Article 18(4) of the Sixth Directive 77/388, as amended by Council Directive 2005/92/EC of 12 December 2005 (OJ 2005 L 345, p. 19) (‘the Sixth VAT Directive’). Secondly, the reference relates to the interpretation of Article 27(1) of the Sixth VAT Directive.

2The reference has been made in the context of proceedings brought by Ms Sosnowska (‘the applicant’) against the Dyrektor Izby Skarbowej we Wrocławiu Ośrodek Zamie‑ jscowy w Wałbrzychu (Director of the Tax Chamber of Wrocław, the ‘Dyrektor’) relating to an application for repayment of excess value added tax (‘VAT’) paid by the applicant.

I ‑ 5144

Legal context

Community legislation

3Article 2 of the First VAT Directive provides:

‘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 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.

The common system of value added tax shall be applied up to and including the retail trade stage.’

4The first paragraph of Article 18(2) of the Sixth VAT Directive states:

‘The taxable person shall effect the deduction by subtracting from the total amount of value added tax due for a given tax period the total amount of the tax in respect of

I ‑ 5145 which, during the same period, the right to deduct has arisen and can be exercised under the provisions of paragraph 1.’

5The first paragraph of Article 18(4) of the Sixth VAT Directive provides:

‘Where for a given tax period the amount of authorised deductions exceeds the amount of tax due, the Member States may either make a refund or carry the excess forward to the following period according to conditions which they shall determine.’

6Under Article 27(1) of the Sixth VAT Directive:

‘The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the amount of tax due at the final consumption stage.’

I ‑ 5146 National law

7Article 87(1) and (2) of the Polish Law on the tax on goods and services (Ustawa o podatku od towarów i usług) of 11 March 2004 (Dz. U of 2004, No 54, heading 535, ‘the Law on VAT’) provide:

‘1. Where the amount of deductible input VAT … exceeds the output VAT, taxable persons shall enjoy the right to a reduction of the output tax due for the following periods by the said difference or to a refund of such a difference into his bank account.

2. … the tax difference shall be refunded … within 60 days from the day on which the return was submitted by the taxable person. Where further investigation is required into whether or not the refund should be granted, the tax office may extend that period until the necessary investigations have been carried out. …

…’

8Article 97 of the Law on VAT provides:

‘1. Prior to making the first intra‑Community supply or acquisition, the taxable persons referred to in Article 15 who are under a duty to register as active VAT payers shall be obliged to notify the head of a tax authority of their intention to carry out such activities, by filing the application for registration referred to in Article 96.

…

I ‑ 5147 5. In the case of taxable persons who commence the activities referred to in Article 5 and taxable persons who commenced such activities within less than 12 months prior to filing the notification referred to in paragraph (1), and who have been registered as European Union VAT payers [the ‘new taxable persons’], the period for refunding the tax difference referred to in Article 87(2) … shall extend to 180 days. …

6. In the case of taxable persons referred to in paragraph (5), the principles and repayment periods laid down in Article 87(2) to (6) shall apply from the date of the return relating to the period after a period of 12 months or four quarters in respect of which the taxable person has lodged a tax return and has paid in due time the taxes constituting State revenue, including his liabilities for the tax on the income of natural persons.

7. The provisions of Paragraph (5) shall not apply if the taxable person lodges with a revenue office a guarantee, by way of (i) a security deposit or (ii) material security or (iii) a bank guarantee, to the value of PLN 250 000, hereinafter referred to as a “security deposit”.’

The dispute in the main proceedings and the questions referred for a preliminary ruling

9In her VAT return for the month of January 2006, the applicant reported payment of excess VAT to the amount of PLN 44 782. Relying on Article 18(4) of the Sixth VAT Directive, she then applied to the tax office of Świdnica for repayment of that excess to her within a period of 60 days from the date of submission of her VAT return.

10On the basis of Article 87(1) and (2), and Article 97(5) and (7) of the Law on VAT, the tax office of Świdnica rejected her application. The opinion of that office was that the applicant could not obtain the repayment of the excess VAT within the period of

I ‑ 5148 60 days, because, since she had commenced her activities less than 12 months earlier and since she had not supplied to the tax office a special deposit within the meaning of Article 97(7), she did not satisfy the conditions established by the Law on VAT for entitlement to the repayment sought.

11The applicant submitted a complaint against that decision to the Dyrektor, who upheld the decision of refusal.

12The applicant was not satisfied with that decision and brought an action before the Wojewódzki Sąd Administracyjny we Wrocławiu (Regional Administrative Court of Wrocław). That court was uncertain whether the national provisions in question were compatible with Community law and therefore stayed proceedings and referred the following two questions to the Court for a preliminary ruling:

‘(1) Does the third paragraph of Article 5 EC, in conjunction with Article 2 of the [First VAT Directive] and Article 18(4) of the [Sixth VAT Directive] confer on a Member State the right to incorporate into national provisions on VAT the rules in Article 97(5) and (7) of the [Law on VAT]?

(2) O r, do the rules laid down in Article 97(5) and (7) of the [Law on VAT] consti‑ tute special measures to prevent certain types of tax evasion or avoidance within the meaning of Article 27(1) of the [Sixth VAT Directive]?’

I ‑ 5149

The questions referred for a preliminary ruling

The first question

13By its first question, the referring court asks essentially whether Article 18(4) of the Sixth VAT directive must be interpreted as precluding national legislation, such as that at issue in the main proceedings, which, in order to allow inquiries necessary to prevent tax evasion and avoidance, extends from 60 to 180 days, starting from the date of submission of the taxable person’s VAT return, the period available to the national tax office for repayment of excess VAT to a category of taxable persons, unless those persons lodge a security deposit to a value of PLN 250 000.

14It must be recalled at the outset that, in accordance with settled case‑law, the right, guaranteed by Article 17 of the Sixth VAT Directive, of taxable persons to deduct the VAT they have already paid on goods purchased and services received as inputs from the VAT which they are liable to pay is a fundamental principle of the common system of VAT established by the relevant Community legislation (see, in particular, to that effect, Joined Cases C‑286/94, C‑340/95, C‑401/95 and C‑47/96 Molenheide and Others [1997] ECR I‑7281, paragraph 47, and Case C‑78/00 Commission v Italy [2001] ECR I‑8195, paragraph 28).

15As the Court has consistently held, it is clear that the right to deduct is an integral part of the VAT scheme and as a general rule may not be limited. In particular, that right is exercisable immediately in respect of all the taxes charged on transactions relating to inputs (see, notably, Case C‑62/93 BP Supergas [1995] ECR I‑1883, para‑ graph 18; Joined Cases C‑110/98 to C‑147/98 Gabalfrisa and Others [2000] ECR I‑1577, paragraph 43; and Case C‑368/06 Cedilac [2007] ECR I‑12327, paragraph 31).

I ‑ 5150

16It is relevant, moreover, to note that where, for a given tax period, the amount of the deductible tax exceeds the amount of tax due and therefore the taxable person cannot effect the deduction by subtraction in accordance with Article 18(2) of the Sixth VAT directive, Article 18(4) provides that the Member States may either make a refund or carry the excess forward to the following period according to conditions which they are to determine.

17As regards the former possibility, which is at issue in the main proceedings, the Court has made it clear that, while the Member States have a certain freedom to manoeuvre in determining the conditions for the refund of excess VAT, those condi‑ tions cannot undermine the principle of neutrality of the VAT tax system by making the taxable person bear the burden of the VAT in whole or in part. In particular, such conditions must enable the taxable person, in appropriate circumstances, to recover the entirety of the credit arising from that excess VAT. This implies that the refund is made within a reasonable period of time by a payment in liquid funds or equivalent means, and that, in any event, the method of refund adopted must not entail any financial risk for the taxable person. (see Commission v Italy, paragraphs 32 to 34).

18Consequently, the question from the referring court must be examined in the light of those fundamental principles, set out in the preceding paragraphs, of the common system of VAT.

19It is apparent from the order for reference that, under the provisions of the Law on VAT determining the conditions for repayment of excess VAT to the taxable person, the tax office has available to it a period of 60 days from the date on which the taxable person submits his VAT return to make such a repayment; that period is extended to 180 days when, as in the case of the applicant in the main proceedings, the taxable persons concerned are new taxable persons who have not lodged a security deposit, within the meaning of Article 97(7) of the Law on VAT.

20It is therefore clear that new taxable persons are subject to conditions for the refund of excess VAT which are more onerous than those to which other taxable persons

I ‑ 5151 are subject. Accordingly they have to bear, at least to the extent of the amount of excess VAT to be repaid, the financial burden of VAT for a particularly long period.

21The Republic of Poland maintains that lengthening of the period is justified by the fact that the persons concerned are taxable persons newly liable to VAT, who are not known to the tax office and in relation to whom more extensive inquiries must be made in order to prevent any tax evasion and avoidance.

22As the Court has already had occasion to make clear, the Member States have a legit‑ imate interest in taking appropriate steps to protect their financial interests and the prevention of possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see, to that effect, Molenheide and Others, paragraph 47; Case C‑255/02 Halifax and Others [2006] ECR I‑1609, paragraph 71; and Joined Cases C‑439/04 and C‑440/04 Kittel and Recolta Recycling [2006] ECR I‑6161, paragraph 54).

23None the less, as the Advocate General observes in point 20 of his Opinion, Member States must, in accordance with the principle of proportionality, employ means which, whilst enabling them effectively to attain such an objective, are the least detri‑ mental to the objectives and principles laid down by the relevant Community legisla‑ tion, which include the fundamental principle of the right to deduct VAT (see Molenheide and Others, paragraphs 46 and 47; Case C‑409/04 Teleos and Others [2007] ECR I‑7797, paragraphs 52 and 53; and Case C‑271/06 Netto Supermarkt [2008] ECR I‑771, paragraphs 19 and 20).

24It is clear from the case‑law that national legislation determining conditions for repayment of excess VAT which are more onerous for one category of taxable persons because of a presumed risk of evasion, without making any provision for the taxable person to demonstrate the absence of tax evasion or avoidance in order to take advantage of less restrictive conditions, is not a means proportionate to the objective of combating tax evasion and avoidance and has a disproportionate effect on the objectives and principles of the Sixth VAT Directive (see, by analogy, in

I ‑ 5152 relation to exclusions from the right to deduct, Joined Cases C‑177/99 and C‑181/99 Ampafrance and Sanofi [2000] ECR I‑7013, paragraph 62, and, in relation to preven‑ tive attachment, Molenheide and Others, paragraph 51).

25That is exactly the case, as determined in paragraph 20 of this judgment, of the national legislation in the main proceedings.

26It is clear from the order for reference that Article 97(5) and (7) of the Law on VAT apply generally and preventively to new taxable persons, without making any provi‑ sion for such persons to demonstrate the absence of a risk of tax evasion or avoidance.

27Similarly, the national provisions at issue do not appear to be in conformity with the condition laid down in the case‑law, as stated in paragraph 17 of this judgment, that repayment of the excess VAT must be made within a reasonable time. As was stated in the order for reference, the period for repayment of 180 days laid down for new taxable persons is, on the one hand, six times longer than the one month appli‑ cable accounting period for VAT and, on the other hand, three times longer than the period applied to other taxable persons, while the Polish authorities have offered no argument capable of explaining why it is necessary, in order to prevent tax evasion and avoidance, to establish a difference in treatment of such a scale.

28Moreover, such a long period appears even less necessary when, in any event, the tax office has the power, under Article 87(2) of the Law on VAT, if it is useful to make wider inquiry into the lawfulness of repayment and to obtain the necessary clarifica‑ tion, to extend the period of 60 days within which repayment must be made.

29Lastly, as regards the possibility offered to new taxable persons by Article 97(7) of the Law on VAT to lodge a security deposit in order to take advantage of the normal

I ‑ 5153 period of 60 days for the obtaining of repayment of excess VAT, that cannot affect the considerations set out in the preceding paragraphs.

30As is argued by the Commission, the security deposit is not proportionate either to the amount of the excess VAT to be repaid or to the economic size of the taxable person.

31In particular, the lodging of such a security deposit is likely, contrary to what is required by the case‑law referred to in paragraph 17 of this judgment, to entail a not inconsiderable financial risk for undertakings which have just commenced their activities and may, consequently, lack significant resources.

32In reality, the effect of the obligation to put in place such a security deposit, in order to be able to take advantage of the period which ordinarily applies, is only to replace the financial burden associated with the fact that the amount of the excess VAT is tied up for a period of 180 days with the burden consequent on the amount of the security deposit being tied up. There is even less justification when, first, the latter amount may, as in the case in the main proceedings, be greater than the amount of the excess VAT at issue, and, second, the length of time over which the security deposit is tied up is greater than the period for repayment of the excess VAT laid down for new taxable persons. Under Article 97(6) of the Law on VAT, the security deposit can be released only after a period of 12 months, on condition that the taxable person has paid all of the taxes relating to that period for which he is liable to the State.

33In those circumstances, the reply to be given to the first question is that Article 18(4) of the Sixth VAT Directive and the principle of proportionality preclude national legislation, such as that at issue in the main proceedings, which, in order to allow the investigations required to prevent tax evasion and avoidance, extends from 60 to 180 days, as from the date of submission of the taxable person’s VAT return, the period available to the national tax office for repayment of excess VAT to a cate‑ gory of taxable persons unless those persons lodge a security deposit to a value of PLN 250 000.

I ‑ 5154 The second question

34By its second question, the referring court essentially asks whether the provisions of Article 97(5) and (7) of the Law on VAT can be regarded as ‘special measures for derogation’ intended to prevent certain types of tax evasion or avoidance, within the meaning of Article 27(1) of the Sixth VAT directive.

35It must be borne in mind that Article 27(1) of the Sixth VAT Directive provides that the option of a Member State to introduce such derogating measures is subject to a specific procedure, in particular requiring the agreement of the Council of the Euro‑ pean Union, acting unanimously.

36However, as the Advocate General states in point 39 of his Opinion and as is correctly pointed out by the Commission, the documents before the Court do not disclose that the measures at issue were authorised by the Council, in accordance with that provi‑ sion, as special measures for derogation from the Sixth VAT directive.

37That being the case, provisions such as those within Article 97(5) and (7) of the Law on VAT cannot fall within the scope of Article 27(1).

38Consequently the reply to be given to the second question is that provisions, such as those at issue in the main proceedings, do not constitute ‘special measures for derogation’ intended to prevent certain types of tax evasion or avoidance, within the meaning of Article 27(1) of the Sixth VAT directive.

I ‑ 5155

Costs

39Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

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

1. Article 18(4) 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 2005/92/EC of 2 December 2005, and the principle of proportionality preclude national legislation, such as that at issue in the main proceedings, which, in order to allow investigations required to prevent tax evasion and avoidance, extends from 60 to 180 days, as from the date of submission of the taxable person’s VAT return, the period available to the national tax office for repayment of excess VAT to a category of taxable persons, unless those persons lodge a security deposit to a value of PLN 250 000.

2. Provisions such as those at issue in the main proceedings do not constitute ‘special measures for derogation’ intended to prevent certain types of tax evasion or avoidance within the meaning of Article 27(1) of the Sixth Directive 77/388, as amended by Directive 2005/92.

[Signatures]

I ‑ 5156

Opinion of the Advocate-General

1The present reference for a preliminary ruling from the Wojewódzki Sąd Administracyjny we Wrocławiu (Regional Administrative Court, Wroclaw) (Poland) seeks an interpretation of the third paragraph of Article 5 EC, in conjunction with Article 2 of the First VAT Directive (2) as well as with Articles 18(4) and 27(1) of the Sixth VAT Directive. (3)

2In particular, the referring court harbours doubts as to whether provisions of Polish law laying down a period for repayment of an excess of input tax over that due (‘excess VAT’) to the bank account of EU VAT payers (4) during the first 12 months of their registration and the conditions governing the shortening of that period are compatible with Community law.

I – Legal framework

A – Community law

3The third paragraph of Article 5 EC provides that ‘[a]ny action by the Community shall not go beyond what is necessary to achieve the objectives of this Treaty’.

4Article 2 of the First Directive states as follows:

‘The principle of the common system of [VAT] 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 transactions which take place in the production and distribution process before the stage at which tax is charged.

On each transaction, [VAT], 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 [VAT] borne directly by the various cost components.

The common system of [VAT] shall be applied up to and including the retail trade stage.’

5Article 18(4) of the Sixth Directive provides as follows:

‘Where for a given tax period the amount of authorised deductions exceeds the amount of tax due, the Member States may either make a refund or carry the excess forward to the following period according to conditions which they shall determine.

…’

6Finally, under the terms of Article 27(1) of the Sixth Directive:

‘The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the amount of tax due at the final consumption stage.’

B – National law

7Under Article 87 of the Law on the tax on goods and services of 11 March 2004 (Ustawa o podatku od towarów i usług), (5) in the version applicable to the case before the referring court, (‘the Law on VAT’):

‘1. Where the amount of deductible input tax … exceeds the output tax during a given tax period, taxable persons shall enjoy the right to a reduction of the output tax due for the following periods by the said difference or to a refund of such a difference into his bank account.

2. … [T]he tax difference shall be refunded … within 60 days from the day on which the return was submitted by the taxable person.

Where further investigation is required into whether or not the refund should be granted, the tax office may extend that period until the necessary investigations have been carried out. Where such investigations establish that the refund referred to in the preceding sentence is justified, the tax office shall pay to the taxable person the amount due, together with interest in an amount equivalent to the interest that would have been payable by the taxable person in the event of deferred payment being allowed or where payment is permitted to be made in instalments.

3. Where the refundable tax difference exceeds the amount of input tax on acquisition of goods or services that are treated by the taxable person as forming part of his depreciable fixed assets, intangible assets and legal assets under the provisions applying to income tax, … increased by 22 per cent of the taxable person’s turnover liable to taxation at rates lower than those specified in Article 41(1), and by the turnover from deliveries of goods or provision of services referred to in Article 86(8)(1), the said difference shall be refunded within 180 days of submission of the tax return.

3a. The turnover referred to in paragraph 3 shall include the turnover from the receipt of trading debts, in respect of which the tax liability arises in accordance with Article 19(12) or Article 20(3), provided that a security deposit is lodged with the tax authorities in the amount corresponding to the amount of tax which would be due if the turnover had concerned a supply of goods in the territory of the country until documents confirming export of goods or an intra-Community supply of goods covered by the relevant trading debt are submitted. …’

8Article 97 of the Law on VAT provides:

‘1. Prior to making the first intra-Community supply or acquisition, the taxable persons referred to in Article 15 who are under a duty to register as active VAT payers shall be obliged to notify the head of a tax authority their intention to carry out such activities, by filing the application for registration referred to in Article 96.

…

5. In the case of taxable persons who commence the activities referred to in Article 5 and taxable persons who commenced such activities within less than 12 months prior to filing the application referred to in paragraph 1 and who have been registered as European Union VAT payers, [(6) ] the period for refunding the tax difference referred to in Article 87(2), (4) to (6) shall extend to 180 days. [(7) ]

…

7. The provisions of paragraph 5 shall not apply if the taxable person [lodges] with a revenue office a guarantee by way of (i) a security deposit, (ii) material security or (iii) a bank [guarantee] in the amount of PLN 250 000, hereinafter referred to as a “security deposit”.’

II – Factual and procedural background and the questions referred for a preliminary ruling

9In a ‘VAT-7’ return for January 2006, the applicant (Ms Alicja Sosnowska) recorded an excess VAT in the amount of PLN 44 782. Relying inter alia on Article 18(4) of the Sixth Directive, she requested the Swidnica Tax Office to repay that excess VAT within 60 days of the date on which the return was submitted.

10However, pursuant to Article 87(1) and (2) and Article 97(5) and (7) of the Law on VAT, the Swidnica tax authority refused to do so. In the grounds for that decision, the tax authority stated that the applicant did not satisfy the conditions laid down in the Law on VAT for repayment of the difference of the VAT to a bank account within 60 days because she had failed to lodge a security deposit, material security or bank guarantee in the amount of PLN 250 000 (approximately EUR 62 000) with the tax authority.

11The applicant lodged an administrative appeal against that decision with the Dyrektor Izby Skarbowej we Wrocławiu Ośrodek Zamiejscowy w Wałbrzychu (Director of the Wroclaw Tax Office, Walbrzych branch, ‘the Tax Office’), which upheld the decision taken by the authority at first instance. Therefore, the applicant brought an action against the decision of the Tax Office before the Wojewódzki Sąd Administracyjny in Wroclaw.

12The referring court has doubts as to the compatibility of the national provisions at issue with Community law and in those circumstances, it has decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:

‘1. Does [Article 5(3)] EC, in conjunction with Article 2 of [the First Directive] and Article 18(4) of [the Sixth Directive], confer on a Member State the right to incorporate into national provisions on [VAT] the rules laid down in Article 97(5) and (7) of the [Law on VAT]?

2. Do the rules laid down in Article 97(5) and (7) of the [Law on VAT] constitute special measures to prevent certain types of tax evasion and avoidance within the meaning of Article 27(1) of the Sixth Directive?’

13Written observations have been submitted, and oral observations were made at the hearing on 22 November 2007, by the Polish Government and by the Commission. As for the applicant, she did not put forward arguments of her own, but instead referred in a general manner to the point of view of the referring court in the order for reference, which she shares.

III – Assessment

A – First question

14Even though, by its first question, the national court asks whether Article 5(3) EC, in conjunction with Article 2 of the First Directive and Article 18(4) of the Sixth Directive, confers on a Member State the right to incorporate into national provisions on VAT rules such as those laid down in Article 97(5) and (7) of the Law on VAT, I understand the question as asking in effect whether the Polish rules regarding the refunding of excess VAT – in essence prolonging the period for such repayment from 60 to 180 days in the case of new EU VAT payers unless they lodge a security deposit in the amount of PLN 250 000 – are compatible with Community law, in particular with Article 18(4) of the Sixth Directive, regard being had to the principles of fiscal neutrality and proportionality.

15First of all, it should be noted that the Sixth Directive does not specify the precise conditions under which the Member States have to effect repayment of excess VAT to a taxable person’s account.

16However, it should be recalled that, where they exercise the powers conferred on them by Community directives, Member States must in any event take account of the general principles of law which form part of the Community legal order, such as the principle of proportionality. In addition, in the interpretation and application of the Sixth Directive, account must be taken of the principle of fiscal neutrality underlying it.

17In that connection, while the Court has held that the Member States have a certain freedom to manoeuvre in determining the conditions for the refund of excess VAT, since the refund of excess VAT is one of the fundamental factors ensuring the application of the principle of neutrality of the common system of VAT, the conditions determined by the Member States cannot undermine that principle by making the taxable person, in whole or in part, bear the burden of VAT. (8)

18The Court has held that the conditions for the refund of excess VAT that a Member State sets must enable the taxable person, in appropriate conditions, to recover the entirety of the credit arising from that excess VAT. This implies that the refund is carried out within a reasonable period of time by a payment in liquid funds or equivalent means. In any case, the method of refund adopted must not entail any financial risk for the taxable person. (9)

19Here, it should be noted that the Polish Government argues that the national measures in question are necessary to prevent tax evasion and avoidance. In that connection, I appreciate that tackling tax evasion and avoidance is a genuine aim. (10) Indeed, the Member States have a legitimate interest in taking appropriate steps to protect their financial interests and the Court has held that ‘[p]reventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive’. (11)

20None the less, it appears from the Court’s case-law that, in accordance with the principle of proportionality, the Member States must employ means which, whilst enabling them effectively to attain the objective pursued by their domestic laws, are the least detrimental to the objectives and the principles laid down by the relevant Community legislation. Accordingly, whilst it is legitimate for the measures adopted by the Member States to seek to preserve the rights of the exchequer as effectively as possible, they must not go further than is necessary for that purpose. They may not therefore be used in such a way that they would have the effect of systematically undermining the right to deduct VAT, which is a fundamental principle of the common system of VAT established by the relevant Community legislation. (12)

21As regards the question whether the national provisions on the repayment of excess VAT at issue in the present case comply with those requirements, it should be noted, first, that the right of taxable persons to recover the excess VAT in full is not, per se, called into question. Moreover, recovery of that kind was, in the case in the main proceedings, also allowed by way of carrying forward the excess VAT to the next accounting period. (13) Therefore, what are at issue in the present case are the procedures which govern the right to repayment.

22Subject to Article 87(3) and (3a) of the Law on VAT, repayment of the excess VAT is to be made to the taxable person’s bank account within 60 days. As a new EU VAT payer, the applicant has a right to have her excess VAT repaid in 180 days. Provided that a security deposit in the amount of PLN 250 000 is lodged with the tax authorities, the latter period may, however, be shortened to 60 days. (14)

23I should note that, contrary to what the parties seem to suggest, I do not consider it decisive in the present context which of the two periods for refunds of excess VAT – that is to say 60 and 180 days respectively – is to be considered as the ‘basic’ period. Rather, what should in my view be assessed is the Polish legislation at issue as a whole, regard being had, in particular, to (the extension of) the period applicable to new EU VAT payers.

24In my view, the legislation at issue does not comply with the requirements applicable to repayments of excess VAT as set out above.

25First, it should be noted that with regard to all new EU VAT payers the period of 60 days is (automatically) extended to 180 days unless they lodge a security deposit with the tax authorities. Thus, the national measures in question impose the 180-day period in a sweeping and fixed manner without making any differentiation, as regards that period, between the various groups of taxable persons within the ‘subsystem’ of new EU VAT payers. It is thus assumed in a general fashion and without any objective basis that the activity of those taxable persons might be directed at causing harm to the interests of the exchequer. (15)

26Second, I also agree with the referring court that in view of the fact that the period of 180 days – over which the exercise of the taxable person’s right to deduct VAT is de facto suspended – is: (i) six times longer than the applicable accounting period for VAT (one month), and (ii) three times longer than the basic period for dealing with particularly complicated matters (two months), (16) it can consequently be regarded as unreasonable. The amount of the security deposit which is meant to safeguard the interests of the exchequer is approximately EUR 62 000, which is 100 times the average monthly income in the Polish economy.

27In addition, as regards the context in which a new EU VAT payer is called on to lodge such a security deposit and benefit from the 60-day period, a trader is at that point just developing his economic activities and, as practice shows, that involves substantial investment expenditure and often he will not yet be operating on a large scale. Therefore, the need to wait for 180 days to obtain the refund of excess VAT and/or the inability to dispose of PLN 250 000 may have a marked effect on a taxable person’s financial results. (17) Also, a larger Polish company would appear to gain access to the Community market much more easily than a small Polish trader would (in fact, such an amount may even constitute an insurmountable obstacle for the latter).

28Indeed, to require a security deposit in the amount of PLN 250 000 and the alternative option of receiving the refund of excess VAT merely in 180 days may in practice well represent an obstacle for small and medium-sized enterprises wishing to trade on the Community market. In any event, I agree with the Commission that automatically requiring a fixed amount of PLN 250 000 (18) from all new EU VAT payers in order for them to benefit from the 60-day period would appear, as a general rule, to go beyond what is necessary to prevent fraud and to protect the interests of the exchequer.

29As to the argument that 180 days (or, alternatively, the lodging of the security deposit) are necessary to verify intra-Community transactions, (19) first of all, the Polish Government has not adequately explained why, as a rule, it needs to avail itself of 180 days. Even if, as it contends, the time it took other Member States to answer the Polish authorities exceeded three months in 60% of cases, it still does not automatically follow that 180 days (that is to say six full months) is the least onerous period which can be imposed in order to prevent tax evasion or avoidance.

30It may be recalled that the Member State’s authorities have at their disposal the Community instruments for cooperation and administrative assistance adopted to allow the correct assessment of VAT and counter evasion and avoidance in that area, such as the measures provided for by Council Regulation (EC) No 1798/2003, (20) and Commission Regulation (EC) No 1925/2004. (21)

31Furthermore, to use the argument advanced by the Advocate General in the N case by analogy, I agree that even though in practice the various cooperation mechanisms available to the Member States may not function in an efficient and satisfactory manner, the Member States should not be able to rely on deficiencies in the cooperation between their tax authorities in order to justify a restriction of such a fundamental principle of the common system of VAT as is the right to deduction. (22)

32In any event, most importantly, it would appear that such a necessity – to have sufficient time for verification – is already taken into account through the provisions in Article 87(2) and (3), and through those of Article 97(5), of the Law on VAT. (23) Therefore, the arguments of the Polish Government for a 180-day period (or the alternative, the lodging of the security deposit) are not particularly compelling.

33In these circumstances, although the Member States are in principle not precluded from adopting precautionary measures designed to ensure the veracity of the apparent excess of VAT arising from the information contained in the underlying declaration made by the taxable person, the national measures in question are in my view disproportionate in that they place a particularly high burden on new EU VAT payers. They do not enable those taxpayers to recover the entirety of the credit in appropriate conditions, in particular, within a reasonable period of time.

34To my mind, the Member States should not be able to protect themselves from tax evasion or avoidance by way of making all, or even only a few, new EU VAT payers bear the burden of VAT. If periods are too long that implies that taxable persons bear, even if only partially, the burden of VAT which puts at risk the neutrality of the system. Rather, it should be primarily the State that bears: (i) the responsibility for the management of its tax system, including the prevention of tax evasion and avoidance, as well as (ii) the corresponding risks.

35I would add that, ‘[a]lthough it is not for the Court to comment on the appropriateness of other means of combating tax evasion and avoidance which might be contemplated’, (24) there must surely be less onerous and restrictive means of safeguarding such interests of the exchequer. For instance, it would be possible for the amount of the security deposit to be proportionate to the excess VAT to be refunded (25) or for it to depend on the economic size and/or the ability to pay of the taxable person’s business, which could, one imagines, be inferred from his return. In the alternative, certain thresholds could be applied instead.

36To conclude, Article 18(4) of the Sixth Directive precludes in principle national measures such as those at issue in the main proceedings which are disproportionate and as such undermine the implementation of fundamental principles of the common system of VAT, in particular the right to deduction.

37In the light of the above considerations, it is for the national court to determine and verify – taking into account all the relevant circumstances of the case before it – whether the national measures in question are compatible with the principles of neutrality and proportionality, disapplying, if necessary, any contrary provision of domestic law. (26)

B – Second question

38By its second question, the national court asks whether the national measures in question may none the less be considered to constitute special measures to prevent certain types of tax evasion and avoidance under Article 27(1) of the Sixth Directive.

39In my opinion, the second question calls for a brief answer. Regardless of whether or not the national measures in question in fact constitute special measures of that kind, they cannot be considered as such simply because – as appears from the documents before the Court and indirectly from the arguments put forward by the Polish Government (27) – the Republic of Poland did not have recourse to the formal procedure which is expressly provided for in Article 27 of the Sixth Directive and did not obtain the authorisation referred to in Article 27(1). (28)

IV – Conclusion

Conclusion

40I am therefore of the opinion that the Court should give the following answers to the questions referred by the Wojewódzki Sąd Administracyjny we Wrocławiu:

(1) Article 18(4) 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, precludes in principle national measures like those at issue in the main proceedings which are disproportionate and as such undermine the implementation of fundamental principles of the common system of VAT, in particular the right to deduction.

(2) The rules laid down in national measures like those at issue in the main proceedings cannot be considered to constitute special measures to prevent certain types of tax evasion and avoidance within the meaning of Article 27(1) of Directive 77/388 where the formal procedure which is expressly provided for in Article 27 of Directive 77/388 has not been followed.

(1) .

(2) – 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 First Directive’).

(3) – 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) (‘the Sixth Directive’).

(4) – That is to say, taxable persons who have notified their tax office that they intend to make their first intra-Community supply of goods or services or their first intra-Community acquisition. See further below for the provisions of the Polish legislation governing the requirement to register in such circumstances.

(5) – Dziennik Ustaw (Journal of Laws) No 54, heading 535.

(6) – Referred to below as ‘new EU VAT payers’.

(7) – The second and third sentences of Article 87(2), which apply to cases where further investigation is required, are to apply mutatis mutandis .

(8) – See Case C‑78/00 Commission v Italy [2001] ECR I‑8195, paragraphs 32 and 33.

(9) – Ibidem, paragraph 34.

(10) – See, in this connection, the Opinion of Advocate General Fennelly in Joined Cases C‑286/94, C‑340/95, C‑401/95 and C‑47/96 Molenheide and Others [1997] ECR I‑7281, points 37 to 39.

(11) – See Case C‑255/02 Halifax and Others [2006] ECR I‑1609, paragraph 71 and the case-law cited there; Joined Cases C-439/04 and C-440/04 Kittel and Recolta Recycling [2006] ECR I-6161, paragraph 54; and Joined Cases C‑487/01 and C‑7/02 Gemeente Leusden and Holin Groep [2004] ECR I‑5337, paragraph 76. See also the Opinion of Advocate General Cosmas in Joined Cases C‑177/99 and C‑181/99 Ampafrance and Sanofi [2000] ECR I‑7013, points 70 and 72; the judgment in Molenheide and Others , cited in footnote 10, paragraph 47; and the Opinion of Advocate General Poiares Maduro in Joined Cases C‑354/03, C‑355/03 and C‑484/03 Optigen and Others [2006] ECR I‑483, point 43.

(12) – See the judgment in Molenheide and Others , cited in footnote 10, paragraphs 46 and 47. See also, by way of example, with regard to Article 22(8) of the Sixth Directive, Halifax and Others , cited in footnote 11, paragraph 92 and the case-law cited there. As regards the prevention of fraud, see Case C‑146/05 Collée [2007] ECR I‑0000, paragraph 26, and see also the Opinion of Advocate General Cosmas in Case C‑361/96 Société générale des grandes sources [1998] ECR I‑3495, point 14.

(13) – In the present case, the applicant requested, in conformity with Polish law, that the excess VAT be repaid into her bank account (so-called direct repayment). The other option of carrying the excess VAT over to the following accounting period is referred to as indirect repayment.

(14) – The security deposit is not a condition for obtaining a refund of excess VAT. Rather, it is a condition for those who want to benefit from a period shorter than 180 days. Following a period of 12 months during which the taxable person has submitted a tax return and timeously paid all taxes, including income tax on natural persons, he may apply for release or repayment of the security deposit.

(15) – As the referring court rightly points out, for the period of 180 days to include (during their first 12 months) all EU VAT payers in the category of persons whose operations pose a threat to the interests of the exchequer would appear to be an excessively mechanical approach, since the relevant national provisions do not take account of the conditions whose satisfaction would allow the objective finding that the activity of those taxable persons might be directed at causing harm to the exchequer. Such a finding would justify the penalisation and less favourable treatment of ‘dishonest’ taxable persons in relation not only to persons carrying on activities subject to VAT for a period of more than 12 months from the date of registration but also in relation to persons duly paying VAT during the first year of operation.

(16) – As established in the Polish Tax Code. The national court refers to Article 139(1) of the Law establishing the Tax Code (Ustawa Ordynacja Podatkowa) of 29 August 1997.

(17) – As it is clear that such an amount undoubtedly constitutes a financial burden.

(18) – As the tax authorities have no possibility of adapting the amount of the security deposit to a particular case.

(19) – The Polish Government submits that the 180-day period is required because of the need to verify intra-Community transactions, inter alia in the framework of the VIES (VAT Information Exchange) system which, it argues, take time.

(20) – Council Regulation of 7 October 2003 on administrative cooperation in the field of value added tax and repealing Regulation (EEC) No 218/92 (OJ 2003 L 264, p. 1).

(21) – Commission Regulation of 29 October 2004 laying down detailed rules for implementing certain provisions of Council Regulation (EC) No 1798/2003 (OJ 2004 L 331, p. 13). See, in this connection, Case C‑73/06 Planzer Luxembourg [2007] ECR I‑5655, paragraph 48.

(22) – Even though Advocate General Kokott uses that argument with regard to restrictions on fundamental freedoms. See her Opinion in Case C‑470/04 N [2006] ECR I‑7409, point 114.

(23) – Namely, where the reasons for the refund require additional investigation. No time-limits are laid down for that extension. Where the refund is ultimately determined to be lawful, the tax authorities are to pay the taxable person the amount due plus interest.

(24) – See Ampafrance and Sanofi , cited in footnote 11, paragraph 62.

(25) – Which appears to have been originally foreseen as regards the security deposit in a relatively recent proposed amendment to the Polish Law on VAT. Such considerations (for the security deposit to be proportionate to the excess VAT) come to mind not least in view of the fact that the amount of the security deposit (as it stands) does not correspond in any way to the effective or real risk for the exchequer to which it is exposed vis-à-vis a new EU VAT payer. Cf., for instance, Case C‑262/99 Louloudakis [2001] ECR I‑5547, paragraph 69. I may add that at present, in fact, a security deposit of PLN 250 000 is required even in a case of an intra-Community supply of an otherwise completely insignificant value. As an aside, in the present case, the amount of the security deposit is four times higher than the excess VAT indicated as being refundable to the applicant.

(26) – With regard to the question of disapplication, see Case C‑357/06 Frigerio Luigi & C. [2007] ECR I‑0000, paragraph 28, which refers to Case 157/86 Murphy and Others [1988] ECR 673, paragraph 11, and Case C‑208/05 ITC [2007] ECR I‑181, paragraphs 68 and 69.

(27) – Where it maintains that the measures at issue cannot be considered ‘special measures’ within the meaning of Article 27(1) of the Sixth Directive, as the latter does not regulate questions regarding the periods and procedures applying to refunds of excess VAT. These are matters which lie within the discretion of the Member States.

(28) – See Case 50/87 Commission v France [1988] ECR 4797, paragraph 22; the Opinion of Advocate General Slynn in Joined Cases 123/87 and 330/87 Jeunehomme and EGI [1988] ECR 4517, 4535; Case 5/84 Direct Cosmetics [1985] ECR 617, paragraph 37; and Case C‑97/90 Lennartz [1991] ECR I‑3795, paragraphs 33 to 35. Cf. also Case 324/82 Commission v Belgium [1984] ECR 1861.