C-269/00 Seeling

JUDGMENT OF THE COURT (Fifth Chamber)

8 May 2003 *

In Case C-269/00,

REFERENCE to the Court under Article 234 EC by the Bundesfinanzhof (Germany) for a preliminary ruling in the proceedings pending before that court between

Wolfgang Seeling

and

Finanzamt Stamberg,

on the interpretation of Articles 6(2)(a), 13B(b) and 17(2)(a) 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),

* Language of the case: German.

I - 4 1 15 THE COURT (Fifth Chamber),

composed of: M. Wathelet, President of the Chamber, C.W.A. Timmermans, D.A.O. Edward, P. Jann and S. von Bahr (Rapporteur), Judges,

Advocate General: F.G. Jacobs,

Registrar: H.A. Rühi, Principal Administrator,

after considering the written observations submitted on behalf of:

— Mr Seeling, by H.G. Zaisch, Steuerberater,

— the German Government, by W.-D. Plessing and T. Jiirgensen, acting as Agents,

— the Commission of the European Communities, by E. Traversa and K. Gross, acting as Agents, assisted by A. Böhlke, Rechtsanwalt,

having regard to the Report for the Hearing, after hearing the oral observations of Mr Seeling, represented by H.G. Zaisch, the German Government, represented by B. Muttelsee-Schön, acting as Agent, and the Commission, represented by K. Gross, assisted by A. Böhlke, at the hearing on 7 February 2002,

after hearing the Opinion of the Advocate General at the sitting on 16 May 2002,

gives the following

Judgment

Legal context and the dispute

1By order of 25 May 2000, received at the Court on 3 July 2000, the Bundesfinanzhof (Federal Finance Court) referred to the Court for a preliminary ruling under Article 234 EC a question on the interpretation of Articles 6(2)(a), 13B(b) and 17(2)(a) 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, hereinafter 'the Sixth Directive').

2That question was raised in proceedings between Mr Seeling and the Finanzamt Starnberg (hereinafter 'the Finanzamt') relating to Mr Seeling's right to deduct in full value added tax (hereinafter 'VAT') paid as input tax in connection with the construction of a building which he treated as forming, in its entirety, part of the assets of his business but part of which he uses for private purposes.

I - 4 1 17

Legal background

Community legislation

3Article 2(1) of the Sixth Directive subjects to VAT 'the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such'.

4Article 6(2)(a) of the Sixth Directive treats as a supply of services for consideration 'the use of goods forming part of the assets of a business for the private use of the taxable person or of his staff or more generally for purposes other than those of his business where the value added tax on such goods is wholly or partly deductible'.

5Under Article HA(l)(c) of the Sixth Directive, the taxable amount is to be 'in respect of supplies referred to in Article 6(2), the full cost to the taxable person of providing the services'.

6Under Article 13B(b) of the Sixth Directive, the Member States are to exempt: 'the leasing or letting of immovable property excluding:

1. the provision of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use as camping sites;

2. the letting of premises and sites for parking vehicles;

3. lettings of permanently installed equipment and machinery;

4. hire of safes'.

7Article 13C of the Sixth Directive provides as follows:

'Member States may allow tax payers the right of option for taxation in cases of:

(a) letting and leasing of immovable property;

(b) ...

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

8Article 17(2)(a) of the Sixth Directive provides:

'In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person.'

9Article 20 of the Sixth Directive, on adjustments of deductions, as amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18), provides as follows, in paragraph (2):

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

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

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

National legislation

10Under Paragraph 1(1)(2)(b) of the Umsatzsteuergesetz (Law on Turnover Tax, BGBl. 1993 I, p. 565), in the version in force in the year in point (1995) (hereinafter 'the UStG'), private use is subject to VAT. Private use includes cases where a trader in the context of his business effects transactions, other than the supply of goods, for purposes extraneous to the business.

11Under Paragraph 4(12)(a) of the UStG the leasing and letting of immovable property are exempt.

12Paragraph 9(1) of the UStG provides that the trader may waive the exemption provided for in Paragraph 4(12) if the transaction is effected for the purposes of another trader's business. Paragraph 9(2) of the UStG provides that the exemption may be so waived only where the lessee uses or intends to use the immovable property exclusively for transactions which do not preclude the deduction of input tax.

13Paragraph 15(2)(1) of the UStG precludes deduction of VAT on supplies of goods and services used for exempt transactions.

14The order for reference indicates that, under the Bundesfinanzhofs earlier case-law, the use of immovable property forming part of the assets of a business for purposes other than those of the business is exempt and the right to deduct under Paragraph 15(2)(1) of the UStG is therefore precluded where the immovable property is let within the meaning of Paragraph 4(12)(a) of the UStG if the right to use that property is conferred on a third party for consideration. In the case of private use, waiver of the exemption pursuant to Paragraph 9 of the UStG is not permissible because that provision presupposes a transaction with another trader for his business.

The main proceedings and the question referred

15Mr Seeling owns a tree-surgery and horticultural business which is subject to the normal tax rules. In 1995 he erected a building which he treated as forming, in its entirety, part of the assets of his business. Since its completion he has used it partly for business and partly for residential purposes.

SKI-XING

16In his VAT declaration for 1995 Mr Seeling claimed the deduction in full of the amount of VAT paid as input tax for the construction of the building. He declared as taxable personal use the private use of a dwelling in the building.

17However, the Finanzamt regarded the private use of part of the building as being exempt personal use and refused the corresponding deductions.

18The Finanzgericht (Finance Court) (Germany) confirmed the decision of the Finanzamt and dismissed Mr Seeling's appeal.

19Mr Seeling brought an appeal on a point of law ('Revision') against that decision before the Bundesfinanzhof. He argued that it follows from Community law that his private use of part of the building is taxable and therefore deduction of the amount of the input tax attributable to that part of the building is not precluded.

20After observing that it is the Court's case-law (Case C-258/95 Fillibeck [1997] ECR 1-5577, paragraph 25) that Article 6(2)(a) of the Sixth Directive is designed to ensure equal treatment as between taxable persons and final consumers, the Bundesgerichtshof questioned the scope of that equivalence of treatment. It queried in particular whether the partial use of goods forming part of the assets of a business for the private use of the taxable person may be regarded as an exempt 'leasing or letting of immovable property', within the meaning of Article 13B(b) of the Sixth Directive. According to it, that question was not conclusively settled by the judgment in Case C-291/92 Armbrecht [1995] ECR I-2775.

21In those circumstances, the Bundesfinanzhof has decided to stay proceedings and refer the following question to the Court for a preliminary ruling:

'May a Member State treat the use for private residential purposes of a dwelling in business premises forming as a whole part of the assets of the business — which is equated to a supply of services for consideration under Article 6(2)(a) of Directive 77/388/EEC — as tax-exempt (in accordance with Article 13B(b) of that directive, but without the possibility of waiving the exemption), with the result that deduction under Article 17(2)(a) of the directive of the value added tax which arose in connection with the construction of the premises is precluded to that extent?'

Grounds

The question referred for a preliminary ruling

22By its question the national court is essentially asking whether Articles 6(2)(a) and 13B(b) of the Sixth Directive must be interpreted as meaning that they preclude a national law which treats as an exempt supply of services, on the basis that it constitutes a leasing or letting of immovable property within the meaning of Article 13B(b), the private use by a taxable person of part of a building forming, in its entirety, part of the assets of his business.

Observations submitted to the Court

23Mr Seeling argues that the equivalence of treatment provided for in Article 6(2)(a) of the Sixth Directive does not mean that the taxable person must be equated to a lessee.

24The sole purpose of Article 6(2)(a) of the Sixth Directive is to prevent the benefit of deducting input tax paid on the business asset in question from being acquired definitively by the taxable person. Only the expenses subject to VAT paid as input form part of the taxable amount for the purposes of that provision (see Armbrecht). The deduction of input tax should not be precluded but simply offset or, in other words, neutralised.

25According to Mr Seeling, tax neutrality in respect of the private use of goods forming part of the assets of a business cannot be assured unless deduction of the input tax is allowed in full initially, and the private use then taxed over the entire period of use, in accordance with Article 6(2)(a) of the Sixth Directive.

26The German Government submits that Article 6(2) of the Sixth Directive broadens the scope of Article 13 of the directive. It follows from the equivalence of treatment provided for in Article 6(2)(a) of the Sixth Directive that all provisions of that directive applicable to supplies of services are, in principle, also applicable to situations deemed to be equivalent.

27In this case, the conditions to be satisfied for there to be equivalence of treatment in accordance with Article 6(2)(a) of the Sixth Directive are met. The taxable person treated the entire building as part of the assets of his business, whilst at the same time using part of it as a private residence. Furthermore, the asset gave rise to an entitlement to proportional deduction of input tax, in this case in the amount attributable to that part of the immovable property used for business purposes.

28The German Government submits that equivalence of treatment means that Article 13B(b) of the Sixth Directive applies as the most appropriate analogous provision. It contends that, since Article 6(2)(a) of the Directive deems the use of an asset of a business for private purposes equivalent to a supply of services, and since that use most closely resembles, from the point of view of final consumption, a lease, the exemption provided for in Article 13B(b) of the directive applies.

29The German Government adds that the sense and purpose of Article 6(2)(a) of the Sixth Directive, namely to avoid the non-taxation of private use of business assets (see Case 50/88 Kühne [1989] ECR 1925, paragraph 8), also militate in favour of the proposition that Article 13B(b) of the directive applies to private use. From the point of view of final consumption, whether the taxable person leases the residence or uses it himself is immaterial. It is therefore appropriate, in this case, to treat both cases alike for tax purposes.

30The German Government also cites the principle of tax neutrality as supporting the applicability of Article 13B(b) of the Sixth Directive, referring to paragraphs 9 and 17 of the judgment in Kühne.

SELLING

31In that connection, it points out that if the private use of the building were to decrease in the years following its acquisition, a posteriori deduction pro rata temporis of input tax could be applied for during the 10-year adjustment period provided for in Article 20(2) of the Sixth Directive.

32However, if private use were subject to VAT — thus giving rise to entitlement to deduct as input tax the VAT on all the construction costs incurred in respect of the building — there would be untaxed end use. The building could then, for instance, be sold free of VAT to a private individual after the adjustment period of 10 years provided for in Article 20(2) of the Sixth Directive, without any a posteriori adjustment being made to the deduction of VAT paid as input upon acquisition of the building. In this second case, the taxable person would thus obtain an advantage because taxing the private use of the building over 10 years would, in most instances, correct to a very limited extent only the deduction of the VAT paid as input tax at the time when the building was acquired. Under Article 11A(1)(c) of the directive, the full cost to the taxable person of providing the services constitutes the taxable amount for transactions treated as equivalent under Article 6(2) of the directive. Since a building will not, as a rule, depreciate within 10 years, taxing its private use over 10 years will not enable the sums of VAT paid as input tax to be offset in their entirety by the amount of depreciation. That result contravenes the principle of fiscal neutrality.

33The Commission observes that it follows from Article 6(2)(a) of the Sixth Directive that, where a taxable person makes private use of goods forming part of the assets of his business, he is deemed to be supplying services to himself, in consideration for a sum corresponding to the amount of the costs attributable to the supply of those services, which amount is calculated in accordance with the provisions of Article 11A(1)(c) of the directive. The use of goods forming part of the assets of the business other than for the purposes of that business is therefore taxable where the goods in question give rise to an entitlement to deduct input tax wholly or in part.

34That provision is designed to ensure equal treatment as between the taxable person and the final consumer with regard to non-business use. It therefore treats a taxable person making private use of goods forming part of the business in the same way as an individual who has acquired goods without entitlement to deduct. The Court held at paragraph 8 of the judgment in Kühne that it is clear from the structure of the Sixth Directive that Article 6(2)(a) is designed to prevent the non-taxation of business goods used for private purposes and therefore requires the taxation of the private use of such goods only where the tax paid on their acquisition was deductible.

35With respect to the German conception of private use as a leasing transaction entered into by the taxable person with himself, the Commission submits that it finds no basis either in Article 6(2)(a) or in Article 13B(b) of the Sixth Directive.

36With regard to Article 13B(b), it observes that the exemptions provided for in Article 13 of the Sixth Directive have their own independent meaning in Community law (see, inter alia, Case 348/87 Stichting Uitvoering Financiële Acties [1989] ECR 1737, paragraph 11, and Case C-2/95 SDC [1997] ECR I-3017, paragraph 21), and must therefore be interpreted strictly (see, inter alia, Stichting Uitvoering Financiële Acties, paragraph 13; Case C-216/97 Gregg [1999] ECR I-4947, paragraph 12, and Case C-358/97 Commission v Ireland [2000] ECR I-6301, paragraph 52, and Case C-359/97 Commission v United Kingdom [2000] ECR I-6355, paragraph 64).

SKF.I.INC;

37The Commission emphasises that the exception to the general principle of taxation laid down in Article 13B(b) of the Sixth Directive is only applicable where the specific characteristics of a contract to let, and in particular the duration of the right of enjoyment of the property, which is an essential element, Commission Ireland, Commission are actually met (see v paragraph 56, and v United Kingdom, paragraph 68). Accordingly, the inclusion in that exception of a fictional leasing transaction by the taxable person to himself is not permissible.

38As for Article 6(2)(a) of the Sixth Directive, the Commission argues that, as an exception, that provision too must be interpreted strictly. It cannot be inferred from Article 6(2)(a) that the Member States may, contrary to its unambiguous wording, at will transform a taxable transaction into an exempt transaction by treating it as being equivalent.

39Finally the Commission observes that, according to the Court's case-law, a taxable person may choose whether or not to integrate into his business, for the purposes of applying the Sixth Directive, part of an asset which is given over to his private use. Accordingly, capital goods used both for business and private purposes may none the less be treated as business goods, the VAT on which is in {Armbrecht, principle wholly deductible paragraph 20).

Findings of the Court

40It must first of all be pointed out that it is settled case-law that a taxable person may choose whether or not to integrate into his business, for the purposes of applying the Sixth Directive, part of an asset which is given over to his private use Armbrecht, Bakcsi (see paragraph 20, and Case C-415/98 Į2001] ECR 1-1831, paragraph 25).

41If the taxable person chooses to treat capital goods used both for business and private purposes as business goods, the VAT due as input tax on the acquisition of those goods is in principle wholly and immediately deductible (see, inter alia, Case C-97/90 Lennartz [1991] ECR I-3795, paragraph 26, and Bakcsi, cited above, paragraph 25).

42It follows from Article 6(2)(a) and from Article 11A(1)(c) of the Sixth Directive that the use of capital goods for the private use of a taxable person or of his staff or for purposes other than those of his business, where the input VAT paid on such goods is wholly or partly deductible, is treated as a supply of services for consideration and is taxed on the basis of the cost of providing the services (see Lennartz, paragraph 26, and Bakcsi, paragraph 30).

43Accordingly, where a taxable person chooses to treat an entire building as forming part of the assets of his business and subsequently uses part of that building for private purposes, on the one hand, he is entitled to deduct the input VAT paid on all construction costs relating to that building and, on the other, he is subject to the corresponding obligation to pay VAT on the amount of expenditure incurred to effect such use.

44Next, as regards Article 13B(b) of the Sixth Directive, the Court has repeatedly stated that the terms used to specify the exemptions provided for by Article 13 of the Sixth Directive are to be interpreted strictly, since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person (see, in particular, Stichting Uitvoering Financiële Acties, paragraph 13, and Case C-287/00 Commission v Germany [2002] ECR I-5811, paragraph 43).

SELLING

45Accordingly, contrary to what the German Government contends, Article 13B(b) of the Sixth Directive cannot be applied by analogy.

46Moreover, it is settled case-law that the exemptions in Article 13 of the Sixth Directive constitute independent concepts of Community law whose purpose is to avoid divergences in the application of the VAT system from one Member State to another (see, in particular, Case C-349/96 CPP [1999] ECR 1-973, paragraph 15, and Commission v Germany, paragraph 44).

47In that regard, it must be observed that the wording of Article 13B(b) of the Sixth Directive provides no illumination as to the scope of the words 'letting or leasing of immovable property'.

48None the less, leaving aside the specific cases expressly mentioned in Article 13B(b), the concepts 'leasing' and 'letting of immovable property', which, as pointed out in paragraph 44 of this judgment, constitute an exception to the general VAT rules contained in the Sixth Directive, must be construed strictly (see Commission v Ireland, paragraph 55, and Commission v United Kingdom, paragraph 67).

49The letting of immovable property for the purposes of Article 13B(b) of the Sixth Directive essentially involves the landlord of property assigning to the tenant, in return for rent and for an agreed period, the right to occupy his property and to exclude other persons from it (see Case C-409/98 Mirror Group [2001] ECR I-7175, paragraph 31, and Case C-108/99 Cantor Fitzgerald International [2001] ECR I-7257, paragraph 21).

50The private use by the taxable person of a dwelling in a building which he has treated as forming, in its entirety, part of the assets of his business does not satisfy those conditions.

si It is a feature of such use not only that no rent is paid but also that there is no genuine agreement on the duration of the right of enjoyment or the right of occupation of the dwelling, or to exclude third parties.

52It follows that the private use by the taxable person of a dwelling in a building which he has treated as forming, in its entirety, part of the assets of his business does not fall within Article 13B(b) of the Sixth Directive.

53Nor, finally, does the German Government's argument based on the principle of fiscal neutrality and the adjustment of deductions under Article 20 of the Sixth Directive alter that conclusion.

54While authorising a taxable person to treat a building as forming, in its entirety, part of the assets of his business, and thus to deduct input VAT on all the construction costs, by taxing the private use by the taxable person of a dwelling in that building may have the result, as the German Government maintains, that there will be untaxed end use, because the adjustment period provided for in Article 20(2) of the Sixth Directive is likely to correct to a limited extent only the deduction of input tax made when the building was constructed, that is a consequence of a deliberate choice on the part of the Community legislature and cannot have the effect of requiring that another article of the directive be given a broad interpretation.

55In addition, it must be observed that, since the entry into force of Directive 95/7 in May 1995, the adjustment period for capital goods in the form of immovable property may be extended to 20 years, rather than 10 years as previously. It is clear from the fifth recital in the preamble to that directive that this amendment was made precisely in order to take account of the duration of the economic life of such goods.

56The reply to the question referred for a preliminary ruling must therefore be that Articles 6(2)(a) and 13B(b) of the Sixth Directive must be interpreted as precluding national legislation which treats as an exempt supply of services, on the basis that it constitutes a leasing or letting of immovable property within the meaning of Article 13B(b), the private use by a taxable person of part of a building which is treated as forming, in its entirety, part of the assets of his business.

Costs

Costs

57The costs incurred by the German Government and by the Commission, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main proceedings, a step in the proceedings pending before the national court, the decision on costs is a matter for that court. On those grounds,

THE COURT (Fifth Chamber),

in answer to the question referred to it by the Bundesfinanzhof by order of 25 May 2000, hereby rules:

Articles 6(2)(a) and 13B(b) 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, must be interpreted as precluding national legislation which treats as an exempt supply of services, on the basis that it constitutes a leasing or letting of immovable property within the meaning of Article 13B(b), the private use by a taxable person of part of a building which is treated as forming, in its entirety, part of the assets of his business.

Wathelet Timmermans Edward

Jann von Bahr

Delivered in open court in Luxembourg on 8 May 2003.

M. Wathelet R. Grass

President of the Fifth Chamber Registrar

OPINION OF ADVOCATE GENERAL JACOBS delivered on 16 May 2002 1

1In this case die Bundesfinanzhof (Federal Finance Court), Germany, has asked the Court whether a Member State may treat the use for private residential purposes of a dwelling in business premises forming as a whole part of the assets of the business as tax-exempt in accordance with Article 13(B)(b) of the Sixth VAT Directive with the result that deduction of the VAT which arose in connection with the construction of the premises is to that extent precluded.

Relevant provisions of the Sixth Directive

2Article 2(1) of the Sixth Directive subjects to value added tax:

'the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such'.

3Article 6(2)(a) treats as a supply of services for consideration:

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

4Article 11(A)(1)(c) provides that the taxable amount shall be, 'in respect of supplies referred to in Article 6(2), the full cost to the taxable person of providing the services'.

5Article 13(B) lays down a series of mandatory exemptions from VAT. Article 13(B)(b) exempts, subject to certain exceptions of no relevance here:

'the leasing or letting of immovable property...'

6Article 13(C) provides:

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

(a) letting and leasing of immovable property;

(b) the transactions covered in B(d) (g) and (h) above.

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

7Article 17 concerns the right of a taxable person to deduct from the output VAT payable on his taxable supplies the input VAT incurred on the goods and services used for making those supplies. The deduction mechanism ensures that traders do not themselves ultimately bear the tax which they collect by adding it to the selling price of their supplies: VAT is definitively borne only by the final consumer who, not being a taxable person, has no right of deduction.

8Article 17(2) provides:

'In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person.'

9Sometimes however it may be necessary to adjust the initial deduction. Article 20(2) 3 and (3) lay down rules for adjustment in respect of capital goods where the degree to which such goods are used for the purpose of taxable transactions varies over time:

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

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

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

•3. In the case of supply during the period of adjustment capital goods shall be regarded as if they had still been applied for business use by the taxable person until expiry of the period of adjustment. Such business activities are presumed to be fully taxed in cases where the delivery of the said goods is taxed; they are presumed to be fully exempt where the delivery is exempt. The adjustment shall be made only once for the whole period of adjustment still to be covered.

ï

Relevant provisions of national legislation

10Paragraph 1 of the Umsatzstcuergesetz (Law on Turnover Tax) 1993, in the version in force in the year in dispute (1995) ('the Law'), is headed Taxable transactions' and lists transactions which are subject to VAT. Paragraph 1(2)(b) includes in that list 'private use', the definition of which there given includes cases where a trader in the course of his business effects supplies other than of goods for purposes which fall outside the business.

11Paragraph 4 of the Law is headed 'Exempt supplies of goods and services and private use'. Paragraph 4(12)(a) includes among exempted transactions the leasing or letting of immovable property.

12Paragraph 9(1) of the Law provides that the taxpayer may treat a transaction exempted pursuant to Paragraph 4(12) as taxable if it is a supply to another trader for his business. Paragraph 9(2) provides that the exemption may be so waived in the case of a letting or leasing of immovable property only where the lessee uses or intends to use the immovable property exclusively for transactions which do not preclude the deduction of input tax.

13In accordance with the case-law of the Bundesfinanzhof, the private use of immovable property forming part of the assets of a business is exempt pursuant to Paragraph 4(12)(a) of the Law. Waiver of the exemption pursuant to Paragraph 9 of the Law is not permissible because that provision presupposes a supply to another trader for his business.

14Paragraph 15(2) of the Law precludes deduction of VAT on supplies used for exempt transactions.

15The present case is not the first occasion on which the German rules relating to the VAT treatment of private use of business assets have come before the Court. I have already explained the scheme and effect of those rules in my Opinion in Armbreckt, 6 and it may be helpful at this point to repeat that explanation:

'... the principle underlying the German implementing rules is that, in order to ensure fiscal neutrality between taxable persons and private individuals, a taxable person putting goods or services to private use must be placed in the same position for VAT purposes as one of his customers. The German rules therefore require a taxable person to assign goods acquired partly for business and partly for private use to the business. The taxable person is seen as having the right to deduct tax in full on the goods under Article 17(2) of the directive, but must then account for his private use of them by paying an annual charge based on the depreciation of the goods under Article 6(2)(a).

In keeping with the logic of the German arrangements the private use of an immovable property is equated with an exempt residential letting by the business. In other words, the private use is deemed to be a supply by the taxable person under Article 6(2)(a), but is exempted under Article 13(B)(b). The effect of this is that, in contrast to the position with other goods, on the acquisition of an immovable property a taxable person is not entitled to deduct the VAT on the proportion of the property put to private use since it is referable to an exempt supply. Nor however is he obliged to pay a charge for private use under Article 6(2)(a).'

The main proceedings and the question referred

16Mr Seeling owns a tree-surgery and horticultural business which is subject to the normal tax rules. In 1995 he erected a building which he treated (as a whole) as an asset of his business. Since its completion, he has used it partly for business and partly for private residential purposes.

17In his turnover tax declaration for 1995, Mr Seeling claimed the deduction of sums attributable to the whole building. With regard to the private use of the building, he declared taxable personal use. However, the Finanzamt viewed the private use of the building as exempt personal use and refused the deduction to that extent.

18The Finanzgericht (Finance Court) followed the view taken by the Finanzamt and dismissed Mr Seeling's action.

19Mr Seeling has appealed to the Bundesfinanzhof. He submits that in accordance with Community law his private use of the dwelling is taxable and therefore deduction of the amounts attributable to the part of the building used as a dwelling is not precluded.

20In its order for reference the Bundesfinanzhof states that according to the case-law of the Court of Justice Article 6(2)(a) of the Sixth Directive is designed to ensure equal treatment as between taxable persons and final consumers by preventing the non-taxation of business goods used for private purposes: Kühne, Mobsche 8 and Fillibeck.

21It adds, however, that it is open to question how far that equivalence of treatment extends, in particular whether the (partial) use of goods forming part of the assets of a business for the private use of a taxable person may be regarded as an exempt 'leasing or letting of immovable property' within the meaning of Article 13(B)(b) of the Directive.

22The Bundesfinanzhof concludes that the question appears not to be conclusively settled, even following the judgment of the Court of Justice in Armbrecht. It notes that in my Opinion in that case I observed that the German arrangements, which equate a taxable person who occupies privately immovable property that belongs to the business with a lessee under an exempt lease, are based on an understanding of the notion of fiscal neutrality which is contrary to the case-law of the Court of Justice. However, those observations were not taken up by the Court of Justice in its judgment.

23The Bundesfinanzhof has accordingly referred the following question to the Court:

'May a Member State treat the use for private residential purposes of a dwelling in business premises forming as a whole part of the assets of the business — which is equated to a supply of services for consideration under Article 6(2)(a) of Directive 77/388/EEC — as tax-exempt (in accordance with Article 13(B)(b) of that directive, but without the possibility of waiving the exemption), with the result that deduction under Article 17(2)(a) of the directive of the value added tax which arose in connection with the construction of the premises is precluded to that extent?'

24Mr Seeling, the German Government and the Commission presented written observations and were represented at the hearing.

Analysis

25Mr Seeling and the Commission, in contrast to the German Government, are of the view that the question referred must be answered in the negative. I agree.

26The starting point must be the principle, well established in the case-law of the Court, that a taxable person may choose whether or not to integrate into his business, for the purposes of applying the Directive, that part of an asset which is given over to his private use. Where a taxable person has opted to treat as business assets goods used for both business and private purposes, the VAT on those goods is in principle wholly deductible. It is clear that by 'in principle' the Court meant simply in the absence of any relevant derogation in the Sixth Directive: subject to that, the Court has stressed the absolute nature of the 'right of deduction' even where the use of the goods for the purposes of the business is very limited.

27Where a taxable person has exercised that option and VAT has been fully deducted, Article 6(2)(a) — which it will be recalled treats the private use of such goods as a supply of services — is designed to ensure equal treatment as between taxable persons and final consumers by preventing the non-taxation of business goods used for private purposes; it therefore requires the taxation of the private use of such goods where the tax paid on their acquisition was deductible.

28It may seem surprising at first sight that an asset that is used partly for private purposes may be treated as assigned wholly to the business. However, such an analysis may in some circumstances promote the neutrality of the tax by allowing proper account to be taken of changes in the degree of private use over the useful life of the asset by a taxable person or as between a taxable vendor and a taxable purchaser.

29The case-law of the Court therefore permits two alternative methods of dealing for VAT purposes with goods used partly for private purposes: the taxable person may either retain the goods to that extent outside the VAT system altogether or integrate them into his business, deduct the input VAT on the goods and pay the charge for use under Article 6(2)(a). The German rules however permit a third method where the goods in question are immovable property: in that case they equate the service deemed to be supplied in accordance with Article 6(2)(a) with a letting and treat it as exempt by virtue of the exemption which would in the case of a genuine leasing arrangement be applicable under Article 13(B)(b) of the Directive. On the basis that the letting is exempt, deduction of input tax is precluded.

30In support of that approach the German Government submits that it follows from the wording of Article 6(2)(a) that all the provisions of the Directive applicable to supplies of services are in principle also applicable to the private use of business assets. In the present case treating the private use of the property as a supply of services for consideration pursuant to Article 6(2) of the Directive implies that Article 13(B)(b) should be applied by analogy. The fact that there is no use by a third party does not in the German Government's submission preclude that interpretation: the fact that Article 6(2)(a) treats private use as a supply of services shows that a link with a third party is not critical.

31In my view, and as Mr Seeling and the Commission submit, Article 13(B)(b) cannot support that interpretation.

32It is settled law that the exemptions provided for by Article 13 of the Directive must constitute independent concepts of Community law so that the basis for assessing VAT is determined uniformly and according to Community rules. Moreover the terms used to specify the exemptions are to be interpreted strictly since they constitute exceptions to the

I - 4 1 10 general principle stated in Article 2 of the Directive according to which VAT is to be levied on all supplies of goods or services made for consideration by a taxable person. Although that requirement of strict interpretation does not mean that the terms used to specify exemptions should be construed narrowly or restrictively so as to deprive the exemptions of their intended effect, it is clear that exemptions cannot in any event be extended by analogy, as the German Government's argument seems to require.

33With particular regard to the interpretation of Article 13(B)(b) of the Directive, the Court has in a series of recent cases given guidance on the scope of the concept 'leasing or letting'. First, it has stated that the term 'letting of immovable property' cannot be considered to cover contracts in which the parties have not agreed on any duration for the right of enjoyment of the immovable property, which is an essential element of a contract to let. Second, it has ruled that the letting of immovable p r o p e r ty f or t he p u r p o s es of Article 13(B)(b) essentially involves the landlord of property assigning to the tenant, in return for rent and for an agreed period, the right to occupy his property and to exclude other persons from it. The exemption provided for in Article 13(B)(b) cannot therefore in my view apply to a fictional leasing by the taxpayer to himself, where there can by definition be no genuine agreement as to consideration or term (or indeed anything else).

34If moreover the legislature had intended Article 6(2)(a) to be read in conjunction with Article 13(B)(b), it might have been expected that Article 6(2)(a) would contain an express reference to Article 13(B)(b): the effect of such a reading is, after all, to transform a taxable supply into an exempt supply.

35Furthermore, the German Government's approach involves an interpretation of Article 6(2)(a) which is contradictory. That provision explicitly states that the rules on the private use of goods there laid down are to apply 'where the value added tax on [the] goods is wholly or partly deductible'. The German rules purportedly implementing Article 6(2)(a) however refuse to allow the VAT on the goods to be deducted where the goods are immovable property.

36Finally, as the Commission points out, the Court has held that both Article 6(2)(a) and Article 13(B)(b) may be relied upon by an individual as against a Member State before a national court. It would perhaps be surprising if two provisions which have separately been held to be sufficiently clear, precise and unconditional to have direct effect were to be construed so as to be interdependent in the absence of any explicit or implicit reference to that effect.

37Since I do not accept the German G o v e r n m e n t 's a r g u m e nt t h at Article 13(B)(b) applies by analogy to the private use of immovable property forming part of the taxable person's business assets, it is not necessary to deal with its submissions as to the relevance and effect of Article 13(C), which permits Member States to allow taxable persons a right of option for taxation in cases of letting and leasing of immovable property.

38.1 accordingly consider that the German rules governing the VAT treatment of the private use by a taxable person of immovable property integrated into the assets of the business are contrary to the scheme of the Sixth Directive. Mr Seeling is therefore entitled to deduct in full the input tax attributable to the whole building and will be liable to pay an annual charge under Article 6(2)(a) of the Directive.

39The German Government submits however that that approach would enable a taxable person in Mr Seeling's position to obtain a cash-flow advantage and a tax advantage which would not be available under the German rules.

40First, the taxable person would obtain a cash-flow advantage in that he would have the full benefit of the deduction at the outset whereas the tax charge under Article 6(2)(a) which is designed in effect to offset the deduction is staggered over the period of private use.

41However, in my view and as Mr Seeling's representative suggested at the hearing, that advantage is inherent in the structure of Article 6(2)(a) and appears to be regarded by the Court — which has never suggested in the numerous cases on Article 6(2)(a) that that provision is flawed — as an acceptable consequence of the private use mechanism. Private use of goods could equally have been accounted for by adjusting the initial deduction made by the taxable person. However it appears from the Explanatory

I - 4 1 12 Memorandum to the Commission's proposal for the Sixth Directive that it was accepted that the same aim could have been attained by other means (specifically, adjustments to deductions already made), but that 'the technique of treating these transactions as taxable supplies was chosen for reasons of impartiality and simplicity'. Thus the output tax charge under Article 6(2)(a) was specifically chosen as an alternative to a restriction on the right to deduct input tax.

42Second, the German Government submits that a taxable person in Mr Seeling's position would obtain a tax advantage if he were to sell the building more than 10 years after its acquisition and deduction in full of the input tax. An analysis of that argument requires a brief explanation of the mechanism used in the Sixth Directive for the adjustment of deductions.

43Article 20 of the Directive provides for subsequent adjustment of the initial deduction made on the acquisition of capital goods in order to take account of changes of use thereafter. Article 20(2) provides for an adjustment period of five years; that may be extended to 20 years (originally 10 years) for immovable property. Article 20(3) deals with the situation where capital goods are disposed of during the adjustment period: if the taxable person makes a supply of goods during that period, their use for the remainder of the period is deemed to be wholly taxable or exempt business use (depending on whether the supply is taxable or exempt). It appears that Germany has extended the five-year period mentioned in Article 20(2) to 10 years for immovable property in accordance with the original option.

44The German Government notes that in accordance with Article 11(A)(1)(c) the taxable amount in the case of supplies referred to in Article 6(2) is the full cost to the taxable person of providing the service. Where that service consists in the private use of immovable property, that cost will principally consist in the depreciation of the property or that part of it which is subject to private use. It is unlikely that within ten years of acquisition immovable property will have depreciated fully or consequently that the input tax deducted will have been fully extinguished by the annual charge paid. If therefore the taxable person sells the property after the 10-year period without any VAT being payable on that supply, he will have had the benefit of deduction of input tax in full with no further possibility of adjusting that deduction. Such a result would in the German Government's submission conflict with the principle of fiscal neutrality.

45While there may be some justification for those concerns, they can now be at least partially allayed by opting to permit adjustment within a 20-year period. Mr Seeling moreover points out a further anomaly arising from the German rules on private use of immovable property. Where there has been deduction in full of the input tax attributable to immovable property forming part of business assets and used in the 10 years following its acquisition wholly for business purposes, there is no mechanism for adjusting that deduction to reflect subsequent private use of the property if that private use starts ten years after its acquisition. Even where — as in the present case — private use began on acquisition of the property, there will be no possibility of making adjustments to the proportion of input tax whose deduction was permitted in order to reflect changes in the proportion of private and business use after the 10-year period. Fiscal neutrality can be attained only if deduction in full is permitted at the outset, since in that case private use is taxed throughout its duration in accordance with Article 6(2)(a).

Conclusion

46I accordingly consider that the question referred by the Bundesfinanzhof should be answered as follows:

A Member State may not treat the use for private residential purposes of a dwelling in business premises forming as a whole part of the assets of the business as tax-exempt in accordance with Article 13(B)(b) 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.

Notes

(1) Original language: English.

(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 hasis of assessment; OJ 1977 L 145, p. 1.

(3) As amended by Council Directive 95/7/EC of 10 April 1995 amending Directive 77/388/EEC and introducing new simplification measures with regard to value added tax — scope of certain exemptions and practical arrangements for implementing them, OJ 1995 L 102, p. 18.

(4) BGBl I, p. 565.

(5) As amended by the law of 21 December 1993, BGBl I, p. 2310.

(6) Case C-291/92 [1995] ECR I-2775, paragraphs 22 and 25.

(7) Case 50/88 [1989] ECR 1925, paragraph 8 of the judgment.

(8) Case C-193/91 [1993] ECR I - 2 6 1 5, paragraph 8 of the judgment.

(9) Case C-258/95 [1997] ECR I-5577, paragraph 25 of the judgment.

(10) Cited in note 4.

(11) See paragraphs 22 et seq. and 47 of the Opinion.

(12) See in particular Armbrecht, cited in note 4, paragraph 20 of the judgment.

(13) Case C-97/90 Lennartz [1991] ECR I-3795, paragraph 26 of the judgment.

(14) Lennartz, cited in note 13, paragraph 29 of the judgment.

(15) See Kühne, cited in note 7, paragraph 8 of the judgment, and Fillibeck, cited in note 9, paragraph 25.

(16) For further discussion illustrated by an example see my Opinion in Armbrecht, cited in note 6, paragraphs 34 to

(36) .

(17) Unless the lessor was a taxable person and had opted for taxation in accordance with Article 13(C)(a).

(18) See for example Case C-358/97 Commission v Ireland [2000] ECR 1-6301, paragraph 51 of the judgment, and Case C-359/97 Commission v United Kingdom [2000] ECR I-6355, paragraph 63, and the earlier cases there cited.

(19) See, as regards in particular the exemption for leasing and letting of immovable property, Case C-326/99 'Goed Wonen' [2001] ECR 1-6831, paragraph 46 of the judgment, and the cases there cited.

(20) See further Case C-267/00 London Zoological Society, in which judgment was delivered on 21 March 2002, paragraph 19 of my Opinion delivered on 13 December

(200) 1.

(21) Commission v Ireland, paragraph 56 of the judgment, and Commission v United Kingdom, paragraph 68, both cited in note 18.

(22) Case C-409/98 Mirror Croup [2001] ECR I-7175, paragraph 31 of the judgment, and Case C-108/99 Cantor Fitzgerald International [2001] ECR I-7257, paragraph

(21) , and the cases there cited.

(23) See in an analogous context my Opinion in Mohsche, cited in note 8, paragraph 14.

(24) See Kühne, cited in note 7, paragraph 27 of the judgment; Mohsche, cited in note 8, paragraph 19; and Case C-150/99 Stockholm Lindöpark [2001] ECR I-493, paragraph 32.

(25) Although the English text refers to 'taxpayers', it is clear that 'taxable persons' is what is meant: see for exemple the French text, which uses the term 'assujettis', and the German which uses 'Steuerpflichtigen'.

(26) Bulletin of the European Communities, Supplement 11/73, commentary on Article 5(3), the predecessor of Article 5{6) in the Directive which is the equivalent provision in Article 5 ('supplies of goods') to Article 6(2)(a).

(27) See further P. Farmer and R. Lyal, EC Tax Law (1994), p. 102.

(28) See also my Opinion in Lennartz, cited in note 13, paragraph 59.

(29) Before amendment by Directive 95/7, cited in note 3, which came into force on 25 May 1995.

(30) Presumably because the supply would be exempt by virtue of Article 13(B)(g|. It should however be noted that in some circumstances the vendor may opt for taxation in accordance with the German rules implementiim b Article 13(C)(1)).