C-288/07 Isle of Wight Council and Others

Parties Grounds Operative part

In Case C‑288/07,

REFERENCE for a preliminary ruling under Article 234 EC from the Chancery Division of the High Court of Justice of England and Wales (United Kingdom), made by decision of 6 March 2007, received at the Court on 14 June 2007, in the proceedings

The Commissioners of Her Majesty’s Revenue & Customs

v

Isle of Wight Council,

Mid-Suffolk District Council,

South Tyneside Metropolitan Borough Council,

West Berkshire District Council,

THE COURT (Grand Chamber),

composed of V. Skouris, President, P. Jann, C.W.A. Timmermans, A. Rosas and K. Lenaerts, Presidents of Chambers, G. Arestis, U. Lõhmus, A. Borg Barthet, M. Ilešič, J. Malenovský, E. Levits, A. Ó Caoimh and A. Arabadjiev (Rapporteur), Judges,

Advocate General: M. Poiares Maduro,

Registrar: C. Strömholm, Administrator,

having regard to the written procedure and further to the hearing on 1 April 2008,

after considering the observations submitted on behalf of:

– the Isle of Wight Council, Mid-Suffolk District Council, South Tyneside Metropolitan Borough Council and West Berkshire District Council, by J. Ghosh QC, J. Henderson, Barrister, R. Genn, Solicitor, and L. Leach, adviser,

– the Government of the United Kingdom of Great Britain and Northern Ireland by Z. Bryanston-Cross, acting as Agent, and by C. Vajda QC and B. Rayment, Barrister,

– Ireland, by D. O’Hagan, acting as Agent, assisted by A. Aston SC, and N. Travers, BL,

– the Italian Government, by I.M. Braguglia, acting as Agent, assisted by G. De Bellis, avvocato dello Stato,

– the Commission of the European Communities, by R. Lyal and M. Afonso, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 12 June 2008,

gives the following

Judgment

Grounds

1This reference for a preliminary ruling concerns the interpretation of the second subparagraph of Article 4(5) 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; ‘the Sixth Directive’).

2The reference was made in the course of proceedings between the Commissioners of Her Majesty’s Revenue & Customs (‘the Commissioners’) and four local authorities, namely the Isle of Wight Council, Mid-Suffolk District Council, South Tyneside Metropolitan Borough Council and West Berkshire District Council (hereinafter, together, ‘the local authorities concerned’), regarding their treatment as taxable persons for the purposes of value added tax (‘VAT’) on the provision of off-street car-parking facilities (‘off-street parking’).

Legal context

3Article 2 of the Sixth Directive, in Title II thereof, entitled ‘Scope’, provides:

‘The following shall be subject to value added tax:

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

…’

4Article 4 of the Sixth Directive, in Title IV thereof, entitled ‘Taxable Persons’, states:

‘1. “Taxable person” shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.

…

5. States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions.

However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition.

In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided they are not carried out on such a small scale as to be negligible.

Member States may consider activities of these bodies which are exempt under Article 13 or 28 as activities which they engage in as public authorities.’

5Annex D to the Sixth Directive, to which the third subparagraph of Article 4(5) of the Sixth Directive refers, lists 13 types of activities. However, the provision of off-street parking is not among them.

6Article 4(5) of the Sixth Directive, the direct effect of which was recognised by the Court in Joined Cases 231/87 and 129/88 Comune di Carpaneto Piacentino and Others [1989] ECR 3233, paragraph 33, has not been transposed into the law of the United Kingdom.

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

7The local authorities concerned provide off-street car-parking facilities. The private sector also provides like facilities.

8Historically, the local authorities in the United Kingdom accepted that they were accountable for VAT on their revenue from the provision of off-street parking. However, following the decision in Case C‑446/98 Fazenda Pública [2000] ECR I‑11435, some 127 local authorities made claims for repayment of the VAT they had previously paid, taking the view by reason of the first subparagraph of Article 4(5) of the Sixth Directive that they should not have been accountable for that VAT. The total of the claims made for repayment amounts to GBP 129 million. As regards the total sum which could be reclaimed, it is stated in the order for reference that there are some 468 local authorities in the United Kingdom of Great Britain and Northern Ireland.

9In the cases in the main proceedings, the claims amount to GBP 1.6 million. The referring court indicates that these cases are test cases as the local authorities concerned form a representative cross-section of all local authorities. The Isle of Wight Council, Mid-Suffolk District Council, South Tyneside Metropolitan Borough Council and West Berkshire District Council administer, respectively, an island, a rural area, an urban area and a provincial region.

10Since the local authorities concerned concluded that under a correct interpretation of Community law they were not subject to VAT for the activities in question, they claimed repayment of the VAT previously paid. However, the Commissioners refused such repayment. Consequently, those local authorities appealed against the Commissioners’ decision to the VAT and Duties Tribunal, London. Having held that the question of the exemption from VAT of bodies governed by public law on the basis of the second subparagraph of Article 4(5) of the Sixth Directive must be dealt with separately for each of the local authorities concerned, that is on a ‘taxable person by taxable person’ basis, the VAT and Duties Tribunal, London, concluded that the exemption of those authorities from VAT did not lead to significant distortions of competition. Each of those authorities was thus exempt from VAT in respect of its revenue from the provision of off-street parking.

11The Commissioners appealed against the decision of the VAT and Duties Tribunal, London, to the Chancery Division of the High Court of Justice of England and Wales. Their principal argument is that Article 4(5) of the Sixth Directive is of national scope which requires that there should be an investigation of the nationwide impact on the private sector generally of the exemption of local authorities from VAT on the provision of off-street parking. Their appeal also concerns the meaning of the words ‘would lead to’ and ‘significant’ in the passage comprised of the words ‘where treatment as non-taxable persons would lead to significant distortions of competition’ in the second subparagraph of Article 4(5) of the Sixth Directive.

12In those circumstances the Chancery Division of the High Court of Justice of England and Wales decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:

‘1. Is the expression “distortions of competition” to be ascertained on a public body by public body basis such that, in the context of the present case, it should be determined by reference to the area or areas where the particular body in question provides off-street parking or by reference to the totality of the national territory of the Member State?

2. What is meant by the expression “would lead to”? In particular, what degree of probability or level of certainty is required for that condition to be satisfied?

3. What is meant by the word “significant”? In particular, does “significant” mean an effect on competition that is more than trivial or de minimis , a “material” effect or an “exceptional” effect?’

The questions referred for a preliminary ruling

The first question

Observations submitted to the Court

13The local authorities concerned submit that the expression ‘distortions of competition’ is properly to be ascertained on a public body by public body basis, such that, in the context of the present case, it should be interpreted by reference to the area or areas where the particular body in question provides off-street parking and not by reference to a hypothetical market which encompasses the totality of the national territory of any particular Member State. A contrary approach would be inconsistent with the very concept of ‘competition’. The VAT exemption conferred on each of those authorities does not lead in any way to distortions of competition in relation to private providers or local authorities in, for example, Glasgow, let alone to ‘significant’ distortions. Similarly, a person who wished to shop on the Isle of Wight would not park his vehicle in Manchester.

14The United Kingdom Government, relying especially on the fundamental principles of fiscal neutrality and legal certainty, submits that as a matter of principle, ‘the activities’ approach, that is taking account of the entire national market and not of each local market, is the most sensible approach to the interpretation of the second subparagraph of Article 4(5). The local nature of demand means that even in an area within a given local authority, several local markets could exist in some of which there might be competition, while there might be no competition in others.

15In Ireland’s submission, it is clear from the Court’s case-law that the Member States are free to choose the appropriate method for transposing the second and third subparagraphs of Article 4(5) of the Sixth Directive into national law. It is for each Member State to determine the activities engaged in by the State or public entities which, if not subjected to VAT, would lead to significant distortions of competition. The Member States may, thus, adopt local, regional or nationwide approaches.

16The Italian Government suggests that principles specific to the field of competition be applied. In that regard, it refers to the Commission’s Notice on the definition of relevant market for the purposes of Community competition law (OJ 1997 C 372, p. 5) and concludes, on that basis, that the relevant geographic market cannot be the entire national market. In matters of off-street parking there cannot be any conceivable competition between the parking facilities offered by different towns.

17The Commission of the European Communities takes the view that it is the nature of the activity, and not the local conditions of competition, that has to be taken into account to assess the likelihood of distortions of competition. That such an approach is correct may be inferred from the fact that the third subparagraph of Article 4(5) of the Sixth Directive provides that the activities listed in Annex D thereto are in any event to be subjected to VAT, unless they are negligible. In doing so, the Sixth Directive clearly proceeds on the basis that the relationship of competition and the consequent likelihood of distortions fall to be determined in the abstract, having regard to the activity as such and without reference to local conditions.

The Court’s reply

18At the outset, it must be noted that, under the first subparagraph of Article 4(5) of the Sixth Directive, States, regional and local government authorities and other bodies governed by public law are not to be considered taxable persons in respect of the activities or transactions in which they engage as public authorities.

19As the Court has held on numerous occasions, two conditions must be cumulatively fulfilled in order for that provision to apply: the activities must be carried out by a body governed by public law and they must be carried out by that body acting as a public authority (see to that effect, particularly, Case C‑202/90 Ayuntamiento de Sevilla [1991] ECR I‑4247, paragraph 18, and Fazenda Pública , cited above, paragraph 15).

20As regards the first of those conditions, it is common ground that the local authorities concerned are bodies governed by public law within the meaning of Article 4(5) of the Sixth Directive.

21As for the second condition, activities pursued as public authorities within the meaning of that provision are those engaged in by bodies governed by public law under the special legal regime applicable to them and do not include activities pursued by them under the same legal conditions as those that apply to private economic operators (see, particularly, Fazenda Pública , paragraph 17, and the case-law cited).

22In view of the nature of the analysis to be carried out, it is for the national court to classify the activity at issue in the main proceedings in the light of the criterion adopted above ( Comune di Carpaneto Piacentino and Others , cited above, paragraph 16; Case C-4/89 Comune di Carpaneto Piacentino and Others [1990] ECR I‑1869, paragraph 11; and Fazenda Pública , paragraph 23).

23Since the question whether, in the cases in the main proceedings, the local authorities concerned were acting as public authorities has not been referred to the Court, it is appropriate to start from the hypothesis, subject to verification by the referring court, that the activity in question in the main proceedings must be regarded, for the purposes of this reference for a preliminary ruling, as coming within Article 4(5) of the Sixth Directive.

24It must also be noted that, even where local authorities carry on such an activity as public authorities, they are, under the second subparagraph of Article 4(5) of the Sixth Directive, to be considered taxable persons where their treatment as non-taxable persons would lead to significant distortions of competition. The referring court is asking, in that respect, whether those distortions are to be evaluated by reference to the local market on which each of the local authorities concerned operates or by reference to the activity, as it is carried on throughout the national territory.

25To reply to that question, it is necessary, in the absence of any guidance in the text of the second subparagraph of Article 4(5) of the Sixth Directive, to take into account the scheme and purpose of the Sixth Directive, as well as the place of Article 4(5) in the common system of VAT established by it.

26It is important to emphasise in that regard that, as a general rule and in accordance with Article 2(1) of the Sixth Directive, the supply of services effected for consideration is to be subject to VAT.

27Indeed, ‘taxable person’ means, under Article 4(1) of the Sixth Directive, any person who independently carries out in any place any economic activity specified in paragraph 2 thereof, whatever the purpose or results of that activity. ‘Economic activity’ is defined in Article 4(2) as including all activities of producers, traders and persons supplying services (Case C‑284/04 T-Mobile Austria and Others [2007] ECR I‑5189, paragraph 33).

28Article 4 of the Sixth Directive gives a very wide scope to VAT (see Case 235/85 Commission v Netherlands [1987] ECR 1471, paragraph 7, and Case C‑186/89 van Tiem [1990] ECR I-4363, paragraph 17).

29However, only activities of an economic nature are covered by that provision (see, to that effect, Case C‑306/94 Régie dauphinoise [1996] ECR I‑3695, paragraph 15; Case C‑77/01 EDM [2004] ECR I‑4295, paragraph 47; Case C‑465/03 Kretztechnik [2005] ECR I‑4357, paragraph 18; and T-Mobile Austria and Others , cited above, paragraph 34).

30It is only by way of derogation from that general rule that certain activities of an economic nature are not to be subjected to VAT. Such derogation is laid down by the first subparagraph of Article 4(5) of the Sixth Directive, under which activities engaged in by a body governed by public law acting as a public authority are not to be subject to VAT.

31That derogation covers principally activities engaged in by bodies governed by public law acting as public authorities, which, while fully economic in nature, are closely linked to the exercise of rights and powers of public authority. In those circumstances, the fact that such bodies are not subject to VAT on those activities does not potentially have an anticompetitive effect, inasmuch as they are generally engaged in exclusively, or almost exclusively, by the public sector.

32However, even where those bodies carry on such activities in their capacity as public authorities, they are to be considered taxable persons, under the second and third subparagraphs of Article 4(5) of the Sixth Directive, where their treatment as non-taxable persons would lead to significant distortions of competition or again if those activities, provided they are not carried out on such a small scale as to be negligible, are listed in Annex D to that directive.

33A body governed by public law may, thus, be responsible, under national law, for carrying on certain activities of an essentially economic nature under the special legal regime applicable to them where those same activities can also be carried on in parallel by private operators, with the result that the treatment of that body as a non-taxable person may give rise to certain distortions of competition.

34It is that undesirable result that the Community legislature sought to avoid by providing, in the third subparagraph of Article 4(5) of the Sixth Directive, that the activities specifically listed in Annex D to that directive (telecommunications, the supply of water, gas, electricity and steam, the transport of goods, port and airport services and passenger transport, etc.) are, ‘in any event’, unless they are negligible, to be subject to VAT, even when they are carried on by bodies governed by public law acting as public authorities.

35In other words, the treatment of bodies governed by public law as non-taxable persons in respect of those activities is, unless such activities are negligible, presumed to lead to distortions of competition. It is thus clear from the wording of the third subparagraph of Article 4(5) of the Sixth Directive that the treatment of those bodies as taxable persons results from the carrying-on, as such, of the activities listed in Annex D to that directive, irrespective of the question whether or not a particular body governed by public law faces competition at the level of the local market on which it carries on those same activities.

36Furthermore, there may exist, on the national level, other activities of an essentially economic nature, not listed in Annex D to the Sixth Directive, the list of which may vary from one Member State to another or from one economic sector to another, which are carried on in parallel both by bodies governed by public law in their capacity as public authorities and by private operators.

37It is precisely to those activities that the second subparagraph of Article 4(5) of the Sixth Directive applies, in providing that bodies governed by public law, even when they act as public authorities, are to be considered taxable persons where their treatment as non-taxable persons would lead to significant distortions of competition.

38The second and the third subparagraphs of Article 4(5) of the Sixth Directive are, consequently, closely linked since they pursue the same objective, namely the treatment of bodies governed by public law as taxable persons, even when they are acting as public authorities. Those subparagraphs are thus subject to the same logic, by which the Community legislature intended to limit the scope of the treatment of bodies governed by public law as non-taxable persons, so that the general rule stated in Articles 2(1) and 4(1) and (2) of that directive, under which any activity of an economic nature is, in principle, to be subject to VAT, is observed.

39Consequently, the second and third subparagraphs of Article 4(5) of the Sixth Directive are to be interpreted as a whole.

40It follows that the treatment of bodies governed by public law as taxable persons, either on the basis of the second subparagraph of Article 4(5) of the Sixth Directive, or on that of the third subparagraph of that provision, results from the carrying-on, as such, of a given activity, irrespective of whether or not those bodies face competition at the level of the local market on which they engage in that activity.

41That conclusion is supported by the general principles of Community law applicable to fiscal matters, such as the principles of fiscal neutrality and legal certainty.

42Thus, the principle of fiscal neutrality, a fundamental principle of the common system of VAT (see, particularly, Case C‑255/02 Halifax and Others [2006] ECR I‑1609, paragraph 92), precludes economic operators carrying on the same activities from being treated differently as far as the levying of VAT is concerned (see, particularly, Case C‑216/97 Gregg [1999] ECR I-4947, paragraph 20).

43In that regard, it must be recalled that the second subparagraph of Article 4(5) of the Sixth Directive is intended to ensure compliance with the principle of fiscal neutrality (Case C‑430/04 Feuerbestattungsverein Halle [2006] ECR I‑4999, paragraph 24).

44Whilst it is true that the Sixth Directive provides for certain derogations which may interfere to some extent with the application of the principle of fiscal neutrality, like the derogation under the second subparagraph of Article 4(5) of the Sixth Directive (see, to that effect, Case C‑378/02 Waterschap Zeeuws Vlaanderen [2005] ECR I‑4685, paragraph 43), since that provision permits the treatment of bodies governed by public law as non-taxable persons provided that such treatment would only distort competition insignificantly, the fact remains that that derogation must be interpreted in such a way that the least possible damage is done to that principle.

45The argument put forward by the local authorities concerned amounts to treating only certain local authorities as taxable persons to the exclusion of others, according to whether distortions of competition are or are not produced on each of the local markets on which those local authorities operate, although the supply of services in question, namely the provision of off-street parking is substantially the same. That argument thus entails not only that private operators are treated differently to bodies governed by public law in a situation where the latter’s treatment as non-taxable persons would lead to only insignificant distortions of competition, but also that different treatment might be introduced even among bodies governed by public law.

46On the other hand, if those distortions are analysed by reference to the activity as such, irrespective of the conditions of competition prevailing on a given local market, compliance with the principle of fiscal neutrality is ensured, given that all bodies governed by public law are either taxable or non-taxable persons, the sole strain on that principle concerning only relations between those bodies and private operators, and that to the extent that the distortions of competition remain insignificant.

47Moreover, as the Court has repeatedly held, Community legislation must be certain and its application foreseeable by those subject to it (see, particularly, Case C-301/97 Netherlands v Council [2001] ECR I‑8853, paragraph 43, and Halifax and Others , cited above, paragraph 72). That requirement of legal certainty must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which they impose on them (see, particularly, Case 326/85 Netherlands v Commission [1987] ECR 5091, paragraph 24, and Case C‑17/01 Sudholz [2004] ECR I‑4243, point 34).

48The principle of legal certainty, which forms part of the Community legal order, must be observed both by the Community institutions and by the Member States when they exercise the powers conferred on them by Community directives (see Case C‑376/02 ‘ Goed Wonen ’ [2005] ECR I‑3445, paragraph 32).

49The argument that distortions of competition, within the meaning of the second subparagraph of Article 4(5) of the Sixth Directive, must be evaluated having regard to each of the local markets on which the local authorities offer off-street parking assumes a systematic re-evaluation, on the basis of often complex economic analyses, of the conditions of competition on a multitude of local markets, the determination of which may prove particularly difficult since the markets’ demarcation does not necessarily coincide with the areas over which the local authorities exercise their powers. In addition, several local markets may exist within the territory of the same local authority.

50Such a situation is capable, consequently, of giving rise to numerous disputes following any change affecting the conditions of competition prevailing on a given local market.

51Thus, neither the local authorities nor the private operators will be in a position to provide, with the required certainty, for the conduct of their affairs if, on a given local market, the provision by the local authorities of off-street parking will or will not be subject to VAT.

52That situation is therefore likely to jeopardise the principles of fiscal neutrality and legal certainty.

53Accordingly, the reply to the first question must be that the second subparagraph of Article 4(5) of the Sixth Directive is to be interpreted as meaning that the significant distortions of competition, to which the treatment as non-taxable persons of bodies governed by public law acting as public authorities would lead, must be evaluated by reference to the activity in question, as such, without such evaluation relating to any local market in particular.

The second question

54By its second question, the referring court is asking, in essence, whether the expression ‘would lead to’ significant distortions of competition, within the meaning of the second subparagraph of Article 4(5) of the Sixth Directive, is to be interpreted as encompassing only actual competition or as extending also to potential competition. That court is also asking for clarification as to what degree of probability is required for that condition to be satisfied.

Observations submitted to the Court

55Relying on Paragraph 139 of Advocate General Kokott’s Opinion in Case C‑369/04 Hutchison 3G and Others [2007] ECR I‑5247, the local authorities concerned maintain that the expression ‘would lead to’ is to be interpreted as requiring a real risk of material distortions of competition.

56The United Kingdom Government submits that the expression ‘would lead to’ is interchangeable with the expression ‘could lead to’, which the Court used in the above-cited judgments in the two Carpaneto Piacentino and Others cases and which is also consistent with Advocate General Kokott’s analysis in paragraphs 127 and 131 of her Opinion in Hutchison 3G and Others , cited above. It adds that there is already, on the one hand, competition between private companies and local authorities in many areas of the United Kingdom as well as, on the other hand, potential competition in other areas where there are, as yet, no private operators.

57In Ireland’s submission, the expression ‘would lead to’ requires the relevant national authorities charged with applying Article 4(5) of the Sixth Directive to be satisfied that an apprehended distortion of competition must be likely as a matter of probability rather than something that merely could or might result.

58The Italian Government submits that, while absolute certainty is not necessary, the expression ‘would lead to’ must be understood as meaning that the risks of distortions of competition arising from the carrying-on of an activity which is not subject to VAT represent a strong probability and not a mere possibility.

59The Commission contends that, in order to ensure that public bodies and private operators are placed on an equal footing in relation to the conditions of competition, there should be no barrier to the entry of private traders on to the market in question in the main proceedings. The Commission therefore submits that the expression ‘would lead to’ includes potential competition. It is sufficient, in that regard, that there be a real possibility for private traders to enter that market in competition with the relevant bodies governed by public law.

The Court’s reply

60It is important to record, as is clear from paragraph 30 of the present judgment, that the treatment of bodies governed by public law as non-taxable persons under the first subparagraph of Article 4(5) of the Sixth Directive constitutes a derogation from the general rule that any activity of an economic nature be subjected to VAT, and that this provision must, therefore, be interpreted strictly. But the second subparagraph of Article 4(5) restores that general rule in order to avoid such treatment of those bodies leading to significant distortions of competition. The latter provision cannot therefore be construed narrowly.

61The scope of the first subparagraph of Article 4(5) of the Sixth Directive would be enlarged unduly if the treatment, under the second subparagraph of Article 4(5), of those bodies as taxable persons had to be confined to cases of distortion of actual competition, which would, were they confronted only with potential competition, permit their treatment as non-taxable persons.

62In addition, the treatment of those same bodies as non-taxable persons is liable, by itself, to discourage potential competitors from entering the market for the provision of off-street car-parking facilities.

63It follows that the expression ‘would lead to’, for the purposes of the second subparagraph of Article 4(5) of the Sixth Directive, encompasses not only actual competition, but also potential competition.

64However, the purely theoretical possibility of a private operator entering the relevant market, which is not borne out by any matter of fact, or by any objective evidence or by any analysis of the market, cannot be assimilated to the existence of potential competition. To make such an assimilation, that possibility must be real, and not purely hypothetical.

65Consequently, the reply to the second question must be that the expression ‘would lead to’ is, for the purposes of the second subparagraph of Article 4(5) of the Sixth Directive, to be interpreted as encompassing not only actual competition, but also potential competition, provided that the possibility of a private operator entering the relevant market is real, and not purely hypothetical.

The third question

66The third question concerns the interpretation to be given to the word ‘significant’, for the purposes of the second subparagraph of Article 4(5) of the Sixth Directive, and, in particular, whether it is to be interpreted as meaning ‘more than trivial or de minimis ’, or ‘material’ or even ‘exceptional’.

Observations submitted to the Court

67The local authorities concerned submit that the word ‘significant’ means ‘a materially adverse effect’ or ‘exceptional effect’ on the public sector body’s competitors, or an effect other than the simple fact that the public body does not charge VAT while its private sector competitors do charge it. They rely, in that regard, on Paragraph 41 of Advocate General Jacobs’ Opinion in Case C-378/02 Waterschap Zeeuws Vlaanderen , cited above, according to which the word ‘significant’ is a synonym for ‘exceptional’.

68The United Kingdom Government contends that the word ‘significant’ means any distortion of competition that is not insignificant or de minimis . It adds, in relation to the use of the word ‘exceptional’ by Advocate General Jacobs in Paragraph 41 of his Opinion in Waterschap , that the Court did not endorse his analysis and did not repeat that word.

69In Ireland’s submission, the word ‘significant’ means that the distortions of competition must be important and appreciable, in the sense of likely to create a considerable alteration of the conditions of competition otherwise applicable on the market in question to the clear detriment of the affected taxable private operators.

70The Italian Government submits that the word ‘significant’ is to be interpreted as meaning ‘at least material and not merely negligible’.

71The Commission takes the view that the word ‘significant’ refers to a distortion that is not insignificant or negligible. It relies, in that regard, on the third subparagraph of Article 4(5) of the Sixth Directive, read in conjunction with Annex D thereto, according to which the activities listed in that annex are to be subject to VAT ‘provided they are not carried out on such a small scale as to be negligible’. The function of the third subparagraph is, in any event, to make subject to VAT certain categories of activities which would otherwise have to be assessed under the second subparagraph of Article 4(5). Those two subparagraphs follow the same logic and it may be inferred that in using the word ‘negligible’ the legislature intended to describe activities which do not lead to ‘significant’ distortions of competition.

The Court’s reply

72It must be emphasised, first of all, as is clear from paragraph 60 of the present judgment, that the treatment of bodies governed by public law as taxable persons for the activities of an economic nature which they carry on as public authorities, required by the second subparagraph of Article 4(5) of the Sixth Directive, restores the general rule that any activity of an economic nature be subject to VAT, in order to avoid the treatment of those bodies as non-taxable persons leading to significant distortions of competition, and that that provision cannot therefore be construed narrowly.

73Accordingly, the word ‘significant’ is to be understood as intended to restrict the scope of the treatment, under the first subparagraph of Article 4(5) of the Sixth Directive, of bodies governed by public law as non-taxable persons for those activities.

74If that word had to be understood as meaning ‘material’, or even ‘exceptional’, the scope of the treatment of bodies governed by public law as non-taxable persons would be unduly enlarged. On the other hand, if their treatment as such were allowed only in cases where it would lead only to negligible competition, that scope would be circumscribed effectively.

75Moreover, under the third subparagraph of Article 4(5) of the Sixth Directive, bodies governed by public law are taxable persons for the activities listed in Annex D thereto, provided they are not carried out on such a small scale as to be ‘negligible’. In other words, the treatment of those bodies as non-taxable persons is permitted provided that those activities are negligible, assuming thus that the distortions of competition which would result would also be negligible.

76Since, as is clear from paragraph 38 of the present judgment, the second and third subparagraphs of Article 4(5) of the Sixth Directive are closely linked since they pursue the same objective and since they are subject to the same logic, the word ‘significant’ is to be interpreted as meaning that the treatment of public bodies as non-taxable persons can be permitted only in cases where it would lead only to negligible distortions of competition.

77Finally, compliance with the principle of fiscal neutrality supports that interpretation. The argument put forward by the local authorities concerned that bodies governed by public law should be subjected to VAT only in cases where the distortions of competition resulting from their treatment as non-taxable persons are material, or even exceptional, would create a fiscal situation in which a significant number of private operators effecting the same transactions as those carried out by those bodies would be treated differently from them in respect of the levying of VAT, which would constitute a significant impairment of the principle of fiscal neutrality.

78By contrast, the treatment of those bodies as non-taxable persons, in circumstances where it would not lead to any distortion of competition or lead only to negligible distortions, would bring about the least possible damage to the principle of fiscal neutrality.

79Therefore the reply to the third question must be that the word ‘significant’ is, for the purposes of the second subparagraph of Article 4(5) of the Sixth Directive, to be understood as meaning that the actual or potential distortions of competition must be more than negligible.

Costs

Costs

80Since 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 (Grand Chamber) hereby rules:

1. The second subparagraph of Article 4(5) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment is to be interpreted as meaning that the significant distortions of competition, to which the treatment as non-taxable persons of bodies governed by public law acting as public authorities would lead, must be evaluated by reference to the activity in question, as such, without such evaluation relating to any local market in particular.

2. The expression ‘would lead to’ is, for the purposes of the second subparagraph of Article 4(5) of Sixth Council Directive 77/388, to be interpreted as encompassing not only actual competition, but also potential competition, provided that the possibility of a private operator entering the relevant market is real, and not purely hypothetical.

3. The word ‘significant’ is, for the purposes of the second subparagraph of Article 4(5) of Sixth Council Directive 77/388, to be understood as meaning that the actual or potential distortions of competition must be more than negligible.

Opinion of the Advocate-General

1The questions in this reference for a preliminary ruling concern the interpretation of the second subparagraph of Article 4(5) 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 (2) (‘the Sixth Directive’), which provides that bodies governed by public law are to be taxable persons for the purposes of value added tax (‘VAT’) in respect of the activities in which they engage as public authorities where treatment as non-taxable persons would lead to significant distortions of competition. The Court is thus called upon to explain the conditions of this derogation from the rule, laid down in the first subparagraph of Article 4(5), that bodies governed by public law are not taxable persons in respect of the activities in which they engage as public authorities. In other words, the Community judicature must explain the criteria governing the reintroduction of the general principle that economic activities are subject to VAT.

I – Legal context, facts of the main proceedings and questions referred for a preliminary ruling

2The main proceedings concern the operation of off-street car-parking facilities by four local authorities in the United Kingdom of Great Britain and Northern Ireland: Isle of Wight Council, Mid-Suffolk District Council, South Tyneside Metropolitan Borough Council and West Berkshire District Council. (3) The private sector provides similar services in each of the local authority areas.

3Historically, local authorities considered themselves to be taxable persons for VAT purposes in respect of payments made by persons using those facilities. Users were charged VAT and the proceeds of the tax were paid over to the United Kingdom tax authorities.

4However, on the basis of the first subparagraph of Article 4(5) of the Sixth Directive the respondents in the main proceedings consider that they are entitled to reimbursement of VAT previously paid since, according to that provision, ‘States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions’.

5The following subparagraphs of Article 4(5) of the Sixth Directive none the less provide that, in certain circumstances, those bodies remain liable for VAT. It is thus stated:

‘However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition.

In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided they are not carried out on such a small scale as to be negligible.

Member States may consider activities of these bodies which are exempt under Article 13 or 28 as activities which they engage in as public authorities.’

6Taking the view that they did not fulfil the conditions of these exceptions to the rule under which they are not taxable, and fortified in this regard by the judgment in Fazenda Pública , (4) the local authorities made claims to the competent tax authority (the Commissioners of Her Majesty’s Revenue & Customs, the appellant in the main proceedings) for repayment of the VAT paid since 2000. In their submission, treating them as non-taxable persons leads to no distortion of competition and, a fortiori, to no significant distortion of competition, in their local authority areas.

7The Commissioners refused reimbursement. After the local authorities had succeeded in their appeals against the Commissioners’ decision which they brought before the VAT and Duties Tribunal, the Commissioners appealed to the High Court of Justice of England and Wales (Chancery Division), which decided to stay proceedings and refer the following questions to the Court of Justice for a preliminary ruling:

‘(1) Is the expression “distortions of competition” to be ascertained on a public body by public body basis such that, in the context of the present case, it should be determined by reference to the area or areas where the particular body in question provides off-street parking or by reference to the totality of the national territory of the Member State?

(2) What is meant by the expression “would lead to”? In particular, what degree of probability or level of certainty is required for that condition to be satisfied?

(3) What is meant by the word “significant”? In particular, does “significant” mean an effect on competition that is more than trivial or de minimis , a “material” effect or an “exceptional” effect?’

II – Legal analysis

A – The first question referred for a preliminary ruling

8By this question, the national court essentially asks whether, in the situation referred to in the second subparagraph of Article 4(5) of the Sixth Directive, any distortion of competition caused by considering public bodies not to be taxable persons where they engage in certain activities as public authorities is to be assessed at a local level, which requires the conditions of competition on the relevant market to be established, or whether it must be assessed solely in the light of the activity concerned.

1. Introductory remarks on the system under Article 4(5) of the Sixth Directive

9For the purpose of answering the first question, the system under Article 4(5) of the Sixth Directive should be outlined. The rule laid down in this provision is that bodies governed by public law are not taxable persons for VAT purposes when they act as public authorities. In derogation from this rule set out in the first subparagraph of Article 4(5) of the Sixth Directive, the second subparagraph of Article 4(5) provides that such bodies must none the less pay VAT where failure to tax the activities in question would lead to significant distortions of competition. This general exception is, moreover, supplemented by the third subparagraph which establishes certain activities in respect of which bodies governed by public law will remain taxable persons for VAT purposes despite engaging in them as public authorities; however, if those activities are carried out on such a small scale as to be negligible, the Member States may remove them from the scope of VAT if they so wish.

10The various subparagraphs of Article 4(5) of the Sixth Directive are consequently closely linked. In order for the second subparagraph to apply, it is necessary to fall within the field of application of the first subparagraph. The Court has interpreted the first subparagraph as laying down two cumulative conditions for treatment as a non-taxable person. First, the activities must be carried out by a body governed by public law and, second, they must be carried out by that body acting as a public authority. The Court has then specified that the activities covered are the activities engaged in by those bodies under the special legal regime applicable to them and do not include activities pursued by them under the same legal conditions as those that apply to private economic operators. (5)

11In this regard, it is possible to express doubts in the present case, as the Commission of the European Communities has done in its observations, as to whether the provision of parking spaces by local authorities satisfies those conditions. More specifically, it is not certain that the provision of off-street parking is subject to a legal regime specific to the public body. However, since the High Court has not referred this question to the Court of Justice and it is for national courts to review whether those conditions are met, (6) it is not appropriate to examine this issue any further.

2. Interpretation of the second subparagraph of Article 4(5) of the Sixth Directive

12As previously noted, the Court is called upon by the central question raised in the present case to rule on the approach that should be adopted in determining whether there is significant distortion of competition as referred to in the second subparagraph of Article 4(5) of the Sixth Directive, which derogates from the rule laid down in the first subparagraph of Article 4(5) that bodies governed by public law are not taxable persons when acting as public authorities.

13The parties are divided on this point. While the respondents in the main proceedings and the Italian Government argue in favour of a competition-based approach, involving specific prior analysis of the relevant market in order to determine whether the transaction in question must be subject to VAT, the appellant in the main proceedings expresses its preference for a fiscal approach based on the activity concerned. The United Kingdom dwells in addition on the difficulties involved in applying competition tests in tax matters. Ireland seeks to reconcile these positions, submitting that it is for the Member States in the exercise of their discretion to choose between these options.

14As will be shown below, the fiscal approach must prevail. The tax system laid down by the Sixth Directive has the aim of making all economic activities subject to VAT. Thus, Article 2 of the Sixth Directive states that the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such and the importation of goods are to be subject to VAT. It is only by way of derogation from this general rule that certain activities are removed from the scope of VAT. In this regard, the first subparagraph of Article 4(5) of the Sixth Directive provides that activities engaged in by a public body acting as a public authority are not subject to tax. On the other hand, even if the conditions for this derogation from liability for tax are met, the Community legislature has considered it necessary, in the third subparagraph of Article 4(5), to retain liability for tax in respect of certain of those activities. Since Article 4(5) of the Sixth Directive, whichever the subparagraph at issue, concerns the same bodies acting as public authorities, the justification for the various paragraphs’ different tax treatment of the activities concerned can only be founded on the difference in nature of those various activities. This view is confirmed by the Court which has stated that the reintroduction of liability for tax that is provided for in the third subparagraph of Article 4(5) of the Sixth Directive is intended to ensure that ‘certain categories of economic activity the importance of which derives from their subject-matter are not [exempted from] VAT’. (7)

15The rationale for the derogation, provided for in Article 4(5) of the Sixth Directive, from the rule that economic activities are subject to tax is founded on the weak presumption that activities engaged in by public bodies as public authorities are activities of an essentially regulatory nature that are linked to the exercise of rights and powers of public authority. In those circumstances, the fact that the activities are not subject to VAT does not potentially have an anticompetitive effect vis-à-vis activities engaged in by the private sector, inasmuch as they are generally undertaken exclusively, or almost exclusively, by the public sector. Fiscal neutrality is thus observed.

16However, that presumption remains a weak one. Inasmuch as the definition of public bodies acting as public authorities, while founded on Community criteria, nevertheless depends on the internal organisation of each Member State, the probability that certain of these activities engaged in by these public bodies are also entrusted to the private sector remains strong. Activities of an essentially economic nature can indeed fall within the conditions of the derogation provided for in the first subparagraph of Article 4(5) of the Sixth Directive where national law makes the public body act under a ‘special legal regime applicable to it’, the specific nature of such a regime entailing, in accordance with the Court’s case-law, that the activity is classified as one engaged in by the body as a public authority. Not making such, essentially economic, activities subject to tax may become a source of distortion of competition inasmuch as they are or may be generally engaged in, in parallel or even principally, by the private sector. The effect of not taxing them would thus be to divert the VAT system which rests above all on the principle of fiscal neutrality.

17It is principally this situation that the Community legislature sought to avoid by providing in the third subparagraph of Article 4(5) of the Sixth Directive that certain activities specifically listed in Annex D to that directive are subject to tax. Those activities correspond to: telecommunications; the supply of water, gas, electricity and steam; the transport of goods; port and airport services; passenger transport; the supply of new goods manufactured for sale; the transactions of agricultural intervention agencies in respect of agricultural products carried out pursuant to regulations on the common organisation of the market in these products; the running of trade fairs and exhibitions; warehousing; the activities of commercial publicity bodies; the activities of travel agencies; the running of staff shops, cooperatives and industrial canteens and similar institutions; and transactions other than those specified in Article 13A(1)(q) of the Sixth Directive of radio and television bodies. It is clear upon reading that subparagraph that these activities are subject to tax regardless of whether there is actual or potential competition at the level of certain local markets upon which the activities may equally be engaged in by public bodies under a special regime applicable to them. Solely the nature of the activity concerned matters.

18Consequently, the second subparagraph of Article 4(5) of the Sixth Directive which, like the third subparagraph, lays down a derogation from the rule of freedom from VAT, must be interpreted as sharing the same logic as the third subparagraph, namely re-establishment of the principle that activities of an economic nature are subject to VAT.

19From this viewpoint, the criterion of distortion of competition has the sole purpose of helping the competent national authorities to determine which activities are to be subject to VAT. The concept of distortion of competition operates not as a principle regulating particular economic situations, such as cartels or abuse of a dominant position, but as an incidental criterion available to the Member States for implementation of the VAT system so that they can determine the activities the carrying out of which must be subject to VAT. (8) This criterion thus falls within Community fiscal policy which, in accordance with the principle of fiscal neutrality, seeks to make all economic activities subject to VAT.

20Furthermore, only this approach makes it possible to safeguard the principle of simplicity that is linked to the need for legal certainty in the levying of tax. These principles would be seriously undermined by a case-by-case analysis of the state of competition on the relevant markets. In this connection, the approach adopted incidentally has the advantage of avoiding particularly onerous administrative costs for the competent national authorities.

21Therefore, the second subparagraph of Article 4(5) of the Sixth Directive must be interpreted as meaning that it is incumbent upon the Member States, within the framework of the discretion that is accorded to them for implementation of that provision, (9) to determine on the basis of the activities concerned whether there would be a risk of distortion of competition if bodies governed by public law engaging in those activities as public authorities were not taxable persons for VAT purposes.

B – The second question referred for a preliminary ruling

22By its second question, the national court raises the issue of what is meant by the words ‘ would lead to significant distortions of competition’ in the second subparagraph of Article 4(5) of the Sixth Directive. It seeks to ascertain whether this provision covers only actual competition or whether it also extends to potential competition.

23It follows logically from the interpretation adopted in answering the first question that potential competition is to be taken into account. Inasmuch as the activity-based approach prevails, the state of competition on a given local market is unimportant.

24Above all, the Court has already explained that, ‘with a view to ensuring the neutrality of the tax, which is the major objective of the Sixth Directive, [the second subparagraph of Article 4(5) of the Sixth Directive] envisages the situation in which bodies governed by public law engage, under the special legal regime applicable to them, in activities which may also be engaged in, in competition with them, by private individuals under a regime governed by private law or on the basis of administrative concessions’. (10) If actual competition only were to be taken into consideration, fiscal neutrality would no longer be preserved inasmuch as actual competition alone precludes account being taken of future or immediate entry of certain private operators, who, in all events, will be taxable persons for VAT purposes. In those circumstances, it is, however, clear that freedom from tax of public operators engaging in the same activity as private operators, who are taxable persons for VAT purposes, may lead to a significant distortion of competition.

25Moreover, as Advocate General Kokott has pointed out, ‘(t)he risk of distortions of competition can be real even if no competitor is at present offering competing supplies subject to value added tax. A disadvantageous starting point is in itself liable to dissuade potential competitors from becoming active in the market …’ (11)

26Consequently, and in accordance with the view put forward by the Commission, the words ‘would lead to’ must be understood as including both actual competition and potential competition in so far as the possibility of the latter is real.

C – The third question referred for a preliminary ruling

27The national court’s third question concerns the meaning of the phrase ‘ significant distortions of competition’. (12) Does it mean an effect on competition that is not trivial or only an ‘exceptional’ effect going beyond the distortions which would normally flow from the coexistence of taxed and untaxed suppliers on the same market?

28I must admit that my initial instinct would be to reply: neither one nor the other. The Community legislature no doubt specifically intended to opt for a word such as ‘significant’ presupposing a distortion of competition that is probably more than trivial, but is not exceptional. In this connection, the answer which could be given to the question brings to mind the observation of George Bernard Shaw that ‘no question is so difficult to answer as that to which the answer is obvious’.

29The risk run by replacing one word with another is that of choosing wording that is just as equivocal. It seems to me to be more pertinent to begin by recognising the limits to the interpretation of certain terms, which in actual fact resist all predetermination by means of general and abstract interpretation. They acquire their full and complete meaning only when they are applied, on a case-by-case basis and in the light of the objectives of the enactment in which they appear. From this viewpoint, in the present context the interpretation of the concept ‘significant’ must take account of the discretion that the Sixth Directive leaves the Member States to determine what this word covers in the context in which it is applied. (13)

30In addition, quite often the interpretation of such a concept can be established only by means of a negative definition highlighting more what it is not than what it is. In this regard, as already noted, the various subparagraphs of Article 4(5) are closely linked so that the interpretation of one of them cannot be isolated from the interpretation to be placed on each of the others. Thus, the view that the mere exercise of rights and powers of public authority, which characterise the activity as being that of an authority acting as a public authority, is sufficient to preclude the existence of any distortion of competition with, in particular, private operators would effectively render the second subparagraph of Article 4(5) of the Sixth Directive redundant. Similarly, the exclusion from the scope of VAT that is enjoyed by a body acting as a public authority cannot be considered in itself to entail a distortion of competition justifying treatment as a taxable person under the second subparagraph of Article 4(5) of the Sixth Directive. Only a significant distortion of competition is to trigger payment of VAT by bodies acting as public authorities if the first subparagraph of Article 4(5) is not to be rendered redundant. Any other interpretation would risk including practically all transactions or activities engaged in by a public authority, acting as such, within the scope of the derogation from the rule that such bodies are not taxable persons for VAT purposes.

31The word ‘significant’ does not imply that the distortion of competition is trivial or exceptional, but that it is out of the ordinary. The concept can be given further concrete expression only on a case-by-case basis and in the light of the objectives of the Sixth Directive which have been specified in the first part of this Opinion. It must therefore be concluded in this regard that the interpretation of such a concept falls within the discretion of the Member States inasmuch as it can acquire its meaning only in the context in which it is applied, provided that that interpretation complies with the objectives, as have been specified, of the Sixth Directive.

III – Conclusion

Conclusion

32In the light of the foregoing considerations, I propose that the Court answer the questions referred for a preliminary ruling as follows:

(1) The second subparagraph of Article 4(5) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, must be interpreted as meaning that it is incumbent upon the Member States, within the framework of the discretion that is accorded to them for implementation of that provision, to determine on the basis of the activities concerned whether there would be a risk of distortion of competition if bodies governed by public law engaging in those activities as public authorities were not taxable persons for VAT purposes.

(2) The words ‘would lead to’ must be understood as including both actual competition and potential competition in so far as the possibility of the latter is real.

(3) The word ‘significant’ does not imply that the distortion of competition is trivial or exceptional, but that it is out of the ordinary. The interpretation of such a concept falls within the discretion of the Member States inasmuch as it can acquire its meaning only in the context in which it is applied, provided that that interpretation complies with the objectives, as have been specified, of Directive 77/388.

(1) .

(2) – OJ 1977 L 145, p. 1. This directive, which was amended on a number of occasions, has been repealed by Council Directive 2006/112/EC of 28 November 2006 (OJ 2006 L 347, p. 1). The second subparagraph of Article 13(1) of Directive 2006/112 is in essentially the same terms as the second subparagraph of Article 4(5) of the Sixth Directive. Similarly, Annex D, referred to in the third subparagraph of Article 4(5) of the Sixth Directive, is now Annex I to Directive 2006/112.

(3) – ‘The local authorities’ or ‘the respondents in the main proceedings’.

(4) – Case C-446/98 [2000] ECR I‑11435.

(5) – Fazenda Pública , paragraphs 16 and 17.

(6) – Joined Cases 231/87 and 129/88 Comune di Carpaneto Piacentino and Others (‘ Carpaneto I ’) [1989] ECR 3233, paragraph 16, and Fazenda Pública , paragraph 23.

(7) – Carpaneto I , paragraph 26 (emphasis added).

(8) – See, to this effect, also the view put forward by Advocate General Mischo in points 14 and 15 of his Opinion in Case C-4/89 Comune di Carpaneto Piacentino and Others (‘ Carpaneto II ’) [1990] ECR I‑1869.

(9) – For confirmation of such discretion granted to the Member States, see in particular Carpaneto I , paragraph 23, Carpaneto II , paragraph 13, and Fazenda Pública , paragraphs 31 and 32. It is also to be pointed out that the discretion accorded to the Member States is thus wider under the second subparagraph of Article 4(5) of the Sixth Directive than it is for transposition of the third subparagraph where the activities, which are required in principle to be subject to tax, are established in advance by the Community legislature.

(10) – Carpaneto I , paragraph 22. The objective of fiscal neutrality pursued by this subparagraph has been consistently pointed out; see, most recently, Case C-430/04 Feuerbestattungsverein Halle [2006] ECR I‑4999, paragraph 24.

(11) – Point 131 of the Opinion in Case C-369/04 Hutchison 3G and Others [2007] ECR I‑5247.

(12) – Emphasis added.

(13) – For similar reasoning, see in particular Joined Cases C-240/98 to C-244/98 Océano Grupo Editorial and Salvat Editores [2000] ECR I‑4941, paragraph 25 et seq.