C-291/92 Armbrecht

JUDGMENT OF THE COURT 4 October 1995 *

In Case C-291/92,

REFERENCE to the Court under Article 177 of the EEC Treaty by the Bundesfinanzhof for a preliminary ruling in the proceedings pending before that court between

Finanzamt Uelzen

and

Dieter Armbrecht

on the interpretation of Articles 5(1), 17(2) and 20(2) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization 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 COURT,

composed of: G. C. Rodriguez Iglesias, President, F. A. Schockweiler, P. J. G. Kapteyn, C. Gulmann and P. Jann (Presidents of Chambers), G. F. Mancini,

* Language of the case: German.

J. C. Moitinho de Almeida, J. L. Murray (Rapporteur), D. A. O. Edward, G. Hirsch and H. Ragnemalm, Judges,

Advocate General: F. G. Jacobs, Registrar: L. Hewlett, Administrator,

after considering the written observations submitted on behalf of:

— Mr Armbrecht, by Bernd Kleemann, Steuerberater,

— the German Government, by Ernst Röder, Ministerialrat in the Federal Ministry of the Economy, and Claus-Dieter Quassowski, Regierungsdirektor in the same ministry, acting as Agents, and

— the Commission of the European Communities, by Henri Étienne, Principal Legal Adviser, acting as Agent,

having regard to the Report for the Hearing,

after hearing the oral observations of Finanzamt Uelzen, represented by Christel Kuwert, Ministerialrätin in the Finance Ministry of Lower Saxony, acting as Agent, of Mr Armbrecht, of the German Government and of the Commission at the hearing on 17 June 1993,

after hearing the Opinion of the Advocate General at the sitting on 15 September 1993, having regard to the order of 13 December 1994 reopening the oral procedure,

after considering the answers to the written questions put by the Court, submitted on behalf of:

— Mr Armbrecht, by Bernd Kleemann,

— the German Government, by Ernst Roder,

— the French Government, by Edwige Belliard, Deputy Director in the Legal Affairs Directorate of the Ministry of Foreign Affairs, and Jean-Louis Falconi, Foreign Affairs Secretary in the same directorate, acting as Agents,

— the Portuguese Government, by Luis Fernandes, Director of the Legal Service in the Directorate-General for European Community Affairs in the Ministry of Foreign Affairs, and Angelo Seiça Neves, Legal Officer in the same directorate, acting as Agents,

— the United Kingdom, by Lindsey Nicoli, of the Treasury Solicitor's Department, acting as Agent, and

— the Commission of the European Communities, by Jürgen Grunwald, of the Legal Service, acting as Agent, having regard to the Report for the Hearing,

after hearing the oral observations of Finanzamt Uelzen, represented by Christel Kuwert, of Mr Armbrecht, of the German Government and of the Commission at the hearing on 14 March 1995,

after hearing the Opinion of Advocate General Jacobs at the sitting on 6 April 1995,

gives the following

Judgment

Legal context and the dispute

1By order of 28 April 1992, received at the Court on 1 July 1992, the Bundesfinanzhof (Federal Finance Court) referred to the Court for a preliminary ruling under Article 177 of the EEC Treaty three questions on the interpretation of Articles 5(1), 17(2) and 20(2) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization 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 Directive').

2Those questions were raised in proceedings brought by Mr Armbrecht against a decision of the Finanzamt Uelzen (Tax Office, Uelzen) concerning the determination of the turnover tax payable for 1981.

3Mr Armbrecht, a hotelier, owned a building comprising a guesthouse, a restaurant and premises used as a private dwelling. In 1981, he sold that building for a price of DM 1 150 000 'plus 13% VAT'.

4Under Paragraph 4(9)(a) of the Umsatzsteuergetsetz (Law on Turnover Tax) 1980, transactions governed by the Grunderwerbsteuergesetz (Law on Land Transfer Tax) are exempted from turnover tax. However, Paragraph 9 of the Law on Turnover Tax allows taxable persons to treat such transfers as taxable when they are made 'to another trader for the purposes of his business'. Under that paragraph, Mr Armbrecht opted for taxation on the sale of his building.

5In his turnover tax declaration for 1981, Mr Armbrecht regarded only the sale of that part of his building which was used for professional purposes as subject to turnover tax; he treated the DM 157 705 received in respect of the private dwelling as exempt from turnover tax and accordingly invoiced the purchaser for turnover tax only on the former part.

6Following an inspection, the Tax Office imposed turnover tax on the sale of the private dwelling. Mr Armbrecht challenged that decision in proceedings before the Finanzgericht Niedersachsen (Finance Court, Lower Saxony), which considered that when a building is used partly for business purposes and partly as a private dwelling, it is subdivided into two economically separate items for the purposes of the rules on value added tax ('VAT'). Since Mr Armbrecht had not invoiced the purchaser for VAT on the sale of the private dwelling, the Finanzgericht considered that he was not liable for the tax on that sale.

7The Tax Office appealed against that ruling. Being in doubt as to the interpretation of the Directive, as regards both its applicability to the property sold by Mr Armbrecht and the extent of the deduction entitlement for which it provides, the Bundesfinanzhof decided to stay the proceedings until the Court had given a preliminary ruling on the following questions:

'(1) Where an immovable property is disposed of, does the portion of the property used for business purposes constitute a separate item of supply for the purposes of Article 5(1) of the Directive?

(2) Is an immovable property of which part of the rooms are used for private purposes and part for business purposes used wholly for the purposes of taxable transactions of the business under Article 17(2) of the Directive, or is it also possible for just the portion used for the purposes of the business to be assigned to the business?

(3) Can the adjustment of the input-tax deduction under Article 20(2) of the Directive be limited to the portion of an immovable property used for business purposes?'

s Under Article 2(1) of the Directive, supplies of goods or services effected for consideration within the territory by a taxable person acting as such are subject to VAT.

9Article 5(1) provides: '"Supply of goods" shall mean the transfer of the right to dispose of tangible property as owner'.

10Article 13(B) of the Directive sets up a series of exemptions for transactions in respect of immovable property, including:

'(g) the supply of buildings or parts thereof, and of the land on which they stand, other than as described in Article 4(3)(a);

(h) the supply of land which has not been built on other than building land as described in Article 4(3)(b)'.

n Article 13(C) adds the following proviso to those exemptions:

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

(a) ...

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

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

The first question

i2 The German Government stresses that Mr Armbrecht's property forms a single item in German civil law and is entered as such in the land register. It should therefore be treated as a single item for the application of the Directive.

u It is true that Article 5(1) of the Directive does not define the extent of the property rights transferred, which must be determined in accordance with the applicable national law, but the Court has held that the objective of the Directive, which is to base the common system of VAT on a uniform definition of taxable transactions, would be jeopardized if the preconditions for a supply of goods, which is one of the three taxable transactions, varied from one Member State to another (Case C-320/88 Staatssecretaris van Financiën v Shipping and Forwarding Enterprise Safe [1990] ECR 1-285).

M Consequently, the national law applicable in the main proceedings cannot provide the answer to the question raised, which concerns not the civil law applicable to supply but whether the transaction is subject to the tax.

is The first question must therefore be understood as seeking to ascertain whether, where a taxable person sells property part of which he had chosen to reserve for his private use, he acts with respect to the sale of that part as a taxable person within the meaning of Article 2(1) of the Directive.

16 It is clear from the wording of Article 2(1) of the Directive that a taxable person must act 'as such' for a transaction to be subject to VAT.

17 A taxable person performing a transaction in a private capacity does not act as a taxable person.

18 A transaction performed by a taxable person in a private capacity is not, therefore, subject to VAT.

19 Nor is there any provision in the Directive which precludes a taxable person who wishes to retain part of an item of property amongst his private assets from excluding it from the VAT system.

20 This interpretation makes it possible for a taxable person to choose whether or not to integrate into his business, for the purposes of applying the Directive, part of an asset which is given over to his private use. That approach concurs with one of the basic principles of the Directive, namely that a taxable person must bear the burden of VAT only when it relates to goods or services which he uses for private consumption and not for his taxable business activities. The availability of that option does not impede the application of another rule stated by the Court in Case C-97/90 Lennartz v Finanzamt München III [1991] ECR 1-3795, to the effect that capital goods used both for business and private purposes may none the less be treated as business goods the VAT on which is in principle wholly deductible. 2i As the Advocate General pointed out in point 50 of his Opinion, apportionment between the part allocated to the taxable person's business activities and the part retained for private use must be based on the proportions of private and business use in the year of acquisition and not on a geographical division. The taxable person must, moreover, throughout his period of ownership of the property in question, demonstrate an intention to retain part of it amongst his private assets.

22 The German Government cannot object to the foregoing on the ground that, by authorizing Member States to restrict the scope of any right of option for taxation which they may allow their taxpayers in respect of transactions exempted under Article 13(B)(g) and (h) of the Directive and to fix the details of its use, Article 13(C) empowers the German legislaturato impose on a taxable person the taxation of the property in its entirety in a case such as the present.

23 Such an approach is incompatible with the Directive. The right of option provided for in Article 13(C), whilst making it possible to transform an exempted transaction into a taxable transaction and entitling the taxpayer to deduct input tax, does not enable a supply which does not fall within the scope of the tax as defined in the Directive to be transformed into a taxable supply.

24 The answer to the first question must therefore be that, where a taxable person sells property part of which he had chosen to reserve for his private use, he does not act with respect to the sale of that part as a taxable person within the meaning of Article 2(1) of the Directive.

The second question

25 By its second question, the national court seeks to ascertain whether, where a taxable person sells property part of which he had chosen at the time of acquisition not to assign to his business, he was entitled, while he was operating that business, to deduct from the tax which he was liable to pay the VAT due or paid on the whole of the property in accordance with Article 17(2) of the Directive, or whether only the part of the property assigned to his business was to be taken into account for the application of that provision.

26 Article 17(2)(a) of the Directive provides that, in so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay value added tax due or paid in respect of goods or services supplied or to be supplied to him.

27 It is only to the extent that an item is used for the purposes of his taxable transactions that a taxable person may deduct from the tax which he is liable to pay the VAT due or to be paid in respect of that item.

28 It is established that if the taxable person chooses to exclude part of an item of property from his business assets, that part never forms part of those assets. He cannot, therefore, be regarded as using goods forming part of his business assets for the purposes of Articles 5(6) and 6(2)(a) of the Directive. Consequently, that part, which is not used for providing taxable business services or deliveries, does not fall within the scope of the VAT system and must not be taken into account for the application of Article 17(2)(a) of the Directive.

29 The answer to the second question must therefore be that, where a taxable person sells property part of which he had chosen at the time of acquisition not to assign to his business, only the part of the property assigned to his business is to be taken into account for the application of Article 17(2) of the Directive.

The third question

30 In its third question, the national court asks whether the adjustment of the input-tax deduction under Article 20(2) of the Directive may be limited to the part of the property assigned to the business.

3i Article 20(2) of the Directive provides:

'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.'

32 Since, as is clear from the answer given to the second question, the right to deduct input tax under Article 17(2) of the Directive applies only to the part of the relevant asset assigned to the business, the adjustment of that deduction must also be limited to that part of the asset.

33 The answer to the third question must therefore be that the adjustment of the input-tax deduction under Article 20(2) of the Directive must be limited to the part of the property assigned to the business.

Costs

34 The costs incurred by the German, French, Portuguese and United Kingdom Governments and the Commission of the European Communities, 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 action pending before the national court, the decision on costs is a matter for that court.

Operative part

On those grounds,

THE COURT

in answer to the questions referred to it by the Bundesfinanzhof by order of 28 April 1992, hereby rules:

1) Where a taxable person sells property part of which he had chosen to reserve for his private use, he does not act with respect to the sale of that part as a taxable person within the meaning of Article 2(1) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment.

2) Where a taxable person sells property part of which he had chosen at the time of acquisition not to assign to his business, only the part of the property assigned to his business is to be taken into account for the application of Article 17(2) of the said directive.

3) The adjustment of the input-tax deduction under Article 20(2) of the said directive must be limited to the part of the property assigned to the business.

Rodriguez Iglesias Schockweiler Kapteyn

Gulmann Jann

Mancini Moitinho de Almeida Murray

Edward Hirsch Ragnemalm

Delivered in open court in Luxembourg on 4 October 1995.

G. C. Rodriguez Iglesias R. Grass

President Registrar

OPINION OF ADVOCATE GENERAL

JACOBS

delivered on 6 April 1995 ( *1 )

Introduction

1Where a taxable person sells a guesthouse which he has put to both business and private use and in so doing waives the exemption from tax for which the sale would otherwise qualify under Article 13(B)(g) of the Sixth VAT Directive, ¹ must he pay tax on the portion of the proceeds that is attributable to the parts of the guesthouse put to private use? That, essentially, is the issue which has led the Bundesfinanzhof to refer to the Court three questions concerning the interpretation of the Sixth Directive.

2After an oral hearing held on 17 June 1993 before the Second Chamber, Advocate General Van Gerven delivered his Opinion on 15 September 1993. By order of 13 December 1994 the Court reopened the oral procedure and a further hearing was held before the full Court on 14 March 1995.

The facts and questions

3The case raises issues of some complexity. The basic facts are however simple. Mr Armbrecht, a hotelier, owned a property comprising a guesthouse, a restaurant and parts used as a private dwelling. In 1981 he agreed to sell the property for a price of DM 1150000‘plus 13% VAT’. He claims that the reference to VAT in the notarial document was intended to relate solely to the parts of the building put to business use and that he neither charged nor received VAT in respect of the parts used as a private dwelling. In his VAT declaration for 1981 he treated as taxable the sale of the business parts but entered as tax-free the proceeds of DM 157705 in respect of the private dwelling. Following an inspection the Finanzamt took the view that Mr Armbrecht should also have paid tax on the sale of the dwelling. Mr Armbrecht appealed successfully to the Finanzgericht, which took the view that, contrary to the position under the German Civil Code, there were for the purposes of VAT law two separate goods where a property was used partly for business purposes and partly as a dwelling. Since Mr Armbrecht did not charge the purchaser VAT on the sale of the private dwelling, he was not liable to VAT thereon. The Bundesfinanzhof, before which the matter has now come, seeks a ruling on the following questions:

Where an immovable property is disposed of, does the portion of the property used for business purposes constitute a separate item of supply for the purposes of Article 5(1) of the Sixth VAT Directive (77/388/EEC)?

Is an immovable property of which part of the rooms are used for private purposes and part for business purposes used wholly for the purposes of taxable transactions of the business under Article 17(2) of the Sixth VAT Directive (77/388/EEC), or is it also possible for just the portion used for the purposes of the business to be assigned to the business?

Can the adjustment of the input-tax deduction under Article 20(2) of the Sixth Directive be limited to the portion of an immovable property used for business purposes?’

4The essential issue underlying those questions is whether a taxable person may choose to exclude the parts of an immovable property set aside for private occupation from the assets of his business for the purposes of the Sixth Directive, notwithstanding the fact that the immovable property constitutes a single asset under the national law governing the ownership of property. In his Opinion of 15 September 1993 Advocate General Van Gerven concluded that a taxable person was so entitled. I take the same view, although I do so on different grounds.

The Community legislation

5Before I turn to the individual questions, it may be helpful to set out the provisions of the Sixth Directive that are of particular relevance to the present case.

6Article 2(1) subjects to tax:

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

7Article 5(1) provides:

‘“Supply of goods” shall mean the transfer of the right to dispose of tangible property as owner.’

8Articles 5(6) and 6(2)(a) lay down provisions concerning the private use of goods or services by a taxable person. Article 5(6) provides:

‘The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration. However, applications for the giving of samples or the making of gifts of small value for the purposes of the taxable person's business shall not be so treated.’

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

‘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.’

9Article 13(B) lays down a series of exemptions for immovable property transactions. Article 13(B)(b) exempts, subject to certain exceptions of no relevance here:

‘the leasing or letting of immovable property ...’

Article 13(B)(g) and (h) exempt from tax:

the supply of buildings or parts thereof, and of the land on which they stand, other than as described in Article 4(3)(a);

the supply of land which has not been built on other than building land as described in Article 4(3)(b).’

10Article 4(3)(a) and (b), referred to in those provisions, define the supplies excluded from exemption as follows:

the supply before first occupation of buildings or parts of buildings and the land on which they stand; Member States may determine the conditions of application of this criterion to transformations of buildings and the land on which they stand.

Member States may apply criteria other than that of first occupation, such as the period elapsing between the date of completion of the building and the date of first supply or the period elapsing between the date of first occupation and the date of subsequent supply, provided that these periods do not exceed five years and two years respectively.

“A building” shall be taken to mean any structure fixed to or in the ground;

the supply of building land.

“Building land” shall mean any unimproved or improved land defined as such by the Member States.’

11Article 13(C) adds the following important qualification to the foregoing exemptions:

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

letting and leasing of immovable property;

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

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

12Article 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:

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

13Article 20(2) and (3) lays down rules for the adjustment of deduction in respect of capital goods where the degree to which such goods are used for the purpose of taxable transactions varies over time:

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 ten years.

3In 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.’

Question 1

14The Bundesfinanzhofs question is framed in terms of Article 5(1) of the directive. It asks whether the business portion of an immovable property constitutes a separate item of supply for the purposes of that provision. In that regard the German Government has placed great emphasis on the fact that Mr Armbrecht's guesthouse is a single property under German civil law and is registered as a single plot in the land registry. Much of the discussion has focused on this issue. It seems to me, however, that that discussion is beside the point.

15There can, I think, be little doubt that Article 5(1) refers to national law for the purpose of determining the extent of the property rights transferred and that in this case Mr Armbrecht transferred the right to dispose of the entire guesthouse within the meaning of that provision. That is so notwithstanding the judgments of the Court referred to in these proceedings. It is true that in de Jong ² the Court held that, where a builder acquired land in his private capacity and subsequently built a house on it for his private occupation, the charge for private use applied solely to the value of the building and not to the value of the land; the land never became part of the builder's business assets and hence could not be transferred to private use for the purposes of Article 5(6). However, that case was a very special one. It must be remembered that the power of Member States to treat as a supply of goods (rather than services) the supply by a builder of works of construction on land to which he does not hold the title arises from a specific provision in Article 5(5)(b). That provision does not however authorize a Member State to treat a builder constructing a dwelling on his customer's land as making a supply of goods consisting not only of the dwelling but also the land. He clearly cannot be treated as supplying to his customer land already owned by the customer. Equally therefore Mr de Jong could not be treated as supplying to himself land already held in his private capacity. The need to include a specific provision in Article 5 suggests, if anything, that the general rule is that a building is transferred together with the land on which it stands as a single property for the purposes of Article 5(1).

16Nor, in my view, is it helpful to refer to the judgment in Shipping and Forwarding Enterprise Safe. ³ There the Court held that the term ‘supply of goods’ did not refer to the transfer of ownership in accordance with the procedures laid down by national law but covered any transfer of tangible property by one party which empowered the other party actually to dispose of it as if he were the owner; consequently, there could be a supply of goods even if legal title were not transferred. That ruling does not however remove the need to refer to national law in order to determine the extent of the rights that have been transferred for the purpose of Article 5(1), as is apparent from the fact that the Court left it to the national court to determine whether a transfer of the right of disposal had taken place.

17Nor finally is it of any relevance that under German civil law partial ownership of immovable property may be possible in some circumstances since no such question arises here.

18However, that is not the end of the matter. Article 5(1) of the directive must be read in conjunction with Article 2(1), which subjects to tax supplies of goods and services only where they are effected ‘by a taxable person acting as such’. In my view the proper question in this case is whether a trader who disposes of the privately occupied parts of an immovable property is acting wholly in his capacity as a taxable person or partly as a private individual. In other words, it is necessary to consider whether the property rights, as defined by national law, are held by the taxable person partly in his private capacity. Since little is to be gleaned from the wording of Article 2(1) itself, it is necessary to resolve that question by reference to the aims and scheme of the directive.

19Before turning to that question I must consider a point raised by the German Government at the hearings. The Government argues that, since Article 13C allows Member States to restrict the scope of the option to tax and fix the details of its use, the German legislature is entitled to require a taxable person to opt to tax the whole of an immovable property. Consequently, the national court's first question does not arise.

20That view is however inconsistent with the basic structure of the Sixth Directive. As already noted, Article 2(1) defines the scope of the tax. It subjects to tax supplies of goods and services effected by a taxable person acting as such. Article 13 provides for a series of exemptions from tax for certain supplies of goods and services. Such supplies do not give rise to a liability to tax but nevertheless fall within the scope of the tax for the purposes of Article 2(1). They must be distinguished from supplies which fall outside the scope of the tax under Article 2(1), such as sales by private individuals.

21The German Government's view disregards that basic structure. Article 13C allows

Member States to restrict the scope of the option to tax. The exercise of an option to tax converts an exempt supply into a taxable supply and confers upon the taxable person the right of deduction. It cannot however convert a supply which falls outside the scope of the tax into a taxable supply. In other words, the option to tax can operate only within the framework defined by Article 2(1). Consequently, the national court quite rightly considered that the first question arising in this case was whether the disposal of the privately occupied part of the guesthouse fell within the scope of the tax. If it does not, it cannot be brought into the scope of the tax by the exercise of the option to tax. Moreover, as I shall explain below, the problem arising in this case reflects a more general problem relating to the German rules on private use.

22This is the fourth case referred by the German courts in which the Court has had occasion to consider the provisions of the directive on private use. ⁴ It is apparent from those cases that 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). If he subsequently sells the goods, VAT is chargeable in full on the sale under Article 2(1).

23The logic of the German arrangements demands that the taxable person should be obliged to account for a charge for private use even if he is unable to deduct VAT on the acquisition of the goods, for example, because they were acquired from a private individual (see the Kühne case, below at paragraph 29). It also demands that he should be required to account for the private use of services connected with the use of goods even if no VAT was deductible on the services because they were exempt or untaxed (see the Mohscbe case, below at paragraph 30). In both cases a customer of the taxable person's business would suffer tax in full on the goods or services even though the taxable person was unable to deduct VAT on them.

24From the explanations given by the Finanzamt at the hearings it appears that the application of the German rules to immovable property, although more complex, is based on the same principles. It may be noted that under the Sixth Directive the letting of immovable property and the supply of such property (other than building land and new buildings) are in principle exempt: see Article 13(B)(b), (g) and (h) above. Article 13C none the less allows Member States to grant taxable persons the right to opt to tax such transactions, subject to restrictions which they lay down. The German rules restrict the use of the option to cases where the customer uses the property for the purposes of his business. The restriction is a logical one since the purpose of the option is to allow the tax to function normally in transactions between taxable persons.

25In 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 Anicie 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).

26A further aspect of the German implementing rules is worth noting. In the case of goods other than immovable property annual variations in the degree of private use are reflected in the size of the charge for private use. In the case of immovable property this is not possible since there is no annual charge. However, an adjustment is made under the national rules implementing Article 20(2) of the directive on the adjustment of deductions made in respect of capital goods. Under those rules variations in the relative proportions of taxable use and exempted private use within a period of ten years from the acquisition of the property are reflected in an adjustment of the initial deduction, which is based on the proportions applicable in the year of acquisition. Thus, for example, suppose that a taxable person purchases an immovable property which he puts in year one to 80% taxable business use and 20% private use. If in year two his private use decreases to 10% he will be entitled to an additional deduction for that year of l/10th x (20%-10%) of the tax. If the taxable person sells the property to a taxable person within the ten-year adjustment period and opts to tax the property, he is deemed to put the property to taxable use for the remainder of the ten-year period and receives a partial refund. However, after the ten-year adjustment period no further adjustment is made. Consequently, if a taxable person opts to tax the sale of a property after the ten-year period he must charge tax on the full sale price notwithstanding the fact that he has borne tax definitively on the part of the property put to private use. Thus, in effect the German rules depreciate the property on a straight-line basis over ten years.

27The French Government shares the German Government's view that an immovable property put to mixed use must in principle be regarded as a single business asset. Its reply to the written questions put by the Court indicates that, although functioning somewhat differently, the French rules are based on similar principles to the German ones. The issue arises to a lesser extent because, unlike the German rules, the French rules do not provide for an option to tax the sale of used buildings. However, a used building is automatically subject to VAT if it is sold for the first time within a period of five years from its completion. As in the case of the German rules, the taxable sale gives rise to an additional deduction in respect of the parts put to private use.

28The Portuguese Government's reply to the Court's questions indicates that under Portuguese law an option to tax must be exercised in respect of the whole of the immovable property. Finally, the United Kingdom observes that under its law a taxable person may exercise the option to tax solely in respect of the business parts of an immovable property. The sale of the privately occupied parts is treated as an exempt supply.

Relevant case-law

29In its previous rulings the Court has given only qualified approval to the German rules. In Kühne it held that no charge to tax arose under Article 6(2)(a) in respect of the private use of a motor car acquired secondhand without deduction of tax from a private individual. The Court held that the provision was:

‘designed to prevent non-taxation of business goods used for private purposes and therefore requires the taxation of private use of such goods only where the tax paid on their acquisition was deductible.’

30Similarly, in Mohsche it held that the term ‘use of goods’ in Article 6(2)(a) did not cover services ancillary to such use. The effect of the ruling was to exclude from the basis of the charge for private use the value of ancillary services on which no VAT had been deducted.

31Thus, in those judgments the Court, although not calling in question the basic method employed by the German rules for accounting for private use, rejected the underlying notion that a taxable person must be equated with one of his customers. It is sufficient that he should be subject to the tax burden to which he would have been subject if he had purchased the goods or services in question himself privately. It is clear therefore that the notion of fiscal neutrality underlying the German rules on private use, including the private occupation of immovable property, differs from the Court's understanding of the relevant provisions of the directive. There lies the root of the problem in this case.

32Of particular relevance to the present case is a third case referred by the German courts, namely that of Lennartz. ⁵ The Court was asked to consider the lawfulness of a rule denying taxable persons the right to deduct VAT on the acquisition of capital goods put to both business and private use unless business use amounted to a specific minimum proportion. In order to rule on that question it was necessary for the Court first of all to consider the scheme of the Sixth Directive with respect to private use of capital goods. At paragraph 26 of its judgment the Court stated:

‘In reply to the national court's question, it must be emphasized in the first place that, pursuant to Article 6 of the Sixth Directive, the use of capital goods for the private use of a taxable person or for purposes other than those of his business, where the VAT on such goods is wholly or partly deductible, is treated as a supply of services for consideration. It is apparent from the combined provisions of Article 6(2)(a) and of Article 11 A(l)(c) that, where a taxable person acquires goods which he employs partly for private use, he is deemed to effect for consideration a supply of services taxed on the basis of the cost of providing the services. Consequently, a person who uses goods partly for the purposes of taxable business transactions and partly for private use and who, upon acquiring the goods, recovered all or part of the input VAT, is deemed to use the goods entirely for the purposes of his taxable transactions within the meaning of Article 17(2). Consequently, such a person is in principle entitled to a right of total and immediate deduction of the input tax paid on purchasing the goods.’

33The principle that capital goods put to both business and private use should be treated as a business asset on which VAT is in principle fully deductible was in conformity with the views expressed by the French and German Governments in their observations in that case. However, since both France and Germany felt that it was inappropriate to grant taxable persons the right of full deduction where business use was minimal, both Member States had rules denying deduction in such circumstances. Unlike France, however, Germany had not sought authorization of its rule from the Council under Article 27 of the Sixth Directive. The Court held that, in the absence of such authorization, the rule could not be relied upon against taxable persons.

34At first sight it may seem strange that a motor car 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 car by a taxable person or as between a taxable vendor and a taxable purchaser. This may be illustrated by a simple example:

35A lawyer working in Munich purchases a new motor car, which in year one he puts to 30% business use. In year two he acquires an important new client in Hamburg and travels regularly by car to his client's premises. Accordingly, his business use in year two increases to 80%. In year three some of his new client's problems have been resolved and his business use falls to 50%. At the end of the year he sells the motor car to another taxable person, whose business use in year one is 25%.

36According to the Court's interpretation in Lennartz, the lawyer would be entitled to assign the car wholly to his business and to deduct all the VAT on the acquisition of the car since he would be deemed to use it wholly for the purpose of taxable transactions. In years one to three he would be subject to a charge for private use under Article 6(2)(a) which would vary according to the degree of private use in the year in question. The charge would be based on the cost to the business of making the car available, which would include an amount for depreciation of the capital cost of the car. Upon the sale of the car at the end of year three he would account for tax on the selling price of the secondhand car. The process would then begin again with the purchaser, who would be entitled to deduct the tax charged by the vendor but would be liable for a charge for private use.

37The above treatment is in conformity with the basic principles of the tax in so far as a taxable person incurs a VAT burden only in respect of his private consumption of goods and services and incurs no VAT burden in respect of his taxable business activities. Consequently, although in Kühne and Mohsche the Court considered certain aspects of the German rules to be incompatible with the directive, in Lennartz it accepted the basic mechanism for accounting for private use advocated by the French and German Governments.

The scope of the Lennartz judgment

38Mr Armbrecht and the Commission seek to distinguish the Lennartz case from the present one on the ground that, unlike immovable property, a motor vehicle cannot usefully be divided into two separate parts, a view shared by Advocate General Van Gerven. I do not consider such a distinction to be necessary or appropriate. First, in Lennartz the Court was concerned with whether a taxable person had the right to deduct tax on the acquisition of the motor car. The case arose precisely because Mr Lennartz was not permitted to treat his motor car as a business asset because of the German minimum use requirement and wished to do so. The present case raises the converse issue, namely whether a taxable person may be required by a Member State to assign the privately occupied parts of an immovable property to his business.

39Secondly, it is difficult to see the relevance of a distinction based on the fact that, unlike an immovable property, a motor car cannot be geographically divided up or on the — somewhat questionable — notion that it cannot be used simultaneously for business and private use. The rationale for allowing a taxable person to deduct tax in full on the acquisition of goods and to account for private use by means of a periodic charge is to allow account to be taken of variations in the proportions of business and private use, a rationale which may apply equally to immovable property.

40Finally, as I shall explain below, a fixed geographical division of an immovable property into business and privately occupied parts is inconsistent with the scheme of the directive and liable to lead to double taxation.

41There is however an important difference between the goods in issue in Lennartz and those in issue in the present case which is relevant to the solution in this case. The Lennartz case concerned goods which, in the normal course of events, depreciate in value over a useful life which can be estimated with reasonable accuracy. That the method works less well where goods do not depreciate or where they appreciate may be illustrated by adapting slightly the above example.

42A lawyer working in Munich purchases a new limited production sports car for DM 100000 plus VAT. He puts the car to 50% business use. After five years he sells it for an increased price of DM 150000 plus VAT to another taxable person, whose business use amounts to 50%.

43According to the Lennartz method, the lawyer introduces the motor car into his business, deducts the tax paid on the purchase and accounts for his private use during his five years of ownership by means of an annual charge. He then sells the car and charges the purchaser VAT on the full selling price. It will be noted first that the lawyer accounts for tax twice in respect of part of the private element: once by way of annual charges for private use and again — since the car does not depreciate in value — on the resale of the car. Secondly, the charge for private use imposed on the purchaser is based on his purchase price of DM 150000, whereas if he had purchased the car from a private individual his (indirect) VAT burden would be limited to the VAT paid by the vendor on the original purchase price of DM 100 000.

44Such a result is inconsistent with the principle underlying the Court's judgments in Kühne and Mohsche, according to which a taxable person should be placed in the position in which he would have been if the goods or services in question had remained in the private domain.

45The deficiencies of the method when applied to goods which do not depreciate in value in a foreseeable manner are exacerbated by the German rules relating to the private use of immovable property. As already explained, by treating the private occupation of an immovable property as an exempt supply and applying the rules on the adjustment of deductions in Article 20(2) of the Sixth Directive, the German legislation effectively depreciates an immovable property over ten years. The effect of the German legislation is thus to tax in full the sale of the property each time the property is sold after ten years of ownership without any refund of the tax borne by the vendor on the privately occupied parts. Moreover, the tax charge for private use borne by the purchaser is based on the selling price charged by the last vendor rather than the original vendor's purchase price.

46It is clear therefore that, unless a taxable person purchases an immovable property with an unusually short life, he will either incur more tax himself, or cause his purchaser to incur more tax, than he would if he occupied separate residential premises whose sale was not subject to tax.

47That result is of course in keeping with the logic of the German arrangements, which equate a taxable person who occupies privately immovable property belonging to the business with a lessee under an exempt lease. However, as already noted, the German legislation is based on an understanding of the notion of fiscal neutrality which is contrary to the Court's case-law.

The solution to the present case

48It is therefore necessary to seek a solution which is consistent with the objective of fiscal neutrality as understood by the Court. It is clear that in some cases the Lennartz method may allow private use to be accounted for more accurately. However, it does not do so in all circumstances, particularly in the form in which it is applied to immovable property by the German rules.

49Accordingly, I share Advocate General Van Gerven's view that a taxable person should be able to choose whether or not to bring the privately used portion of an asset into his business. If he opts to bring the goods wholly into the business, he must account for his private use under the provisions of Article 6(2)(a). The advantage for the taxable person of opting for this method is that it will take account of any reduction in the proportion of private use in later years. If, on the other hand, the taxable person opts to keep part of the asset out of the business he bears tax definitively on the private element as determined in the year of acquisition. It may be noted however that, if in any subsequent year the proportion of private use exceeds the proportion in the year of acquisition, he will be deemed to make a supply in that year under Article 6(2)(a) in respect of the additional use, in so far as he puts to private use assets forming part of the business. That option may be favoured by a taxable person who considers that his degree of private use of goods is unlikely to vary significantly and would prefer administrative simplicity or who acquires an asset that does not depreciate over a useful life which can be accurately estimated. It may be noted that the fact of giving a choice to the taxable person will not lead to tax avoidance. On the contrary, it will allow private use to be accounted for in accordance with the principle that the tax burden should resemble as closely as possible that which would have been borne if the goods had remained in the taxable person's private domain.

50As already noted (at paragraph 39), I do not consider it necessary or appropriate to make a distinction between immovable property and other categories of assets or between different assets according to whether they lend themselves to a geographical division of business use and private use. Immovable property is not the only category of asset which may be ill suited to the Lennartz method. Moreover, there seems to be no reason why a taxable person should not be able to apply to any category of goods the simpler method of excluding goods partly from the business; it is for him to weigh up the advantages and disadvantages taking account of the nature of the asset and his intended use. A division into private and business portions can readily be made on the basis of the proportions of business and private use in the year of acquisition. Allocation to private use on the basis of a fixed geographical division of the property may moreover lead to double taxation. Suppose; for example, that a hotelier purchased a hotel comprising a main building and an annex. Initially the hotelier occupies privately three rooms in the main building. Subsequently, alterations are carried out to the main building and for a year he moves his private dwelling to the annex. He then returns to another part of the main building after completion of the- alterations. Under a geographical division the three rooms initially occupied would enter definitively into private use and additional charges for private use (or, under the German system, adjustment of deductions) would arise in respect of the new accommodation. In other words, he would have borne tax definitively on rooms he no longer occupies. It is clear therefore that only an apportionment based on the percentage of private use can achieve a rational result. Such an apportionment could be applied equally to other categories of assets such as motor cars or computers since it is based on the use to which the asset is put.

51I conclude therefore that the answer to be given to Question 1 is that a taxable person who, on the acquisition of an asset, elects to exclude a proportion of the asset from his business, does not act as a taxable person for the purposes of Article 2(1) of the Sixth Directive upon the disposal of the private proportion.

Questions 2 and 3

52The answers to Questions 2 and 3 follow from the answer to Question 1. Question 2 asks whether an immovable property put to mixed use is to be regarded as being used wholly for the purposes of transactions of the business for the purposes of Article 17(2) of the directive. The answer to that question depends on whether the taxable person elects to keep part of the property outside the business. If he does, then the privately occupied parts never belong to the assets of the business, with the result that he cannot be regarded as putting business assets to private use for the purposes of Article 6(2)(a). He is not therefore deemed to make a supply of services in respect of the privately occupied parts under that provision. Such parts are therefore not used for making taxable business supplies. They fall outside the VAT system and must be disregarded.

53Similar considerations apply to Question 3. The purpose of the rules on adjustment of deductions in Article 20(2) is to allow the initial deduction to be adjusted to take account of the variations in the degree of taxable use of capital goods. If the taxable person elects to keep the privately occupied parts of an immovable property out of the VAT system, he bears tax on those parts definitively. They cannot be the subject of adjustment under Article 20(2). In such a case Articles 20(2) applies solely to the business portion of the property.

Conclusion

54Accordingly, I am of the opinion that the questions referred should be answered as follows:

Where a taxable person disposes of an asset and, on the acquisition of the asset, elected to exclude a portion of it from his business, he does not act as a taxable person for the purposes of Article 2(1) of the Sixth VAT Directive (77/388/EEC) in respect of the disposal of the private portion.

In such circumstances only the portion of the asset assigned to the business is used for the purpose of business transactions within the meaning of Article 17(2) of the directive.

In such circumstances any adjustment of the input-tax deduction under Article 20(2) of the directive is limited to the portion of the asset assigned to the business.

( *1 ) Original language: English.

¹ Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member Sutes relating to turnover taxes — Common system of value added tax: uniform basis of assessment; OJ 1977 L 145, p. 1.

² Case C-20/91 [1992] ECR I-2847.

³ Case C-320/88 Staatssecretaris van Financiën v Shipping and Forwarding Enterprise Safe BV [1990] ECR I-285.

⁴ See Case 50/88 Kühne v Finanzamt München III [1989] ECR 1925; Case C-97/90 Lennartz v Finanzamt München III [1991] ECR I-3795; and Case C-193/91 Finanzamt München III v Mohsche [1993] ECR I-2615.

⁵ Cited above in note 4.

OPINION OF ADVOCATE GENERAL

VAN GERVEN

delivered on 15 September 1993 ( *1 )

Introduction

1The present case concerns a request by the German Bundesfinanzhof for a preliminary ruling on Articles 5(1), 17(2) and 20(2) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value-added tax: uniform basis of assessment ¹ (hereinafter ‘the Directive’). The preliminary questions have arisen in connection with a dispute between the Finanzamt Uelzen (hereinafter ‘the Finanzamt’) and the Dieter Armbrecht.

Background

2Mr Armbrecht, a hotelier, owned an immovable property comprising a guesthouse, a restaurant and a private dwelling. In 1981 he sold the property for DM 1150000. By virtue of the German Umsatzsteuergesetz 1980 (1980 Law on Turnover Tax) such a sale is in principle exempt from turnover tax. ² If, however, the sale is a transaction which is ‘carried out for another trader for the purposes of his business’, the trader may treat it as taxable. ³ Pursuant to that provision Armbrecht voluntarily opted to tax the sale of his immovable property.

In his 1981 turnover tax declaration Armbrecht, however, treated as taxable only the part of the goods used for business purposes. He considered the price of DM 157705 in respect of the private dwelling to be free of VAT. In any event he maintains that he charged the purchaser of the goods VAT only on the part used for business purposes and not for the private dwelling. ⁴

3Following an inspection the Finanzamt rejected that classification and included the private dwelling within the charge to turnover tax. It takes the view that the splitting of Armbrecht's immovable property into a part used for business purposes and a part used for private purposes is in practice impossible. Certain parts of the goods are of both a business and a private nature. ⁵ Since the land and the building constitute a single asset for the purposes of German civil law, ⁶ they necessarily also constitute a whole for the purposes of tax law. ⁷

Armbrecht appealed against the Finanzamt's decision to the Finanzgericht, which found in its favour. The Finanzgericht considered that a building that is used partly for business purposes and partly as a dwelling constitutes for the purposes of tax law — in contrast to civil law — two separate economic goods. Since Armbrecht did not charge the purchaser turnover tax on the private dwelling he himself is not liable for tax.

4The Finanzamt appealed against the judgment of the Finanzgericht to the Bundesfinanzhof. That appeal led to three preliminary questions, all of which are essentially directed towards ascertaining whether under the Directive — and hence also under the German legislation implementing the Directive — separate treatment for the purposes of fiscal law may be accorded to the part of an immovable property such as Mr Armbrecht's which is used as a dwelling. Owing to their technical nature I shall briefly place the questions, the text of which is set out in full in the Report for the Hearing, in the context of the Community and German law on turnover tax.

The first preliminary question

5According to Article 2(1) of the Directive, implemented in German law by Paragraph 1(1)(1) of the 1980 Law, the following are subject 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’.

By virtue of Article 5(1) of the Directive, implemented by Paragraph 3(1) of the 1980 Law, ‘a supply of goods’ means:

‘the transfer of the right to dispose of tangible property as owner’.

The Bundesfinanzhof asks whether ‘where an immovable property is disposed of, ... the proportion of the property used for business purposes constitute [s] a separate item of supply for the purposes of Article 5(1) of [the Directive]’ or, as I understand the question, whether only the sale of both the private and business parts together can be considered a supply for the purposes of Article 5(1). In the first case the private part of an immovable property is not subject to turnover tax because — and on the assumption that (see point 13 below) — the vendor is not acting as a taxable person for the purposes of Article 2(1) of the Directive upon the sale thereof.

6The argument of the Finanzamt and the German Government to the effect that a building such as that belonging to Mr Armbrecht constitutes a single asset under German civil law and hence must also be regarded as a whole for the purposes of tax law is, in my view, inapposite. ⁸ Quite apart from the question whether it is desirable to demand that tax law and civil law be given a similar interpretation, there can be no question of making the interpretation of Community law — namely the Directive, which the German Law on Turnover Tax implements — dependent on the interpretation of the national hw of a Member State.

In the past the Court has always held that the concepts used in the VAT Directives are to be given a Community meaning, unless the directives themselves leave it to the Member States to determine the meaning of a concept. ⁹ In particular, in the interpretation of the concept of ‘supply’ in Article 5(1) of the Directive national provisions of the Member States must give way to a coherent Community law approach, as the Court held:

‘This view is in accordance with the purpose of the Directive, which is designed inter alia to base the common system on VAT on a uniform definition of taxable transactions. This objective might be jeopardized if the preconditions for a supply of goods varied from one Member State to another, as do the conditions governing the transfer of ownership under civil law’. ¹⁰

7As far as is necessary, it may be noted that it is not at all certain that German civil law precludes a division of an immovable property into independent economic entities. Indeed in its observations to the Court the Commission stated that the German Bürgerliches Gesetzbuch (‘Civil Code’) envisages partial ownership (‘Teilbesitz’) of an asset, ¹¹ and the German law concerning the ownership of dwellings (the Wohneigentumsgesetz or WEiG) regulates a number of forms of partial legal or economic ownership. ¹²

Moreover, again according to the Commission, Paragraph 93 of the Civil Code provides only with respect to the ‘Wezentliche Bestandteile’ (essential parts) of an asset — that is to say the parts ‘which cannot be separated from one another, without one or other of them being destroyed or substantially altered’ — that they cannot be the subject of separate rights. It is difficult to see (and moreover is not alleged by any of the parties) that the business and private parts of the same building can in themselves constitute essential components within the meaning of that provision.

Finally, it appears from what was said at the hearing that the German legislation concerning the taxation of immovable business assets provides for — compulsory — division of a building with multiple functions into different entities. Why should such a division therefore not be possible for the purposes of turnover tax?

8As I have said, I am therefore of the opinion that the German civil law cannot provide guidance for the interpretation of Article 5(1) of the Directive, as implemented by Paragraph 3(1) of the 1980 Law on Turnover Tax. Guidance on the interpretation of those anieles is instead to be derived from the Court's judgment of 6 May 1992 in de Jong. ¹³

That judgment, which was given just after the Bundesfinanzhof decided on 28 April 1992 to make the present request for a preliminary ruling, concerns Article 5(6) of the Directive. That Article assimilates to a taxable supply for consideration:

‘the application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value-added tax on the goods in question or the component parts thereof was wholly or partly deductible ...’.

9De Jong, a builder, acquired for private use, and hence free of turnover tax, a plot of land with a building. He later sold half of the land without charging turnover tax. He subsequently demolished the building and, in the course of his business, built two dwellings, one for the purchaser of the half of the land and one for himself. He subsequently used the latter dwelling exclusively for private purposes. In his turnover tax declaration he treated as taxable the goods and services which he had withdrawn from his business under Article 5(6) for the purposes of constructing the private dwelling. The land, on the other hand, he considered to be free from tax since it had already formed part of his private assets.

The Netherlands tax authorities took the view, however, that the land on which the private dwelling was built was also to be regarded as taxable because

‘as a result of the construction of a dwelling on the land made available for that purpose a new immovable asset was created for the purposes of turnover tax consisting in the building and the accompanying land’ (paragraph 13).

The Court rejected that view and stated expressly:

‘irrespective of whether the Und and the building are inseparable under national legislation ... it is necessary to distinguish for the purposes of Article 5(6) of the Sixth Directive between the taxation of land which a taxable person holds in his private capacity and the taxation of a building which he has constructed on that land in the course of his business’ (paragraph 19).

10The preliminary question to which the Court replied in de Jong does not differ essentially from the present question. In both cases the question is in substance whether under Article 5 of the Directive two parts of an immovable entity (land and building or business and private parts of a building) which are economically divisible but are said to be inextricably linked or to be regarded as a whole under the national law of a Member State may only give rise to a single taxable transaction.

It is apparent from the judgment in de Jong that a plot of building land which a taxable person holds in his private capacity is subject to different treatment for the purposes of turnover tax than a building which the taxable person has constructed in the course of his business and which consequently belongs to his business assets. The fact that a building constructed in the course of a taxable person's business constitutes under the applicable national law a single entity with the privately held land on which it is built does not — contrary to what the Netherlands Government (but not the German Government ¹⁴) argued in de Jong ¹⁵-lead to the conclusion that the land and the building are to be treated for the purposes of the Directive as a single asset belonging to the taxable person's business.

11This case also concerns two parts of an immovable entity, namely the business and private parts of a building of which the latter was privately held before the transfer and apparently was also transferred as such by the taxable person. Just as in de Jong it must be assumed that for the purposes of the Directive both parts may be transferred separately. This means in particular that the business part of the building can itself constitute the subject of a supply for the purposes of Article 5(1) of the Directive. That is so notwithstanding the Finanzamtes argument that the existence within the immovable property of a number of parts which are used for mixed private and business purposes makes a division of the property into business and private parts impossible (supra, point 3). It is still possible to calculate as a percentage the extent to which the common parts are used for business or private use. The German turnover tax authorities appear to be familiar with such calculations. ¹⁶

12The above reasoning derived from the de Jong judgment seems to me, moreover, to be the most in keeping with Article 5(1) of the Directive. According to that Article {supra, point 5) a ‘supply of goods’ means ‘the transfer of the right to dispose of tangible property as owner’. From that definition I infer that what is decisive is the economic function which the transferor, as the person entitled to dispose of the goods, has accorded to the goods or parts thereof. It is not disputed that prior to the transfer Armbrecht used certain parts of his asset for business purposes and others for private purposes.

This also refutes the argument put forward at the hearing that a division according to the use of immovable property which is to be sold could lead to a sudden change in the subject of the sale transaction. ¹⁷ In my view, it appears from Article 5(1) that what is decisive is the state in which the transferred goods are to be found at the moment of the transfer, that is to say, the moment at which the holder of the goods has ‘the right to dispose of (the goods) as owner’. It is therefore the manner in which the goods are divided at the moment of the transfer which is decisive for the purposes of the tax treatment under the Directive, which is unaffected by changes after the transfer. ¹⁸

13I wish to add the following clarification to the foregoing. Exemption from turnover tax requires that the private dwelling which is to be sold should have remained or have been brought outside the scope of application of the turnover tax system. Part of an immovable asset used for business purposes can therefore only be the subject of a separate taxable supply — or, expressed in other terms, the sale of the part of the asset used for private purposes is only free from turnover tax — if the part used for private purposes actually belongs to the private assets of the vendor at the time of the sale.

That is, for example, not the case, as the Commission correctly observes, where a vendor has himself paid and deducted turnover tax when he purchased the dwelling. In that case the dwelling did not become part of the vendor's private assets, even if it was only used for private purposes. Nor is the vendor exempt from turnover tax in respect of the sale of a private dwelling if he charges tax to his purchaser. ¹⁹

In both cases the vendor has by implication indicated that the immovable property comes within the scope of the turnover tax system.

On the other hand, exemption from turnover tax on the sale of the private part of an immovable property should, in my view, be granted to a vendor who did not himself pay or deduct turnover tax on the purchase of the property and who has, moreover, taken no steps in order to bring his private dwelling within the scope of turnover tax.

14In answer to the first preliminary question I therefore conclude that the part of an immovable property used for business purposes constitutes in itself the subject of a supply within the meaning of Article 5(1) of the Directive on the sale of the asset and that the part belonging to the private assets of the vendor — on condition that the vendor kept it outside the scope of turnover tax — does not constitute, together with the business part, a single taxable supply within the meaning of that provision.

The second preliminary question

15This question concerns the deduction of input tax. That deduction, which is dealt with in Chapter 11 (Articles 17 to 20) of the Directive, is intended to prevent turnover tax being paid on the full price of goods or a service where the component of those goods or that service have already been subject to turnover tax. Thus, the system of deducting input tax is intended to guarantee the neutrality of turnover tax, as is apparent from Article 2 of the First VAT Directive: ²⁰

‘The principle of the common system of value-added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of goods and services, whatever the number of transactions which take pUce in the production and distribution process before the stage at which tax is charged.

On each transaction, value-added tax, calculated on the price of goods or services at the rate applicable to such goods or services, shall he chargeable after the deduction of the amount of value-added tax borne directly by the various cost components....’ (my emphasis).

16Article 17(2) of the Sixth Directive, which implements that principle, ²¹ provides that input tax may be deducted ‘[i] n so far as the goods and services are used for the purposes of ... taxable transactions’. The Bundesfinanzhof has asked the Court whether the whole of an asset such as that belonging to Armbrecht or only the business part is used for the purpose of taxable transactions within the meaning of that article.

If the Court does not follow me in the answer to the first preliminary question and takes the view that a trader such as Armbrecht is also liable for turnover tax on the sale price of the part of the immovable property used as a private dwelling, then no problem arises. It is clear that he may also deduct input tax in respect of that part of the purchase price. A problem does arise however if the Court, as I have proposed, gives an affirmative reply to the first preliminary question. In that case the question arises whether a trader who is not liable for turnover tax in respect of a certain amount may deduct turnover tax in respect of that amount.

17In the abovementioned judgment of 11 July 1991 in Lennartz the Court held that a taxable person who uses goods for both business and private purposes is in principle entitled to deduct input tax without restriction ‘however small the proportion of business use’. ²²

As the Bundesfinanzhof correctly states, however, there is a material difference between the situation in Lennartz and the present situation. Lennartz concerned a car in respect of which the court could not determine which parts precisely were intended for private or business use. This case concerns immovable property which can be precisely divided into a private part and a business part. In other words, Lennartz concerned a single economic asset taxable as a whole that was used for business and private purposes. The present case concerns two divisible parts of an immovable asset {supra, point 10), one used for business purposes and taxable, the other for private purposes and not taxable.

18In my view the nontaxable part does not give rise to deduction of input tax. The fundamental neutrality of the system of turnover tax {supra, point 14) requires a logical connection between the extent to which goods are taxable and the extent to which goods can give rise to tax deduction of input tax.

That connection is determined by the Directive itself, which permits deduction of input tax only ‘in so far as’ goods and services are used for taxable use {supra, point 16). It also forms the basis of the Court's case-law concerning turnover tax on immovable goods:

‘As the Court pointed out in its judgment of 5 May 1982 in Case 15/81 {Schul v Inspecteur der Invoerrechten en Accijnzen [1982] ECR 1409), a basic element of the VAT system is that VAT is chargeable on each transaction only after deduction of the amount of the VAT borne directly by the cost of the various components of the price of the goods ...’ (my emphasis). ²³

The close connection between liability to tax and deductibility of input tax would be disrupted if it were accepted that the untaxed part of an immovable asset none the less gave rise to deduction of input tax, which would be deducted from the tax to which the taxable part of the asset gives rise.

19In answer to the second preliminary question I conclude therefore that the part of an immovable asset used for private purposes that is free of turnover tax on the basis of the interpretation of Article 5(1) proposed above (at point 13) is not used for taxable transactions for the purposes of Article 17(2) of the Directive and thus cannot give rise to deductions of input tax. Moreover, I should stress that that conclusion is in keeping with the Lennartz judgment. In that judgment the Court held that a car which at the time of its sale was wholly subject to turnover tax must also give rise to deduction of input tax in its entirety and without restriction. Wholly by analogy I propose that the Court hold that an immovable asset which at the time of its sale is only partially subject to turnover tax should only partially give rise to input tax deductions. The underlying reasoning is the same.

The third preliminary question

20By its third question the Bundesfinanzhof wishes to ascertain whether any adjustment of the input tax deduction can be restricted to the part of an immovable asset used for business purposes. Such an adjustment, which in Germany is governed by Paragraph 15(a) of the 1980 Law on Turnover Tax, is the subject of Article 20 of the Directive. That article provides inter alia:

The initial deduction shall be deducted according to the procedures laid down by the Member States, in particular:

where that deduction was higher or lower than that to which the taxable person was entitled;

where after the return is made some change occurs in the factors used to determine the amount to be deducted ...;

2In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured. ...

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

21Just as the answer to the second preliminary question follows logically from the answer to the first question, the answer to the third preliminary question is determined by the answer to the second question. In answer to that question (supra, point 19) I stated that a part of an immovable asset used for private purposes and exempt from VAT is not used for taxable transactions within the meaning of Article 17(2) of the Directive and thus does not give rise to the deduction of input tax. Where no deduction of input tax can take place, nor can there be any adjustment of such deductions.

22The adjustment of the deduction of input tax under Article 20(2) of the Directive can therefore certainly be restricted to the parts of an immovable property used for business purposes, which implies an affirmative answer to the third preliminary question. What is more, since adjustment of deductions is only possible in so far as the deduction is itself possible, the deduction cannot concern that part of the immovable property that forms part of the private assets of the vendor.

Conclusion

In conclusion I propose that the Court decide as follows:

The part of an immovable asset used for business purposes constitutes, on the sale of the asset, of itself the subject of a supply for the purposes of Article 5(1) of Council Directive 77/388/EEC of 17 May 1987 provided that the private part of the immovable asset concerned belongs at the time of the sale to the private assets of the vendor and has been kept by him outside the scope of turnover tax.

In so far as the part of an immovable asset used for private purposes is free from turnover tax on the basis of the foregoing, that part is not to be regarded as being used for the purposes of taxable transactions within the meaning of Article 17(2) of Directive 77/388/EEC.

The adjustment of the deduction of input tax under Article 20(2) of Directive 77/388/EEC can be restricted to the part of an immovable asset used for business purposes. That adjustment cannot relate to the part of an immovable asset used for private purposes which is free from turnover tax on the grounds stated in reply to the first question.

( *1 ) Original language: Dutch.

¹ OJ 1977 L 145, p. 1.

² This may be explained by the fact that the sale already falls under the Grunderwerbsteuergesetz, the German law relating to transfer tax on the purchase of land. See Paragraph 4(9)(a) of the 1980 Law on Turnover Tax, which corresponds to Article 13B(g) of the directive.

³ See Paragraph 9 of the 1980 Law, which corresponds to Article 13C of the directive. Opting for taxation may be financially more advantageous because it allows input tax (.infra, point 15) to be deducted (see Paragraph 15(2) of the 1980 Law).

⁴ Although in the notarial act a purchase price of DM 1150000‘plus 13% VAT’ was agreed, he claims that the reference to VAT concerned only those parts of the goods used for the purposes of the business.

⁵ The Bundesfinanzhof cites as examples ‘the heating system, the roof, the staircase and parts which are essential to the structure of the house’.

⁶ More specifically, for the purposes of Paragraph 90 of the Bürgerliches Gesetzbuch (BGB).

⁷ More specifically, for the purposes of Paragraph 3(1) of the 1980 Law.

⁸ A similar line of reasoning was in fact rejected by the Court in its judgment in Case 73/85 Kerrutt [1986] ECR 2219, which also concerned the charging of turnover tax on immovable property. The judgment concerned the construction of a building under the so called ‘Bauherrenmodell’, under which co-proprietors purchase a plot of land and conclude an agreement to erect a building on the land. Notwithstanding the case-law of the Bundesfinanzhof according to which the purchase and construction contracts were to be regarded as a single transaction for the purposes of Grunderwerbsteuer (see footnote 2 supra), ‘if each of the two partial contracts is devoid of purpose without the other’ (paragraph 4), the Court held that supplies made in connection with a construction contract ‘cannot be regarded as forming ... a unity’ with the supply of a plot of land by another contractor to the builder (paragraph 15).

⁹ Judgment in Case 51/76 Verbond van Nederlandse Ondernemingen [1977] ECR 113, paragraphs 10 and 11.

¹⁰ Judgment in Case C-320/88 Safe [1990] ECR I-285, paragraph 8. See also paragraph 11 of my Opinion in the judgment in Case C-186/89 Van Tiem [1990] ECR I-4363, at p. 4377.

¹¹ Paragraph 865 of the Civil Code refers to the ownership of part of an asset, ‘insbesondere abgesonderte Wohnräume oder andere Räume’.

¹² The Commission mentions the separate property right (‘Sondereigentum’) which can exist in relation to an apartment or single room (Paragraph 3 of the WEiG) and the letting or business tenancy in perpetuity (Paragraph 31 of the (WEiG).

¹³ Case C-20/91 [1992] ECR I-2847.

¹⁴ A short comparison should be made between the German Government's position in de Jong and its position in the present case. According to Paragraph 94(1) of the German Civil Code a plot of land and the building situated on the land constitute inextricably linked ‘essential components’ of the same asset. None the less, in de Jong the German Government subscribed to the Commission's view that the land and building may be treated separately for the purposes of turnover tax. It is not clear why the same Government now takes a contrary view, particularly since it is not clear that under German law the parts concerned in this case constitute ‘essential components’ of a single asset {supra, point 7).

¹⁵ See paragraphs 13 and 14 of the judgment.

¹⁶ See in that connection the judgment in Case C-97/90 Lennarti [1991] ECR I-3795, which concerned a German administrative practice which provided that no account was taken of the business use of economic goods if such use represented less than 10% of the total use.

¹⁷ The representative of the Finanzamt referred to the example of the sale of a building with ten rooms. The vendor uses three for business purposes and the other seven for private fturposes. The purchaser, however, wishes to use five rooms or Dusiness purposes and five rooms for private purposes. If it is assumed that the business and private parts constitute separate items, then the latter change during the sale. Three business rooms are supplied but five are received, whereas of the seven private rooms supplied only five are received.

¹⁸ Moreover, changes after the transfer may also substantially alter the sales transaction where the asset is not divided, for example, because a trader sells his business premises to someone who wishes to use it as a private dwelling.

¹⁹ It is for the national court to determine whether Armbrecht in this case charged turnover tax to the purchaser in respect of the private dwelling: supra, footnote 4.

²⁰ Council Directive 67/227/EEC of 11 April 1967 on the harmonization of legislation of Member Sutes concerning turnover taxes (OJ, English Special Edition 1967, p. 14). For later amendments to that article see the Opinion of Advocate General Jacobs in Lenrmrtz [1991]ECR I-3795, at p. I-3815.

²¹ See the judgment in Case 50/87 Commission v France [1988] ECR 4797, paragraph 23.

²² Lennartz, cited above at footnote 16, paragraph 35. See also points 58 and 59 of the Opinion of Advocate General Jacobs [1991] ECR I-3826 and I-3827.

²³ Judgment in Case 268/83 Rompelman v Minister van Finanzien [1985] ECR 655, paragraph 16. The case concerned the (future) acquisition and letting of units in premises.