C-32/03 Fini H

JUDGMENT OF THE COURT (Third Chamber)

Legal context and the dispute

3 March 2005 *

In Case C-32/03,

REFERENCE for a preliminary ruling under Article 234 EC from the Højesteret (Denmark), made by decision of 22 January 2003, received at the Court on 28 January 2003, in the proceedings

I/S Fini H

ν

Skatteministeriet

THE COURT (Third Chamber),

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

Advocate General: F.G. Jacobs, Registrar: H. von Holstein, Deputy Registrar

* Language of the case: Danish.

having regard to the written procedure and further to the hearing on 15 September 2004,

after considering the observations submitted on behalf of:

— I/S Fini H, by S. Halling-Overgaard and M. Krarup, advokaterne,

— the Skatteministeriet, by P. Biering, acting as Agent,

— the Danish Government, by J. Molde and P. Biering, acting as Agents,

— the Commission of the European Communities, by E. Traversa and T. Fich, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 28 October 2004,

gives the following

Judgment

1This reference for a preliminary ruling concerns the interpretation of Article 4(1) to (3) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1), as amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18, 'the Sixth Directive').

2The reference was made in the course of proceedings between the limited partnership I/S Fini H ('Fini H') and the Skatteministeriet (Ministry of Taxation). The Skatteministeriet demands that the partnership repay the negative value added tax ('VAT') paid to it during the period from 1 October 1993 to 31 March 1998. Moreover, it refuses to pay Fini H negative VAT in respect of the period from 1 April to 30 September 1998.

Legal framework

Community legislation

3According to the fourth recital in its preamble, the purpose of the Sixth Directive is, inter alia, to ensure that the common system of turnover taxes is non discriminatory.

4Article 4 of the Sixth Directive provides:

'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.

3. Member States may also treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in paragraph 2 ...

5Article 17(2) of the Sixth Directive is worded as follows:

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

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

National legislation

6Article 3 of the momsloven (law on VAT), as published in Consolidating Regulation No 804 of 16 August 2000, ('the VAT law') is worded as follows:

'Taxable person shall mean any natural or legal person who independently carries on an economic activity.'

7The right to deduct VAT on expenses linked to an independent economic activity is provided for in Article 37 of the VAT law.

The main case and the questions referred for a preliminary ruling

8Fini H is a limited partnership which was created in 1989 with the object of running a restaurant. In order to carry on that activity, it leased premises from 20 May 1988. The lease, which was concluded for a term of 10 years, could be terminated only with effect from 30 September 1998.

9Fini H closed its restaurant at the end of 1993 and the premises subsequently remained unused. It sought to terminate the lease but the landlord refused to consent, and relied on the absence in the lease of a clause providing for early termination. Moreover, Fini H failed to find a replacement tenant to take over the lease, which came to an end only on its contractual date of expiry.

10During the period from the end of 1993 to 30 September 1998, Fini H remained registered in the VAT register even though it no longer carried on its restaurant business. It thus continued to deduct input tax paid by it on the costs incurred in relation to the lease in question, namely the rent and the heating, electricity and telephone charges. Once the restaurant was closed and there was no longer any output tax to declare, this resulted in net payments to Fini H.

11In September 1998, the told-og skatteregionen (regional tax authority 'the authority') demanded repayment of the sums paid to Fini H as negative VAT between October 1993 and March 1998. It also decided that the amounts of VAT yet to be paid in respect of the period from 1 April to 30 September 1998 would not be reimbursed. The authority argued that Fini H had not carried on any activity subject to VAT since the third quarter of 1993.

12That position was upheld by the Landsskatteretten (Supreme Administrative Tax Authority). It took the view that, following the cessation of its restaurant business, Fini H had not carried on an economic activity within the meaning of Article 3 of the VAT law. The lease could not, by itself, establish liability for VAT under that article. The Landsskatteretten added that the fact that the premises were, for a certain period, used for economic purposes in the form of a restaurant did not appear to justify a requirement that Fini H be regarded as a taxable person for VAT purposes under Article 3 once that activity had ceased.

13Fini H then brought an action against that decision of the Landsskatteretten before the Vestre Landsret (Denmark), which dismissed it by judgment of 29 August 2001. The Vestre Landsret held that entitlement to deduct input tax requires that the taxable expenditure relate to an independent economic activity within the meaning of Article 3 of the VAT law. It ruled that the expenditure on rent and charges incurred after Fini H had ceased its restaurant business, which were not attributable to normal winding-up operations, could not be regarded as operational expenditure linked to an independent economic activity within the meaning of Article 3 of the VAT law.

14Fini H lodged an appeal against that judgment of the Vestre Landsret before the Højesteret.

15It was against that background that the Højesteret decided to stay proceedings and refer the following questions to the Court for a preliminary ruling:

'1. Can a person be regarded as independently carrying on an economic activity within the meaning of Article 4(1) to (3) of the Sixth VAT Directive in a situation in which the person concerned originally entered into a lease agreement as part of an independent economic activity but has now ceased that actual activity, even though the lease continues to exist for a particular period as a result of a non-termination clause, and in which, after the actual activity ceases, no transactions subject to VAT are conducted by application of the lease for the purpose of obtaining income therefrom on a continuing basis?

2. Does the question whether or not the person concerned actively seeks, during the remaining part of the period of non-terminability, either to utilise the commercial lease to conduct transactions subject to VAT for the purpose of obtaining income therefrom on a continuing basis or to dispose thereof have any bearing on the answer to Question 1 and does the length of the period of non-terminability or the remaining part thereof likewise have any bearing?' The questions referred for a preliminary ruling

The first question

16By its first question, the national court is asking, essentially, whether Article 4(1) to (3) of the Sixth Directive must be interpreted as meaning that a person who has ceased his commercial activity but continues to pay the rent and charges on the premises used for that activity because the lease contains a non-termination clause is to be regarded as a taxable person and, therefore, as entitled to deduct VAT on the inputs thus paid.

17Fini H submits that it derives its right to deduct from the fact that the lease was concluded for the purpose of starting or carrying on an economic activity. If it were not recognised as being entitled to deduct VAT, it would have to pay VAT on goods and supplies acquired for business purposes.

18According to the Danish Government and the Commission of the European Communities, where a taxable person no longer exercises an economic activity, the right to deduct ceases to apply to him from the date on which he ceased that activity or after a reasonable period of brief duration calculated from that date. A taxable person cannot enjoy a right to deduct indefinitely on account of the fact that, in the past, he exercised an economic activity.

19The Court observes, first of all, that Article 4(1) of the Sixth Directive defines 'taxable person' by reference to the term 'economic activity'. It is the existence of such an activity which establishes the status of 'taxable person' to whom the Sixth Directive gives the right to deduct.

20Article 4(2) states that 'economic activities' are to be understood as comprising, in particular, all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The expression 'all activities' used in that provision suggests that the economic activity concerned may consist of several consecutive transactions.

21The case-law also makes clear that an economic activity within the meaning of the Sixth Directive need not consist of a single act but may consist of a series of consecutive acts (see, in particular, Case 268/83 Rompelman [1985] ECR 655, paragraph 22).

22Accordingly, preparatory acts must be regarded as economic activities within the meaning of the Sixth Directive. Any person performing such preparatory acts is consequently regarded as a taxable person within the meaning of Article 4 of that directive and is entitled to deduct (Rompelman, paragraph 23, and Case C-110/94 INZO [1996] ECR I-857, paragraph 18). Entitlement to deduct is retained, even ifit is subsequently decided, in view of the results of a profitability study, not to move to the operational phase but to put the company into liquidation, with the result that the economic activity envisaged does not give rise to taxed transactions (INZO, paragraph 20).

23With respect to the transfer of a totality of assets, the Court has held that, where the taxable person no longer effects transactions after using services provided for that purpose, the costs of those services must be regarded as part of the economic activity of his business as a whole before the transfer and that he must be recognised as being entitled to deduct. Any other interpretation would amount to drawing an arbitrary distinction between, on the one hand, expenditure incurred for the purposes of a business before it is actually operated and that incurred during its operation and, on the other hand, the expenditure incurred in order to terminate its operation (see Case C-408/98 Abbey National [2001] ECR 1-1361, paragraph 35, and Case C-137/02 Faxworld [2004] ECR I-5547, paragraph 39).

24Those same considerations dictate that transactions such as the payments which Fini H continued to have to make during the period over which its restaurant business was wound up must be regarded as forming part of the economic activity within the meaning of Article 4 of the Sixth Directive.

25Such an interpretation is justified by the deduction system, with regard to which the Court has repeatedly held that it is intended to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT (see, to that effect, Rompelman, paragraph 19; Case C-37/95 Ghent Coal Terminal [1998] ECR 1-1, paragraph 15; Joined Cases C-110/98 to C-147/98 Gabalfiisa and Others [2000] ECR 1-1577, paragraph 44; and Case C-98/98 Midland Bank [2000] ECR 1-4177, paragraph 19; and Abbey National, paragraph 24).

26However, a direct and immediate link between a particular input transaction and a particular output transaction or transactions giving rise to entitlement to deduct is necessary before the taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement (Midland Bank, paragraph 24).

27In the main case, Fini H's obligation, owing to a non-termination clause in the lease, to continue paying business rent and charges on a property which it had leased for the purpose of carrying on a restaurant business until the normal expiry of the lease could, in principle, be regarded as being directly and immediately linked to the restaurant business.

28Since Fini H entered into the lease in order to have the premises necessary for carrying on its restaurant business and given that the premises were actually used for that business, it must be conceded that the partnership's obligation to continue paying the rent and other charges after it had ceased that business was a direct consequence of the carrying on of that business.

29Accordingly, the duration of the obligation to pay the rent and the charges on those premises has no bearing on the existence of an economic activity within the meaning of Article 4(1) of the Sixth Directive, provided that that period of time is strictly necessary to complete the winding-up of the business.

30It follows that, in respect of the rent and charges on the premises previously used for carrying on the restaurant business which were paid during the period for which the restaurant was not operated, that is to say, from October 1993 to September 1998, the taxable person must be entitled to deduct the VAT in the same way as during the period from the commencement of his restaurant business to the date on which it came to an end because, for the entire term of the lease, the premises were directly and immediately linked to his economic activity.

31The right to deduct VAT on account of the winding-up of the business must therefore be recognised in so far as its application does not give rise to fraud or abuse.

32In that regard, the Court has already held that Community law cannot be relied on for abusive or fraudulent ends (see, inter alia, Case C-367/96 Kefalas and Others [1998] ECR I-2843, paragraph 20, and Case C-373/97 Diamantis [2000] ECR I-1705, paragraph 33). That would be the case, for example, if Fini H, whilst relying on the right to deduct VAT in respect of the payment of rent and charges relating to the period after the cessation of the restaurant business, continued to use the premises previously used as a restaurant as premises for purely private purposes.

33If the tax authorities were to conclude that the right to deduct has been exercised fraudulently or abusively, they would be entitled to demand, with retrospective effect, repayment of the amounts deducted (see, inter alia, Rompelman, paragraph 24; INZO, paragraph 24; and Gabalfiisa, paragraph 46).

34It is, in any event, a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent or abusive ends.

35The answer to the first question must therefore be that Article 4(1) to (3) of the Sixth Directive is to be interpreted as meaning that a person who has ceased an economic activity but who, because the lease contains a non-termination clause, continues to pay the rent and charges on the premises used for that activity is to be regarded as a taxable person within the meaning of that article and is entitled to deduct the VAT on the amounts thus paid, provided that there is a direct and immediate link between the payments made and the economic activity and that the absence of any fraudulent or abusive intent has been established.

The second question

36In light of the answer given to the first question, the second question is irrelevant and there is no need to answer it.

Costs

37Since 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 (Third Chamber) rules as follows:

Article 4(1) to (3) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, is to be interpreted as meaning that a person who has ceased an economic activity but who, because the lease contains a non-termination clause, continues to pay the rent and charges on the premises used for that activity is to be regarded as a taxable person within the meaning of that article and is entitled to deduct the VAT on the amounts thus paid, provided that there is a direct and immediate link between the payments made and the commercial activity and that the absence of any fraudulent or abusive intent has been established.

[Signatures]

OPINION OF ADVOCATE GENERAL

JACOBS delivered on 28 October 2004 1

Introduction

1This reference for a preliminary ruling from the Danish Højesteret (Supreme Court) concerns the circumstances in which a person who holds a lease for premises on which he formerly carried out an economic activity but who has now ceased that activity may or may not continue to be regarded for VAT purposes as a taxable person in respect of the continuing lease, entitled in that capacity to deduct input tax on expenditure relating to the premises.

Legislative background

2The essence of the VAT system is set out in Article 2 of the First VAT Directive: 2

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

On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods and services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.'

3Under Article 2 of the Sixth VAT Directive, 3 a supply of goods or services effected for consideration by a taxable person acting as such is subject to VAT.

4A taxable person is defined in Article 4(1) as one who carries out an economic activity, whatever its purpose or result. Economic activities are, under Article 4(2), 'all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions', together with the 'exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis'. Article 4(3) provides that 'Member States may also treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in paragraph 2'.

5The essentials of the right to deduct are set out in Article 17 of the Sixth Directive. Article 17(2) states: 'In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay (a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person ...' That entitlement arises, in accordance with Article 17(1), at the time when the deductible tax becomes chargeable.

6Issues relating to the use of taxed input goods and services 'for the purposes of' taxable output transactions, and thus to the circumstances in which a right to deduct arises or does not arise under Article 17(2) of the Sixth Directive, have been considered by the Court on a number of occasions.

7Of some relevance to the present case is 4 the case-law to the effect that whenever a person has the intention, confirmed by objective evidence, to commence an economic activity and acquires initial taxed supplies for that purpose, he must be regarded as a taxable person acting in that capacity and as having the right immediately to deduct the VAT on supplies acquired for the purposes of his intended taxable transactions, without having to wait for the actual exploitation of the business to begin and even if it does not in fact begin.

8The Court has not yet ruled specifically on the 'mirror' situation in which a taxable person has ceased an economic activity yet continues to acquire taxed supplies connected with obligations undertaken for the purpose of that activity.

9It has however held that, at least where a business making taxable transactions is transferred as a going concern, any costs incurred by the transferor for services acquired in order to effect the transfer form part of the overheads of the business prior to the transfer, so that VAT on those services is in principle deductible from his output tax. 5

10In Denmark, the relevant version of Paragraph 3 of the Momslov (VAT Law) defines a 'taxable person' as 'any legal or natural person who independently carries on an economic activity'.

11The practice of the Danish tax authorities was set out in the Momsvejledning (VAT Guidelines) 2001. The cases in which the tax authorities regard legal or natural persons as independently carrying on an economic activity are stated to be those flowing from the case-law of the Court of Justice.

Facts, procedure and submissions

12I/S Fini H ('Fini H') is a partnership set up in order to operate a restaurant, which it did on leased premises. The 10-year lease was to run until July 1998 with no possibility of termination on either side and could thereafter be terminated on notice by either party. The restaurant closed in July 1993, after which the premises remained unused.

13It appears that Fini H sought to terminate the lease despite its terms but the landlord would not consent, and that the only other tenants who could be found were unwilling either to pay the same rent or to agree to Fini H's terms for taking over the fixtures. The landlord would have accepted another tenant, provided that Fini H paid the difference between the two rents. Fini H was unwilling to do this and in fact continued as tenant until the lease expired.

14After the restaurant business ceased, the two partners each pursued their separate business interests but the partnership as such remained registered for VAT and submitted returns setting out deductions of input tax on rent, heating, electricity and the standing telephone charge, all of which continued to be paid in respect of the premises. Since there were no sales and thus no output tax to account for, this resulted in net payments to Fini H.

15In September 1998, however, the regional tax authority decided that the amounts which it had paid out since October 1993 should be recovered and that no payment would be made in respect of the period from April to September 1998. The decision was taken on the ground that Fini H had not carried on any activity involving the taxable supply of goods and services within the meaning of the Momslov — a condition for deduction of input tax — since the third quarter of 1993. In November 1999, the national tax authority confirmed that decision but in February 2000 Fini H brought a challenge before the Vestre Landsret (Western Regional Court).

16In August 2001 that court upheld the decision, considering that expenditure on rent after the business had been wound up, not attributable to normal winding-up operations but based solely on a non-termination clause, could not be regarded as operational expenditure connected with an independent activity for the purposes of Paragraph 3 of the Momslov and that Fini H could not be regarded as having acted in good faith in remaining registered for VAT purposes.

17That judgment has now been appealed to the Højesteret, which seeks a preliminary ruling on the following questions:

'1. Can a person be regarded as independently carrying on an economic activity within the meaning of Article 4(1) to (3) of the Sixth VAT Directive in a situation in which the person concerned originally entered into a lease agreement as part of an independent economic activity but has now ceased that actual activity, even though the lease continues to exist for a particular period as a result of a non-termination clause, and in which, after the actual activity ceases, no transactions subject to VAT are conducted by application of the lease for the purpose of obtaining income therefrom on a continuing basis?

2. Does the question whether or not the person concerned actively seeks, during the remaining part of the period of non-terminability, either to utilise the commercial lease to conduct transactions subject to VAT for the purpose of obtaining income therefrom on a continuing basis or to dispose thereof have any bearing on the answer to Question 1 and does the length of the period of non-terminability or the remaining part thereof likewise have any bearing?'

18Written observations have been submitted by Fini H, the Danish Government and the Commission, all of whom presented oral argument at the hearing on 15 September 2004. Fini H considers that it is entitled to deduct, while the Danish Government and the Commission consider that it is not.

19Fini H argues essentially that it derives a right to deduct from the fact that the lease was entered into for the purposes of the commencement or operation of an economic activity. It cites the judgments in Rompelman, INZO Breitsohl, 7 and p lacing particular reliance on the Court's references to the principles of fiscal neutrality and legal certainty. If it were not entitled to deduct, it would be burdened with input VAT on supplies acquired for the purposes of a business making taxable output supplies, and obligations which it had undertaken in the course of business would change their nature as a result of a later change in circumstances. At the hearing, Fini H stressed that the length of the non-termination period was usual practice in the commercial context.

20The Danish Government draws attention to the phrase 'for the purpose of obtaining income therefrom on a continuing basis' in Article 4(2) of the Sixth Directive. When a taxable person no longer exploits property for such a purpose, the right to deduct ceases at the same time as the economic activity or within a reasonably brief period thereafter; he cannot enjoy an indefinite right on the basis that he formerly carried on such an activity. On cessation of that activity, the taxable person must dispose of the property or otherwise use it for the purpose of obtaining income. In the present case no effort was made to use the premises or the lease for that purpose. The continuing expenditure was not related to the commencement, operation or cessation of the business. To allow a right to deduct in those circumstances would run counter to the principle of fiscal neutrality, since no VAT is passed on to any final consumer. To refuse the right is however consistent with legal certainty in that it is based on objective, ascertainable criteria. The case-law cited by Fini H concerns a different situation and is not transposable. Other judgments 8h owever make it clear that the mere possession of a lease cannot constitute an economic activity.

21The Commission notes first that the Rompelman Breit-Court's case-law, from to sohl, 9a cknowledges that tax authorities may require objective evidence in support of a person's declared intention to pursue an economic activity which will give rise to taxable transactions, and in the absence of such evidence may refuse the right to deduct. Second, certain transactions relating for example to closing down a business will continue to be 'for the purposes of' taxed outputs even after the cessation of economic activity. In the present case, it is for the national court to assess whether the transactions showed an intention to pursue the activity or are directly and necessarily linked to the closing down of the business. The

Polysar Investments mere continuation of a contractual obligation in the form of a lease cannot however demonstrate an intention to pursue an economic activity. If Fini H in fact sought to exploit the lease for the purpose of obtaining income — again a matter to be determined by the national court — the supplies acquired might be attributable to that new or future economic activity, but not to the previous restaurant business.

Assessment

General considerations

22In the normal course of a business acquiring input supplies and making output supplies both subject to VAT, the taxable person seeks to make a regular profit, so that the value of the output tax will regularly be greater than that of the input tax. He will therefore periodically pay to the tax authorities the difference between the two, that is to say the amount of the output tax which he has received from his customers after deduction of the input tax charged on the supplies which he uses for the purpose of his output transactions.

23That is however a simplified scenario, from which detailed operation may differ in practice.

24First, although input tax may be deducted only if the supplies bearing it are used for the purposes of taxable output supplies, and although the metaphor of a chain of transactions is often used in that context, deduction is not dependent on completion of a chronological sequence of specifically related input and output transactions.

25Thus input tax is deductible as soon as it becomes chargeable; it is not necessary to wait until an output transaction making use of the input supply has been made. 1 What matters is whether that input is a cost component of a taxable output transaction and thus whether it has a direct and immediate link with such a transaction.

26Secondly, although they cannot be attributed to specific outputs, the general running costs of a business making taxable supplies are in principle to be regarded as such cost components inasmuch as they have a direct and immediate link to the business as a whole.

27Thirdly, not only is input VAT deductible, both on specific supplies and on general running costs, before any taxable output transactions are made — for example, when a business is starting up — but the right to deduct is not lost even if the economic activity envisaged does not give rise to taxed transactions or the taxable person has been unable to use the goods or services acquired by reason of circumstances beyond his control. There is however in such cases a proviso that there must have been a genuine intention — borne out by objective evidence, which tax authorities are fully entitled to require — to make such transactions and that the costs were incurred to that end. 1

28Fourthly, the right to deduct may remain even where the taxable person no longer effects output transactions after acquiring the input supplies, as for example in the case of expenditure incurred in order to terminate the operation of the business.

29The Court has held that to be the case in principle with regard to expenditure incurred in order to transfer all or part of the assets of a business to another taxable person. Even though that ruling was given in the specific context of Article 5(8) of the Sixth Directive, under which it is possible to deem that no supply has taken place in those circumstances, the same interpretation must apply when the taxable person ceases to operate the business in other circumstances also. As the Court stated in Abbey National:

Any other interpretation of Article 17 of the Sixth Directive would be contrary to the principle that the VAT system must be completely neutral as regards the tax burden on all the economic activities of a business provided that they are themselves subject to VAT, and would make the economic operator liable to pay VAT in the context of his economic activity without giving him the possibility of deducting it (see, to that effect, Gabalfiisa, paragraph 45). An arbitrary distinction would thus be drawn between expenditure incurred for the purposes of a business before it is actually operated and that incurred during its operation, on the one hand, and, on the other hand, the expenditure incurred in order to terminate its operation.'

30Finally, in some circumstances the amount of input VAT may exceed the amount of output tax, resulting in a payment by the tax authorities to the taxable person. Such an outcome is possible if a business fails to make a profit or even simply fails to make any taxed output transactions. That, in turn, is likely during tax periods when a business is commencing or being wound up and output transactions are not yet, or no longer, made.

31Such a situation is not in itself in any way inconsistent with the Community VAT regime, even though it entails a net payment to the taxable person in respect of part or all of the period of that person's economic activity — which remains an economic activity whatever its results.

32VAT is designed as a general tax on 18 (final, private) consumption, not as a burden on businesses which operate at the stages leading up to that consumption. The Court has consistently stressed that the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. Situations in which a taxable person may recover input VAT without actually making any taxable output supplies simply involve the restitution of amounts previously advanced to the tax authorities in the expectation that the transactions on which they were levied would lead to an ultimate taxable supply for final consumption. If that expectation is not fulfilled and no such final consumption takes place, there is no basis for levying the tax at earlier stages. Consequently, the amounts advanced fall to be refunded to the taxable person who currently bears the burden.

The present case

33Although the national court's questions are framed in terms of what may constitute an economic activity within the meaning of Article 4 of the Sixth Directive, the issue is whether Fini H is entitled to deduct its input tax in the factual circumstances described.

34That entitlement is dependent not only on Fini H's status as a taxable person (one carrying out such an economic activity) but also on the existence of a direct and immediate link between the input supplies in question and the actual or intended output transactions of the activity in question, as required by Article 17 of the Directive and the case-law cited in notes 1213.

35Fini H ceased operating its restaurant on the premises in question in July 1993, but continued to pay rent in pursuance of the obligation which it had contracted in order to carry on that business.

36When a taxable person terminates an economic activity, it seems clear that his status as such cannot come to an end immediately on making the final output transaction. There will inevitably be subsequent costs — including such as may arise out of obligations which cannot be terminated forthwith — to be counted against the final and overall profits of the business. VAT on those costs must be deductible since they will affect the overall value added during the course of the operation of the business as a whole, which in turn determines the overall amount of VAT to be accounted for.

37It follows moreover from Abbey 20 National that VAT on costs incurred in relation to closing down the business must remain deductible even though no further taxable outputs were made. Such costs form part of the general overheads of the complete restaurant business from inception to termination and thus have a direct and immediate link with the output transactions of that business.

38Costs incurred in disposing of the lease of the business premises must fall within that category, in the same way as those involved in disposing of the restaurant's other assets. And since a business which is closing down cannot reasonably be expected to dispose of its assets overnight, necessary interim costs such as rent pending final disposal must also be included.

39In principle, therefore, the national court's first question must be answered in the affirmative: in the circumstances stated the taxable person may be regarded as continuing to act as such, in other words as continuing to carry on an economic activity for the purposes of Article 4 of the Directive. Duration of the lease

40However, the difficulty in the present case, to which the national court refers in its second question, stems from the unusual length of time — some five years — during which the lease was kept on after the business closed, without being in any way disposed of or used for any other economic activity.

41The reason for that length of time appears to be twofold: on the one hand the lease could not be terminated without the landlord's consent, which was not given; on the other hand such opportunities as arose for finding another tenant were all on terms which were not accepted by Fini H.

42As regards the first point, it appears from the order for reference that Fini H had no legal entitlement to terminate the lease before 1998. The lease was entered into for the purposes of the restaurant business, an economic activity making taxable output transactions. To the extent that Fini H could not escape paying the rent after the closure of the business (and the premises were not used for any other purpose) then that rent must be regarded as forming part of the overheads of the business as a whole. The VAT charged on it must therefore be deductible.

43However, it also appears that payment of the full rent was not inescapable, since at least some of the cost could have been saved by accepting another tenant, albeit on terms not wholly satisfactory to Fini H. Can the latter's refusal to accept those terms affect its entitlement to deduct?

44As a rule, a person carrying on an economic activity will seek to do so — whether in starting up, in operating, or in closing down the enterprise — in as profitable a manner as possible. Indeed, the assumption that this is so underlies the whole system of value added tax.

45It is moreover an entirely reasonable assumption in the normal course of business, and one which tends to belie the Danish Government's fears that a trader might somehow contrive to obtain 98 years' refunds of input VAT on a 99-year lease used for just one year for the purposes of an active business. In the absence of fraud, the amount of input tax deducted can never exceed actual expenditure on inputs.

46Sometimes however one or more parts of the operation will not be profitable.

47In its judgments from Rompelman to Breitsohl, the Court has recognised that such circumstances do not in principle affect the right to deduct input tax when the initial phase of a business comes to naught for reasons beyond the economic operator's control. The same must be true when the final phase or even the whole enterprise is loss-making in that the value of taxed inputs exceeds that of taxable outputs.

48In my view, it should make no difference if the reasons for that situation are not — or not entirely — beyond the taxable person's control, provided that there is no fraud, abuse or other extraneous use of the inputs in question.

49The application of value added tax is an objective matter. Tax is levied on the value actually added, even if greater value could have been added by a more astute operator, generating greater tax revenue. Nor can the result be affected if a taxable person failed to minimise his losses, and thus the amount of input tax to be refunded by the tax authority, either during a particular tax period or over the whole operation of his business. The desired level of profit depends on many considerations, and a taxable person cannot be required to run his business with a view to maximising VAT revenue or be penalised for failing to do so.

50It should moreover be borne in mind that, unless there is some intention to abuse the tax system, taxable persons will generally seek to keep their own losses to a minimum, so that 'shortfalls' in VAT revenue in circumstances such as those of the present case are likely in practice to be rather rare.

51The view which I advocate is however based on the assumption that the input supplies in issue do not lose their direct and immediate link with the taxable output transactions of the business as a whole, from its inception to its demise.

52That link might be lost in a number of ways, whenever the input supplies — in this case the leased premises and related services — are used for a purpose separate from those of the business. That would be the case if they were used for private purposes (which would constitute final consumption and would not give rise to any right to deduct) or for the purposes of some other business (in which case the right to deduct would be determined by the circumstances of that business; see paragraphs 54 to 57 below). It would also of course be the case if there were any fraud or abuse, in relation either to the VAT system itself or to any other system.

53In that regard, it would seem reasonable to consider, by analogy with the case-law on costs incurred in the course of setting up a business, that the tax authority may require objective evidence that the input supplies were not employed for any purpose separate from those of the original business.

Possible intention to commence a new economic activity

54A final aspect of the national court's second question is whether it would be relevant if Fini H intended to use the premises for some other business subject to VAT.

55Any such situation would be covered by the Court's existing case-law from Rompelman to Breitsohl. If, during the disputed period, Fini H genuinely intended to use the premises in order to derive income through transactions subject to VAT, which might include subletting, then the input tax is in principle deductible, even if no such income was ultimately forthcoming.

56However, it is clear from the case-law that the tax authority may require objective evidence that Fini H intended in good faith to use the leased premises for that purpose. In the absence of such evidence, it may refuse to allow deduction. That in turn presupposes that the intention must be definite and reasonably specific. Mere willingness to use premises in that way as and when the opportunity might arise would not in my view be sufficient.

57Where such an approach is relevant, the assessment would be one of fact for the national court to carry out. Since however in the present case Fini H itself does not appear to rely on such an approach, the determination is likely to turn solely on the factors I have outlined above in relation to the link between the closed restaurant business and the continuing lease.

Conclusion

Conclusion

58I am therefore of the opinion that the Court should give the following answer to the questions raised by the Højesteret:

(1) Articles 4 and 17 of the Sixth VAT Directive 77/388/EC are to be interpreted as meaning that where for the purposes of his taxable output transactions a taxable person enters into an obligation — such as a lease of business premises — to acquire taxable supplies of goods or services, but ceases to make taxable output transactions before the expiry of the obligation, continuing none the less to acquire the goods or services in question in pursuance of that obligation, he is in principle to be considered in that regard as retaining the status of taxable person acting as such and thus entitled to deduct the VAT on those goods or services for the duration of the initial obligation, provided that:

— the direct and immediate link between the supplies and the transactions for the purposes of which the original obligation to acquire them was entered into is not lost by their use for private purposes or for the purposes of a different economic activity; and

— the continued existence of that direct and immediate link can be established by objective evidence, if the tax authority so requires.

(2) The length of the period which elapses until the expiry of the obligation is in principle not relevant in that regard. The fact that the person concerned may actively seek to utilise the goods or services acquired for a purpose other than the original taxable output transactions is relevant only in so far as it may break the direct and immediate link with those transactions.

Notes

(1) Original language: English.

(2) First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes. Ol. English Special Edition 1967, p. 14.

(3) Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, O] 1977 L 145, p. 1 ('the Sixth Directive').

(4) Case 268/83 Rompelman [1985] ECR 655; Case C-l 10/94 INZO [1996] ECR 1-857; Case C-37/95 Ghent Coal Terminal [1998] ECR 1-1; Joined Cases C-110/98 to C-147/98 Gabalfiisa [2000] ECR I-1577; Case C-396/98 Schloßstraße [2000] ECR I-4279; Case C-400/98 Breitsohl [2000] ECR I-

(432) 1.

(5) See Case C-408/98 Abbey Nailonai [2001] ECR I-1361, especially at paragraph 35 et seq. of the judgment; Case C-137/02 Faxworld. judgment of 29 April 2004, ECR 1-5547, paragraph 39.

(6) In Consolidating Regulation No 804 of 16 August 2000.

(7) Cited in note 4.

(8) Case C-60/90 [1991| ECR I-3111; Hamas & Helm C-80/95 [1997] ECR I-745; C-102/00 Welthgrove Į2001] ECR 1-5679.

(9) Cited in note 4. The Commission cites in particular Breitsohl, paragraph 39 of the judgment.

(10) The situation is more complex where some transactions are taxable and others are exempt, giving rise to deduction pro rata. In the present case, however, there is no suggestion that Fini H was engaged in anything other than a business fully subject to VAT.

(11) Article 17(2) of the Sixth Directive.

(12) See for example Case C-4/94 BLP Group [1995] ECR I-983, at paragraph 19 of the judgment; Case C-98/98 Midland Bank [2000] ECR I-4177, at paragraph 20 et seq.

(13) Sec for example Case C-16/00 CIBO Participations |2001] ECR 1-6663, at paragraph 35 of the judgment.

(14) See for example the cases cited in footnote 412. paragraph 22 of the judgment.

(15) See Abbey Xational and Faxworld, both cited in footnote 5.

(16) At paragraph 35 of the judgment.

(17) Article 4(1) of the Sixth VAT Directive.

(18) Article 2 of the First VAT Directive, cited in paragraph 2.

(19) See for example Ghent Coal Terminal, cited in footnote 4, at paragraph 15 of the judgment.

(20) See paragraphs 28 and 29 above.

(21) Compare BLP Group, cited in footnote 12. at paragraph 26 of the judgment.

(22) See for example Gabalfrisa, cited in footnote 4, paragraph 46 of the judgment.