C-321/02 Harbs

JUDGMENT

In Case C-321/02, OF THE COURT (First Chamber)

15 July 2004 * REFERENCE to the Court under Article 234 EC by the Bundesfinanzhof (Germany) for a preliminary ruling in the

Finanzamt Rendsburg

Detlev Harbs,

on the interpretation of Article 1977 on the harmonisation of proceedings pending before that court between

and

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

* Language of the case: German.

THE COURT (First Chamber),

composed of: P. Jann, President of the Chamber, A. Rosas, S. von Bahr (Rapporteur), R. Silva de Lapuerta and K. Lenaerts, Judges,

Advocate General: P. Léger, Registrar: R. Grass,

after considering the written observations submitted on behalf of:

— Mr Harbs, represented by G. Flock and U. Fischer, Rechtsanwälte,

— the German Government, represented by W.-D. Plessing and M. Lumma, acting as Agents,

— the Commission of the European Communities, represented by E. Traversa and K. Gross, acting as Agents, assisted by A. Böhlke, Rechtsanwalt, having regard to the Report for the Hearing,

after hearing the oral observations of Mr Harbs and the Commission at the hearing on 12 February 2004,

after hearing the Opinion of the Advocate General at the sitting on 11 March 2004,

gives the following

Judgment

Legal context and the dispute

1By order of 4 July 2002, received at the Court on 13 September 2002, the Bundesfinanzhof (Federal Finance Court) referred to the Court for a preliminary ruling under Article 234 EC a question on the interpretation of Article 25 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, 'the Sixth Directive').

2That question was raised in proceedings between Mr Harbs and the Finanzamt Rendsburg (Germany) (Rendsburg Tax Office, 'the Finanzamt') concerning the application of the common flat-rate scheme for farmers provided for in Article 25 of the Sixth Directive to income from the leasing by Mr Harbs of certain assets of his farm.

Legal background

Community law

3Article 13B(b) of the Sixth Directive provides:

'Without prejudice to other Community provisions, Member States shall exempt the following ... :

(b) the leasing or letting of immovable property ...'.

4Article 25 of the Sixth Directive, which is entitled 'Common flat-rate scheme for farmers', provides:

'1. Where the application to farmers of the normal value added tax scheme, or the simplified scheme provided for in Article 24, would give rise to difficulties, Member States may apply to farmers a flat-rate scheme tending to offset the value added tax charged on purchases of goods and services made by the flat-rate farmers pursuant to this Article.

2. For the purposes of this Article, the following definitions shall apply:

— "farmer": a taxable person who carries on his activity in one of the undertakings defined below,

— "agricultural, forestry or fisheries undertakings": an undertaking considered to be such by each Member State within the framework of the production activities listed in Annex A,

— "flat-rate farmer": a farmer subject to the flat-rate scheme provided for in paragraphs 3 et seq.,

— "agricultural products": goods produced by an agricultural, forestry or fisheries undertaking in each Member State as a result of the activities listed in Annex A,

— "agricultural service": any service as set out in Annex B supplied by a farmer using his labour force and/or by means of the equipment normally available on the agricultural, forestry or fisheries undertaking operated by him,

— "value added tax charge on inputs": the amount of the total value added tax attaching to the goods and services purchased by all agricultural, forestry and fisheries undertakings of each Member State subject to the flat-rate scheme where such tax would be deductible under Article 17 by a farmer subject to the normal value added tax scheme, — "flat-rate compensation percentages": the percentages fixed by Member States in accordance with paragraph 3 and applied by them in the cases specified in paragraph 5 to enable flat-rate farmers to offset at a fixed rate the value added tax charge on inputs,

— "flat-rate compensation": the amount arrived at by applying the flat-rate compensation percentage provided for in paragraph 3 to the turnover of the flat-rate farmer in the cases referred to in paragraph 5.

3. Member States shall fix the flat-rate compensation percentages, where necessary, and shall notify the Commission before applying them. Such percentages shall be based on macro-economic statistics for flat-rate farmers alone for the preceding three years. They may not be used to obtain for flat-rate farmers refunds greater than the value added tax charges on inputs. Member States shall have the option of reducing such percentages to a nil rate. The percentage may be rounded up or down to the nearest half point.

Member States may fix varying flat-rate compensation percentages for forestry, for the different sub-divisions of agriculture and for fisheries.

5 The flat-rate percentages provided for in paragraph 3 shall be applied to the price, exclusive of tax, of the agricultural products and agricultural services supplied by the flat-rate farmers to taxable persons other than a flat-rate farmer. This compensation shall exclude all other forms of deduction.

6 Member States may provide for the flat-rate compensation to be paid:

(a) either by the taxable person to whom the goods or services are supplied. In this case, the taxable person to whom the goods or services are supplied shall be authorised, following the procedure laid down by the Member States, to deduct from the value added tax for which he is liable, the amount of the flat-rate compensation he has paid to the flat-rate farmers;

(b) or by the public authorities.

8 As regards all supplies of agricultural products and agricultural services other than those covered by paragraph 5, the flat-rate compensation is deemed to be paid by the purchaser or customer.

10 Every flat-rate farmer may opt, subject to the rules and conditions to be laid down by each Member State, for application of the normal or, as the case may be, the simplified scheme provided for

5Annex A to the Sixth Directive provides:

'List of agricultural production activities:

I. Crop production

1. General agriculture, including viticulture;

II. Stock farming together with cultivation

1. General stock farming;

value added tax scheme in Article 24(1).

III. Forestry

IV. Fisheries

V. Where a farmer processes, using means normally employed in an agricultural, forestry or fisheries undertaking, products deriving essentially from his agricultural production, such processing shall also be regarded as agricultural production.'

6Annex B to the Sixth Directive is worded as follows:

'List of agricultural services:

Supplies of agricultural services which normally play a part in agricultural production shall be considered the supply of agricultural services, and include the following in particular:

— field work, reaping and mowing, threshing, baling, collecting, harvesting, sowing and planting — packing and preparation for market, for example drying, cleaning, grinding, disinfecting and ensilage of agricultural products

— storage of agricultural products

— stock minding, rearing and fattening

— hiring out, for agricultural purposes, of equipment normally used in agricultural, forestry or fisheries undertakings

— technical assistance

— destruction of weeds and pests, dusting and spraying of crops and land

— operation of irrigation and drainage equipment

— lopping, tree felling and other forestry services.'

National law

7Under German law, the flat-rate compensation scheme provided for in Article 25 of the Sixth Directive is implemented by Paragraph 24 of the Umsatzsteuergesetz 1991 (Law on turnover tax, 'the UStG') in the version in force at the time of the facts at issue in the main case.

The main proceedings and the question referred for a preliminary ruling

8In 1992, Mr Harbs was the owner of a farm comprising, in addition to land of 92 hectares and farm buildings, livestock of approximately 60 fattening bulls, 65 dairy cows and 120 other cattle. He received a milk reference quantity (milk quota) of 321 367 kg.

9By virtue of two agreements of 12 November 1992, Mr Harbs leased part of his farm to his son, for consideration, from 15 November 1992 to 30 June 2005. First, by way of a 'farm lease', he leased to his son land of approximately 31 hectares, the 65 milk cows and his milk quota. Secondly, by way of an 'agreement for the use of animal sheds', he let to his son a cowshed containing 75 spaces. Mr Harbs continued to farm the rest of his agricultural land.

10Mr Harbs took the view that the consideration agreed under the farm lease was taxable at the average rates provided for in Article 24 of the UStG and that, under that paragraph, the tax on the turnover from a farming business is offset by input tax of a corresponding amount, with the result that there is no tax to be levied. He therefore did not declare any taxable turnover for the 1992 financial year in the tax statement of 20 January 1995 which he had been asked to submit.

11The Finanzamt considered that, whilst the lease of the land and the building was exempt from tax under German law, the turnover achieved by Mr Harbs in 1992 from the leasing of the milk quota and the dairy cows did not arise from farming within the meaning of Article 24 of the UStG and, accordingly, had to be taxed under the general provisions of the UStG. It therefore charged turnover tax on the net amount of the consideration paid for that lease and, on 10 July 1996, it issued a tax notice for DEM 361.

12His objection having been dismissed, Mr Harbs brought an action before the Finanzgericht Schleswig-Holstein (Schleswig-Holstein Finance Court) (Germany), which held the action to be well founded. The Finanzamt appealed on a point of law ('Revision') to the Bundesfinanzhof.

13Taking the view that, in order to reach a decision in the main case, it is necessary to interpret Article 25 of the Sixth Directive, the Bundesfinanzhof decided to stay the proceedings and to refer the following question to the Court for a preliminary ruling:

'Where the owner of a farm:

— gives up part of his farm (the entire dairy cow operation) and leases the assets necessary for that operation to another farmer;

— and continues to farm on a not insignificant scale after granting the lease,

may he treat the turnover from the lease — like the rest of his turnover — under the flat-rate scheme for farmers (Article 25 of Directive 77/388/EEC), or is the turnover from the lease taxable under the general rules?'

The question referred for a preliminary ruling

14By its question, the national court is asking, essentially, whether Article 25 of the Sixth Directive is to be interpreted as meaning that a farmer who has leased and/or let part of his farm but continues his farming activity on the rest of his farm and who, in respect of the continued farming activity, is subject to the common flat-rate scheme provided for in Article 25 may treat the income from the leasing arrangement as being taxable under that scheme or whether that income must be taxed under the general scheme of value added tax ('VAT').

Observations submitted to the Court

15According to Mr Harbs, Paragraph 24(1) of the UStG does not provide that turnover from the letting or leasing of certain assets is subject to the general taxation scheme. Nor, under that paragraph, must a farmer who lets or leases specific items of his farm property apply the flat-rate compensation percentage when he supplies that service to another flat-rate farmer since the compensation for the input VAT paid is deemed to be included in the total price of the services.

16Mr Harbs submits that the Bundesfinanzhof has itself held in its case-law that only in the event that the farmer leases his entire farm does he cease to run an agricultural undertaking for the purposes of Article 24 of the UStG.

17Moreover, he claims that he is indisputably a farmer within the meaning of Article 25 of the Sixth Directive because he continues to exercise the activities referred to in Annex A to that directive and his status as such cannot be affected by the letting or leasing of certain items of farm property. In addition the flat-rate scheme provided for in Article 25 of the Sixth Directive is applicable to the price of 'agricultural services', which, under the fifth indent of Annex B, comprise those which, as in the main case, play a part in agricultural production, including the 'hiring out, for agricultural purposes, of equipment normally used in agricultural ... undertakings'. Article 25 of and Annex B to the Sixth Directive do not require that the farmer himself also and simultaneously use in his agricultural undertaking the assets transferred 'for use'. Finally, under Article 6(1) of the Sixth Directive, the lease is a supply of services.

18According to the German Government, the income from the lease is not taxable under the common flat-rate scheme for farmers provided for in Article 25 of the Sixth Directive. It is subject to the general turnover-tax scheme.

19The 'hiring out, for agricultural purposes, of equipment normally used in agricultural, forestry or fisheries undertakings' referred to in the fifth indent of Annex B to the Sixth Directive does not cover the leasing of part of a farm. Unlike a single service consisting of the hiring out of the mere use of specific assets, such a leasing arrangement comprises a package of complex services for the benefit of a lessee to whom not only that use but also the usufruct is transferred.

20Moreover, the Sixth Directive distinguishes very clearly between the two legal categories of letting and leasing, as is apparent from a comparison of the provisions of Annex B and Article 13B(b). In addition, since leasing is by no means unusual in agriculture, the Community legislature would not have omitted to include it in Annex B if it had intended that it should be covered by the flat-rate scheme.

21The fact that Annex B contains only examples of agricultural services and is therefore not exhaustive does not mean that leasing can be brought within that annex. Such an inclusion, in so far as it relates to the leasing of land, would render incoherent the system established by the Sixth Directive, which, under Article 13B (b), exempts the letting and leasing of immoveable property. Moreover, in the same way as any scheme permitting exceptions, the scheme under Article 25 of the Sixth Directive must be applied according to a strict interpretation of that article and of Annex B. Finally, to include leasing in the flat-rate scheme under Article 25 would risk giving rise to 'overcompensation' contrary to the provisions of the Sixth Directive, which place the Member States under an obligation to fix such flat-rate compensation percentages as cannot be used to obtain for flat-rate farmers refunds greater than the VAT charges.

22In the German Governments view, the origin of Article 25 of the Sixth Directive confirms that the letting of part of a farm does not fall within the scope of the flat-rate scheme for which it provides. First, the Commission's Sixth Directive proposal of 29 June 1973 referred, in the fifth indent of Annex B, solely to the 'hiring out of agricultural machinery'. It therefore did not include the letting of land, as is also revealed by the subsequent debates and, in particular, the proposals for amendments then made by the German Government itself. Moreover, the obligation to interpret Article 25 of the Sixth Directive strictly is the consequence of the undertaking entered into by the Member States, which agreed at the time to increase efforts to apply the normal VAT scheme progressively to certain categories of farmer.

23The Commission takes the view that, given its status as a special scheme, the flat-rate scheme for farmers must be interpreted strictly (see, in respect of the special scheme provided for in Article 26 of the Sixth Directive, Joined Cases C-308/96 and C-94/97 Madgett and Baldwin [1998] ECR I-6229).

24The Commission submits that, although the scheme is based on a formal criterion in so far as it applies to 'farmers', it also serves a function which is to link, pursuant to Article 25(5) of the Sixth Directive, the flat-rate compensation to 'agricultural products' or 'agricultural services'. It points out that, unlike Article 13B(b) of that directive, which refers to both letting and leasing, the list of 'agricultural services' in Annex B to that directive, to which Article 25 refers, does not mention leasing.

25According to the Commission, whilst Annex B refers, in the list of agricultural services, to 'hiring out, for agricultural purposes, of equipment normally used in agricultural ... undertakings', it does not cover the letting of the farm itself or of an independent part of the farm. The 'equipment' referred to is that which is to be used only for agricultural purposes, in so far as it makes such activity possible or facilitates it, such as agricultural machinery, which, moreover, was the only equipment to have been mentioned in the drafts of the Sixth Directive. Annex A. V to that directive refers to that same idea. The other language versions of Annex B are likewise to be understood to that effect.

26The Commission also points out that, under the fifth indent of Article 25(2) of the Sixth Directive, the agricultural services referred to are those supplied by a farmer 'using his labour force and/or by means of the equipment normally available on the agricultural, forestry or fisheries undertaking operated by him'. That requirement is not satisfied in circumstances, such as those of the main case, in which a farmer ceases to keep a dairy herd and leases it on a long-term basis since the leased assets are no longer used for the lessor's farming activity.

Reply of the Court

27First of all, it should be observed that Article 25(1) of the Sixth Directive confers on the Member States the right to apply a common flat-rate scheme to farmers where the application to them of the normal VAT scheme, or the simplified scheme provided for in Article 24 of that directive, would give rise to difficulties. That special scheme, which is applicable to certain farmers, is therefore an exception to the general scheme provided for in the Sixth Directive. That it is an exception is, as the Advocate General stated in point 31 of his Opinion, confirmed by the fact that, under Article 25(9) and (10), the Member States may exclude from that scheme certain categories of farmer and that any flat-rate farmer is entitled to opt for application of the normal scheme or the simplified scheme. Like the other special schemes provided for in Articles 24 and 26 of the Sixth Directive, the scheme under Article 25 must therefore be applied only to the extent necessary to achieve its objective (see, in respect of the application of the scheme provided for in Article 26 of the Sixth Directive, Madgett and Baldwin, cited above, paragraph 34). Moreover, it is settled case-law that any exception to a general rule is to be interpreted strictly (Case C-83/99 Commission v Spain [2001] ECR I-445, paragraph 19).

28It should also be observed that, in determining the scope of a provision of Community law, its wording, context and objectives must all be taken into account (Case C-162/91 Tenuta il Bosco [1992] ECR I-5279, paragraph 11, and Case C-315/00 Maierhofer [2003] ECR I-563, paragraph 27). Moreover, the need for uniform application of Community law and the principle of equality require that the terms of a provision of Community law which makes no express reference to the law of the Member States for the purpose of determining its meaning and scope must normally be given an autonomous and uniform interpretation throughout the Community; that interpretation must take into account the context of the provision and the purpose of the legislation in question (see, inter alia, Case 327/82 Ekro [1984] ECR 107, paragraph 11; Case C-287/98 Linster [2000] ECR I-6917, paragraph 43; Case C-357/98 Yiadom [2000] ECR I-9265, paragraph 26; Case C-373/00 Adolf Truley [2003] ECR I-1931, paragraph 35; and Case C-497/01 Zita Modes [2003] ECR I-14393, paragraph 34).

29According to Article 25 of the Sixth Directive, the common flat-rate scheme aims to offset the tax charged on purchases of goods and services made by farmers by way of a flat-rate compensation payment to farmers who carry on their activity in an agricultural, forestry or fisheries undertaking when they supply agricultural products or provide agricultural services. That compensation is calculated by applying a percentage, which has been fixed by the Member States, to the price, excluding tax, of the goods or services supplied by the flat-rate farmer to a taxable purchaser of goods or recipient of services other than a flat-rate farmer. It is paid either by the public authorities or by the taxable purchaser or recipient and excludes any other form of deduction of input VAT.

30In order to ensure that the scheme is applied uniformly throughout the entire Community, the Community legislature, subject to an explicit reference to the law of the Member States for the purpose of determining the undertakings concerned, made a point of defining, inter alia, 'farmer', 'agricultural products' and 'agricultural services'.

31The Community legislature thus did not intend to make application of the scheme dependent on satisfaction of a sole criterion, namely the formal status of farmer, but reserved such application to farmers whose situation is covered by all the provisions of Article 25 of the Sixth Directive. Accordingly, the mere fact that a person is a farmer does not mean that he is entitled to have solely that scheme applied to him, irrespective of the nature of the economic transactions effected by him.

32Under Article 25(2) of the Sixth Directive, the services set out in Annex B that are supplied by a farmer using his labour force and/or by means of the equipment normally available on the agricultural, forestry or fisheries undertaking operated by him are to be treated as agricultural services within the meaning of that article. According to Annex B, services which normally play a part in agricultural production, in particular the 'hiring out, for agricultural purposes, of equipment normally used in agricultural ... undertakings', are to be treated as agricultural services.

33Therefore, no express reference is made to leasing in either Article 25(2) of or Annex B to the Sixth Directive. By contrast, in Article 13B(b), the Community legislature expressly provided that that article is to apply in the case of leasing and also that of letting.

34Moreover, it is apparent from the fifth indent of Article 25(2) of and Annex B to the Sixth Directive — which, since each refers expressly to the other, must be read in conjunction — that letting can be included in the services referred to in the fifth indent of Article 25(2) only if it concerns equipment that the farmer normally uses in farming his own agricultural land. It follows that, in particular, the letting, leasing or creation of a usufructuary right by which a farmer transfers exclusive enjoyment of immovable property, such as land or buildings, to another farmer, with the result that the latter may enjoy the fruits of that property, does not fall within the scope of the fifth indent of Article 25(2) of the Sixth Directive because the transferring farmer can then no longer regularly use the assets concerned. For the same reason, this must also apply in the case of the long-term letting of other objects of the farm to which the lessee has exclusive rights of enjoyment.

35Thus, where, in circumstances such as those at issue in the main case, a farmer lets for more than 12 years material assets of his farming business, such as land, a building, cows and the milk quota, and thereby parts with equipment which until then he has used regularly in his dairy business, he cannot be regarded as having supplied a service for the purposes of Article 25(2) of the Sixth Directive.

36Therefore, such letting does not fall within the scope of the common flat-rate scheme for farmers. The turnover from that activity cannot, therefore, be taxed under the special scheme provided for in Article 25 of the Sixth Directive, even if the farmer concerned continues to rear stock on the rest of his land, and, consequently, it falls within the scope of the normal VAT scheme or, where appropriate, the simplified scheme. Moreover, pursuant to Article 25(10) of the Sixth Directive, the farmer concerned may opt for the normal scheme or, where appropriate, the simplified scheme in respect of all of his activities.

37In light of the above, the answer to the question referred for a preliminary ruling must be that Article 25 of the Sixth Directive is to be interpreted as meaning that a farmer who has leased and/or let on a long-term basis some of the material assets of his farming business but continues to farm with the rest of his assets and who, in respect of the continued farming activity, is subject to the common flat-rate scheme provided for in Article 25 may not treat the income from such a lease and/or letting as being taxable under that scheme. The turnover from that arrangement must be taxed under the normal VAT scheme or, where appropriate, the simplified VAT scheme.

Costs

38The costs incurred by the Commission, which has submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main action, a step in the proceedings pending before the national court, the decision on costs is a matter for that court.

Operative part

On those grounds,

THE COURT (First Chamber),

in answer to the question referred to it by the Bundesfinanzhof by order of 4 July 2002, hereby rules:

Article 25 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment is to be interpreted as meaning that a farmer who has leased and/or let on a long-term basis some of the material assets of his farming business but continues to farm with the rest of his assets and who, in respect of the continued farming activity, is subject to the common flat-rate scheme provided for in Article 25 may not treat the income from such a lease and/or letting as being taxable under that scheme. The turnover from that arrangement must be taxed under the normal scheme or, where appropriate, the simplified scheme of value added tax.

Jann Rosas von Bahr

Silva de Lapuerta Lenaerts

Delivered in open court in Luxembourg on 15 July 2004.

R. Grass P. Jann

Registrar President of the First Chamber

OPINION OF ADVOCATE GENERAL LÉGER delivered on 11 March 2004 1

Introduction

1In the present case the Bundefinanzhof (Federal Finance Court) (Germany) is seeking a ruling from the Court on the scope of Article 25 of the Sixth Directive 77/388/ EEC, 2 which concerns the common flat-rate scheme for farmers. The reference was made in the course of proceedings between a national tax authority and a farmer who has leased out the assets of his farm used for milk production. What is being sought is a ruling on whether the income from that leasing arrangement should be subject to the common flat-rate scheme provided for in Article 25 of the Sixth Directive or to the general scheme of value added tax, 3 or whether it should be totally exempt.

I — Law

2In the Sixth Directive the Community legislature sought to harmonise the scope of

1 — Language of the case: French.

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

3 — Hereinafter 'VAT'.

VAT throughout the Member States by laying down a uniform basis of assessment of VAT for the entire European Community. In addition, it provided a very broad definition of the scope of that tax. The tax must therefore apply to the supply of any goods or services effected for consideration as part of an economic activity by a trader operating independently. 4T hose economic activities 5 include agricultural activities.

3VAT is designed as a tax on final private consumption. It must therefore have a neutral effect on traders. However, it is applied by each of the traders involved in the chain of production, distribution or provision of services. In practice, this means that each trader applies VAT to the price of his goods and services and pays the Treasury, at regular intervals, the tax which he recovers by so doing, having first deducted the VAT that he has himself paid on the purchase of the goods and services required for his own economic activity. The operation

4 — Articles 2 and 4.

5 - Article 4(2).

of such a scheme therefore requires every taxable person to keep accounts in sufficient detail to permit application of the value added tax and inspection by the tax authority. 6

4Keeping such accounts proved very difficult for some traders, such as small undertakings and the majority of farmers. In the Sixth Directive the Community legislature therefore sought to harmonise the special schemes which had been introduced by Member States for those occupational categories. 7 Article 24 of the Sixth Directive states that Member States may apply in respect of small undertakings a simplified scheme based on exemptions.

5In Article 25 of the Sixth Directive the Community legislature also made provision that where the application to farmers of the normal VAT scheme, or the simplified scheme provided for in Article 24, would give rise to difficulties, Member States may apply to farmers a flat-rate scheme tending to offset the VAT charge on inputs they have

6 — Article 22 of the Sixth Directive.

7 — Fifteenth recital.

paid on their purchases of goods and services. Those farmers are called 'flat-rate farmers'. 8

6Article 25 of the Sixth Directive provides that that common flat-rate scheme is subject to the following rules. Member States are to fix the flat-rate compensation percentages according to the calculation procedure laid down in that directive. Those percentages must not be used to obtain for flat-rate farmers refunds greater than the VAT charge on inputs. 9

7Under Article 25(5) of the Sixth Directive those flat-rate percentages are to be applied to the price, exclusive of tax, of the agricultural products and agricultural services that flat-rate farmers have sold to taxable persons other than flat-rate farmers. This compensation excludes all other forms of deduction.

8The flat-rate compensation is to be paid to flat-rate farmers either by the taxable person to whom the goods or services are supplied or by the public authorities. In the

8 — Article 25(2), third indent.

9 - Article 25(3).

first case the flat-rate farmer invoices the taxable person to whom the goods or services are supplied for the flat-rate compensation percentage set by the State and retains for himself the VAT that he has received thereby. In the second case, the public authorities pay the flat-rate farmer the amount of flat-rate compensation which results from applying that percentage to his receipts.

9Article 25(8) of the Sixth Directive provides that where a flat-rate farmer sells his products or provides his services to persons who are not liable for VAT or to other flat-rate farmers, the VAT charge on inputs is deemed to be offset by the purchaser or customer.

10Article 25(2), fifth indent, of the Sixth Directive defines an 'agricultural service' as being a service as set out in Annex B supplied by a farmer using his labour force and/or by means of the equipment normally available on his farm.

11Annex B to the Sixth Directive, which contains the list of agricultural services, states that 'supplies of agricultural services which normally play a part in agricultural production shall be considered the supply of agricultural services, and ... in particular hiring out, for agricultural purposes, of equipment normally used in agricultural ... undertakings'.

12Under German law, the flat-rate compensation mechanism provided for in Article 25 of the Sixth Directive is implemented by Paragraph 24 of the Umsatzsteuergesetz 10 1991. Under that article the tax applied by farmers to their products and services, set at 8 %, offsets the VAT that they have had to pay on inputs, so that they do not have to pay the excess.

II — Facts

13Detlev Harbs is a farmer who has leased to his son, from 15 November 1992 to 30 June 2005, all the assets on his farm used for milk production, that is to say, 31.2 ha of land, a cowshed, 65 dairy cows and a milk quota of over 300 000 kg. The lease was agreed at annual amounts of DEM 9 360 and DEM 10 200 respectively for the land and the cowshed and DEM 6 000 and DEM 32 136.70 respectively for the dairy cows and the milk quota. Since concluding

10 — Law on Turnover Tax, 'UStG'.

that contract Mr Harbs has continued his activity on the remaining part of his farm, comprising 61.4 ha of land, buildings, a herd of approximately 60 bulls for fattening and a stock of 120 cattle.

14Mr Harbs considered that the leasing arrangement was covered in full by the flat-rate scheme provided for in Paragraph 24 of the UStG. The Finanzamt (Tax Office) Rendsburg (Germany), however, considered that although leasing the land and the cowshed is tax exempt under German law, payments received as a result of making available the dairy cattle and the milk quota are taxable under the normal VAT scheme. It issued a tax notice to Mr Harbs for DEM 361 for the VAT owing in respect of 1992.

15The Finanzgericht (Finance Court) (Germany) granted Mr Harbs's appeal, considering that the income he receives from the leasing arrangement in question falls within Article 24 of the UStG. The Finanzamt Rendsburg appealed to the Bundesfinanzhof for revision of the judgment.

III — The question referred for a preliminary ruling

16The Bundesfinanzhof, according to the arguments contained in its order for reference, considers that Mr Harbs, despite the contested leasing arrangement, has retained his status as a farmer within the meaning of Article 25 of the Sixth Directive since he has continued to farm the part of his property that has not been leased, which is a relatively large part.

17As regards the appropriate VAT scheme, the Bundesfinanzhof considers, on the one hand, that application to the farmer concerned of two different schemes, namely the common flat-rate scheme in respect of his own farming and the normal scheme in respect of the leasing arrangement at issue, might appear to conflict with the objective of simplification underlying Article 25 of the Sixth Directive.

18The Bundesfinanzhof states, on the other hand, that it doubts whether that leasing arrangement can be regarded as 'an agricultural service' within the meaning of Article 25 of the Sixth Directive. In addition, if the said leasing arrangement does not come under the common flat-rate scheme, it wonders whether, in view of the spirit and purpose of Article 25 of the Sixth Directive, the income from such an arrangement should not be entirely exempt so that, in the same way as the proceeds from the sale of a piece of used agricultural machinery, it is not taxable under either the flat-rate scheme or the general scheme.

19That is why the Bundesfinanzhof decided to stay proceedings and to refer the following question to the Court of Justice:

'Where the owner of a farm:

— gives up part of his farm (the entire daily cow operation) and leases the property necessary for that operation to another farmer;

— and continues to farm on a not insignificant scale after granting the lease,

may he treat the turnover from the lease — like the rest of his turnover — under the flat-rate scheme for farmers (Article 25 of [the Sixth Directive]), or is the turnover from the lease taxable under the general rules?'

IV — Assessment

20In the question it has referred for a preliminary ruling, the Bundesfinanzhof is asking in essence whether Article 25 of the Sixth Directive should be interpreted as meaning that a farmer who has leased out some of the assets of his farm and who continues his agricultural activities on the rest of the farm, activities in respect of which he pays tax under the common flat-rate scheme provided for in that article, may treat the income from that leasing arrangement as being taxable under that flat-rate scheme, or whether the income from the leasing arrangement must be taxed under the general VAT scheme.

21It is clear from the statement of reasons for the order for reference that by that question the Bundesfinanzhof intended to refer to the Court two separate questions. The first is whether or not the income from the contested leasing arrangement may be taxed under the common flat-rate scheme for farmers. The second seeks to ascertain whether, if the answer to the first question is negative, the income from the leasing arrangement should be taxed under the general VAT scheme or whether it may be completely exempt. I shall consider each of these questions in turn.

A — Application of the common flat-rate scheme

22Like the German Government and the Commission of the European Communities, and unlike the defendant in the main proceedings, I consider that the income from the contested leasing arrangement does not fall within the scope of the common flat-rate scheme provided for in Article 25 of the Sixth Directive. That conclusion stems quite logically, in my view, from an analysis of the criteria the Court usually takes into account when interpreting a provision of Community law, which are: the wording of the relevant provisions, the structure of the common flat-rate scheme and, lastly, the reasons why that 1 scheme was introduced. 1

1. The wording of the relevant provisions

23As we have seen, Article 25 of the Sixth Directive provides that the common flat-rate scheme for farmers applies only to farmers who are engaged in agricultural production and the provision of agricultural services.

24In order to ensure a uniform application of that scheme throughout the Community, the Community legislature took care to define what is covered by the term 'agricultural service'. Under Article 25(2), fifth

11 — See, for an application of that method of interpretation in VAT matters, Case C-315/00 Maierhofer [2003] ECR I -563, paragraph 27.

indent, this is 'any service as set out in Annex B supplied by a farmer using his labour force and/or by means of the equipment normally available on the agricultural undertaking operated by him'.

25It is therefore quite clear from that definition that the service referred to is one which a flat-rate farmer is in a position to provide with the labour and equipment with which he normally farms his own agricultural property. It follows that the reference in Annex B, fifth indent, to the 'hiring out, for agricultural purposes, of equipment normally used in agricultural ... undertakings' must be interpreted, in the light of the definition contained in Article 25(2), fifth indent, as meaning the hiring out by a flat-rate farmer of the equipment he normally uses to farm his own agricultural property.

26That means that the equipment hired out can, despite the contract for hire, still be considered to form part of the equipment normally used by the flat-rate farmer to farm his own agricultural property. Whether or not that condition is met therefore depends, in my view, on two criteria, which must be taken into account jointly, one relating to the length of the hire, the other to its purpose. Thus, first of all, the length of the contract for hire must be sufficiently short for the person or persons hiring the equipment concerned not to be the sole users of the equipment concerned. That condition would not be met if, for example, a flat-rate farmer hired out his combine harvester for the entire harvest and did not use it at all for his own purposes. Another requirement is that the equipment hired out should not be in addition to what the flat-rate farmer needs for his own farming purposes. That condition would not be met if a flat-rate farmer were to hire out several combine harvesters and used them in turn for his own purposes, although he needed only one in order to farm his own property.

27It follows, in my opinion, that the term 'agricultural service', within the meaning of Article 25 of the Sixth Directive, does not cover a contract such as the lease entered into in the present case, that is to say, an arrangement whereby one flat-rate farmer gives another farmer the right to use for several years some of the assets of his own farm so that the latter may enjoy the gains produced thereby. In leasing to another farmer for a term of twelve and a half years all the assets of his farm used for milk production, that is to say, the buildings, meadows, his herd of dairy cows and his milk quota, the defendant in the main proceedings transferred to that other farmer throughout the term of the lease exclusive use of each of those assets and the opportunity to enjoy the gains produced thereby. Such an agreement cannot therefore be treated as a service provided by a flat-rate farmer using the equipment that he normally uses on his farm since, of necessity, he will not be able to use any of those assets for his own farming purposes for twelve and a half years. In other words, all those assets, from the entry into force of the lease, have ceased to form part of the assets normally used for farming his own agricultural property.

28This analysis of the wording of the provisions of Article 25 of, and Annex B to, the Sixth Directive is supported by the fact 1 that in some of the language versions, 2 the Sixth Directive refers expressly to the concepts of 'leasing' and 'letting' in the context of the provisions relating to cases of exemption from VAT, in Article 13B(b) and Article 13 13C(a). As Advocate General Jacobs stated 14 in point 76 of his Opinion in Goed Wonen, in the Danish, Dutch, French, German, Italian and Swedish language versions those two terms refer in domestic law to agreements whose contents differ, in that 'letting' consists of granting the tenant the right to use the property of another, whereas 'leasing' consists of allowing the tenant also to enjoy the gains produced by the property. Of

12 — The Danish. German. Spanish, French. Italian. Dutch. Swedish and English versions. The Greek, Portuguese and Finnish versions use a single word.

13 — Article 13B(b) provides that, without prejudice to other Community provisions. Member States are to exempt 'the leasing or letting of immovable property', and Article 13C(a) provides that Member States may allow their taxpayers a right of option in respect (if taxation in cases of 'letting and leasing of immovable property'.

14 — Case C-326/99 [2001] ECU I-6831 course, as the Court has held, the terms 'leasing' and 'letting' used in Article 13 of the Sixth Directive should not be interpreted on the basis of their meaning in national law. They must constitute independent concepts of Community law so that the basis for 15 assessing VAT is determined uniformly. However, the fact that in those same language versions the list of agricultural services that may be provided by a flat-rate farmer mentions only 'hiring out, for agricultural purposes, of equipment normally used in agricultural ... undertakings' and does not include any reference to leasing, implies that the Community legislature did not want to include among the services falling within the common flat-rate scheme agreements by which one flat-rate farmer transfers to another person, as in the present case, part of his activity or of his farming assets.

29Consideration of the common flat-rate scheme for farmers involves a similar analysis.

15 — Ibid, (paragraph 47).

2. The common flat-rate scheme for farmers

30As is clear from Article 25(1) of the Sixth Directive, Member States may apply a flat-rate scheme to farmers where the application of the normal VAT scheme, or the simplified scheme, would give rise to difficulties. Therefore, in principle, farmers are liable for tax under the normal VAT scheme or the simplified scheme and the flat-rate scheme is an exception which Member States may or may not decide to apply.

31The exceptional nature of the common flat-rate scheme is also confirmed by the provisions of Article 25(9) and (10) of the Sixth Directive, which provide, respectively, that Member States may exclude from that scheme certain categories of farmers and the flat-rate farmers themselves may opt for application of the normal scheme or the simplified scheme under conditions to be laid down by each Member State.

32As it is an exception to the principle that farmers are liable for tax under the normal scheme or the simplified scheme, the scope of the common flat-rate scheme is to be interpreted strictly. A strict interpretation is required in order to comply with the principle that VAT must be neutral, which is one of its guiding principles. That principle means that persons engaged in the same and similar operations are to be treated respec 17 tively in the same way. As the fourth recital in the preamble to the Sixth Directive reaffirmed, the neutrality of VAT as regards the origin of goods and services is a precondition for the achievement of a common market based on fair competition. The definition of the agricultural services to which the common flat-rate scheme for farmers applies, and which are consequently not taxable under the general VAT scheme, must therefore be interpreted strictly. Consequently, the common flat-rate scheme must not be applied to services to which the legislature did not expressly intend it to be applied because that might undermine the abovementioned principle.

33More specifically, we have seen that the common flat-rate scheme operates on the basis of 'flat-rate compensation percentages' that must be determined by each Member State in accordance with the method of calculation provided for that purpose in Article 25(3) of the Sixth Directive. That method of calculation is designed to prevent those percentages, which must be notified to the Commission before they are applied, having the effect of obtaining for flat-rate

16 — See in particular Case C-453/93 Bulthuus-Griffioen [1995] ECR I-2341, paragraph 19 and Case C-150/99 Stockholm Lindopark [2001] ECR I-493, paragraph 25.

17 - See, to that effect. Case C-216/97 Gregg [1999] ECR I-4947, paragraph 20.

farmers refunds greater than the VAT charge on inputs. The common flat-rate scheme must not therefore have the effect of over-compensating flat-rate farmers for the VAT charge they incur on purchases of the goods and services needed for their farming activities. In other words, the common flat-rate scheme should be neither an advantage nor a disadvantage to flat-rate farmers because that would be contrary to the objectives of the Sixth Directive, which seek to ensure that VAT is collected fairly and to avoid distortion of competition between the different Member States applying the flat-rate scheme. I consider that those requirements, and hence the common flat-rate scheme, would be jeopardised if flat-rate farmers were able to lease out part of their farm and include the income from such an arrangement in the flat-rate scheme which continues to apply to them in respect of farming the part of their property that is not leased out.

34We are aware that under the common flat-rate scheme a flat-rate farmer receives compensation of the VAT charge on inputs that he has paid on purchases of goods and services he has made in order to engage in his farming activities, by applying to the prices, exclusive of tax, of his own goods and services the percentage determined by the national competent authorities. By transferring some of his activities to another person the farmer is also freed of the costs he would incur in order to engage in those activities. Thus, by leasing out all the assets used in milk production for a period of twelve and a half years, as in the present case, the defendant in the main proceedings has also freed himself from all the costs he would have incurred for such production. For example, he no longer has to provide fodder to feed the dairy herd, or to maintain it. The VAT charge on inputs is therefore reduced commensurately. However, if the income from the contested leasing arrangement falls within the scope of the common flat-rate scheme, the amount of flat-rate compensation due to the flat-rate farmer concerned will increase to reflect the application to that income of the percentage determined by the competent national authorities. That means that a flat-rate farmer will receive compensation although he is no longer paying the VAT charge on inputs for engaging in activities in connection with the part of the farm he has leased out.

35That analysis is borne out also where, as in the present case, the leasing arrangement is entered into with a farmer who is himself liable for tax under the flat-rate scheme. As 18 the Court held in Commission v Italy, and as the defendant himself states in his written , 19 observations when a flat-rate farmer sells his goods or supplies his services to a non taxable person or another flat-rate farmer compensation for the VAT charge on inputs is obtained by the payment of an 'all-in price'

18 — Case 3/86 [1988] ECR 3369, paragraph 21.

19 — Page 3.

for those goods or services which is deemed to include that charge. Even in a case like that, a flat-rate farmer may therefore obtain compensation for the VAT charge on inputs by increasing the price of his goods and services if the market conditions so permit.

36That is why I consider that if Article 25 of the Sixth Directive were to be interpreted as meaning that flat-rate farmers can lease out part of their farm and include the income from that leasing arrangement under the flat-rate scheme, there would be a serious risk of over-compensating for the VAT charge on inputs.

37Moreover, the common flat-rate scheme is not in my view intended to cover cases in which a farmer leases out part of his farm.

3. The objectives

38As the Bundesfinanzhof states, Article 25 of the Sixth Directive responds to the need for simplification. However, it is appropriate to point out why that objective of simplification led the Community legislature to introduce the opportunity for Member States to apply a common flat-rate scheme.

39As the wording of Article 25(1) of the Sixth Directive expressly states, that scheme was introduced for the benefit of farmers for whom the normal VAT scheme, or the simplified scheme, would give rise to difficulties. As is clear from the statement of reasons for the proposal for the Sixth Directive, submitted by the Commission to 20 the Council on 29 June 1973, that scheme, designed to be an exceptional scheme, was intended essentially to apply to small farmers who were unable to meet the requirements connected with the normal or simplified 21 schemes. It was designed as a transitional scheme to exempt those small farmers from the requirements in respect of accounts, invoices, returns and payment incumbent on

20 — Proposal for a Sixth Council Direttive on the harmonisation of the laws of the Member States Telatine, to turnover taxes — Common system of value added tax: uniform basis of assessment (Bulletin of the European Communities, Supplement 11/73).

21 — See also the First Report by the Commission to the Council on the operation of the commun system of value added tax submitted under Article 34 of the Sixth Directive (COM/83/426 final).

other taxpayers which they were considered to be incapable of meeting at the time the 22 Sixth Directive entered into force.

40That is why the scope of the common flat-rate scheme as regards the provision of services was defined restrictively, in such a way as to exclude all services provided regularly, or using equipment that could be regarded as being additional to the needs, size and characteristics of the farm in question. In that connection, the Commission had even proposed that the Sixth Directive should state expressly that for that type of operation a flat-rate farmer, since he is in competition with traders, industry or other service providers, should be liable for tax under the normal VAT scheme or the simplified scheme, according to a procedure 3 to be determined by each Member State. 2 Accordingly, the Commission included only 'hiring out of agricultural machinery' in the list of agricultural services given in the fifth indent of Annex B to its proposal for a directive.

22 — In the 1960 Community agriculture comprised a large number of farms, mostly small in size. On 1 January 1967 there were some 6.2 million farms of one hectare or more; 85 \ of these had an area of less than 20 ha: only 170 600 farms had an area of more than 50 ha. In addition, the majonty of those farms engaged in mixed fanning and a significant share of their products were consumed on the farm, as food for people or feed for animals (Ries, A., Application of VAT to ECC agriculture', Revue du morette commun, 1968, p. 560).

23 — Proposal for a directive. Article 27(12)(b).

41It follows that the objective of simplification which underlies Article 25 of the Sixth Directive should not, in my opinion, lead to the concept of 'agricultural service' defined in that article being extended to include a contract under which a flat-rate farmer transfers part of his farm to another farmer.

42Nor can it be seriously argued that a farmer who, as in the present case, leases out 31.2 ha of land, a cowshed, 65 dairy cows and a milk quota of over 300 000 kg, and continues to farm the remaining part of his property, comprising 61.4 ha of land, buildings, a herd of approximately 60 bulls for fattening and a stock of 120 cattle, is incapable of applying the general VAT scheme in respect of the income from the leasing arrangement at the same time as the common flat-rate VAT scheme in respect of his own farming activities, given the accounting and administrative procedures which the farming of such agricultural property involves in a Member State nowadays.

43I therefore consider that Article 25 of the Sixth Directive must be interpreted as meaning that a farmer who has leased out some of the assets of his farm and who continues his farming activities using the rest of that farm, activities in respect of which he pays tax under the common flat-rate scheme provided for in that article, cannot treat the income from that leasing arrangement as being covered by that flat-rate scheme.

B — Application of the general scheme

44The answer to the second question from the Bundesfinanzhof can be inferred already in part from the information I have set out above. We have seen that, under Article 2 of the Sixth Directive, VAT applies to the supply of all goods or services effected by a taxable person acting as such. Under Article 4 of the Sixth Directive 'taxable person' means any person who carries out any economic activity independently and, under Article 4(2), the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis is considered in particular to be an economic activity.

45An arrangement by which a flat-rate farmer gives another person, for consideration, the exclusive use of some of the assets of his farm, under a rental agreement or lease designed to confer on that person additionally the right to enjoy the gains thereof, constitutes a priori an economic activity within the meaning of that definition. In the present case, the leasing out by a flat-rate farmer for a term of twelve and a half years of all the assets of his farm used for milk production can indeed be regarded as an economic activity carried out independently and the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis. To take the example given by the Bundesfinanzhof in its order for reference, such a service cannot be considered to be a purely occasional or isolated operation in the same way as the sale of used agricultural equipment.

46It is also clear from established case-law that there can be no exceptions to the general principle that VAT is to be levied on all supplies of goods or services made for consideration by a taxable person, except in those cases expressly provided for in the Sixth Directive and that such exemptions 24 must be interpreted strictly. Although, under Article 13B(b) of the Sixth Directive, the leasing and letting of immovable property are in principle exempt from VAT, no provision is made for an exception in respect of making available for consideration movable tangible and intangible property such as a herd of dairy cows and a milk quota. In that regard, it should be pointed out that the Court of Justice has ruled that a national provision extending to the letting of certain forms of movable property the exemption

24 — Sec in particular Goed Wonen, cited above (paragraph 46) and Case C-8/01 Taksatomngcn 12003) ECR I-13711. paragraph 36.

from VAT which, pursuant to Article 13B(b) of the Sixth Directive, is restricted to the letting of immovable property, conflicted 25 with the provisions of that directive.

47Therefore, if the agricultural services provided by a flat-rate farmer for consideration are not covered by the definition contained in Article 25 of the Sixth Directive they must fall within the scope of the general scheme. The fact that the lessor is liable for tax, in respect of the part of his farm he continues to farm himself, under the common flat-rate scheme cannot constitute grounds for exempting the income from that leasing arrangement from tax. It follows that the income from hiring out the herd of daily cows and the milk quota should therefore be taxable under the general VAT scheme, that is to say, the normal scheme or the simplified scheme.

48I therefore propose that the Court should rule that the income from an arrangement whereby a flat-rate farmer leases some of the assets of his farm should be taxable under the general VAT scheme.

25 - Case C-60/96 Commission v France [1997] ECR I-3827. paragraph 16.

V — Conclusion

49In the light of the above considerations, I propose that the Court give the following answer to the question referred by the Bundesfinanzhof:

Article 25 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, should be interpreted as meaning that a farmer who has leased out some of the assets of his farm and who continues his agricultural activities on the rest of the farm, activities in respect of which he pays tax under the common flat-rate scheme provided for in that article, may not treat the income from that leasing arrangement as being taxable under that flat-rate scheme. The income from the leasing arrangement must be taxable under the general VAT scheme.