C-322/99 Fischer and Brandenstein

JUDGMENT OF THE COURT (Fifth 17 May 2001 *

In Joined Cases C-322/99 and C-323/99,

REFERENCE to the Court under Article 234 EC (Germany) for a preliminary ruling in the proceedings between

Finanzamt Burgdorf

and

Hans-Georg Fischer (C-322/99)

and between

Finanzamt Düsseldorf-Mettmann

and

Klaus Brandenstein (C-323/99),

* Language of the case: German.

Chamber)

by the Bundesfinanzhof pending before that court on the interpretation 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 COURT (Fifth Chamber),

composed of: A. La Pergola, President of the Chamber, M. Wathelet (Rapporteur), D.A.O. Edward, P. Jann and L. Sevón, Judges,

Advocate General: EG. Jacobs, Registrar: H.A. Rühl, Principal Administrator,

after considering the written observations submitted on behalf of:

— the German Government, by W.-D. Plessing and B. Muttelsee-Schön, acting as Agents (Cases C-322/99 and C-323/99),

— the Greek Government, by V. Kyriazopoulos and G. Alexaki, acting as Agents (Case C-322/99),

— the Commission of the European Communities, by E. Traversa and K. Gross, acting as Agents (Cases C-322/99 and C-323/99),

having regard to the Report for the Hearing, after hearing the oral observations of Mr Brandenstein, represented by E. Will ing, Rechtsanwalt, of the German Government, represented by B. Muttelsee-Schön and by F. Huschers, acting as Agent, and of the Commission, represented by K. Gross, at the hearing on 12 October 2000,

after hearing the Opinion of the Advocate General at the sitting on 14 December 2000,

gives the following

Judgment

Legal context and the dispute

1By orders of 15 July 1999, received at the Court on 27 August 1999, the Bundesfinanzhof referred to the Court for a preliminary ruling pursuant to Article 234 EC a number of questions on the interpretation of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, hereinafter 'the Sixth Directive').

2Those questions were raised in proceedings between, in Case C-322/99, the Finanzamt Burgdorf and Mr Fischer and, in Case C-323/99, the Finanzamt Düsseldorf-Mettmann and Mr Brandenstein concerning liability for value added tax ('VAT') on the allocation by taxable persons for their private use of motor vehicles which they had purchased from private individuals without VAT being deductible but where VAT on supplies of various services and goods for those vehicles had been deductible.

Legal framework

Community legislation

3Article 5(6) of the Sixth Directive provides:

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

4Article 6(2)(a) of the Sixth Directive lays down a similar rule for the supply of services:

'The following shall be treated as supplies of services for consideration:

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

5Article 11A(1)(b) of the Sixth Directive provides:

'The taxable amount shall be:

(b) in respect of supplies referred to in Article 5(6) and (7), the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined as [at] the time of supply.'

6Article 20(1 )(b) of the Sixth Directive provides:

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

(b) where after the return is made some change occurs in the factors used to determine the amount to be deducted, in particular where purchases are cancelled or price reductions are obtained; however, adjustment shall not be made in cases of transactions remaining totally or partially unpaid and of destruction, loss or theft of property duly proved or confirmed, nor in the case of applications for the purpose of making gifts of small value and giving samples specified in Article 5(6). However, Member States may require adjustment in cases of transactions remaining totally or partially unpaid and of theft.'

National legislation and case-law

7At the material time, Paragraph 1(1)(2)(a) of the Umsatzsteuergesetz (Turnover Tax Law) 1991 provided:

'(1) The following transactions shall be subject to turnover tax:

2. own consumption on the national territory. Own consumption shall be deemed to occur where a trader

(a) allocates business goods for purposes other than those of the business...'

8Unlike Article 5(6) of the Sixth Directive, which does not provide for the taxation of the allocation of goods for own consumption unless the value added tax on the goods or the component parts thereof was wholly or partly deductible, Paragraph 1(1)(2)(a) of the Turnover Tax Law does not make the taxation of that allocation subject to such a condition.

9However, that condition prescribed by Community law is applied by the German finance authorities on the basis of the direct effect of Article 5(6) of the Sixth Directive.

10Thus a notice from the Federal Ministry of Finance of 13 May 1994 (BStBl. 1994, p. 298) provides that, in order to avoid taxation of goods allocated to his private use, a trader may rely on the provisions of Article 5(6) of the Sixth Directive provided that no input VAT was deductible either in respect of the goods themselves or in respect of components subsequently incorporated in the goods. In such a case the allocation will not be taxable, by way of derogation from Paragraph 1(1)(2)(a) of the Turnover Tax Law.

11However, that notice laid down the following principles:

'If the trader was entitled to deduct VAT in respect not of the goods themselves but of the components subsequently incorporated therein, the allocation of the goods is subject to VAT under Paragraph 1(1)(2)(a) of the Turnover Tax Law... For the sake of simplicity, an allocation for own consumption need not be subject to VAT where the expenditure (without VAT) on improvements, repairs and servicing (including maintenance) for the goods allocated does not exceed 20% of the initial cost of acquisition. If such expenditure exceeds 20% of the initial cost of acquisition, it can as a rule be assumed without further investigation that components have been incorporated in the goods.'

12On the other hand, the Bundesfinanzhof held in a judgment of 30 March 1995 (V R 65/93, BFHE 177, 541) that expenditure incurred by a taxable person for the maintenance or use of goods, where the VAT thereon had been deducted, could not affect the taxation of the allocation of the goods for private purposes, since as a general rule it did lead to the acquisition or creation of a component part of the goods within the meaning of Article 5(6) of the Sixth Directive. In that judgment the Bundesfinanzhof referred to the judgment of the Court of Justice in Case 50/88 Kühne [1989] ECR 1925, where the Court of Justice held that Article 6(2)(a) of the Sixth Directive did not require taxation of the allocation by a taxable person for his private use of a motor vehicle acquired second hand from a private individual where it was not possible to deduct the VAT, even where the taxable person has subsequently deducted the VAT payable on the expenditure incurred in connection with the maintenance and use of the asset.

13The German legislation was amended by the Law of 24 March 1999 (BGBl. 1, p. 402), with effect from 1 April 1999. Paragraph 3(1)(b) of the Turnover Tax Law, as amended, provides that the allocation by a taxable person of business goods for purposes other than business purposes, the transfer free of charge of an asset by the taxable person to his staff for their private purposes and any other transfer of an asset free of charge are to be treated as a supply for consideration, with the exception of gifts of small value and samples. Their treatment as such is subject to the condition that VAT was deductible in whole or in part in respect of the asset or its component parts.

The main proceedings

Case C-322/99

14In 1989, Mr Fischer, who traded as a second-hand car dealer, bought a Bentley motor car from a private individual. He was therefore unable to deduct VAT from the purchase price, which was DEM 28 000. The vehicle was acquired for the purposes of Mr Fischer's taxable activities, namely to be re-sold in the course of his business.

15In 1990, Mr Fischer restored the Bentley, having extensive bodywork repairs and respraying done. The invoice for that work, dated 14 May 1990, came to DEM 10 800, plus VAT of DEM 1 512. In the same year Mr Fischer deducted the VAT on that invoice as input VAT.

16On 31 December 1992, Mr Fischer ceased trading and took the unsold vehicles, including the Bentley, into his private assets.

17Mr Fischer made no VAT return for 1992. Following a special VAT investigation, the Finanzamt Burgdorf decided that the removal of the Bentley and its allocation to Mr Fischer's private assets constituted a taxable own consumption. The Finanzamt assessed the taxable amount as a proportion of the value of the vehicle, namely DEM 20 000, and fixed the VAT payable at DEM 2 800.

18The Niedersächsische Finanzgericht, before which the matter was brought following the rejection of the complaint lodged by Mr Fischer, found in his favour. It held that, pursuant to Article 5(6) of the Sixth Directive, a vehicle purchased in circumstances in which no input VAT is deductible cannot be subject to VAT when it is transferred from the assets of the business when the business ceases to trade. The fact that Mr Fischer was able to deduct VAT in respect of the bodywork repairs and respraying amounting to DEM 10 800 after acquiring the Bentley did not alter the fact that the vehicle must be regarded as not having given rise to the right to deduct input VAT.

19The Finanzgericht referred to Kühne, cited above, which established that the private use of business goods may be taxed only if the VAT on the goods themselves, and not on the expenses incurred for their use and maintenance, was deductible. It considered that the bodywork repairs and respraying which Mr Fischer had had done constituted expenditure incurred for the use and maintenance of that classic vehicle and were not 'component parts' of the goods for the purposes of Article 5(6) of the Sixth Directive.

20The Finanzamt Burgdorf appealed to the Bundesfinanzhof on a point of law against the Finanzgericht's decision. It pleaded breach of Paragraph 1(1)(2)(a) of the Turnover Tax Law, on the taxation of allocations for own consumption, and claimed that the contested judgment should be set aside and Mr Fischer's application rejected.

21Mr Fischer did not submit observations on the appeal on a point of law.

Case C-323/99

22Mr Brandenstein is a self-employed tax adviser and auditor. In 1985, he purchased a vehicle for business use from a private individual for DEM 33 600 and was unable to deduct VAT. It is not disputed that from the time of purchase Mr Brandenstein used the vehicle in question solely for business purposes.

23In 1991 he allocated the vehicle to his private assets. Up to that time Mr Brandenstein had spent a total of DEM 16 028.54 on, inter alia, servicing, minor repairs, replacement tyres, the fitting of a catalytic converter in 1987 and of a new windscreen in 1991. He had deducted the input VAT on each occasion.

24The Finanzamt Düsseldorf-Mettmann rejected Mr Brandenstein's turnover tax return and in the 1991 tax demand took the view that the allocation of the vehicle to his private assets constituted a taxable own consumption under Paragraph 1(1)(2)(a) of the Turnover Tax Law. Relying on a taxable basis of D EM 7 500, the amount which Mr Brandenstein had declared as the value of the allocation for the purposes of profits tax, the Finanzamt Düsseldorf-Mettmann assessed the amount of VAT payable as D EM 1 050.

25In his complaint against that decision, Mr Brandenstein maintained that the allocation of business goods in respect of which no input VAT had been deductible on acquisition was not taxable as own consumption. He relied, in particular, on Kühne.

26The Finanzamt Düsseldorf-Mettmann, applying the notice of 13 May 1994 from the Federal Ministry of Finance, concluded that the allocation of the vehicle by Mr Brandenstein should be taxed, since the expenditure, net of VAT, incurred in respect of improvements, repairs, servicing and maintenance had exceeded 20% of the purchase price. It therefore rejected Mr Brandenstein's complaint.

27Mr Brandenstein appealed to the Finanzgericht Düsseldorf against that decision.

28The Finanzgericht Düsseldorf allowed his appeal on the ground that the conditions of taxation laid down in Article 5(6) of the Sixth Directive, namely that the VAT on the goods in question or the component parts thereof was deductible, were not satisfied in this case. The Finanzgericht held that the expenditure incurred by Mr Brandenstein in connection with the vehicle while it was being used for business purposes neither altered nor extended its potential use as determined and did not substantially increase its product value.

29The Finanzamt Düsseldorf-Mettmann appealed to the Bundesfinanzhof on a point of law. It claimed that the Bundesfinanzhof should set aside the judgment of the Finanzgericht and reject Mr Brandenstein's application.

30Mr Brandenstein contends that the appeal on a point of law should be dismissed.

The questions referred to the Court

31In the orders for reference, the Bundesfinanzhof observes, apropos the first sentence of Article 5(6) of the Sixth Directive, that the Court has not yet ruled on the interpretation of the words 'where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible'. It goes on to say, however, that in Kühne the Court held that the taxation of the private use of business goods under another provision of the Sixth Directive, Article 6(2)(a), was conditional upon the VAT on the goods themselves, and not on the expenditure incurred in respect of the maintenance and use of the goods, having been deductible.

32The Bundesfinanzhof states that, on the basis of Kühne, it concluded in its judgment of 30 March 1995 that the allocation by a taxable person, for private use, of goods on which VAT was not deductible on acquisition could not be taxed in respect of the expenditure incurred for their use and maintenance in respect of which the input VAT had been deductible, since that expenditure did not generally lead to the acquisition or creation of a component. However, the German financial administration did not follow the principles laid down in the judgment of 30 March 1995 and the interpretation of the first sentence of Article 5(6) of the Sixth Directive is therefore still subject to debate.

33The Bundesfinanzhof further states that the question of the appropriate taxable amount will arise if, in the cases before it, the conditions laid down in the first sentence of Article 5(6) of the Sixth Directive are satisfied. Under Article HA(1)(b) of that directive, the taxable amount in respect of supplies referred to in Article 5(6) is to be the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined as at the time of supply. The Bundesfinanzhof is uncertain as to how Article HA(1)(b) is to be interpreted where VAT was wholly or partly deductible not on the goods allocated but on some of their components.

34The Bundesfinanzhof also observes that, on the assumption that no components within the meaning of the first sentence of Article 5(6) of the Sixth Directive have been incorporated in Mr Fischer's and Mr Brandenstein's vehicles and that that provision does not apply to the allocations at issue in the main proceedings, the question arises as to whether the input VAT deducted by Mr Fischer and Mr Brandenstein when services and goods were supplied for their vehicles is to be partly adjusted pursuant to Article 20(1)(b) of that directive.

35The Bundesfinanzhof states in that regard that although in Case C-322/99 the allocation of the Bentley for private purposes does not entail taxation in respect of the supplies of services made after the vehicle was purchased, that allocation might constitute a change in the factors used to determine the amount to be deducted in respect of the supplies of bodywork repairs and respraying. In Case C-323/99, the Bundesfinanzhof considers that the value of the various goods Mr Brandenstein acquired for his vehicle after purchasing it, in particular the catalytic converter and the new windscreen, still subsisted in part when the vehicle was allocated in 1991 and was not completely depreciated. It is therefore possible that the factors then used to determine the amount of input VAT to be deducted had changed within the meaning of Article 20(1 )(b) of the Sixth Directive. Those goods, which have not yet wholly depreciated and which were allocated free of VAT according to the first sentence of Article 5(6) of the Sixth Directive, were no longer used for the purposes of taxable transactions within the meaning of Article 17(2) of the Sixth Directive after they had been allocated.

36The Bundesfinanzhof therefore considered that the outcome of the cases pending before it required an interpretation of Community law and decided to stay proceedings and to refer a number of questions to the Court for a preliminary ruling.

37In Case C-322/99, the Bundesfinanzhof has referred the following questions:

'1. Do subsequent bodywork repairs and respraying work (on which VAT was deducted) carried out on a car (on the acquisition of which VAT was not deductible) mean, on application of the car for private use,

(a) that the car must be viewed as goods on which VAT was partly deductible under Article 5(6) of the Directive, or (b) that the subsequent expenditure is to be viewed as component parts, on which VAT was deductible, of the goods?

2. If Question 1 is answered in the affirmative, what are the business goods applied for private use which are to be taxed under Article 5(6) of the Directive:

(a) the car including the work carried out on it (bodywork repairs and respraying) or

(b) only the work carried out (bodywork repairs and respraying)?

3. If Question 2 is answered in the affirmative: Is the basis of assessment under Article HA(1)(b) of the Directive therefore the purchase price of the car (or an equivalent car) together with the cost of repairs each determined as at the time of application for private use, or only the price of the repairs carried out (on which VAT was deducted)?

4. What is the relationship between Article 5(6) and Article 5(7)(c) of the Directive?

5. If the answer to Question 1 is to the effect that the subsequent (tax-deductible) work carried out (bodywork repairs and respraying) is not subject to tax on application of the goods (car) for private use under Article 5(6) of the Directive, is the deduction of input tax on these services to be adjusted under Article 20(1)(b) of the Directive?'

38In Case C-323/99, the Bundesfinanzhof has referred the following questions to the Court:

'1. Is [the first sentence of Article 5(6) of the Sixth Directive] applicable where, although VAT on the goods themselves was not deductible, VAT was deductible on the services or supplies which the taxable person received in respect of those goods after their acquisition?

2. What does the term "component parts" mean in the context of this provision?

3. How is the basis of assessment to be determined for an application of business assets for private use, where VAT is wholly or partly deductible, not on the goods disposed of, but on some of their components?

4. Is the deduction of input tax which a taxable person has claimed in respect of services or supplies for goods on the purchase of which VAT was not deductible to be adjusted under Article 20 of [the Sixth Directive] if the first sentence of Article 5(6) of the Directive is not applicable?'

39By order of the President of the Court of Justice of 6 July 2000, Cases C-322/99 and C-323/99 were joined for the purposes of the oral procedure and judgment, pursuant to Article 43 of the Rules of Procedure.

Questions 1 and 2 in Cases C-322/99 and C-323/99, on the charging of VAT under Article 5(6) of the Sixth Directive

40By Question 1 in Case C-322/99 and Questions 1 and 2 in Case C-323/99, the national court is essentially seeking to ascertain whether VAT is payable under Article 5(6) of the Sixth Directive when a taxable person allocates for purposes other than those of the business a vehicle which was purchased without VAT being deductible and which, after its acquisition, had work done to it on which VAT was deducted. Question 2 in Case C-322/99 seeks to ascertain whether, if the answer is in the affirmative, Article 5(6) is to be interpreted as meaning that the tax must be paid on the goods and their component parts or only on the components subsequently incorporated in the goods.

41The Greek Government, which has submitted observations only in respect of Case C-322/99, argues that goods acquired by a taxable person without the input VAT being deductible and belonging to the taxable person's business must be regarded as goods on which the input VAT was partly deductible within the meaning of Article 5(6) of the Sixth Directive, where the VAT-deductible expenditure incurred on those goods increased the value of the goods. In this case, the bodywork repairs and respraying carried out on Mr Fischer's Bentley were very considerable, as may be seen from the cost compared with the price he paid for the car, and they should therefore be regarded as being added to its total purchase price. Liability for VAT therefore arises owing to Mr Fischer's having allocated the goods in question for his personal use.

42The German Government and the Commission submit that VAT-deductible expenditure incurred for work carried out on goods in respect of which input VAT was not deductible on acquisition may give rise to liability for VAT when the goods are allocated to purposes other than those of the business, in so far as the work in question produced 'component parts' within the meaning of Article 5(6) of the Sixth Directive. However, they differ as regards their interpretation of 'component parts'.

43The German Government argues that the purpose of Article 5(6) of the Sixth Directive requires that 'component parts' within the meaning of that provision be taken to comprise not only independent physical goods but also supplies of services which contribute, with a sufficient degree of permanence, to maintaining or increasing the value of the goods. Tax is payable in both cases in order to prevent the taxable person from allocating to his own private assets without paying any VAT items of value the input VAT on which was deductible and from thus enjoying an undue advantage by comparison with an ordinary consumer who purchases goods of the same type. The German Government further refers to the practical difficulties in distinguishing between 'supplies of goods' and 'supplies of services', particularly in the case of repairs to motor vehicles.

44The Commission, on the other hand, contends that 'component parts' within the meaning of Article 5(6) of the Sixth Directive can exist only where two cumulative conditions are satisfied. First, there must have been a supply of goods, in the sense that other physical goods must have been added to the business goods. A supply of services in respect of the business goods cannot therefore be regarded as a 'component part' of those goods. Second, the incorporation of other components in the goods in question must have resulted in a significant increase in the overall value of the business goods. Expenditure incurred in respect of the use and maintenance of the goods, such as expenditure on regular maintenance work, even where it involves the replacement of used parts, does not normally lead to an increase in the value of the goods.

45The Commission states that the first condition, namely the requirement that physical goods be supplied, follows from the general scheme and position of Article 5 of the Sixth Directive, which expressly contains only rules on the supply of physical goods. Furthermore, unlike the addition of other components which have an impact on the physical characteristics of goods, the value added by the supply of services is regularly consumed by the use to which the asset is put. Where an activity includes both an element of supply of goods and an element of supply of services, for example where repairs carried out on a motor vehicle entail the supply and fitting of replacement parts, the activity should be assessed as a whole for the purpose of determining which is the dominant element.

46In the Commission's view, the second condition, namely the requirement of a significant increase in the value of the goods, is the consequence of the principle of the neutrality of VAT. Since, in the case of an allocation which is taxable under Article 5(6) of the Sixth Directive, in particular the allocation of goods acquired without VAT being deductible, the Commission considers that both the goods themselves and the component parts the VAT on which was deductible are subject to VAT, which would mean double taxation of the goods, 'component parts' must be given a restrictive interpretation.

47As regards the question of the taxable amount for the purposes of Article 5(6) of the Sixth Directive, the German Government and the Commission consider that when a taxable person allocates for his private use business goods which he has purchased without being able to deduct the input VAT, but in respect of which he has deducted the VAT on the expenditure incurred for services and goods supplied after the asset was purchased, the VAT payable under Article 5(6) of the Sixth Directive is charged on the goods and the component parts taken together.

48The German Government and the Commission submit that it is clear from Article 5(6) of the Sixth Directive that treatment as a supply made for consideration and therefore taxation concern the goods in question in their entirety and not just their component parts, since that concept is used solely in order to distinguish the right to deduct in respect of the goods allocated from the right to deduct in respect of the components of those goods.

49The German Government and the Commission maintain that that interpretation finds support in the legislative history of Article 5(6) of the Sixth Directive.

50In that regard, they claim that the Commission had initially proposed that the allocation be taxed in proportion to the input VAT deducted. Article 5(3)(a) of the proposal for the Sixth Directive of 29 June 1973 (Bulletin des Communautés Européennes, Supplement 11/73, p. 39), provided that the allocation was to be taxed only 'in so far as' the VAT on the goods in question or the component parts thereof had been wholly or partly deductible. The provision as thus proposed was not accepted by the Member States. The use of the word 'where' in Article 5(6) of the Sixth Directive, as adopted by the Council, instead of the expression 'in so far as', clearly shows in that context that the Community legislature intended that, in the interest of simplicity, the allocation should be taxed on the basis of the total value of the goods and not solely on the value of the component part of the goods in respect of which VAT had been deducted, where the input VAT on the goods themselves had not been deductible.

Grounds

Findings of the Court

51As regards, first, the question as to whether liability for VAT under Article 5(6) of the Sixth Directive arises where a taxable person allocates for purposes other than those of his business a motor vehicle purchased in circumstances in which the VAT was not deductible and which, after its acquisition, has had work done on it, the VAT on that work having been deducted, it is necessary to interpret the following words of Article 5(6) of the Sixth Directive: 'where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible'.

52To that end, a distinction must be made between 'goods' and 'component parts thereof' within the meaning of Article 5(6) of the Sixth Directive.

53On the one hand, the words 'the value added tax on the goods in question... was... deductible' refer only to the tax on the initial purchase or manufacture of the goods and not to the tax on expenditure subsequently incurred in respect of the goods, which is referred to in particular by the words 'the value added tax... on... the component parts thereof was... deductible'.

54The interpretation proposed by the Greek Government cannot therefore be accepted.

55On the other hand, the concept of 'component parts [of those goods]' referred to in Article 5(6) of the Sixth Directive, which is not defined therein, must be taken to cover both the parts already present when the goods were initially acquired and the parts subsequently incorporated in the goods.

56In that regard, it should be noted that the purpose of Article 5(6) of the Sixth Directive is, in particular, to ensure equal treatment as between a taxable person who withdraws goods from his business and an ordinary consumer who buys goods of the same type. In pursuit of that objective, Article 5(6) prevents a taxable person who has been able to deduct VAT on the purchase of goods used for his business from escaping payment of VAT when he transfers those goods from his business to private purposes and from thereby enjoying advantages to which he is not entitled by comparison with an ordinary consumer who buys goods and pays VAT on them (see Case C-415/98 Bakcsi [2001] ECR I-1831, paragraph 42, and the case-law cited there).

57For the purpose of attaining that objective, the components already present when the goods are initially acquired and the components incorporated after acquisition cannot be treated differently. In both cases, if a taxable person has deducted the VAT on the component parts of the goods, he must, when he allocates the goods for his private use, be prevented from enjoying an advantage to which he is not entitled by comparison with an ordinary consumer.

58The question as to whether 'component parts' may also refer to the supply of services as well as to the supply of goods was the subject of debate before the Court.

59In that regard, it is clear from Article 5(6) of the Sixth Directive that 'component parts' refers to tangible, physical objects incorporated into the goods and cannot apply to the supply of services.

60Such an interpretation is supported by the position of that provision in the general scheme of the Sixth Directive. Since 'goods' are defined in Article 5(1) of the Sixth Directive as tangible property, the 'component parts' of those goods within the meaning of Article 5(6) must be of the same nature. 'Supply of services' is defined in Article 6(1) of the Sixth Directive as any transaction which does not constitute a supply of goods within the meaning of Article 5 of that directive.

61The broad interpretation of 'component parts' proposed by the German Government cannot therefore be accepted.

62As the German Government has emphasised the difficulty in distinguishing between supplies of goods and supplies of services, particularly where work is carried out on a motor vehicle, it should be observed that there is a consistent body of case-law to the effect that in order to determine whether a given transaction is a supply of goods or a supply of services, it is necessary to identify its characteristic features (Case C-231/94 Faaborg-Gelting Linien [1996] ECR I-2395, paragraph 12). Where a supply of goods is only one component of a transaction in which supplies of services predominate, the transaction must be regarded as a supply of services (Faaborg-Gelting Linien, paragraph 14).

63It follows that supplies of services, including those which necessitate ancillary and minor supplies of goods, cannot constitute 'component parts' within the meaning of Article 5(6) of the Sixth Directive.

64As regards supplies of goods, it is necessary first of all, as the Advocate General observes in paragraph 72 of his Opinion, to distinguish according to whether the goods incorporated in the vehicle are or are not separable and independent by comparison with the vehicle. Thus, where such goods retain their physical and economic distinctiveness they must not be regarded as component parts of the vehicle.

65For VAT purposes, the allocation to the private assets of a taxable person of a vehicle in which such separable and independent goods have been incorporated must be regarded as constituting two independent taxable allocations. Consequently, neither of those allocations will be subject to VAT under Article 5(6) of the Sixth Directive unless the input VAT on what was allocated was deductible.

66Second, for reasons dictated by the principle of neutrality inherent in the scheme of the Sixth Directive, it is necessary to distinguish between supplies of goods which merely contribute to maintaining the value of the goods and which as a general rule have been consumed at the time of the allocation and those which lead to a lasting increase in the value of the goods and have not been completely consumed at the time of the allocation.

67Where a taxable person allocates goods initially acquired from a non-taxable person without the possibility of deducting VAT, it would run counter to that principle of neutrality for that allocation to be subject to VAT where the supplies of goods after the acquisition, even though the VAT thereon was deductible, merely contributed to maintaining the goods without increasing their value and have therefore been consumed when the allocation is effected. In those circumstances, the taxable person would not enjoy any advantage to which he was not entitled by comparison with an ordinary consumer in allocating the goods without paying VAT.

68On the other hand, it is consistent with the objective pursued by Article 5(6) of the Sixth Directive for that type of allocation to be subject to VAT where the post-acquisition supplies of goods have led to a lasting increase in the value of the goods which has not been wholly consumed at the time of the allocation.

69The national court is of the view that that might apply, in Case C-323/99, to the catalytic converter and new windscreen fitted to Mr Brandenstein's motor vehicle in 1987 and 1991 respectively, unless they are considered to have retained their physical and economic distinctiveness. The national court considers that the value of those components remained in part when the vehicle was allocated in 1991 and had therefore not fully depreciated.

70In the light of the foregoing considerations, it must be concluded that where a taxable person allocates for purposes other than those of the business goods in respect of which no VAT was deductible and which, after acquisition, had VAT-deductible work done on them, VAT is payable under Article 5(6) of the Sixth Directive if the work resulted in the incorporation of 'component parts' within the meaning of that provision. Where a motor vehicle is allocated, the 'component parts' are goods supplied which have definitively lost their physical and economic distinctiveness as a result of being incorporated in the vehicle and which have given rise to a lasting increase in the value of the goods which has not been entirely consumed at the time of the allocation.

71Furthermore, that interpretation, given in answer to the questions referred to the Court in connection with the allocation of a motor vehicle, is valid irrespective of the nature of the physical goods allocated.

72Second, it is necessary to consider whether, when an allocation gives rise to liability for VAT in the circumstances referred to in paragraph 70 above, Article 5{6) of the Sixth Directive is to be interpreted as meaning that VAT is to be assessed on the goods and their component parts or only on the parts incorporated after the goods were purchased.

73In paragraph 44 of Bakcsi the Court held that when the taxable person has been unable to deduct the VAT on the business goods purchased second-hand from a non-taxable person, the VAT on such goods must be considered not to have been deductible for the purposes of Article 5(6) of the Sixth Directive and no tax may therefore be levied under that provision when they are allocated.

74The same applies where business goods are allocated by a taxable person for his private use and where, after the purchase of the goods acquired without input VAT being deductible, supplies of services or supplies of goods have been made in connection with those goods and the VAT on those supplies has been deductible.

75It would run counter to the objective of equal treatment pursued by Article 5(6) of the Sixth Directive if that provision were to be interpreted as meaning that, where goods are allocated for the private purposes of the taxable person, the goods and the parts which have been incorporated in them were to be taxed as a whole, even though no input VAT was deductible when the goods were initially acquired and only the input VAT on the 'component parts' acquired after purchase was deductible.

76Taxation of the goods in such a situation, where the input tax was not deductible on purchase, would lead to double taxation contrary to the principle of fiscal neutrality inherent in the common system of VAT, of which the Sixth Directive forms part (see, with regard to Article 5(6) of the Sixth Directive, Bakcsi, paragraph 46, and with regard to heading (a) of the first subparagraph of Article 6(2) of the Sixth Directive, Kühne, paragraph 10, and Case C-193/91 Mobsche [1993] ECR I-2615, paragraph 9). Taxation of the 'component parts' as defined in paragraph 70 above ensures, moreover, that the taxable person does not enjoy any advantage to which he is not entitled by comparison with an ordinary consumer.

77In the light of paragraphs 72 to 76 of this judgment, it must be concluded that Article 5(6) of the Sixth Directive is to interpreted as meaning that charge to tax does not arise on goods allocated by a taxable person for his private use where tax was not deductible on the goods because they were purchased from a non taxable person, even if expenditure in respect of which input VAT was deductible has subsequently been incurred in connection with those goods. Where work on which input VAT was deductible has been carried out on the goods after they were acquired and that work resulted in the incorporation of component parts in the goods, as defined in paragraph 70 above, the VAT payable under Article 5(6) of the Sixth Directive when they are allocated will therefore apply only to those component parts.

78The answer to Questions 1 and 2 referred by the national court in Cases C-322/99 and C-323/99 must therefore be that where a taxable person allocates for purposes other than those of the business goods (in this case a motor vehicle) on the acquisition of which VAT was not deductible and which, after being acquired, had VAT-deductible work done on them, the VAT payable under Article 5(6) of the Sixth Directive applies solely to the component parts of the goods in respect of which there was entitlement to deduct, namely the components which definitively lost their physical and economic distinctiveness when they were incorporated in the vehicle, after its purchase, following transactions involving supplies of goods which led to a lasting increase in the value of the vehicle which has not been entirely consumed at the time of the allocation.

Question 3 in Cases C-322/99 and C-323/99, on the taxable amount pursuant to Article HA(1)(b) of the Sixth Directive

79By Question 3 in Cases C-322/99 and C-323/99, the national court is essentially asking whether, in circumstances such as those which gave rise to the main proceedings, the taxable amount for the purposes of Article HA(l)(b) of the Sixth Directive is to be determined by reference to the purchase price of the vehicle or a similar vehicle at the time of allocation plus the price of the repairs which resulted in 'component parts' within the meaning of Article 5(6) of that directive or whether it consists solely of the price paid for such repair work the input VAT on which was deductible.

so The reference to the purchase price, determined at the time of allocation, may appear to be contradictory where goods are by definition acquired before they are allocated; however, it is taken from the actual wording of Article 11 A¹(b) of the Sixth Directive. It is necessary to specify that that refers to the residual value of the goods at the time of allocation.

81The German Government submits that the taxable amount referred to in Article HA(l)(b) of the Sixth Directive is made up of the purchase price of the vehicle or a similar vehicle and the price of the repairs, determined at the time of allocation. Since the taxable amount is calculated on prices determined at the time of allocation, it must necessarily include the expenditure incurred in maintaining the value of the goods and any increase in their value while they formed part of the assets of the business.

82Similarly, the Commission considers that, if it follows from the assessment of the facts that 'component parts' within the meaning of Article 5(6) of the Sixth Directive were added to business goods on which no input VAT was deductible on acquisition, the taxable amount where those goods are allocated consists of the price of similar goods at the time of allocation, including the component parts which have been added to the goods.

83The Greek Government submits that the taxable amount should be determined separately for each element. To that end, it is necessary first to determine the value of the goods at the time of allocation, then to calculate the VAT, the amount of which depends on the relationship between the expenditure in respect of which input VAT was deductible and the total price of acquisition of the goods.

Findings of the Court

84In view of the answer given in paragraph 78 above, the answer to Question 3 in Cases C-322/99 and C-323/99 must be that in the case of an allocation which is taxable under Article 5(6) of the Sixth Directive, in particular the allocation of goods (in this case a motor vehicle)

— which were acquired without any entitlement to deduct, and

— on which work giving entitlement to deduct has been carried out, resulting in the incorporation of 'component parts' in the goods,

the taxable amount for the purposes of Article HA(1)(b) of the Sixth Directive must be determined by reference to the price, at the time of the allocation, of the goods incorporated in the vehicle which constitute component parts of the goods allocated, within the meaning of Article 5(6) of that directive.

Question 4 in Case C-322/99, on the relationship between Article 5(6) and Article 5(7)(c) of the Sixth Directive

85By Question 4 in Case C-322/99, the national court is seeking to ascertain the relationship between Article 5(6) and Article 5(7)(c) of the Sixth Directive.

86Article 5(7) of the Sixth Directive provides that Member States may treat as supplies made for consideration the retention of goods by a taxable person or his successors when he ceases to carry out a taxable economic activity where the value added tax on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with Article 5(7)(a). Article 5(7)(c) thus authorises Member States to adopt a special provision for situations in which a taxable person ceases to trade.

87As the Advocate General observes in paragraph 83 of his Opinion, it is common ground that the Federal Republic of Germany has not made use of the possibility afforded by Article 5(7)(c) of the Sixth Directive. The taxation of the allocation of goods which gave rise to the main proceedings is therefore governed exclusively by Article 5(6) of the Sixth Directive and there is no need to interpret Article 5(7)(c) thereof.

Question 5 in Case C-322/99 and Question 4 in Case C-323/99, on the adjustment of deductions pursuant to Article 20 of the Sixth Directive

88By Question 5 in Case C-322/99 and Question 4 in Case C-323/99, the national court seeks to ascertain whether the deductions of VAT are to be adjusted pursuant to Article 20 of the Sixth Directive. It asks essentially whether, in the event that work carried out after the purchase of a vehicle, and on which input VAT was deductible, does not give rise to liability for VAT under Article 5(6) of that directive when the vehicle is allocated, the VAT deducted in respect of that work is to be adjusted pursuant to Article 20(1)(b) of that directive.

89It should be noted that, in situations such as those which gave rise to the main proceedings, it follows from Article 20(1)(b) of the Sixth Directive that the VAT initially deducted by the taxable person must be adjusted when the goods are allocated by the taxable person for his private purposes when changes in the factors used to determine the amount to be deducted occurred after the return was made.

90That rule apples to post-acquisition transactions on which input VAT was deducted which are excluded from the concept of 'component parts' referred to in Article 5(6) of the Sixth Directive. Those transactions are those concerning, on the one hand, post-acquisition supplies of services on which input VAT was deducted and, on the other hand, post-acquisition supplies of goods on which input was deducted, which are excluded from the concept of 'component parts' referred to in Article 5(6) of the Sixth Directive.

91It must be noted, however, that where those supplies of services or supplies of goods subject to deductible VAT were entirely consumed in the course of the business activity before the goods were allocated, there is no change in the factors within the meaning of Article 20(1 )(b) of the Sixth Directive to justify an adjustment of the deductions.

92Accordingly, the deduction of the VAT on the expenditure incurred in connection with the work carried out on Mr Fischer's and Mr Brandenstein's vehicles must be adjusted pursuant to Article 20(1 )(b) of the Sixth Directive in so far as the allocation is not subject to VAT under Article 5(6) of the Sixth Directive and the value of the work in question was not entirely consumed in the course of the taxable persons' business activities before the vehicles were allocated to their private assets.

93It remains to determine whether, for supplies of goods in respect of which VAT was deducted and which constitute 'component parts' within the meaning of Article 5(6) of the Sixth Directive, the application of Article 20(1 )(b) of that directive is necessarily precluded.

94In that regard, it should be observed that there is nothing to preclude the application of Article 20(1)(b) of the Sixth Directive in the case of the 'component parts' referred to in Article 5(6) of that directive. Furthermore, Article 20(1)(b) expressly precludes the adjustment of the transactions referred to in Article 5(6) only in the case of allocations for the purpose of making gifts of small value and giving samples.

95The answer to Question 5 in Case C-322/99 and to Question 4 in Case C-323/99, as reformulated in paragraph 88 above, must therefore be that where work which is carried out on goods (in this case a motor vehicle) after their purchase and on which the input VAT was deducted does not give rise to liability for VAT pursuant to Article 5(6) of the Sixth Directive when the vehicle is allocated, the VAT deducted in respect of that work must be adjusted in accordance with Article 20(1)(b) of that directive if the value of the work in question has not been entirely consumed in the context of the business activity of the taxable person before the vehicle is allocated to his private assets.

Costs

Costs

96The costs incurred by the German and Greek Governments and by the Commission, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main proceedings, a step in the actions pending before the national court, the decision on costs is a matter for that court.

Operative part

On those grounds,

THE COURT (Fifth Chamber),

in answer to the questions referred to it by the Bundesfinanzhof by orders of 15 July 1999, hereby rules:

1. Where a taxable person allocates for purposes other than those of the business goods (in this case a motor vehicle) on the acquisition of which value added tax was not deductible and which, after being acquired, had value-added-tax-deductible work done on them, the value added tax payable under Article 5(6) 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 applies solely to the 'component parts' of the goods in respect of which there was entitlement to deduct, namely the components which definitively lost their physical and economic distinctiveness when they were incorporated in the vehicle, after its purchase, following transactions involving supplies of goods which led to a lasting increase in the value of the vehicle which has not been entirely consumed at the time of the allocation.

2. In the case of an allocation which is taxable under Article 5(6) of the Sixth Directive 77/388, in particular the allocation of goods (in this case a motor vehicle)

— which were acquired without any entitlement to deduct,

I - 4 1 07 — on which work giving entitlement to deduct has been carried out, resulting in the incorporation of 'component parts' in the goods,

the taxable amount for the purposes of Article 11(A)(1)(b) of Sixth Directive 77/388 must be determined with reference to the price, at the time of the allocation, of the goods incorporated in the vehicle which constitute component parts of the goods allocated, within the meaning of Article 5(6) of that directive.

3. Where work which is carried out on goods (in this case a motor vehicle) after their purchase and on which input value added tax was deducted does not give rise to liability for value added tax pursuant to Article 5(6) of Sixth Directive 77/388 when the vehicle is allocated, the value added tax deducted in respect of that work must be adjusted in accordance with Article 20(l)(b) of that directive if the value of the work in question has not been entirely consumed in the context of the business activity of the taxable person before the vehicle is allocated to his private assets.

La Pergola Wathelet Edward

Jann Sevón

Delivered in open court in Luxembourg on 17 May 2001.

A. La Pergola R. Grass

President of the Fifth Chamber Registrar

OPINION OF ADVOCATE GENERAL JACOBS delivered on 14 December 2000 1

1In the present two cases the German Bundesfinanzhof (Federal Finance Court) requests the Court to interpret Articles 5(6), 5(7)(c), 11(A)(1)(b) and 20(1)(b) of the Sixth VAT Directive. 2

2Under Article 5(6) of the Directive VAT is to be paid on the application by a taxable person of goods forming part of his business assets for his private use. That charge to tax is however subject to the condition that 'the value added tax on the goods in question or the component parts thereof was wholly or partly deductible'.

3At issue in the present cases is the tax treatment of the application by a trader of a motor car for his private use where, although he initially acquired the car without being able to deduct input tax, he subsequently deducted tax on the expenditure incurred in connection with improvements to or the maintenance or use of the car in question.

The relevant provisions of the Directive

4Article 2 of the Directive subjects to VAT supplies of goods or services for consideration by a taxable person acting as such.

5According to Article 5(6) 'shall be treated' as supplies made for consideration

'[t]he application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible...'.

6Article 6(2)(a) contains a similar rule:

'The following shall be treated as supplies of services for consideration:

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

7Article 5(7)(c) allows Member States to adopt a supplementary provision.

'Member States may treat as supplies made for consideration:

(c) ... the retention of goods by a taxable person or his successors when he ceases to carry out a taxable economic activity where the value added tax on such goods became wholly or partly deductible upon their acquisition... .'

8Article 11(A)(1)(b) defines the taxable amount in respect of the supplies referred to in Article 5(6) and 5(7). That taxable amount is to be:

'... the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined as [at] the time of supply'.

9Under Article 20(1 )(b) the initial deduction is to be adjusted where after the return is made some change occurs in the factors used to determine the amount to be deducted.

10The purpose of Article 5(6) of the Directive is to ensure equal treatment as between a taxable person who applied goods forming part of the assets of his business for private use and an ordinary consumer who bought goods of the same type. In pursuit of that objective that provision prevents a taxable person who has been able to deduct VAT on the purchase of goods used for his business from escaping the payment of VAT when he applies those goods for his private use and from thereby enjoying advantages (resulting from the right of deduction) to which he is not entitled by comparison with an ordinary consumer who buys goods and pays VAT on them. 3

11It follows from the system and the wording of the Directive that Article 5(6) creates a deemed (fictitious) supply of goods and concerns the outright transfer of goods out of the business. The parallel provision of Article 6(2)(a) creates by contrast a deemed supply of services and concerns the private use of goods which continue to form part of the business. 4

German legal background

12The main proceedings concern the years 1991 and 1992 and are thus governed by the Umsatzsteuergesetz (Turnover Tax Law) 1991. Paragraph 1(1)(2) thereof subjected the private use of goods and services (Eigenverbrauch) to tax. Paragraph 1(1)(2)(a) defined as one of the cases of Eigenverbrauch the application (Entnahme) of business goods for other than business purposes.

13The applicable German law was thus in substance similar to Article 5(6) of the Directive, with one exception: Article 5(6) subjects the charge to tax to the condition that 'the value added tax on the goods in question or the component parts thereof was wholly or partly deductible' whilst the applicable German law did not contain such a condition.

14Despite that difference the German authorities applied the condition in question on the basis of the direct effect of Article 5(6). The transfer of a business car to private use was, for example, not taxed where the car had been acquired without deduction of tax from a private individual.

15In that connection the question arose whether Article 5(6) allowed taxation where the trader in question, after the initial non-deductible acquisition, deducted tax on expenses incurred in connection with improvements to or the maintenance or use of the goods transferred to private use. At the centre of that debate was the meaning of the concept of 'component parts' in Article 5(6) of the Sixth Directive.

16On that issue the Federal Ministry of Finance published on 13 May 1994 a notice 6 which rapidly became known as the windscreen-wiper decree (Scheiben-wischererlass). The notice lays down the following principles. If the trader was entitled to deduct VAT not in respect of the goods themselves but for component parts added later, the transfer of the goods to non-business use is subject to VAT. For the sake of simplicity a transfer of goods to non-business use may not be subject to VAT where the expenditure (net of VAT) on improvements to and repairs, maintenance and care of the goods transferred does not exceed 20% of the initial cost of acquisition. If such expenditure exceeds 20% of the initial cost of acquisition, it can be assumed without further investigation that components have been added to the goods. As examples of the expenditure to be taken into account the notice mentions expenditure on the inspection of a car, on a car wash, for the replacement of the clutch and of the brake-shoes, and on the acquisition of new windscreen-wiper blades. 7

17The Bundesfinanzhof held by contrast in a judgment of 30 March 1995 8 that expenditure on the maintenance or the use of goods which gave rise to deduction cannot affect the taxation of the application for private use of the goods themselves. That was because expenditure on the maintenance or the use of goods did not in general lead to the acquisition or the creation of 'component parts' of goods within the meaning of Article 5(6) of the Directive. In its judgment the Bundesfinanzhof referred extensively to the Court's judgment in Kühne. In that case the Court held that no charge to tax arose under Article 6(2)(a) in respect of private use by a taxable person of a motor car acquired second-hand without deduction of tax from a private individual, notwithstanding the fact that the taxable person had deducted tax on the costs incurred in connection with the maintenance and use of the goods. The tax rules applicable to the supply of business goods were to be distinguished from those concerning the taxable expenses incurred for their use and maintenance.

The main proceedings and the questions referred

Case C-322/99

18Mr Fischer operated a business dealing in second-hand (vintage) cars. In 1989 he purchased for his business an 'RR-Bentley' at a price of DEM 28 000 from a private vendor and thus without the possibility of deducting input tax. In 1990 he had extensive repairs to the bodywork and respraying work carried out for which he paid DEM 10 800 plus DEM 1 512 VAT. He applied to deduct the VAT included in that invoice. On 31 December 1992 he ceased trading and transferred some of the unsold vintage cars, including the 'RR-Bentley', to his private assets.

19The Finanzamt (Tax Office) Burgdorf ruled the transfer of the Bentley to be a transfer of business assets to private use which was subject to tax. It used as the basis of assessment the Teilwert (notional value) of DEM 20 000 and accordingly levied VAT of DEM 2 800.

20Mr Fischer, relying on Article 5(6) of the Directive, lodged an official complaint and then brought a successful action before the Finanzgericht (Finance Court).

21In its appeal to the Bundesfinanzhof the Finanzamt pleads breach of Paragraph l(1)(2)(a) of the Umsatzsteuergesetz 1991 and, in doing so, relies on the following arguments. Under Article 5(6) of the Directive a transfer to private use may be subject to tax where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible. Even if Mr Fischer did not claim deduction of tax on the purchase of the car, he did so in respect of the extensive bodywork repairs and respraying work carried out. According to the case-law of the Bundesfinanzhof, expenditure on the maintenance and use of goods does not lead to 'component parts thereof' within the meaning of Article 5(6). The underlying assumption is that such expenditure is usually consumed during the course of the business use of the goods and does not therefore result in any final consumption at the moment of the transfer to private use. That is not so in the case of measures which result in a lasting increase in the value of the goods (and thus of their value when transferred to private use). They should be treated as tax-deduc tible component parts which have been added to the goods. In such cases the system requires that the transfer of the goods to private use be subject to tax to prevent their final consumption from being free of tax. In the present case the extensive work on the car is equivalent to subsequent acquisition and manufacturing costs and therefore justifies taxation of the transfer of the 'RR-Bentley' to Mr Fischer's private use.

22The Bundesfinanzhof referred the following questions for a preliminary ruling:

'(1) Do subsequent bodywork repairs and respraying work (on which VAT was deducted) carried out on a car (on the acquisition of which VAT was not deductible) mean, on application of the car for private use, (a) that the car must be viewed as goods on which VAT was partly deductible under Article 5(6) of the Directive, or

(b) that the subsequent expenditure is to be viewed as component parts, on which VAT was deductible, of the goods?

(2) If Question (1) is answered in the affirmative, what are the business goods applied for private use which are to be taxed under Article 5(6) of the Directive:

(a) the car including the work carried out on it (bodywork repairs and respraying) or

(b) only the work carried out (body work repairs and respraying)?

(3) If Question (2) is answered in the affirmative: Is the basis of assessment under Article 11A(1)(b) of the Directive therefore the purchase price of the car (or an equivalent car) together with the cost of the repairs each determined as at the time of application for private use, or only the price of the repairs carried out (on which VAT was deducted)?

(4) What is the relationship between Article 5(6) and Article 5(7)(c) of the Directive?

(5) If the answer to Question (1) is to the effect that the subsequent (tax-deduc tible) work carried out (bodywork repairs and respraying) is not subject to tax on application of the goods (car) for private use under Article 5(6) of the Directive, is the deduction of input tax on these services to be adjusted under Article 20(1)(b) of the Directive?'

Case C-323/99

23Mr Brandenstein is a self-employed tax adviser and auditor. On 8 November 1985 he purchased a car from a private vendor for DEM 33 600. There was no separate statement of VAT in the invoice. Until 1991 the car was exclusively part of Mr Brandenstein's business assets. During that period he spent a total of DEM 16 028.54 (including VAT) on servicing, minor repairs, changing tyres, the installation of a catalytic converter in 1987 and the replacement of the windscreen in 1991. In each case he claimed deduction of input tax. In 1991 he transferred the car to his private use.

24In its VAT notice for 1991, the Finanzamt Düsseldorf-Mettmann deemed the transfer of the car to private use to be taxable under Paragraph 1(1)(2)(a) of the Umsatzsteuergesetz 1991. It used as the basis of assessment the sum which the plaintiff had declared as the value of the transfer to private use for the purposes of tax on profits (DEM 7 500) and levied VAT of DEM 1 050.

25Mr Brandenstein lodged an official complaint and argued that the transfer to private use of business goods, on the purchase of which VAT was not deductible, should not be taxed. In support of his argument he referred to Court's judgment in Kühne and to the case-law of the Bundesfinanzhof.

26The Finanzamt dismissed the complaint. It referred to the notice from the Federal Ministry of Finance of 13 May 1994. 11 The transfer of the car to private use was subject to VAT because the expenditure (net of VAT) on improvements, repairs, maintenance and care amounted to more than 20% of the initial costs of acquisition of DEM 33 600.

27The action brought by Mr Brandenstein before the Finanzgericht (Finance Court) against that decision was successful. In the grounds of its judgment, the Finanzgericht stated that the requirements for not being subject to tax under Article 5(6) of the Sixth Directive were met because Mr Brandenstein's expenditure on the car whilst it formed part of his business assets neither altered nor extended its potential use, nor substantially increased its value.

28In its appeal on a point of law before the Bundesfinanzhof the Finanzamt essentially argues that Mr Brandenstein either added to the car 'component parts' within the original meaning of that expression which — at least in part — were not consumed before the transfer to private use, or independently (or additionally) acquired 'goods'. According to the Finanzamt 'component parts' are parts of a natural ensemble (natürliche Sacheinheit) or of a composite object which have lost their self-standing distinctiveness {Selbstän-digkeit) through combination with one another.

29The Bundesfinanzhof referred the following questions for a preliminary ruling:

'1. Is [Article 5(6) of the Sixth Directive] applicable where, although VAT on the goods themselves was not deductible, VAT was deductible on the services or supplies which the taxable person ordered or received in respect of those goods after their acquisition?

2. What does the term "component parts" mean in the context of this provision?

3. How is the basis of assessment to be determined for an application of business assets for private use, where VAT is wholly or partly deductible, not on the goods disposed of, but on some of their components?

4. Is the deduction of input tax which a taxable person has claimed in respect of services or supplies for goods on the purchase of which VAT was not deductible to be adjusted under Article 20 of Directive 77/388/EEC if the first sentence of Article 5(6) of Directive 77/388/EEC is not applicable?'

30Cases C-322/99 and C-323/99 were joined for the purposes of the oral hearing and the judgment by order of 6 July 2000.

31Written observations have been submitted in both cases by the German Government and the Commission and in Case C-322/99 by the Greek Government. At the oral hearing Mr Brandenstein, the German Government and the Commission were represented.

Taxation under Article 5(6)

32The first question in Case C-322/99 and the first and second questions in Case C-323/99 raise the issue whether a charge to tax under Article 5(6) arises where, although VAT on the acquisition of the car was not deductible, VAT was deducted on work carried out on the car after the acquisition.

33In the event of an affirmative reply to the first question the referring court wishes to know by its second question in Case C-322/99 whether under Article 5(6) a charge to tax arises with regard to the goods in question and the component parts taken as a whole or only with regard to the newly added component parts.

34The cars which Mr Fischer and Mr Brandenstein applied for their private use are 'tangible property' within the meaning of Article 5(1) of the Directive and must as a consequence be classified as 'goods' for the purposes of Article 5. They may therefore be the subject of a deemed supply under Article 5(6).

35It is common ground that before their application for private use those cars formed exclusively part of the two plaintiffs' business assets. It is also common ground that VAT on the acquisition of the cars was not deductible.

36.The issue is whether the application of those cars for private use may none the less be taxed because Mr Fischer and Mr Brandenstein deducted VAT on work carried out on the cars after their acquisition. It will be recalled that they deducted VAT on 'extensive bodywork repairs and respraying work' (Case C-322/99) and on 'servicing, minor repairs, changing tyres, installation of a catalytic converter and replacement of a windscreen' (Case C-323/99).

37The answer to that question depends on the interpretation of the phrase in Article 5(6) 'where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible'.

38As the referring court rightly 13 explains, there are two ways to read that phrase both of which might lead to taxation under Article 5(6). In situations such as those in the main proceedings it might be argued

— that VAT on the 'goods in question' was 'partly' deductible, or — that VAT on 'the component parts thereof' was deductible.

39I will assess whether one of those alternative readings applies in the present cases.

Was VAT on the 'goods' in question 'partly' deductible?

40According to the Greek Government, in Case C-322/99 VAT on the 'goods in question' was 'partly' deductible within the meaning of Article 5(6) of the Directive. It considers that the bodywork repairs and respraying work carried out on Mi-Fischer's 'RR-Bentley' were very extensive as can be seen from their considerable costs (in comparison with the initial purchase price). Those costs must therefore be viewed as having contributed to the total costs of the acquisition of the car in question.

41More generally, in the Greek Government's view, the concept of 'goods' in Article 5(6) refers not only to their initial acquisition but also to all types of later expenditure which increases the value of those goods in the long run. Only expenditure on the maintenance and use of goods which does not have any lasting influence on their value can be disregarded when assessing whether VAT on the 'goods' in question was 'partly' deductible. The suggested interpretation is therefore compatible with the judgments in Kühne and in Mohsche. 5 There the Court held that Article 6(2) of the Directive subjected taxation of the private use of business goods to the condition that the goods themselves, and not the expenditure on their maintenance or use, had given rise to deduction.

42I agree however with the Commission and the German Government which both maintain that Article 5(6) of the Directive may not be interpreted in that way.

43First, the alternative 'partly deductible' seems designed to cover only situations in which the goods in question were allocated partly to the taxable person's business activities and partly to his private activities. A good example is provided by Armbrecht in which a trader chose at the moment of the acquisition of a property to assign only a part thereof to his business and to reserve the rest for his private use. Only in those cases is it entirely correct to speak of 'partly' deductible input tax. In the present cases, by contrast, the initial acquisition of the second-hand cars did not give rise to any deduction at all, whilst subsequent work on the cars gave rise to several 'full' deductions.

44Secondly, I consider that the expression 'VAT on the goods in question' refers to input tax on the initial acquisition or production of those goods only and not to input tax on subsequent expenditure on the goods. That is because input tax on subsequent expenditure is covered, in so far as is relevant for the application of Article 5(6), by the expression 'tax on... the component parts thereof' (see paragraphs 45 to 77 below).

Was VAT on 'component parts thereof' deductible?

45The debate before the Court has concentrated on the meaning of the expression 'component parts thereof' in Article 5(6) of the Directive.

46The German Government considers essentially that expenditure of all kinds (including expenditure on supplies of services) which either maintains or increases the value of those goods gives rise to the applicability of the concept of 'component parts'.

47The Commission considers, by contrast, that 'component parts' can arise only through supplies of goods and not through supplies of services. Furthermore, supplies of goods of limited value which do not clearly increase the value of the goods in question cannot be regarded as giving rise to 'component parts'.

— May 'component parts' be added after the initial acquisition?

48A preliminary question is whether the concept of 'component parts thereof' is limited to parts already present at the moment of the initial acquisition or includes also parts added later.

49I agree with the German Government and the Commission which both consider that 'component parts' may be added after the initial acquisition of the goods in question.

50Even if the Finnish, Greek, German, Netherlands, Swedish and Danish language versions of Article 5(6) use 'time-neutral' expressions similar to the English 'component parts', it follows from the French ('les éléments le composant'), Spanish ('los ele mentos que lo componen'), Italian ('gli elementi che lo compongono') and Portuguese ('aos elementos que os compõem') versions that the relevant moment for establishing whether VAT on component parts was deductible is the moment of the application for private use and not the moment of the initial acquisition. The wording of Article 5(6) supports therefore the view that component parts may be added after the initial acquisition.

51Furthermore, Article 5(6) is intended, as already stated, to prevent a taxable person who has been able to deduct VAT on the purchase of goods used for his business from escaping the payment of VAT when he applies those goods for his private use. In view of that objective, preexisting component parts and component parts added after the initial acquisition may not be treated differently. In both situations VAT on component parts was deductible in view of an envisaged later use of the goods for the trader's taxable transactions and in both cases a trader who applies the goods for his private use should be prevented from enjoying a deduction advantage to which he is no more entitled than an ordinary consumer who buys goods and pays VAT on them.

52Accordingly, the concept of 'component parts' encompasses parts added after the initial acquisition.

— May supplies of services give rise to 'component parts'?

53The issue is whether 'component parts' can only arise through supplies of goods or also through supplies of services. That question might be relevant in Case C-322/99 where Mr Fischer deducted VAT on 'extensive bodywork repairs and respraying work' on the 'RR-Bentley' and in Case C-323/99 where Mr Brandenstein deducted VAT on 'servicing' and 'minor repairs'.

54The German Government considers on the basis of a teleologicai interpretation of Article 5(6) of the Directive that both supplies of services and supplies of goods might give rise to component parts. In its view, the aim of Article 5(6) is to prevent a taxable person's private consumption (in the form of a transfer of business assets to his private assets) from escaping tax. An application of business goods for private use leads to private consumption if those goods or the value which is embodied in them have not been fully consumed while they were part of the taxable person's business assets. The same follows indirectly from Article 11(A)(1)(b) which establishes as the relevant taxable amount the purchase price of the goods determined at the time of the transfer to private use. Taxation under Article 5(6) thus depends on the physical condition in which the goods in question leave the sphere of the undertaking and become part of the taxable person's private assets. The physical condition of the goods at the time of the transfer depends in turn on whether work for the improvement or maintenance of the goods in question has been carried out on them. Since supplies of services (e.g. bodywork repairs) might in economic terms have the same positive long-term effects on the physical condition and value of the goods in question as supplies of goods (e.g. the supply of a new engine) the concept of component parts should be interpreted as including supplies of services which increase or maintain the value of the goods in question. In that connection the German Government points also to the practical difficulties of distinguishing between supplies of services and supplies of goods. Work carried out on goods after their initial acquisition typically involves mixed supplies of services and goods (e.g. the replacement of a windscreen).

55In my view, the unambiguous wording of Article 5(6) and the system of the Directive do not allow such an extensive interpretation of the concept of component parts.

56The French (les éléments le compo sant), Spanish (los elementos que lo com ponen) and Italian (gli elementi che lo compongono) versions of the Directive use words which might perhaps be translated into English as 'component elements'. The German (Bestandteile) and Dutch (bestand delen) versions use words closer to the expression actually used in the English version of the Directive, namely 'component parts'. Despite that minor difference between 'elements' and 'parts' the terminology used in all language versions suggests that 'component parts' within the meaning of Article 5(6) must be physical and tangible objects which are integrated into the goods in question. I cannot see how services which do not entail supplies of goods (e.g. a car wash, or bodywork repairs) can lead to 'elements' or 'parts' of goods within the meaning of Article 5(6) of the Directive.

57That is confirmed by a systematic interpretation of Article 5(6). In all the language versions the concept of component parts is directly linked to the first alternative in Article 5(6), namely the 'goods in question'. For example in the English version VAT must have been deductible on the component parts 'thereof'. Consequently, if 'goods' are defined under Article 5(1) as tangible property, 'component parts thereof' must be of the same nature. A supply of services is by contrast defined as a transaction which does not constitute a supply of goods (Article 6(1) of the Directive).

58Furthermore, I do not share the fears underlying the German Government's position, namely that the exclusion of supplies of services from the concept of component parts will lead to a significant amount of untaxed private consumption and thus to tax avoidance. Either the services in question do not result in a lasting increase in the value of the goods (e.g. a car wash) and are therefore consumed within the business before the transfer to private use; or, where the services in question result in a lasting increase in the value of the goods in question (e.g. extensive bodywork repairs) the initial deduction can be adjusted under Article 20(1)(b) of the Directive (see paragraphs 84 to 93 below).

59Finally, it is true that work carried out on a car often involves mixed supplies of services and goods. But that does not mean that supplies of services cannot be distinguished from supplies of goods. In order to determine whether a given transaction constitutes a supply of goods or a supply of services its characteristic features must be identified. Where a supply of goods is only one element of a transaction in which the provision of services largely predominates the transaction in question must be regarded as a supply of services. Servicing, for example, might require the supply of screws, oil-filters or spark plugs. Respraying work requires the supply of paint. In those cases where work on a car involves some ancillary and minor supplies of goods which are inextricably linked to the services in question that work must be viewed as a supply of services within the meaning of Article 6(1) of the Directive and cannot therefore be regarded as giving rise to the applicability of the concept of 'component parts'.

60Accordingly, supplies of services (including those which necessarily entail ancillary and minor supplies of goods) cannot give rise to 'component parts' within the meaning of Article 5(6).

— What categories of supplies of goods lead to 'component parts'?

61If only supplies of goods may give rise to 'component parts' within the meaning of Article 5(6), the question arises whether all such supplies must be taken into account. In Case C-323/99 for example Mr Brandenstein deducted VAT on 'changing tyres, the installation of a catalytic converter and the replacement of a windscreen'. Similar questions arise in connection with the replacement of a battery or the installation of a more powerful engine or a car telephone.

62The German Government considers that all supplies which have not been consumed while the goods and component parts formed part of the taxable person's business assets should in principle lead to taxation under Article 5(6). Consequently supplies of goods which may be classified as maintenance expenditure might also give rise to 'component parts', the only condition being that those supplies may be used and consumed over a certain period of time.

63The Commission suggests by contrast, as already stated, a narrower interpretation of the concept of 'component parts'. In its view, only supplies which clearly increase the value of the goods in question give rise to component parts. Supplies of goods of a comparatively limited value should not be taken into account.

64If I understand those two divergent positions correctly, the German Government would regard for example a new battery as a 'component part', whilst the Commission would probably not. Both the Commission and the German Government would probably accept that a new engine must be viewed as a component part.

65Nothing in the wording of Article 5{6) indicates whether or not VAT deductions on parts of relatively little value should trigger taxation under that provision.

66I agree therefore with the Commission that the content of the concept of 'component parts' cannot be determined without having regard to the legal consequences of Article 5(6) of the Directive. It is thus necessary to address forthwith the issue raised by the second question in Case C-322/99, namely whether, in the event that Article 5(6) is applicable, a charge to tax arises with regard to the goods in question and the component parts taken as a whole or only with regard to the newly added component parts.

67Article 5(6) states that the application of 'goods' for private use or 'their' application for other than business purposes must be treated as supplies made for consideration, 'where' the value added tax on the goods in question 'or' the component parts thereof was deductible. It follows from that unambiguous wording that the application of the goods in question and not just of parts of those goods is subject to tax. Moreover the formulation of the condition ('where' and not 'in so far as', 'or' and not 'and') indicates that deduction of VAT on component parts suffices to trigger taxation of the transfer to private use of the goods and their component parts taken together and that the authors of the Directive did not intend to set up pro rata taxation.

68Both the Commission and the German Government point out that on a literal interpretation Article 5(6) may therefore lead to double taxation. A second-hand car acquired without the possibility of deducting VAT from a private person carries VAT in it which normally was borne by a final consumer at the moment of an earlier acquisition. If VAT-deductible work on that car such as the installation of a new engine gives rise to a 'component part' within the meaning of Article 5(6), the transfer of the car to private use triggers the taxation of the car as a whole. Consequently, everything in the car except the new engine will be taxed a second time. Those submitting observations are also aware that such double taxation is in principle contrary to the general objective of fiscal neutrality inherent in the system of value added tax.

69It seems that in such cases the most desirable solution would be that VAT should be charged on the residual value of those items on which VAT was originally deducted. That would agree with the principle of neutrality and would ensure equal treatment of taxable and non-taxable persons.

70The clear wording and the legislative history suggest however that the legislature deliberately accepted that risk of double taxation and presumably did so for practical reasons. For example in the German version of the initial Commission proposal the conditional sentence in question started with 'insoweit' (in so far). Such a formulation could have been interpreted as setting up pro rata taxation. The final version of the Directive uses however 'wenn' (where).

71We are thus faced with a dilemma in respect of the interpretation of the concept of 'component parts' in Article 5(6). Either that concept is interpreted narrowly, which might conflict with the specific objective of Article 5(6), namely to prevent a taxable person from enjoying deduction advantages to which he is not entitled by comparison with an ordinary consumer. Or that concept is interpreted broadly, which might conflict with the general objective of fiscal neutrality.

72In my view, a first step in resolving this dilemma is to distinguish 'component parts' clearly from independent goods. Where two goods are brought together without definitely losing their physical and economic distinctiveness they should not be considered as component parts. That is compatible both with the wording of Article 5(6) and with the objective of fiscal neutrality. If for tax purposes the two goods remain independent, their transfer(s) to private use must be seen as two independent taxable events. With regard to each of those events the condition under Article 5(6), namely that VAT on the goods in question was deductible, must be satisfied. Double taxation in respect of goods on which VAT was not deductible is thereby precluded.

73I consider therefore for example that the replacement of tyres or the installation of a car telephone or a car radio does not create 'component parts' of the car in question. Since those goods may easily be separated from the car and be the object of independent transactions they do not definitely lose their physical and economic distinctiveness. The transfer to private use of a car with a car radio or a car telephone must therefore be viewed for VAT purposes as several applications for private use of independent goods and for each of those applications the requirements of Article 5(6) must be satisfied.

74The second element of the solution is in my view to exclude from the concept of 'component parts' supplies of goods which do not result in a lasting increase in the value of the 'goods in question' but simply contribute to maintaining their value. It seems disproportionate to accept double taxation of the 'goods in question' where the risk of the taxable person enjoying deduction advantages does not exist because the value of the newly added parts is consumed while they form part of the business assets, or where the deduction advantage realised on transfer of the goods in question to private use is small in comparison with the disadvantages of double taxation.

75I agree therefore with the Commission that the deduction of VAT on the replacement of a windscreen wiper or an empty car battery should not lead to taxation of the car as a whole when it is transferred to private use, whilst the installation of a more powerful engine or of a catalytic converter for the purpose of modernising the car might do so. That solution also has the advantage of leading to a similar result to that in Kühne.

76Although in some cases the above solution will lead to double taxation contrary to the system of the Directive, that consequence must be seen in the context of the wider problems arising under the Directive on the sale of second-hand goods, notably where goods bought from a private individual are subsequently re-sold by a trader in the course of his business. 4

77It follows from the foregoing considerations that the provisions of Article 5(6) relating to 'component parts' apply only where 'goods' are supplied within the meaning of Article 5(1) (not services), where those goods become an integral part of the 'goods in question' by losing their physical and economic distinctiveness and where there is a lasting increase in the total value. It follows also from the above that where those conditions are fulfilled a charge to tax arises in respect of the application for private use of the goods in question and the component parts taken as a whole and not only with regard to the component parts.

Taxable amount under Article 11(A)(1)(b)

78By the third questions in each case the referring court wishes to know whether, if in situations such as those in the main proceedings there is a supply within the meaning of Article 5(6), the taxable amount under Article 11(A)(1)(b) must be determined by reference to the purchase price of the car and the component parts taken together or only of the component parts.

79In my view, it follows from a combined reading of Article 11(A)(1)(b) with Article 5(6) and from the interpretation of Article 5(6) given above that the taxable amount must be determined by reference to the purchase price of the car and the component parts taken together. According to the first and main alternative of Article 11(A)(1)(b) the taxable amount in respect of supplies referred to in Article 5(6) shall be the purchase price of 'the goods' determined at the time of supply. For the determination of the taxable amount Article 11(A)(1)(b) thus refers back to the goods which are subject to taxation under Article 5(6). As I have stated above, according to its clear wording Article 5(6) subjects to tax the goods and their component parts taken together.

80Accordingly, if in situations such as those in the main proceedings a charge to tax arises under Article 5(6), the taxable amount under Article 11(A)(1)(b) of the Directive must be determined by reference to the price of the goods and their component parts taken together.

Relationship between Articles 5(6) and 5(7)(c)

81By the fourth question in Case C-322/99 the referring court wishes to know what the relationship is between, on the one hand, Article 5(6), and, on the other hand, Article 5(7)(c) which relates to the retention of goods by a taxable person when he ceases to carry out a taxable economic activity.

82Article 5(7)(c) allows Member States to introduce a special provision for situations in which a taxable person ceases trading.

83In the present case it is however common ground that Germany has not made use of the possibility afforded by Article 5(7)(c). I therefore agree with the Commission that in the absence of such a special provision the taxation of the application for private use of goods after the cessation of trading is governed exclusively by Article 5(6). It is therefore not necessary to give an interpretation of Article 5(7)(c).

Adjustments of deductions under Article 20

84The fifth question in Case C-322/99 and the fourth question in Case C-323/99 raise the novel issue whether the initial deduction for expenditure for work carried out on the cars in question may be adjusted under Article 20 of the Directive, if according to the Court's interpretation no charge to tax arises under Article 5(6).

85It will be recalled that, in my view, tax-deductible supplies of services and supplies of goods which do not result in a lasting increase in the value of the goods in question cannot be viewed as 'component parts' and that there is therefore no deemed supply under Article 5(6) when the goods concerned by those supplies are put to private use. It will also be recalled that in Case C-322/99 Mr Fischer deducted VAT on extensive bodywork repairs and respraying work and in Case C-323/99 Mr Brandenstein deducted VAT on servicing, minor repairs and the replacement of the windscreen.

86Under Article 20(1)(b) the initial deduction is to be adjusted where

'after the return is made some change occurs in the factors used to determine the amount to be deducted, in particular where purchases are cancelled or price reductions are obtained; however, adjustments shall not be made in cases of transactions remaining totally or partially unpaid and of destruction, loss or theft of property duly proved or confirmed, nor in the case of applications for the purpose of making gifts of small value and giving samples specified in Article 5(6). However, Member States may require adjustment in cases of transactions remaining totally or partially unpaid and of theft.'

87According to the referring court all the work carried out on the cars in question after their initial acquisition constituted expenditure for the purposes of Mi-Fischer's and Mr Brandenstein's taxable transactions within the meaning of Article 17(2) of the Directive. Therefore they both enjoyed at the time when the work was carried out a right of immediate and integral deduction of tax. Then, however, the business objectives in question were not fully realised with regard to the cars in question since Mr Fischer ceased trading altogether and Mr Brandenstein put his car to private use. In the referring court's view it might therefore be argued that, if the VAT-deductible work carried out on the cars after their acquisition is not to be taxed under Article 5(6) (together with the transfer of the cars to private use), the application of the cars for private use must be regarded as a change of factors within the meaning of Article 20(1)(b) of the Directive and therefore lead to an adjustment of the initial deductions.

88The German Government contends that as a matter of principle Article 20 cannot apply in cases of application of goods for private use. It argues that the rules on deemed supplies in Articles 5 and 6 of the Directive constitute a complete and exhaustive legal regime governing the private use of goods and services which precludes the parallel and/or cumulative application of the rules on adjustments of deductions under Article 20(1)(b).

89I agree however with the Commission that in principle the Directive allows the application of goods for private use to be viewed as a change of factors within the meaning of Article 20(1)(b). That follows from a comparison of the actual text of that provision with the corresponding provision of the Commission proposal. Under Article 20(1)(c) of the proposal adjustments were expressly excluded in all cases specified in Article 5(3) of the proposal which contained the different categories of application of goods to non-business purposes. The text of Article 20(1 )(b) as enacted, in that it excludes from the possibility of adjustment only two categories of application for private use, which are specifically mentioned in Article 5(6) of the Directive, namely applications for purposes of making gifts of small value and giving samples, thereby allows the Member States to provide for adjustments in respect of other types of application. The issue is therefore not so much whether as a matter of principle adjustments of deductions under Article 20 are possible, but in which situations Article 5(6) leaves room for such adjustments.

90I consider, on the one hand, that in so far as at least one VAT-deductible 'component part' within the meaning of Article 5(6) was added, the application of Article 20 is precluded. In those cases all VAT deductions for work carried out on the goods in question are, where appropriate, automatically 'corrected' through the mechanism of a deemed supply under Article 5(6). As stated above Article 5(6) subjects the goods in question and their component parts taken together to tax. According to Article 11(A)(1)(b) the taxable amount is determined by reference to the purchase price of the goods in question at the time of supply. That price is in turn also affected by VAT-deductible work carried out on those goods (including those supplies of services and goods which did not lead to new component parts). In so far as the value created by VAT-deductible work is still present in the value of the goods in question at the moment of their transfer to private use, unjustified deductions are thus compensated by taxation under Article 5(6).

91On the other hand, where subsequent VAT-deductible work has not given rise to 'component parts', the rules on adjustment of deductions may provide an appropriate safety net in order to prevent a taxable person from enjoying unjustified deduction advantages. It must be remembered that the rules on adjustment of deductions pursue a similar objective to the legal fiction of Article 5[6), namely to prevent a taxable person who has benefited from the right to deduct from enjoying unjustified economic advantages. The method in Article 5(6) of a deemed supply was merely chosen for 'reasons of neutrality and simplicity'. I consider therefore that in principle tax deductions on supplies of services and supplies of goods which have not given rise to component parts may be adjusted under Article 20 on the occasion of the transfer of the goods concerned to private use.

92When adjusting those deductions one has however to take into account that the value of the supplies of services and goods in issue may have been consumed within the business before the transfer to private use takes place. In so far as those tax-deductible supplies have been consumed within the business, they can no longer be transferred to private use and on the occasion of the transfer to private use there is therefore no change of factors requiring an adjustment of deductions. Since the two types of supplies concerned, namely supplies of services and supplies of goods which do not result in a lasting increase in the value of the goods concerned, will by their very nature often be consumed before the transfer of the goods to private use, an

Conclusion adjustment of deductions will in many cases not be necessary.

93Accordingly, under Article 20(1)(b) of the Directive deductions on work carried out on goods after their acquisition may be adjusted on the occasion of the transfer of those goods to private use if on the basis of the supplies in question the provisions of Article 5(6) relating to 'component parts' are not applicable. Adjustments are however possible only in so far as the value of the work in question has not been consumed within the business before the goods were transferred to private use.

94For the above reasons the questions referred should in my view be answered as follows:

(1) The provisions of Article 5(6) of the Sixth VAT Directive relating to 'component parts' apply only where 'goods' are supplied within the meaning or Article 5(1) (not services), where those goods become an integral part of the 'goods in question' by losing their physical and economic distinctiveness and where there is a lasting increase in the total value of the goods.

(2) Where tax-deductible component parts have been integrated into goods, charge to tax in respect of the application for private use arises with regard to the goods and the component parts taken as a whole.

(3) Where charge to tax under Article 5(6) arises as a consequence of the integration into goods of tax-deductible component parts, the taxable amount under Article 11(A)(1)(b) of the Directive must be determined by reference to the price of the goods and their component parts taken together.

(4) In the absence of a special national provision implementing Article 5(7)(c) of the Directive the taxation of the application for private use of goods after the cessation of trading is governed exclusively by Article 5(6) of the Directive.

(5) Deductions on work carried out on goods after their acquisition may be adjusted under Article 20(1)(b) of the Directive on the occasion of the transfer of those goods to private use if on the basis of the supplies in question the provisions of Article 5(6) relating to 'component parts' are not applicable. Adjustments are however possible only in so far as the value of the work in question has not been consumed within the business before the goods were transferred to private use.

Notes

(1) Original language: English.

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

(3) Case C-20/91 De Jong v Staatssecretaris van Financiën [1992] ECR I-2847.

(5) The German legislation has in the meantime been modified and now expressly subjects the taxation of the transfer by a trader of business goods to non-business purposes to the condition that the input tax on the goods in question or the component parts thereof was wholly or partly deductible: see Paragraph 3(1b) of the Umsatzsteuergesetz in its

(4) See my Opinion in Case De Jong v Staatssecretaris van Financiën, cited in note 3, at paragraph 5. amended version.

(6) BStBl. 1994 I, p. 298.

(7) A recent notice from the Federal Ministry of Finance of

(8) June 1999 no longer contains that 'simplification' rule: BStBl. 1999 I, p. 581.

(8) BFHE 177, 541.

(9) Case 50/88 Kuhne v Finanzamt München III [1989] ECR

(192) 5.

(10) Cited in note 9.

(11) See paragraph 16 above.

(12) In a different factual context the Bundesfinanzhof requests in Case C-415/98 Bakcsi v Finanzamt Fürstenfeldbruck a preliminary ruling inter alia on the question whether a trader can assign goods exclusively to his private assets where he uses those goods partly for business purposes: see the Opinion of Advocate General Saggio of 13 April 2000.

(13) See the two alternatives suggested in the first question in Case C-322/99, above at paragraph 22.

(14) Cited in note 9.

(15) Case C-193/91 Finanzamt München III v Mohsche [1993] ECR I-2615.

(16) Case C-291/92 Finanzamt Uelzen v Armbrecht [1995] ECU I-2775.

(17) See paragraph 10 above.

(18) See Case C-20/91, cited in note 3.

(19) Case C-231/94 Faaborg-Geltung Linien v Finanzamt Flensburg [1996] ECK I-2395, paragraph 12 of the judgment.

(20) Ibidem, paragraph 14 of the judgment.

(21) Case C-45/95 Commission v Italy [1997] ECU I-3605, paragraph 15 of the judgment.

(22) Commission Proposal for a Sixth Council Directive on the harmonisation of legislation of Member States concerning turnover taxes — Common system of value added tax: uniform basis of assessment, submitted by the Commission on 29 June 1973, OJ 1973 C 80, p. 1.

(23) See paragraph 17 above.

(24) See Case 165/88 ORO Amsterdam Beheer and Concerto v Inspecteur der Omzetbelasting [1989] ECR 4081; and the Opinion of Advocate General Saggio in Bakes·, cited in note 12.

(25) See paragraphs 66 and 67 above.

(26) Cited in note 12.

(27) See the statement of reasons which accompanied the proposal for the Sixth Directive, Bulletin of the European Community, Supplement 11/73, p. 10.