C-331/94 Commission v Greece

JUDGMENT OF THE COURT (Fifth Chamber)

23 May 1996 *

In Case C-331/94,

Commission of the European Communities, represented by Dimitrios Gouloussis, Legal Adviser, acting as Agent, with an address for service in Luxembourg at the office of Carlos Gómez de la Cruz, of its Legal Service, Wagner Centre, Kirchberg,

applicant,

v

Hellenic Republic, represented by Panagiotis Mylonopoulos, Legal Assistant in the Special Community Legal Affairs Department of the Ministry of Foreign Affairs, and Anna Rokofyllou, adviser to the minister responsible for Foreign Affairs, with an address for service in Luxembourg at the Greek Embassy, 117 Val Sainte Croix,

defendant,

APPLICATION for a declaration that, by exempting certain transport services from value added tax and by charging that tax on certain services supplied by tour operators, the Hellenic Republic has failed to fulfil its obligations under Articles 2, 9(2)(b) and 26 of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1),

* Language of the case: Greek.

THE COURT (Fifth Chamber),

composed of: D. A. O. Edward, President of the Chamber, J.-R Puissochet (Rapporteur), P. Jann, L. Sevón and M. Wathelet, Judges,

Advocate General: A. La Pergola, Registrar: L. Hewlett, Administrator,

having regard to the Report for the Hearing,

after hearing oral argument from the parties at the hearing on 15 February 1996, at which the Hellenic Republic was represented by Ioanna Galani-Maragkoudaki, Deputy Special Legal Adviser in the Special Community Legal Affairs Department of the Ministry of Foreign Affairs, acting as Agent, and by Anna Rokofyllou, and the Commission by Dimitrios Gouloussis,

after hearing the Opinion of the Advocate General at the sitting on 28 March 1996,

gives the following

Judgment

Grounds

1By application lodged at the Court Registry on 13 December 1994, the Commission of the European Communities brought an action under Article 169 of the EC Treaty for a declaration that, by exempting certain transport services from value added tax (VAT) and by charging that tax on certain services supplied by tour operators, the Hellenic Republic has failed to fulfil its obligations under Articles 2, 9(2)(b) and 26 of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, 'the Sixth Directive').

2By letter of formal notice of 31 December 1991, the Commission informed the Hellenic Republic that it considered that certain provisions of Law No 1642/1986 on the imposition of VAT and other provisions (Official Journal of the Part I, No 125), as amended by Law No 2093/1992 Hellenic Republic, (Official Journal of the Hellenic Republic, Part I, No 181), and of Circular No 10/87 of the Finance Ministry of 10 July 1987 were contrary to the abovementioned articles of the Sixth Directive.

3Since the Hellenic Republic maintained those provisions despite the reasoned opinion which was sent to it on 16 September 1993, the Commission brought the present action.

4The action originally consisted of three complaints: the first related to the exemption from VAT for international rail transport services as regards the part of the journey within the national territory; the second related to the exemption from VAT for sea voyages in Greek-flagged vessels which do not put in at a foreign port ('round trips'), as regards the part of the journey within territorial waters; the third related to the imposition of VAT on the activities of tour operators carried on outside the Community.

5After the Commission brought its action, the Hellenic Republic adopted Law No 2303/1995 {Official Journal of the Hellenic Republic, Part I, No 80) which makes VAT payable on international rail transport services as regards the part of the journey within the national territory and also exempts from VAT the activities of tour operators carried on outside the Community.

6Accordingly, the Commission indicated at the hearing that it was abandoning its first and third complaints.

7In the circumstances, only the Commission's second complaint remains to be examined, relating to the exemption from VAT for round trips by sea.

8In support of that complaint, the Commission states that Article 2 and Article 9(2)(b) of the Sixth Directive require Member States to charge VAT on round trips as regards the part of the journey within their territorial waters.

9The Hellenic Republic does not deny that transport services should be subject to VAT as regards the part of the journey within the national territory or in territorial waters. However, it submits, first, that the taxable amount in respect of round trips by sea is not only negligible but also very difficult to determine in practice since vessels may have to change their route unexpectedly. It points out, secondly, that such taxation is not justified since the definitive rules for charging VAT on passenger transport have not yet been adopted and that international maritime transport operations are, in practice, exempt from VAT in all the Member States. It states, thirdly, that even the partial imposition of VAT on round trips by sea puts Community undertakings at a disadvantage in relation to undertakings from nonmember countries which are not subject to VAT.

10The Court has previously held that the specific connection rule for transport services laid down in Article 9(2)(b) of the Sixth Directive is intended to ensure that each Member State taxes transport services as regards the parts of the journey carried out in its territory (Case C-30/89 Commission v France [1990] ECR I-691, paragraph 16). That article therefore requires Member States to charge VAT on services supplied by operators organizing round trips by sea as regards the part of the journey within territorial waters. That is, moreover, recognized by the Hellenic Republic itself.

1 1 Furthermore, it is not disputed that the Hellenic Republic may not on a transitional basis grant an exemption for the transport of persons pursuant to Article 28(3)(b) of the Sixth Directive.

12First of all, the Hellenic Republic may not rely on the practical difficulties confronting it in order to refuse to charge VAT on round trips by sea. Such difficulties do not suffice, in any event, to establish the absolute impossibility for the defendant of properly implementing the Sixth Directive as laid down in the case-law (see, to that effect, Case C-74/91 Commission v Germany [1992] ECR I-5437, paragraph 12). Moreover, at the hearing, the Commission stated that it was willing to consider the possibility of flat-rate tax on such trips, by way of exception, if the Hellenic Republic proved that there existed serious administrative difficulties.

13Nor can the Hellenic Republic rely on the fact that the taxable amounts resulting from charging VAT on round trips would be negligible. Even if that were true, which is disputed by the Commission, that fact could not relieve the defendant of the obligation to apply the directive correctly. As the Advocate General observes at point 8 of his Opinion, the Greek Government cannot maintain that the taxable amounts are negligible while at the same time arguing that to charge VAT on round trips would be seriously detrimental to Community undertakings.

1 4 The Hellenic Republic also cannot rely on the absence of the definitive rules for charging VAT on passenger transport provided for in Article 28(5) of the Sixth Directive. Even if it is true that maintenance on a transitional basis of taxation rules which differ as between the Member States may give rise to distortions of competition, that fact cannot authorize the Hellenic Republic not to apply Articles 2 and 9 of the Sixth Directive correctly and thereby itself to create distortions of that kind to the detriment of the Member States which transposed the Sixth Directive correctly (see Commission v Germany, paragraph 25).

15Finally, the Hellenic Republic may not effectively rely on the VAT exemption applying to international maritime passenger transport and round trips organized by undertakings from non-member countries.

16First, passenger transport must, in principle, be subject to VAT as regards parts of a journey carried out within territorial waters. It may be exempted from that tax only on the basis of the derogation provisions of the Sixth Directive, such as Article 28(3)(b). The Hellenic Republic cannot effectively rely on the fact that other Member States exempt those transport operations from VAT without authorization to do so in order not to apply the provisions of the Sixth Directive correctly (see, to that effect, Case C-146/89 v [1991] ECR Commission United Kingdom I-3533, paragraph 47).

17Secondly, international maritime transport operations and round trips organized from non-member countries are objectively different from round trips starting from a Member State. In particular, such types of transport operations have points of departure or arrival which are different from those of round trips starting from a Member State and as a general rule, therefore, there is less call for them to travel within the territorial waters of the Member State imposing the tax.

18Accordingly, the Commission's second complaint should be upheld.

19It should therefore be held that, by exempting from VAT round trips by sea as regards the part of the journey within territorial waters, the Hellenic Republic has failed to fulfil its obligations under Articles 2 and 9(2)(b) of the Sixth Directive.

Costs

20Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the other party's pleadings.

21According to Article 69(5), a party who discontinues or withdraws from proceedings is to be ordered to pay the costs, unless such withdrawal or discontinuance is justified by the conduct of the opposite party.

22The Commission abandoned some of the complaints set out in its application in so far as the Hellenic Republic adopted, after the action was brought, some of the measures necessary to make its legislation conform to the Sixth Directive.

23It follows that the Commission's partial withdrawal was caused by the conduct of the Hellenic Republic which, moreover, was unsuccessful as to the remainder.

24The Hellenic Republic should therefore be ordered to pay the costs.

Operative part

On those grounds,

THE COURT (Fifth Chamber)

hereby:

1. Declares that, by exempting from value added tax sea voyages in Greek-flagged vessels which do not put in at a foreign port as regards the part of the journey within territorial waters, the Hellenic Republic has failed to fulfil its obligations under Articles 2 and 9(2)(b) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment;

2. Orders the Hellenic Republic to pay the costs.

Edward Puissochet Jann

Sevón Wathelet

Delivered in open court in Luxembourg on 23 May 1996.

R. Grass D. A. O. Edward

Registrar President of the Fifth Chamber

OPINION OF ADVOCATE GENERAL

LA PERGOLA

delivered on 28 March 1996 ( *1 )

I — Facts

1By an application lodged on 13 December 1994, the Commission is seeking a declaration that, by adopting and maintaining in force legislative provisions contrary to Articles 2, 9(2)(b) and 26 of the Sixth Council Directive (77/388/EEC) on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment ¹ (hereinafter ‘the Sixth Directive'), the Hellenic Republic has failed to fulfil its obligations under the EC Treaty.

The Commission complains that the defendant has exempted from VAT the following services:

the transport of persons by rail and sea, where the destination or place of departure of the voyage is outside Greek territory;

trips by sea in vessels flying the Greek flag which do not put in at the ports of other countries (’round trips');

and has imposed VAT on:

organized trips to destinations in countries other than Member States of the Community, without exempting that part of the provision of services by tour operators concerning activity carried on outside the Community.

2During the written procedure, the Hellenic Republic raised the objection that it had, in the meantime, adjusted its legislation to comply with the obligations laid down by the abovementioned articles of the Sixth Directive as regards the complaints mentioned in point 1(a) and (c) above. It consequently submitted that the Commission's application was now devoid of purpose in so far as the two abovementioned infringements were concerned.

At the hearing, the Commission discontinued its action with regard to the two above-mentioned complaints. ² This was accepted by the defendant. Consequently, the Court of Justice is not required to examine those aspects of the case.

II — Arguments of the parties

3As regards the complaint that it has failed to impose VAT on round trips, the Greek Government does not dispute that its legislation is incompatible with the provisions of the Sixth Directive.

The Greek Government points out, however, that the application of VAT to round trips and the calculation of the amount of tax payable gives rise to considerable practical difficulties because the amount of VAT chargeable on such journeys is in any event negligible. According to the defendant, round trips of that type are conducted for the most part within international waters and only to a very limited extent within Greek territorial waters. It would therefore be disproportionate to tax the part of the voyage that takes place within national waters, since the administrative costs would far exceed the amount of any VAT collected. Furthermore, according to the defendant, it would, in practice, be impossible a priori to calculate the amount of VAT payable in view of the route taken by vessels providing that type of service. The route taken on the trip is subject to changes that cannot be anticipated and depend on external factors — such as weather conditions — which may compel vessels to change route while under way.

4Nor should it be forgotten, according to the Greek Government, that, in the absence of harmonization at Community level, the application of the VAT rules to maritime transport raises problems that cannot easily be resolved. For that very reason, the proposal for amending the Sixth Directive, drawn up by the Commission and dated 30 September 1992, makes international maritime transport generally (and, therefore, both the intra-Community and the national element of such transport) zero-rated for VAT purposes.

5The Greek Government also points out that all the Member States exempt international maritime transport. The Commission, moreover, appears to accept, according to the defendant, that even the national element of the journey may be exempted from VAT in the case of international maritime transport. That exemption should, therefore, apply to round trips also.

6Finally, the defendant refers to its particular geographical position which makes it especially vulnerable to distortion of the market in the round trip sector, laying it open to competition from non-member countries which do not apply VAT to that form of transport. The proposal for amending the Sixth Directive exempts altogether transport to a destination situated outside the Community, precisely because of the risk of distortions of competition.

7The Commission puts forward a number of arguments in response to the defendant's submissions. First of all, the fact that the national element of an international journey is negligible does not exempt Greece from taxing that part of the journey. Furthermore, as regards the method of calculating the VAT payable on such national journeys, the fact that it is negligible and that the administrative cost of levying the tax therefore far exceeds the sum collected in no way relieves Greece of its obligation to tax the part of the journey at issue here. The same applies, according to the Commission, to the alleged difficulty in establishing in advance the amount of the VAT on the ground that the route of the cruise may have to be changed.

The defendant's contention that the taxation required under the directive results in a competitive situation disadvantageous to it is, according to the Commission, equally unfounded. The Sixth Directive permits exemptions and the alleged distortion of competition would, in any event, have no practical significance, given that the defendant can in any case exempt the journey within international waters from VAT. Furthermore, the fact that the proposal for amending the Sixth Directive envisages exempting from VAT the national element of the international transport of persons also in order to rule out possible distortions of competition in this particular sector confirms, in the Commission's view, that until such time as it is abolished, the obligation to levy the tax is a definite requirement under the legislation in force.

The point made by the defendant that it is the practice of the Member States to exempt the national element of the journey in the context of international maritime passenger transport is also irrelevant, according to the Commission: that particular situation cannot in any way be transposed to the case of round trips.

III — Analysis of the dispute

8The arguments of the defendant are basically the same as were advanced by the Federal Republic of Germany in an action for failure to fulfil an obligation which concerned, inter alia, an infringement of Article 26(3) of the Sixth Directive. ³

The judgment given in that case suggests that the pleas put forward by Greece in this case, both those based on the difficulties involved in calculating the amount of VAT payable on the national journey as a result of the frequent and unforeseeable changes in route, ⁴ and those based on the risk of distortion of competition, ⁵ are unfounded.

I shall deal with the latter point first. The defendant claims that the part of the vessel's journey within territorial waters is negligible as compared with the journey as a whole. If that is so, then the fact that it is possible to exempt that part of the journey taking place within international waters, as provided for under the Sixth Directive, means that, in this case, the alleged distortion of competition resulting from the application of the Community tax legislation at issue is without foundation.

9The defendant further asserts that the administrative costs exceed the tax revenue it could obtain. An argument of that nature does not, however, constitute a valid reason for not properly implementing the provisions of the Sixth Directive. Application of the provisions at issue cannot be left to the discretion of the Member States. They are provisions which have to be transposed pursuant to Article 189 of the Treaty. In accordance with the consistent case-law of the Court of Justice, the Member States have to comply with them in full and within the required time-limit by transposing them, as necessary, into the national legal order.

As regards the defendant's argument concerning the proposed amendment to the Sixth Directive, it can have no relevance in the present circumstances, as these are considerations applying, if at all, to law to be created. Nor can it be argued that any disadvantages that might arise for a Member State or private individual from the provisions of Community law authorize the Commission and the Member States to disapply those provisions without recourse to the procedures laid down for having the rules in force removed through legislative process or censured by the courts.

10Nor can it be considered, as the defendant argues, that the treatment accorded, praeter legem, to international maritime passenger transport, for that part of the journey within territorial waters, may be extended to cover round trips.

Even supposing, despite my above comments, that the exemption which the defendant is seeking to have applied extensively were permitted by Community law, the actual circumstances of the round trips in any case differ significantly from those of international maritime passenger transport. Vessels engaged in the latter transport pass through territorial waters only to the extent necessary to enable them subsequently to cross international waters or the territorial waters of other States to reach ports in other countries. The final destination of a round trip is, however, its port of departure, possibly after calls at other ports of the same Member State. In the first example, territorial waters are crossed only in order to reach the open seas, and it is, therefore, perfectly understandable that the tax burden on transport through national waters should be minimized. In the second example, the crossing of national waters is not absolutely necessary in order to reach the high seas and sail to foreign ports but is a an essential feature of the trip and clearly serves touristic purposes. The tax regime that applies to the one set of circumstances is not justified in the other.

11Since the arguments put forward by Greece have been rejected, the action for failure to fulfil an obligation brought by the Commission should be declared well founded in so far as concerns the round trips.

12Under the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs. I therefore propose that the defendant be ordered to pay the costs relating to the complaint concerning the round trips. Furthermore, under Article 69(5) of the Rules of Procedure, the defendant must also be ordered to pay the costs relating to the two complaints of failure to fulfil obligations discontinued by the applicant.

IV — Conclusion

I therefore propose that the Court of Justice should uphold the action in so far as it concerns the infringement of the Sixth VAT Directive, in so far as round trips are not subject to VAT as regards the journey in national waters, and order the defendant State to pay the costs, in accordance with Article 69(2) and (5) of the Rules of Procedure.

( *1 ) Original language: Italian.

¹ OJ 1977 L 145, p. 1.

² See my Opinion of 9 November 1995 in Case C-17/95 Commission v France [1995] ECR I-4896, in particular footnote 4, on the issue of the permissibility of partial discontinuance. The special feature of this case, however, is that it was partially discontinued at the hearing. The proceedings have been partially discontinued in so far as two of the three issues on which the application is based have been resolved. Article 77 of the Rules of the Procedure will therefore apply, whereas Article 78 was relied upon in the earlier case. Moreover, Article 78 of the Rules of Procedure requires the applicant to inform the Court in writing that he wishes to discontinue the proceedings but contains no reference to the agreement of the defendant, whereas that agreement is in fact required under Article 77. The latter article lays down no formal requirement concerning the agreement of the parties on the settlement of their dispute or the communication of that agreement to the Court of Justice.

³ Case C-74/91 Commission v Germany [1992] ECR I-5437.

⁴ Case C-74/91, paragraph 12.

⁵ Case C-74/91, paragraph 25.