C-378/02 Waterschap Zeeuws Vlaanderen

JUDGMENT OF THE COURT (Third Chamber)

Legal context and the dispute

2 June 2005 *

In Case C-378/02,

REFERENCE under Article 234 EC for a preliminary ruling, from the Hoge Raad (Netherlands), made by decision of 18 October 2002, received at the Court on 21 October 2002, in the proceedings

Waterschap Zeeuws Vlaanderen

v

Staatssecretaris van Financiën,

THE COURT (Third Chamber),

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

* Language of the case: Dutch.

Advocate General: F.G. Jacobs, Registrar: M. Mugica Arzamendi, Principal Administrator,

having regard to the written procedure and further to the hearing on 23 September 2004,

after considering the observations submitted on behalf of:

— Waterschap Zeeuws Vlaanderen, by H. de Kat, acting as Agent, and R. Brouwen, advocaat,

— the Netherlands Government, by S. Terstal, acting as Agent,

— the Commission of the European Communities, by E. Traversa, H. van Vliet and D.W.V. Zijlstra, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 18 November 2004,

gives the following

Judgment

1The reference for a preliminary ruling concerns 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 Sixth Directive').

2That reference was made in proceedings between Waterschap Zeeuws Vlaanderen ('WZV') and the Staatssecretaris van Financiën concerning an application for adjustment of the value added tax ('VAT') paid by WZV in respect of the construction and supply of an industrial plant.

Relevant provisions

Community legislation

3Article 2(1) of the Sixth Directive, in Title II headed 'Scope', is worded as follows:

'The following shall be subject to value added tax:

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

4Article 4(1), (2), (3) and (5) ofthat directive provide:

'1. "Taxable person" shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. ...

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

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

(b) the supply of building land.

5States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions.

However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition.

Member States may consider activities of these bodies which are exempt under Article 13 or 28 as activities which they engage in as public authorities.'

Article 20(1) and (2) of the Sixth Directive provide:

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

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

(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.

2. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured. The annual adjustment shall be made only in respect of one fifth of the tax imposed on the goods. The adjustment shall be made on the basis of the variations in the deduction entitlement in subsequent years in relation to that for the year in which the goods were acquired or manufactured.

By way of derogation from the preceding subparagraph, Member States may base the adjustment on a period of five full years starting from the time at which the goods are first used.

In the case of immovable property acquired as capital goods the adjustment period may be extended up to 10 years.'

National legislation

Law of 28 June 1968

6By the law of 28 June 1968 on VAT (Wet van 28 juni 1968, houdende vervanging van de bestaande omzetbelasting door een omzetbelasting volgens het stelsel van heffing over de toegevoegde waarde, Stbl. 1968, p. 329, 'the law'), the Kingdom of the Netherlands introduced taxation on turnover based on a system of VAT.

7Under Article 7 of the law, 'trader' means any person who carries out an economic activity independently. In addition, that article contains a provision on bodies governed by public law carrying out other than as traders services or supplies which, by their nature, tend to be carried out by traders. Under that provision, a ministerial decree may specify that those bodies are to be regarded as traders when they carry out those services or supplies.

8Article 11(1)(a) and (b) of the law provides that the supply and the letting of immovable property is generally to be exempted from VAT, but provides for certain exceptions, subject to the filing of a joint application, as appropriate, by the trader carrying out the supply and the recipient of that supply or by the lessor and the lessee.

The implementation order

9The Netherlands authorities adopted, by ministerial decree of 30 August 1968, the turnover tax implementation order (Uitvoeringsbeschikking omzetbelasting 1968, Stert. 1968, No 169) ('the implementation order').

10Article 3(a) of the implementation order provides that bodies governed by public law are to be regarded as traders in so far as the supply of immovable property and the assignment or grant of rights relating to such property are concerned.

11Articles 13 and 13a of the implementation order, which seeks in particular to transpose the provisions of Article 20 of the Sixth Directive, establish in that connection the machinery for adjusting the right to deduct.

The dispute in the main proceedings and the questions referred for a preliminary ruling

12WZV is a body governed by public law responsible for the public management of water in the territory of the Netherlands covered by it. In carrying out that activity, WZV acts as a public authority for the purpose of Article 4(5) of the Sixth Directive and is therefore not a taxable person in respect of VAT.

13In order to perform the tasks entrusted to it, WZV arranged for the construction of a sewage treatment plant ('the plant'), for which it paid by way of VAT the amount of approximately NLG 7.2 million. The plant commenced operations in 1990.

14WZV and two other public water authorities agreed to make use of the plant for centralised processing of the slurry arising from the purification of sewage. Those two bodies made financial contributions towards the additional investment required for the use of the plant by the three organisations concerned. As from 1993, WZV has passed on to the other two bodies the share of the slurry processing costs respectively attributable to each of them, without, however, charging them VAT. In that regard, the inspector of taxes, by agreement with WZV, allowed VAT not to be charged to those two bodies on condition that WZV waive its right to deduct the input VAT paid.

15In December 1994 WZV established a foundation for the promotion of the environment in Dutch Flanders ('the foundation'), to which it sold the plant for about NLG 18 million exclusive of VAT.

16In view of the circumstances under which the transfer of ownership took place, that transfer must, in the national court's view, be regarded as a supply within the meaning of Article 5(1) of the Sixth Directive and Article 3(1) of the law, which is based on Article 5. On the day of the sale, WZV was granted a lease of the plant by the foundation for a term of nine years and two days.

17WZV and the foundation submitted a joint request to the inspector of taxes under Article ll(l)(a) and (b) of the law designed to implement Article 13C of the Sixth Directive on the right to opt for VAT to apply in respect of the sale and letting of immovable property for the exemption in respect of the sale and the lease of the plant not to be applied.

18Relying on Articles 13 and 13a of the implementation order, WZV calculated the proportion of the amount of the VAT invoiced in respect of construction of the plant, which, in its view, qualified for adjustment, at approximately NLG 3.6 million, namely 5/10 of that amount. That proportion was justified by the fact that five years had elapsed since the purchase of the plant and that an identical period had yet to elapse.

19In its declaration relating to the fourth quarter of 1994, WZV applied to the inspector of taxes for a refund of approximately NLG 3.6 million.

20That application was rejected on the ground that, at the time of supply of the plant, WZV was not entitled to an adjustment under the implementation order transposing Article 20 of the Sixth Directive.

21WZV appealed against that rejection decision by the inspector of taxes. Following judgment on appeal by the Gerechtshof te Amsterdam, the case was appealed on a point of law before the Hoge Raad.

22The national court maintains that, in so far as WZV carried out the sale transaction as a taxable person and submitted a joint request with the purchaser of the plant for the exemption in respect of that transaction not to be applied, an adjustment of the VAT paid by WZV on the construction of the property should in principle be allowed. However, the Hoge Raad has doubts in that regard in light of the Court's case-law.

23According to the Hoge Raad, the question arises whether a body governed by public law which has used goods as a public authority and has not therefore deducted the VAT paid at the time of acquisition of those goods, is entitled, in the same way as a taxable person who has used goods to provide exempt services, to the adjustment provided for in Article 20 of the Sixth Directive where it subsequently effects a supply of those goods as a taxable person and that supply is taxable.

24The national court states that a further difficulty arises from the fact that WZV waived its right to deduct input tax owing to its agreement with the inspector of taxes. For that reason, WZV is regarded as having waived its right partially to assign the plant to its capital assets.

25That court asks whether the case-law of the Court on the designation of capital goods, at the option of the taxable person, as private assets or business assets applies mutatis mutandis to bodies governed by public law.

26It is in those circumstances that the Hoge Raad decided to stay the proceedings and refer the following questions to the Court for a preliminary ruling:

'1. Does a body governed by public law have, as regards a capital item acquired by it which it supplies for consideration to a third party, in respect of which supply it must be regarded as a taxable person, a right to adjust the turnover tax paid in respect of that acquisition pursuant to Article 20 (in particular paragraphs 2 and 3) of the Sixth Directive in so far as it has used that item for activities in which it engages as a public authority under Article 4(5) of that directive?

2. Under the Sixth Directive, is a body governed by public law entitled wholly to exclude from its capital assets a capital item used partly for activities engaged in as a taxable person and partly for activities engaged in as a public authority, as the Court of Justice has held in respect of taxable natural persons?'

Preliminary remarks

27According to the information given by the national court and set out in paragraphs 12 and 13 of this judgment, WZV acquired the plant in order to perform its task of public management of water in the territory covered by it and, in that context, acts as a public authority.

28The first question must therefore be understood as seeking to ascertain whether a body governed by public law which purchases capital goods as a public authority within the meaning of the first subparagraph of Article 4(5) of the Sixth Directive and subsequently sells those goods as a taxable person may, in respect of that sale, be entitled to an adjustment within the meaning of Article 20 of the Sixth Directive for the purpose of deducting the VAT paid on the purchase of those goods.

The first question

29It should be noted that, under the provisions of Article 2 of the Sixth Directive, application of the VAT rules to supply of goods and services transactions within the territory of the country, including the rules on the right to deduct, is dependent on whether the person carrying out the transaction is a taxable person.

30A taxable person may deduct from the VAT which he is liable to pay the tax he himself has paid if he satisfies the conditions laid down in Article 17 of the Sixth Directive.

31Under Article 17(1), the right to deduct arises at the time when the deductible tax becomes chargeable. Article 10(2) of the Sixth Directive provides that that time is when the goods are delivered or the services are performed. Accordingly, where goods are purchased, the right to deduct arises when those goods are delivered. Under Article 17(2) of that directive the taxable person is entitled to deduct the VAT paid in respect of goods supplied to him by another taxable person, in so far as those goods are used for the purposes of his taxable transactions.

32It follows from the provisions of Articles 2 and 17 that only a person who is a taxable person and who is acting as such at the time of the purchase of goods, has a right to deduct in respect of those goods and may deduct the VAT due or paid in respect of those goods if he uses them for the purposes of his taxable transactions (see, as regards Article 17 of the Sixth Directive, Case C-97/90 Lennartz [1991] ECR I-3795, paragraph 8).

33By contrast, a non-taxable person does not have a right to deduct the VAT it may have paid on the purchase of goods. That person's activities — its supplies of goods or services — do not fall within the scope of the VAT rules set out in Article 2 of the Sixth Directive.

34Under Article 4(5) of that directive the bodies governed by public law are not to be considered taxable persons in respect of the activities or transactions in which they engage as public authorities.

35It follows that, when those bodies, which include WZV, act as public authorities at the time of the purchase of capital goods, they do not, as a rule, have any right to deduct in respect of those goods.

36Nevertheless, it is necessary to raise the question whether a change which occurs in the situation of the body concerned as regards liability to VAT can have an impact on the right to deduct. Thus the question arises in particular whether the fact that, subsequently, the body becomes a taxable person in respect of certain transactions relating to the goods bought by it as a non-taxable person can entitle it to deduct the VAT paid on those goods and give rise to an adjustment under Article 20 of the Sixth Directive.

37The Lennartz case, cited above, concerned a private individual liable to VAT who had bought and used a vehicle for private purposes. Subsequently, after also using those goods for professional purposes, he sought to deduct the VAT paid on the purchase thereof.

38The Court noted that Article 17 of the Sixth Directive specifies the time when the right to deduct arises and makes it clear that only the capacity in which the individual is acting at the time of purchase of the goods can determine the existence of a right to deduct. It then pointed out that Article 20 of that directive, entitled Adjustments of deductions', contains no provision concerning the conferral of entitlement to deduct. It held that Article 20 does no more than establish the procedure for calculating the adjustments to the initial deduction and cannot therefore give rise to any right to deduct or convert the tax paid by a taxable person in respect of his non-taxable transactions into a tax that is deductible within the meaning of Article 17 (see Lennartz, cited above, paragraphs 11 and 12).

39That argument must be applied to a body governed by public law which acts as a public authority at the time when it purchases capital goods. Since that body did not at that time act as a taxable person it does not have, in the same way as an individual acting in furtherance of his own needs, any right to deduct the VAT paid by it in respect of those goods.

40The fact that that body subsequently acted as a taxable person cannot, under Article 20 of the Sixth Directive, result in the deductibility, within the meaning of Article 17 of that directive, of the tax paid by that same body in respect of transactions effected as a public authority, which are on that ground not taxable.

41Contrary to the argument put forward by WZV, such a body cannot be equated to a taxable person carrying out some taxable activities and other exempt activities. As was stated above, the capacity in which the person acts is the decisive factor and that is assessed at the time of acquisition by that body of the goods concerned.

42WZV submits, in addition, that the impossibility of deducting the input VAT paid creates a significant distortion of competition which, in its view, justifies application of the exception laid down in the second subparagraph of Article 4(5) of the Sixth Directive under which bodies governed by public law must be regarded as taxable persons. To illustrate the existence of a distortion of competition, WZV compares the situation of an economic operator on the market with that of a body governed by public law, and maintains that in similar circumstances the economic operator could deduct the input VAT paid from the output VAT payable.

43That argument must also be rejected. Any distortion of competition in circumstances such as those in the case in the main proceedings stem more from the exercise by the body governed by public law of the right to opt for taxation in respect of the sale and letting of the immovable property concerned than from application of the rule that bodies governed by public law are not regarded as taxable persons in respect of the transactions in which they engage as public authorities. As the Advocate General pointed out at point 38 of his Opinion, it is inherent in the existence of exceptions to the VAT system that they will interfere to some extent with the application of the principles of neutrality and of equality of treatment.

44The answer to the first question must therefore be that a body governed by public law which purchases capital goods as a public authority within the meaning of the first subparagraph of Article 4(5) of the Sixth Directive, that is to say as a non taxable person, and subsequently sells those goods as a taxable person, is not entitled, in respect of that sale, to a right of adjustment based on Article 20 of that directive in order to deduct the VAT paid on the purchase of those goods.

The second question

45That question arises by implication where a body governed by public law such as WZV is considered, at the time of the purchase of capital goods, to have carried out both economic activities within the meaning of Article 4(1) of the Sixth Directive and activities referred to the first subparagraph of Article 4(5). In the light of the arguments developed in the answer to the first question, from which it is clear that such a body did not act as a taxable person at the time of making that purchase, it is not necessary to answer the second question.

Costs

46Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

On those grounds, the Court (Third Chamber) hereby rules:

A body governed by public law which purchases capital goods as a public authority within the meaning of the first subparagraph of Article 4(5) 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, that is to say as a non-taxable person, and subsequently sells those goods as a taxable person, is not entitled, in respect of that sale, to a right of adjustment based on Article 20 of that directive in order to deduct the VAT paid on the purchase of those goods.

[Signatures]

OPINION OF ADVOCATE GENERAL

JACOBS delivered on 18 November 2004 1

Introduction

1In these proceedings, the Hoge Raad of the Netherlands asks for the Court's guidance on the interpretation of the Sixth VAT 2 Directive (hereinafter 'the Directive') as it applies, in particular, to public bodies.

2In the main proceedings, a Netherlands water authority built a sewage plant in its capacity as a public authority. Later, it sold the plant to a third party, whilst simultaneously agreeing to lease the plant back. It then sought to claim a deduction by way of adjustment of the input tax which it had paid when constructing the plant on the basis that it acted as a taxable person in respect of the sale of the plant.

3The referring court therefore wishes to know whether a body governed by public law has a right pursuant to Article 20 of the Directive to adjust the VAT paid in respect of

1 — Original language: English.

2 — 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 acquisition of a capital good, which it has used for activities in which it engages as a public authority, when it subsequently sells that good as a taxable person.

4The referring court also asks whether a body governed by public law has the right wholly to exclude from its capital assets a capital good used partly for activities engaged in as a taxable person and partly for activities engaged in as a public authority, as in the case of taxable natural persons.

Legal framework

5By Article 2(1) of the Directive, VAT applies to 'the supply of goods and services effected for consideration ... by a taxable person acting as such'. 'Taxable person' is defined in Article 4(1) to mean 'any person who independently carries out in any place any economic activity specified in paragraph 2'.

6The first subparagraph of Article 4(5) provides that 'States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even when they collect dues, fees, contributions or payments in connection with these activities or transactions'. By the second subparagraph of Article 4(5), however, those bodies are to be considered taxable persons when they engage in such activities or transactions where their treatment as non-taxable persons 'would lead to significant distortions of competition'. The final subparagraph of Article 4(5) further provides that 'Member States may consider activities of these bodies which are exempt under Articles 13 or 28 as activities which they engage in as public authorities'.

7Article 13 deals with exemptions from the VAT system. The leasing or letting of immovable property is, with certain exceptions, normally exempt from VAT by virtue of Article 13B(b), as is the supply of buildings or parts thereof, and of the land on which they stand, by virtue of Article 13B (g). However, Article 13C permits Member States to allow taxpayers a right of option for taxation in respect of those activities.

8Articles 17 to 20 of the Directive are concerned with deductions. Article 17(1) provides that 'the right to deduct shall arise at the time when the deductible tax becomes chargeable'. Under Article 17(2), 'in so far as the goods or services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay ... value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person'.

9Adjustments of deductions are the subject of Article 20, which provides, in so far as is relevant, as follows:

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

(a) where that deduction was higher or lower than that to which the taxable person was entitled; ...

2. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured. The annual adjustment shall be made only in respect of one fifth of the tax imposed on the goods. The adjustment shall be made on the basis of the variations in the deduction entitlement in subsequent years in relation to that for the year in which the goods were acquired or manufactured.

In the case of immovable property acquired as capital goods, the adjustment period may be extended up to 20 years.

3. In the case of supply during the period of adjustment capital goods shall be regarded as if they had still been applied for business use by the taxable person until expiry of the period of adjustment. Such business activities are presumed to be fully taxed in cases where the delivery of the said goods is taxed; they are presumed to be fully exempt where the delivery is exempt. The adjustment shall be made only once for the whole period of adjustment still to be covered.'

10Netherlands law extends to taxable persons the right of option for taxation permitted under Article 13C. It also specifies that public bodies are to be treated as taxable persons as far as supply of immovable property and transfer or creation of rights in such property are concerned.

Facts and national proceedings

11Waterschap Zeeuws Vlaanderen (hereinafter 'WZV') operates as a water authority in part of the Netherlands. Under the applicable national legislation, it is a body governed by public law. In its capacity as a public authority, it arranged for the construction of a sewage plant, which was completed in 1990.

12WZV subsequently agreed to allow two other water authorities also to make use of the plant. The cost of modifying the plant was partly borne by those two authorities, and from 1993, so also were the costs which arose periodically owing to their use of the plant. Pursuant to an agreement with the tax inspector, WZV charged no VAT on the costs which it passed on, on condition that it did not exercise its right to deduct VAT paid on inputs.

13I should point out here that, whilst the basis for that arrangement with the tax inspector has not been made clear, any difficulty in that regard seems unlikely to influence the approach to be taken in this case.

14In 1994, WZV initiated the establishment of a foundation for the promotion of the environment in its district, to which it sold the sewage plant. On the same day, the foundation agreed to lease the plant back to WZV for a nine-year period.

15Both the sale and lease were in principle exempt transactions. However, WZV and the foundation each exercised the option for taxation which was available to them under Netherlands law. VAT therefore became payable on both transactions.

16WZV then sought deduction of part of the VAT which had been charged in respect of the initial construction of the plant, adjusted in accordance with Article 20 of the Directive. Deduction was thus sought for five tenths of the total, since five years of the ten-year adjustment period had elapsed. The tax inspector refused WZV's request.

17WZV has brought proceedings to challenge the inspector's decision. The case is now before the Hoge Raad on appeal from the Gerechtshof te Amsterdam (Amsterdam Regional Court of Appeal).

18In so far as the inspector held that the supply of the plant to the foundation was not a taxable transaction, the Hoge Raad upholds WZV's appeal. It is clear under Netherlands law that a public authority acts as a taxable person when it makes a supply of immovable property — and, of course, WZV had in that capacity exercised its option for taxation.

19On the issue whether WZV was eligible for an adjustment under Article 20(2) of the Directive, the Hoge Raad refers to the Court's judgment in Lennartz. 3 It considers that, if that judgment were applicable, WZV would not be so eligible, since the Court stated in that case that it is Article 17, not Article 20, which determines the origin and scope of any right to deduct, and only the capacity in which a person is acting at the time of acquisition can determine the existence of such a right.

20The Hoge Raad is uncertain, however, whether the judgment in Lennartz, which concerned a natural person acting in both a

3 — Case C-97/90 [1991] ECR I-3795; see in particular paragraphs 8 and 11 of the judgment.

private and a business capacity, can be applied to a body governed by public law.

21The Hoge Raad also notes that the Gerechtshof found that adjustment was not possible because WZV had opted not to include part of the plant in its business assets when it entered into its arrangement with the tax inspector not to charge VAT on the operating costs which it passed on to the other two water authorities which made use of the plant. In the Hoge Raad's view, that argument raises the question whether the case-law of the Court concerning the option of the taxable person to designate capital goods as private assets or business assets applies mutatis mutandis to bodies governed by public law.

22The Hoge Raad has therefore decided to stay the proceedings before it and to refer the following questions to the Court:

'(1) Does a body governed by public law have, as regards a capital item acquired by it which it supplies for consideration to a third party, in respect of which supply it must be regarded as a taxable person, a right to adjust the turnover tax paid in respect of that acquisition pursuant to Article 20 (in particular paragraphs 2 and 3) of the Sixth Directive in so far as it has used that item for activities in which it engages as a public authority under Article 4(5) of that directive?

(2) Does a body governed by public law have, under the Sixth Directive, the right wholly to exclude a capital item used partly for activities engaged in as a taxable person and partly for activities engaged in as a public authority from its capital assets, as the Court of Justice has ruled in respect of taxable natural persons?'

Analysis

23As a preliminary point, I note that some of the submissions before the Court concern the question whether WZV built the plant in its capacity as a public authority. However, that is clearly a matter for the national court to determine. No questions have been referred to the Court regarding the criteria to be applied in making such a determination. The correct approach is however indicated in Lennartz 4 and from the first

4 — See paragraph 21 of the judgment.

question referred it may be presumed that the national court has determined that WZV initially built the plant in its capacity as a public authority.

24Another point which has not been raised, and which cannot properly be examined without full submissions, is whether national rules which have the effect of requiring a public body to be treated as a non-taxable person when it acquires capital goods, but as a taxable person when it disposes of them, can be considered compatible with the Directive.

25I shall therefore confine my analysis to the legal issues actually raised by the order for reference.

26As regards the first question, there is a general consensus amongst the parties and the referring court that it must receive a negative answer if the Court's judgment in 5 Lennartz is applicable to bodies governed by public law when they enter into transactions in respect of their activities as public authorities.

5 — Cited above in note 3.

27In Lennartz, the Court was asked in effect to consider whether the input tax adjustment rules in Article 20(2) of the Directive apply where a taxable person initially acquires goods wholly for private use but subsequently uses them for business purposes at some point during the adjustment period.

28The Court held that since the right to deduct arises at the time when the deductible tax becomes chargeable, 'only the capacity in which a person is acting at that time can determine the existence of the right to deduct'. By virtue of Article 17(2), in so far as a taxable person, acting as such, uses the goods for the purposes of his taxable transactions, he is entitled to deduct the tax due or paid in respect of those goods. Conversely, where the goods are not used for the taxable person's economic activities within the meaning of Article 4 of the Directive, but are used by him for his private consumption, no right to deduct can arise. 6

29Whilst that conclusion may appear somewhat harsh in its effects in some situations, and not wholly consistent with the principle of the neutrality of VAT, it must be acknowledged that it flows from the wording of Article 17(1) and (2) and that a

6 — Paragraphs 8 and 9 of the judgment.

contrary approach would raise serious problems as regards legal certainty.

30As regards Article 20(2), the Court held that it does no more than establish the procedure for calculating the adjustments to the initial deduction. It cannot therefore give rise to any right to deduct or convert the tax paid by a taxable person in respect of his non-taxable transactions into a tax that is deductible within the meaning of Article 17. 7

31The Netherlands and the Commission submit that the Court's judgment in Lennartz is applicable by analogy to a situation in which an initial acquisition is made not by a person purchasing for private use but by a body governed by public law purchasing for its activities as a public authority. In each case, the person acquiring is not a taxable person for the purposes of the transaction, with the consequence that no right of deduction arises.

32By contrast, WZV argues that a public authority should be compared with a taxable person providing an exempt service rather

7 — Paragraph 12 of the judgment.

than with a taxable person who acquires goods for his own private purposes.

33In my view, the Netherlands and the Commission are correct to contend that Lennartz applies also where an initial acquisition is made by a body governed by public law for activities in which it engages as a public authority.

34As the Netherlands and the Commission submit, the correct analogy seems to be between a body governed by public law when acting as a public authority and a taxable person who acquires goods for private use. By contrast with a taxable person making an exempt supply, both such parties fall wholly outside the scope of VAT. A person who purchases for private use does not cany out any economic activity within the meaning of Article 4(1) of the Directive. Similarly, Article 4(5) of the Directive clearly states that bodies governed by public law are not normally to be considered taxable persons in respect of the activities or transactions in which they engage as public authorities. Because they are not taxable persons, their transactions as such can never give rise to a right of deduction. By contrast, a taxable person engaging in an exempt transaction is within the scope of VAT. No right of deduction arises only because, only for as long as and only to the extent that the supplies are exempt.

35However, as the Commission rightly points out, an exclusion from the VAT rules such as that effected by Article 4(5) differs in nature and effect from the exemptions 8 contained in Title X of the Directive. Indeed, were that not so, there would be no reason for the final subparagraph of Article 4 (5) to allow Member States to bring certain exempt activities within the scope of that exclusion.

36WZV submits that a distortion of competition would result if bodies governed by public law were unable to deduct VAT in the circumstances as stated in the first question. Such bodies would be unfairly disadvantaged by comparison with taxable persons who could deduct the VAT payable on the initial acquisition of a capital item. WZV refers in that regard to the second subparagraph of Article 4(5), which provides that bodies governed by public law, even when acting as public authorities, are to be considered as taxable persons if significant distortions of competition would otherwise result.

37I am not convinced by that argument, although I can sympathise with it.

38It is inherent in the existence of exceptions to the VAT system that they will interfere to some extent with the application of the principles of neutrality and of equality of treatment. Whatever the merits of the decision to treat public bodies as final consumers, it forms an integral part of the Directive. In that and in comparable situations, the treatment of taxable persons and persons excluded from the VAT system will inevitably be different.

39At the moment of acquisition, a public authority acting as such is subject to a tax burden different in nature from that which applies to a taxable person. It acquires its supplies at a price inclusive of VAT but, unlike a taxable person, is unable to deduct input tax. Its VAT burden is thus fixed at the moment of acquisition and will not be altered by any subsequent output transaction.

40However, that difference in treatment alone cannot in my view be regarded as giving rise to a significant distortion of competition for the purposes of the second subparagraph of Article 4(5) of the Directive. If it were, almost any transaction carried out by a public body acting as such would fall within that provision.

41The purpose of the first subparagraph of 8 — See, for example, Case C-45/95 Commission v Italy [1997] Article 4(5) is to exclude the activities of ECR I-3605, at paragraph 20 of the judgment and paragraph 42 et seq. of the Opinion of Advocate General Ruiz-Jarabo. public bodies acting in their capacity as public authorities from the sphere of VAT, in relation to the acquisition of supplies in principle with whatever consequences that pursuit of its activities as a public authority. entails. The purpose of the second subpar It can thus enjoy no right to deduct, and the agraph is to avoid any significant distortions issue of a right to adjust deductions, mooted of competition, which must necessarily be in the national court's first question, cannot exceptional in comparison to the normal arise.

consequences of the exclusion if the second subparagraph is not wholly to override the first. The difference in treatment in the present case is a normal consequence

43Furthermore, because the status of a of the exclusion and so cannot fall within the public body for VAT purposes is determined second subparagraph.

at the moment of acquisition, the subsequent employment of the supplies acquired cannot alter that status. In the light of the referring court's finding that WZV constructed the plant in its capacity as a public authority, the 42. Consequently, a body such as WZV second question thus does not arise for must be treated as a non-taxable person in consideration.

Conclusion

44Accordingly, for the reasons stated above, I am of the opinion that the questions referred to the Court should be answered as follows:

A body governed by public law which acquires a capital item and later supplies it for consideration to a third party, thereby acting as a taxable person, has a right to adjust the VAT paid in respect of that acquisition pursuant to Article 20 of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, only in so far as it acted as a taxable person when it initially acquired the item.