C-395/11 BLV Wohn- und Gewerbebau

JUDGMENT OF THE COURT (First Chamber)

13 December 2012 ( *1 )

‛Taxation — Sixth VAT Directive — Decision 2004/290/EC — Manner in which a Member State applies a derogating measure — Authorisation — Article 2, point (1) — ‘Construction work’ — Interpretation — Supplies of goods covered — Possibility for the derogating measure to be applied only in part — Restrictions’

In Case C-395/11,

REFERENCE for a preliminary ruling under Article 267 TFEU from the Bundesfinanzhof (Germany), made by decision of 30 June 2011, received at the Court on 27 July 2011, in the proceedings

BLV Wohn- und Gewerbebau GmbH

v

Finanzamt Lüdenscheid,

THE COURT (First Chamber),

composed of A. Tizzano, President of the Chamber, M. Ilešič, E. Levits, M. Safjan and M. Berger (Rapporteur), Judges,

Advocate General: P. Mengozzi,

Registrar: A. Calot Escobar,

after considering the observations submitted on behalf of:

the German Government, by T. Henze and K. Petersen, acting as Agents,

the Finnish Government, by H. Leppo, acting as Agent,

the European Commission, by F. Erlbacher and C. Soulay, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 12 September 2012

gives the following

Judgment

Legal context and the dispute

1This reference for a preliminary ruling concerns the interpretation of point (1) of Article 2 of Council Decision 2004/290/EC of 30 March 2004 authorising Germany to apply a measure derogating from Article 21 of the Sixth Council Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes (OJ 2004 L 94, p. 59).

2The reference was made in proceedings between BLV Wohn- und Gewerbebau GmbH (‘BLV’) and the Finanzamt Lüdenscheid (Lüdenscheid Tax Office) (‘the Finanzamt’) in relation to value added tax (‘VAT’) payable by BLV on the construction of a building for it by another company.

Legal context

European Union ( ‘EU ’) law

3Under Article 5(1) and (2)(e) of Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes – Structure and procedures for application of the common system of value added tax (OJ, English Special Edition 1967, p. 16), which is not applicable in the present case ratione temporis:

‘1. “Supply of goods” means the transfer of the right to dispose of tangible property as owner.

2. The following shall also be considered as supply within the meaning of paragraph 1:

...

the delivery up of works of construction, including those in which moveable property is incorporated in immoveable property.

...’

The Sixth VAT Directive

4Under Article 5(1) and (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 (OJ 1977 L 145, p. 1), as amended by Council Directive 2004/7/EC of 20 January 2004 (OJ 2004 L 27, p. 44) (‘the Sixth Directive’):

‘1. “Supply of goods” shall mean the transfer of the right to dispose of tangible property as owner.

...

5. Member States may consider the handing over of certain works of construction to be supplies within the meaning of paragraph 1.’

5Article 6(1) of the Sixth Directive provides:

‘“Supply of services” shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5.’

6Under the first sentence of point (1)(a) of Article 21 of that directive:

‘1. Under the internal system, the following shall be liable to pay value added tax:

the taxable person carrying out the taxable supply of goods or of services …’

7Article 27(1) of that directive provides:

‘1. The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance …’

Decision 2004/290

8Recital 2 in the preamble to Decision 2004/290 is worded as follows:

‘Considerable [VAT] losses were established in the construction and in the building-cleaning businesses, where VAT was openly invoiced but not paid to the fiscal authorities, while the recipient exercised his right to deduct. The non-compliant operators could not be identified or identification was achieved too late to recover lost VAT. The number of such cases has increased to an extent requiring legal measures. The envisaged liability of the recipient for VAT only concerns businesses which can exercise their right to deduct and does not cover private persons. It is limited to two specific branches, where the losses in terms of VAT have achieved an intolerable dimension ...’

9Recital 4 to that decision states:

‘The derogation does not affect the amount of [VAT] due at the final consumption stage and has no impact on the Communities’ own resources from VAT ...’

10Under Article 1 of Decision 2004/290:

‘By way of derogation from Article 21(1)(a) of [the Sixth] Directive … the Federal Republic of Germany is hereby authorised, with effect from 1 April 2004, to designate the recipients of the supplies of goods and services referred to in Article 2 of this Decision as the persons liable to pay VAT’.

11Under point (1) of Article 2 of Decision 2004/290:

‘In the following instances the recipient of the supply of goods and services may be designated as the person liable to pay VAT:

1where building-cleaning services are supplied to a taxable person, except where the recipient of the supply exclusively rents not more than two residences or where construction work is supplied to a taxable person’.

German law

12Paragraph 3(4) of the Law on turnover tax (Umsatzsteuergesetz, 2005, BGBl. 2005 I, p. 386), in the version applicable to the dispute before the referring court (the ‘UStG’), provides:

‘Where the trader has taken on the task of forming or processing an object and, to this end, uses materials which he himself procures, the supply shall be regarded as a supply of goods (supply of work) if the materials are more than merely accessories or other subsidiary items. This shall apply even if the objects are fixed to or in the ground. ...’

13Under Paragraph 13b(1)(4) and the second sentence of Paragraph 13b(2) of the UStG, which are based on Decision 2004/290:

‘(1) Tax shall become due on the issuing of the invoice, and at the latest at the end of the calendar month following the effecting of the supply, in respect of the following taxable transactions:

...

4Supplies of pieces of work and supplies of services for the construction, repair, maintenance, alteration or demolition of structures, with the exception of planning and supervisory services. ...

(2) ... In the cases specified in subparagraph 1, first sentence, point 4, first sentence, the recipient of the supply shall be liable to the tax if he is a trader who makes supplies within the meaning of subparagraph 1, first sentence, point 4, first sentence ...’

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

14BLV is an undertaking engaged in the activity of acquiring land, providing it with basic infrastructure and building on it. It is a ‘taxable person’ within the meaning of Article 4 of the Sixth VAT Directive.

15In September 2004, BLV engaged Rolf & Co. OHG (‘Rolf & Co.’) to build a residential block of six flats at a fixed price. On 17 November 2005, Rolf & Co. issued a final invoice representing consideration for the work carried out, on which VAT was not itemised, referring to BLV as liable in that it was the recipient of the supply.

16BLV initially declared to the tax authorities that, as the transaction in question had been carried out during the 2005 tax year, it was liable to pay the VAT. Later, however, BLV claimed that the conditions which must be met if it is to incur liability for VAT had not been satisfied, as the Federal Republic of Germany is not permitted under EU law to make the recipient of the supply, rather than the provider, pay VAT on such a transaction. The Finanzamt, on the other hand, disagreed, its position being that BLV was liable for the VAT. BLV brought the matter before the administrative courts.

17The Finanzamt – the defendant in the main proceedings – regarded BLV as liable to pay VAT in accordance with point 4 of the first sentence of Paragraph 13b(1), and the second sentence of Paragraph 13b(2), of the UStG. In the circumstances, the Bundesfinanzhof (Federal Finance Court) believes that the settlement of the dispute depends on the proper interpretation of Decision 2004/290.

18In those circumstances, the Bundesfinanzhof decided to stay proceedings and to refer the following questions to the Court for a preliminary ruling:

Does the term ‘construction work’ as used in point (1) of Article 2 of Decision 2004/290 … encompass not only services but also supplies of goods?

If the authorisation to designate the recipient of the supply as the person liable for tax also extends to supplies of goods:

Is the authorised Member State entitled to exercise the authorisation merely partially in respect of certain subcategories, such as particular types of construction work, and in respect of supplies to certain recipients?

If the Member State is entitled to form subcategories: is the Member State subject to restrictions when forming subcategories?

If the Member State is not entitled to form subcategories generally (see Question 2 above) or on account of its failure to observe restrictions (see Question 3 above):

What are the legal consequences of the impermissible formation of subcategories?

Is the effect of the impermissible formation of subcategories that the provision of national law is not to be applied only to the benefit of particular taxable persons or in general?’

Consideration of the questions referred

Question 1

19By Question 1, the referring court is essentially asking whether point (1) of Article 2 of Decision 2004/290 must be interpreted to the effect that the term ‘construction work’, as used in that provision, covers the supply of goods within the meaning of Article 5(1) of the Sixth Directive, in addition to the transactions to be regarded as supplies of services, as defined in Article 6(1) of that directive.

20The Bundesfinanzhof finds that, if Decision 2004/290 authorised the Federal Republic of Germany to designate the recipient of the supply as the person liable for VAT (‘reverse charge’ system) in respect of construction work only where that work took the form of services and no supply of goods was involved, BLV would undoubtedly be liable for VAT pursuant to Paragraph 13b of the UStG, but not pursuant to Decision 2004/290.

21In that regard, it should be noted at the outset that Decision 2004/290 contains no definition of ‘construction work’.

22Moreover, none of the language versions of the Sixth VAT Directive, to which Article 1 of Decision 2004/290 refers, mentions ‘construction work’, with the exception of the German language version. Article 5(5) of the Sixth VAT Directive mentions only ‘works of construction’.

23However, even supposing that the meaning of the term ‘works of construction’ as used in the Sixth VAT Directive overlaps with that of the term ‘construction work’ as used in Decision 2004/290, the Sixth VAT Directive is silent as to the meaning of the term ‘works of construction’. Admittedly, Article 5(2)(e) of Directive 67/228 (Second VAT Directive), read in conjunction with point 5 of Annex A thereto, provided an example of what is covered by the term ‘works of construction’ and that directive provided – expressly, moreover – that such works were to be ‘considered as [the] supply [of goods]’. However, no such definition is to be found in the Sixth VAT Directive.

24When, therefore, on the basis of Article 27(1) of the Sixth VAT Directive, the EU legislature authorised the Federal Republic of Germany under Decision 2004/290 to provide for a measure in derogation from the VAT rules in relation to ‘construction work’, in particular, it was not referring to a well-defined concept which already existed in that branch of EU law.

25However, settled case-law has established that, in the absence of any definition of the term ‘construction work’, the meaning and scope of that term must be determined by reference to the general context in which it is used and its usual meaning in everyday language (see, to that effect, Case C-431/04 Massachusetts Institute of Technology [2006] ECR I-4089, paragraph 17 and the case-law cited). Moreover, in construing a provision of EU law, it is necessary to consider the objectives pursued by the legislation in question and its effectiveness (see inter alia, to that effect, Case C-19/08 Petrosian [2009] ECR I-495, paragraph 34 and the case-law cited).

26As regards, first, the usual meaning of the term ‘construction work’ in everyday language, it should be observed that transactions such as that at issue in the main proceedings – which include the construction of a building – are indisputably covered by that term. In that connection, it is unimportant not only whether the company carrying out the construction owns the built-up area, or the materials used, but also whether the transaction at issue falls to be categorised as the ‘supply of services’ or the ‘supply of goods’.

27As regards, secondly, the general context and the objectives pursued by the legislation at issue, recital 2 to Decision 2004/290 states that, in Germany, ‘[c]onsiderable VAT losses were established in the construction … businesses, where VAT was openly invoiced but not paid to the fiscal authorities. That is why, under Article 1 of that decision, ‘the Federal Republic of Germany is hereby authorised ... to designate the recipients of the supplies of goods and services referred to in Article 2 of this Decision as the persons liable to pay VAT’.

28However, if point (1) of Article 2 of Decision 2004/290 – under which ‘the recipient of the supply of goods and services may be designated as the person liable to pay VAT ... where construction work is supplied to a taxable person’ – were to be narrowly construed, as not covering the ‘supply of goods’ as defined in Article 5(1) of the Sixth VAT Directive, that interpretation would be in clear contradiction of the objective pursued by point (1) of Article 2 of Decision 2004/290.

29Furthermore, it is common ground that the categorisation of a particular transaction as the ‘supply of goods’ or as the ‘supply of services’ constitutes a complex appraisal which must in principle – as the Advocate General emphasises in point 30 et seq. of his Opinion – be based on a case-by-case analysis (see also, to that effect, Joined Cases C-497/09, C-499/09, C-501/09 and C-502/09 Bog and Others [2011] ECR I-1457, paragraph 61 et seq.).

30In that context, there is nothing to suggest that, in adopting point (1) of Article 2 of Decision 2004/290, the EU legislature intended to confine the application of that provision solely to cases where that complex appraisal would ultimately lead to a finding that the transaction in question should be categorised as the ‘supply of services’.

31Moreover, the categorisation of the transaction at issue in the main proceedings is unimportant in relation to the attainment of the objective pursued by Decision 2004/290, given that the risk of ‘considerable VAT losses’ is the same, whether that transaction is treated as the ‘supply of services’ or as the ‘supply of goods’.

32All the foregoing considerations suggest that the term ‘construction work’, as used in point (1) of Article 2 of Decision 2004/290, should be interpreted as covering not only the supply of services but also the supply of goods.

33That conclusion is unaffected by the fact that point (1) of Article 2 of Decision 2004/290, being a derogation from the general rule laid down in the first sentence of Article 21(1)(a) of the Sixth VAT Directive, must be narrowly construed. Although it is settled law that, in matters of VAT, provisions which are in the nature of exceptions to a principle must be narrowly construed, it is nonetheless appropriate to ensure that the exception is not deprived of its effectiveness (Bog and Others, paragraph 84 and the case-law cited; see also, to that effect, Case C-540/09 Skandinaviska Enskilda Banken [2011] ECR I-1509, paragraph 20 and the case-law cited).

34However, if the supply of goods were to be excluded from the scope of point (1) of Article 2 of Decision 2004/290, the effectiveness of that provision could be impaired. One of the consequences of such an interpretation would be that the construction of a building could be excluded from the scope of the derogating measure authorised by Decision 2004/290. As it is, that transaction naturally belongs with ‘construction work’ and represents a subcategory of transactions which, as the German Government correctly remarks in its observations, accounts for a considerable proportion of the transactions at issue.

35Consequently, the answer to Question 1 is that point (1) of Article 2 of Decision 2004/290 must be interpreted to the effect that the term ‘construction work’, as used in that provision, covers the supply of goods within the meaning of Article 5(1) of the Sixth Directive, in addition to the transactions to be regarded as supplies of services, as defined in Article 6(1) of that directive.

Questions 2 and 3

36By Questions 2 and 3, which it is appropriate to consider together, the Bundesfinanzhof asks, in essence, whether Decision 2004/290 must be interpreted to the effect that it is open to the Federal Republic of Germany to avail itself only partially of the authorisation granted by that decision, exercising it in respect of certain subcategories, such as particular types of construction work, and in respect of supplies to certain recipients, and whether that Member State is, where appropriate, subject to restrictions when establishing those subcategories.

37The Bundesfinanzhof therefore asks whether, if Decision 2004/290 is to be understood as permitting the Federal Republic of Germany to designate the recipient as the person liable for VAT where the transaction concerns the supply of goods relating to construction work, that Member State is required, pursuant to point (1) of Article 2 of that decision, to designate the recipient as the person liable for VAT in respect of all transactions concerning such supplies and, accordingly, on such supplies to any taxable person.

38First, the Bundesfinanzhof observes, Paragraph 13b of the UStG designates the recipient as the person liable for VAT, not in respect of all the supplies of goods at issue, but only for the supply of work consisting in the forming of an object, as referred to in Paragraph 3(4) of the UStG; and, secondly, it is only the taxable persons who themselves carry out the supply of ‘construction’ work who, under the German legislation, are liable for VAT, not all recipients of such supplies.

39In addition, the Bundesfinanzhof asks the Court whether, if the Member State concerned is indeed entitled to establish subcategories, it is subject to restrictions when doing so, in particular as regards respect for the principle of legal certainty on the part of that Member State.

40In that connection, the Court’s case-law should be borne in mind, according to which the derogating measures referred to in Article 27(1) of the Sixth Directive, which are allowed inter alia ‘in order … to prevent certain types of tax evasion or avoidance’, must be interpreted strictly and must also be necessary and appropriate for the purposes of attaining the specific objective which they pursue and affect as little as possible the objectives and principles of that directive (See Case C-489/09 Vandoorne [2011] ECR I-225, paragraph 27 and the case-law cited).

41In addition, and as the Court has already explained in a different context, restriction of the application of an exception to a general VAT rule to concrete and specific aspects is consistent with the principle that exemptions or derogations must be narrowly construed (see, to that effect, Case C-384/01 Commission v France [2003] ECR I-4395, paragraph 28), subject to respect for the principle of fiscal neutrality inherent in the common system of VAT (Case C-442/05 Zweckverband zur Trinkwasserversorgung und Abwasserbeseitigung Torgau-Westelbien [2008] ECR I-1817, paragraph 43; see also, to that effect, Case C-94/09 Commission v France [2010] ECR I-4261, paragraph 30).

42That case-law, which carries implications also for the possibility open to Member States to derogate, in exceptional cases, from the general VAT rule – the principle that the same VAT rate applies for all supplies of goods and services – can be transposed to a case such as that before the referring court. Consequently, the Federal Republic of Germany could legitimately avail itself of the authorisation only in part, applying it for certain subcategories, such as particular types of construction work, and for supplies to certain recipients – subject, however, to respect for the principle of fiscal neutrality and, since the Member State concerned has implemented EU law, for the general principles of EU law.

43First, it should be borne in mind in that connection that, as is stated in recital 4 to Decision 2004/290, that decision authorised the Federal Republic of Germany to provide for a derogating measure which did not affect the amount of VAT due at the final consumption stage and had no impact on the European Union’s own resources accruing from VAT. In the case of the measures actually adopted on that basis, their application was limited to cases where the recipient in the transactions at issue was himself a taxable person for the purposes of the Sixth VAT Directive in the construction sector, who is accordingly entitled to deduct the tax paid upstream of the VAT due or to claim, where applicable, a refund of that VAT. Consequently, aside from the fact that those measures had no impact on the VAT due at the final consumption stage, they did not have the effect of creating a financial burden for the persons directly concerned by them. It does not appear, therefore, that the German legislation at issue has given rise to a breach of the principle of fiscal neutrality inherent in the common system of VAT.

44Secondly, as regards respect on the part of the Federal Republic of Germany for the general principles of EU law when establishing subcategories of transaction and classes of recipient to which the measure at issue in the main proceedings was to be applicable, the only doubts to which, prima facie, the legislation in question could give rise relate to the principles of proportionality and legal certainty.

45As regards the principle of proportionality, there is nothing in the documents before the Court to cast doubt on the proportionality of the derogations adopted by the Federal Republic of Germany on the basis of Decision 2004/290. As was noted in paragraph 43 above, those measures merely made provision for the reverse charge regime to apply to certain transactions and did not, in principle, create a financial burden for the persons concerned by those measures, whilst, on the other hand, they made it possible for considerable VAT losses to be avoided. In the absence of other specific circumstances, which do not emerge, moreover, from the documents before the Court, measures of that kind cannot be regarded as disproportionate. Nevertheless, it is for the referring court to check, where appropriate, whether such other specific circumstances obtain.

46As regards the principle of legal certainty, the referring court points out that the national legislation at issue could make it difficult for taxable persons to determine the person liable to pay the VAT if they do not know the recipient’s situation. In the context of construction work, if the recipient of the supply is to be liable for the tax, one of the conditions that must be met is that at least 10% of the ‘worldwide turnover’ achieved by that recipient during the preceding financial year must be attributable to such work. However, as in the case before the referring court, the taxable person might initially suppose that this threshold had been exceeded before realising that this was not the case.

47In that regard, it should be borne in mind, first of all, that settled case-law has established that EU legislation must be certain and its application foreseeable by those subject to it. That requirement of legal certainty must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which those rules impose on them (see Case C-288/07 Isle of Wight Council and Others [2008] ECR I-7203, paragraph 47 and the case-law cited). The principle of legal certainty is binding on every national authority responsible for applying EU law (see Case C-347/06 ASM Brescia [2008] ECR I-5641, paragraph 65 and the case-law cited).

48Although the legislation at issue is not generally liable to entail financial consequences for taxable persons within the meaning of the case-law devolving from Isle of Wight Council and Others, the fact remains that, as could occur in a case such as that before the referring court, such a financial burden could arise as a result of the way in which the competent national authorities apply that legislation, if that mode of application, at least temporarily, does not enable the taxable persons concerned to know precisely the extent of their obligations in relation to VAT.

49It is therefore for the referring court to determine, taking into account all the relevant facts and points of law, whether that is the position in the case before it and, if appropriate, to take the measures necessary to remedy the harmful consequences brought about by the application of the provisions at issue in a manner inconsistent with the principle of legal certainty.

50Consequently, the answer to Questions 2 and 3 is that Decision 2004/290 must be interpreted to the effect that it is open to the Federal Republic of Germany to avail itself only partially of the authorisation granted by that decision, exercising it in respect of certain subcategories, such as particular types of construction work, and in respect of supplies to certain recipients. When establishing those subcategories, that Member State is required to respect the principle of fiscal neutrality and the general principles of EU law and, in particular, the principles of proportionality and legal certainty. It is for the referring court to determine, taking into account all the relevant facts and points of law, whether that is the position in the case before it and, if appropriate, to take the measures necessary to remedy the harmful consequences brought about by the application of the provisions at issue in a manner inconsistent with the principles of proportionality or legal certainty.

Question 4

51In view of the answer to Questions 2 and 3, there is no need to answer Question 4.

Costs

52Since 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 (First Chamber) hereby rules:

Point (1) of Article 2 of Council Decision 2004/290/EC of 30 March 2004 authorising Germany to apply a measure derogating from Article 21 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 must be interpreted to the effect that the term ‘construction work’, as used in that provision, covers the supply of goods within the meaning of Article 5(1) of that directive, in addition to the transactions to be regarded as supplies of services, as defined in Article 6(1) 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, as amended by Council Directive 2004/7/EC of 20 January 2004.

Decision 2004/290 must be interpreted to the effect that it is open to the Federal Republic of Germany to avail itself only partially of the authorisation granted by that decision, exercising it in respect of certain subcategories, such as particular types of construction work, and in respect of supplies to certain recipients. When establishing those subcategories, that Member State is required to respect the principle of fiscal neutrality and the general principles of European Union law and, in particular, the principles of proportionality and legal certainty. It is for the referring court to determine, taking into account all the relevant facts and points of law, whether that is the position in the case before it and, if appropriate, to take the measures necessary to remedy the harmful consequences brought about by the application of the provisions at issue in a manner inconsistent with the principles of proportionality or legal certainty.

Signatures

[Signatures]

( *1 ) Language of the case: German.

OPINION OF ADVOCATE GENERAL

MENGOZZI

delivered on 12 September 2012 ¹

‛Taxation — Value added tax — Right of a Member State, authorised to apply a derogating measure, to make use of it in part — Definition of ‘construction work’’

I – Introduction

1In this case, the Bundesfinanzhof (Federal Finance Court) of the Federal Republic of Germany has made a reference to the Court of Justice for a preliminary ruling on the interpretation of Council Decision 2004/290/EC of 30 March 2004 authorising Germany to apply a measure derogating from Article 21 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. ²

II – Legal context

A – Union law

2Article 1 of Decision 2004/290 provides:

‘By way of derogation from Article 21(1)(a) of Directive 77/388/EEC, as worded in Article 28(g) thereof, the Federal Republic of Germany is hereby authorised, with effect from 1 April 2004, to designate the recipients of the supplies of goods and services referred to in Article 2 of this Decision as the persons liable to pay VAT’.

3Article 2 of Decision 2004/290 provides:

‘In the following instances the recipient of the supply of goods and services may be designated as the person liable to pay VAT:

where building-cleaning services are supplied to a taxable person, except where the recipient of the supply exclusively rents not more than two residences or where construction work is supplied to a taxable person;

where immovable property is supplied to a taxable person under Article 13(B)(g) and (h) and where the supplier has exercised his right to tax the supply.’

4Article 2 of the Sixth Council Directive 77/388/EEC ³ 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, provided, in the version applicable to this case:

‘The following shall be subject to value added tax:

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

2the importation of goods’.

5Article 5(1) and (5) of Directive 77/388 provided, in the version applicable for the purposes of the decision in this case:

‘1. “Supply of goods” shall mean the transfer of the right to dispose of tangible property as owner.

...

5. Member States may consider the following to be supplies within the meaning of paragraph 1:

...;

the handing over of certain works of construction’.

6Article 6 of Directive 77/388 provided, in the version applicable to this case:

‘Supply of services

“Supply of services” shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5.

...’.

7According to Article 1(7) of Council Directive 2006/69/EC ⁴ of 24 July 2006 amending Directive 77/388/EEC as regards certain measures to simplify the procedure for charging value added tax and to assist in countering tax evasion or avoidance, and repealing certain decisions granting derogations:

‘(7) In Article 21(2), in the version set out in Article 28g, the following point shall be added:

where the following supplies are carried out, Member States may lay down that the person liable to pay tax is the taxable person to whom those supplies are made:

the supply of construction work, including repair, cleaning, maintenance, alteration and demolition services in relation to immovable property, as well as the handing over of construction works considered to be a supply of goods by virtue of Article 5(5);

...”.’

8Article 199 of Council Directive 2006/112/EC ⁵ of 28 November 2006 on the common system of value added tax provides that:

‘1. Member States may provide that the person liable for payment of VAT is the taxable person to whom any of the following supplies are made:

the supply of construction work, including repair, cleaning, maintenance, alteration and demolition services in relation to immovable property, as well as the handing over of construction works considered to be a supply of goods by virtue of Article 14(3);

...’

B – National law

9Paragraph 3(1), (4) and 9 of the Umsatzsteuergesetz (Law on turnover tax, the ‘UStG’) 2005 provides:

‘1. Supplies of goods by a trader are supplies by which either he or a third party on his behalf transfers to a customer or a third party on his behalf the right to dispose of goods in his own name (transfer of the power of disposal).

...

4. Where the trader has taken on the task of forming or processing an object and, to this end, uses materials which he himself procures, the supply shall be regarded as a supply of goods (supply of work) if the materials are more than merely accessories or other subsidiary items. This shall apply even if the objects are fixed to or in the ground.

...

9. Services are supplies which are not supplies of goods. ...’

10Paragraph 13a(1)(1) of the UStG, in the version in force as of 1 April 2004, which is based on Decision 2004/290, establishes that, in the case referred to in Paragraph 1(1)(1), the trader is liable for the tax.

11Paragraph 13b(1)(4) and the second sentence of Paragraph 13b(2) of the UStG, in the version applicable from 1 April 2004, provide:

‘(1) Tax shall become due on the issuing of the invoice, and at the latest at the end of the calendar month following the effecting of the supply, in respect of the following taxable transactions:

...

4Supplies of pieces of work and supplies of services for the construction, repair, maintenance, alteration or demolition of structures, with the exception of planning and supervisory services.

...

(2) ... In the cases specified in subparagraph 1, first sentence, point 4, first sentence, the recipient of the supply shall be liable to the tax if he is a trader who makes supplies within the meaning of subparagraph 1, first sentence, point 4, first sentence

...’

12Paragraph 48 of the Einkommensteuergesetz (Law on income tax) defines construction work as:

‘... all output for the construction, repair, maintenance, alteration or demolition of structures’.

III – Facts of the case and questions referred

13BLV Wohn- und Gewerbebau GmbH (‘BLV’), which brought the action before the national court, is an undertaking that engages in the activity of acquiring land, providing it with basic infrastructure and building on it, and must be regarded as a trader within the meaning of the 2005 UStG and as a taxable person within the meaning of Directive 77/388 in the version applicable in the year in question.

14In September 2004, the applicant engaged Rolf & Co. OHG (‘Rolf & Co.’), as lead contractor, to build a residential block of six flats at a fixed price on land owned by BLV.

15On 17 November 2005, Rolf & Co. issued a final invoice without indicating the VAT, referring to BLV as liable for the tax because it was the recipient of the supply.

16BLV initially paid the VAT on the supply it had received in the tax year 2005, since, on the basis of Paragraph 13b(2), second sentence, of the UStG, in this case, that tax was payable by the recipient of the supply. ⁶

17Subsequently, BLV applied to the competent office (the Finanzamt [Tax Office] Lüdenscheid) for reimbursement of the tax paid, maintaining that the latter provision ought not to have been applied in the case at issue and, consequently, that liability for the tax lay solely with Rolf & Co.

18The rejection by the Finanzamt of the application by BLV gave rise to this case; during the proceedings, the Bundesfinanzhof decided that there was a problem of interpretation in relation to Decision 2004/290 and referred the following questions to the Court for a preliminary ruling:

Does the term “construction work” within the meaning of Article 2(1) of Decision 2004/290/EC encompass not only services but also supplies of goods?

If the authorisation to designate the recipient of the supply as the person liable for tax also extends to supplies of goods:

Is the authorised Member State entitled to exercise the authorisation merely partially in respect of certain subcategories, such as particular types of construction work, and in respect of supplies to certain recipients?

If the Member State is entitled to form subcategories: is the Member State subject to restrictions when forming subcategories?

If the Member State is not entitled to form subcategories generally (see Question 2 above) or on account of its failure to observe restrictions (see Question 3 above):

What are the legal consequences of the impermissible formation of subcategories?

Is the effect of the impermissible formation of subcategories that the provision of national law is not to be applied only to the benefit of particular taxable persons or in general?’

IV – Procedure before the Court

19Written observations have been submitted by the Commission and the German and Finnish Governments.

V – The first question

20By the first question referred, the Bundesfinanzhof asks whether the term construction work within the meaning of Article 2(1) of Decision 2004/290 encompasses not only services but also supplies of goods.

21According to the court making the reference, the significance of this question stems from the fact that, in accordance with the German legislation and case-law, the transaction at issue (the construction of a building on another’s land by a trader using its own materials) constitutes a supply of goods. Under German law, the reverse charge mechanism, whereby the person liable for the tax is the recipient of the supply (in this case BLV) and not the person who carried it out (Rolf & Co.), is to be applied in this case.

22Still according to the court making the reference, that mechanism derogates from the Sixth Directive (which designates the supplier as the person liable for the tax) and, consequently, is admissible only in so far as Decision 2004/290 applies, the latter expressly permitting Germany, in accordance with Article 27 of that directive, to apply the reverse charge mechanism if construction work is provided to a taxable person (as is the case according to German law in this instance). If, therefore, the authorisation contained in Decision 2004/290 referred to the supply of services only and not to the supply of goods too, use of the reverse charge mechanism would no longer be permitted in this case, given that, in Germany, the construction of a building on another’s land by a trader which uses its own materials constitutes a supply of goods. Consequently, BLV would no longer be the person liable for the tax, for Union law would have to be applied instead of German law and, as a general rule, under Union law, it is the person carrying out the supply and not the recipient who is liable for VAT.

23In order to answer the question, it will be necessary to begin by defining the terms ‘supply of goods’ and ‘supply of services’ within the meaning of European Union law, so as to distinguish them with precision, then analyse the term construction work and, lastly, relate it to the supply of goods and the supply of services.

24With regard to the first aspect, I would point out that, according to Article 2 of Directive 77/388, the supply of goods and services effected for consideration within the territory of the country by a taxable person acting as such is a taxable transaction. ⁷

25Article 5 of Directive 77/388 defines a supply of goods as the transfer of the right to dispose of tangible property as owner.

26According to Article 6, a supply of services means any transaction which does not constitute a supply of goods.

27As is apparent from the Court’s case-law in Shipping & Forwarding Enterprise (Safe), the concept of a supply of goods ‘does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law but covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property,’ ⁸ even if legal ownership is not transferred.

28That definition of the concept of supply follows from the objective of the directive ‘which is designed inter alia to base the common system of VAT on a uniform definition of taxable transactions. This objective might be jeopardised if the preconditions for a supply of goods – which is one of the three taxable transactions – varied from one Member State to another, as do the conditions governing the transfer of ownership under civil law’. ⁹

29The supply of services, however, is defined, on a residual basis, as a transaction which does not constitute a supply of goods.

30In view of the difficulty in classifying many transactions as the supply of goods or the supply of services, the Court has frequently endeavoured to identify a criterion to be used in order to make that classification.

31It has not, however, succeeded in establishing an unequivocal distinguishing criterion, because of the very high number and range of transactions that may be subject to VAT, ¹⁰ and has ruled that in order to ‘determine whether such transactions constitute supplies of goods or supplies of services, regard must be had to all the circumstances in which the transaction in question takes place in order to identify its characteristic features,’ ¹¹ and the transaction in question must be analysed in detail, in order to identify the predominant elements of the supply and distinguish them from those that are minor or ancillary. ¹²

32Moreover, it must also be borne in mind that parties frequently engage in extremely complex transactions displaying aspects that can be associated with both the supply of goods and the supply of services.

33The fact that a single event relevant for tax purposes incorporates aspects of different kinds may imply either that a number of distinct (although perhaps connected) transactions have taken place, or that there is actually a single transaction which, since it incorporates at one and the same time aspects of different kinds, is mixed and must be classified as the supply of goods, or as the supply of services, for the purposes of applying value added tax.

34The Court has already considered the distinction between single supplies, which include elements typical of the supply of goods and of the supply of services, and distinct supplies, ruling that ‘where a transaction comprises a bundle of features and acts, regard must be had to all the circumstances in which the transaction in question takes place in order to determine, firstly, if there were two or more distinct supplies or one single supply’. ¹³

35In so doing, it is necessary to take into account, firstly, as provided for under Article 2(1) of the Sixth Directive, that every transaction ‘must normally be regarded as distinct and independent and, secondly, that a transaction which comprises a single supply from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system,’ ¹⁴ and that once the essential features of the transaction have been ascertained, it will then be necessary to determine ‘whether the taxable person is making to the customer, being a typical consumer, several distinct principal supplies or a single supply’. ¹⁵

36Therefore, although the general principle is that every formally distinct supply that could be separately provided should be subject to taxation on an individual basis, there are certain circumstances in which several distinct transactions must be assessed as a single transaction, where they are not independent of each other. ¹⁶

37The Court has clarified that a single supply comes into consideration particularly where one or more elements thereof are to be regarded as constituting the principal service, whilst one or more elements are to be regarded as ancillary services which share the tax treatment of the principal service; a service must be regarded as an ancillary service if it does not constitute for customers an aim in itself, but simply a means of better enjoying the principal service supplied. ¹⁷

38A single supply also exists where ‘two or more elements or acts supplied by the taxable person to the customer, being a typical consumer, are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split’. ¹⁸

39Now that the distinction between the supply of goods and the supply of services (and between single and distinct transactions) has been clearly set out, it is necessary to define the term construction work, in order then to determine whether it must be classified as the supply of goods or the supply of services in the light of the abovementioned principles set out in the Court’s case-law and the provisions of European Union law governing the subject.

40In order to do this, it is necessary to bear in mind, first, that even the Second Council Directive 67/228/EEC ¹⁹ of 11 April 1967 on the harmonisation of the legislation of the Member States concerning turnover taxes – Structure and procedures for application of the common system of value added tax – contained, in Annex A(5), a list of a number of activities regarded as ‘works of construction’ (without, however, providing a general definition of the term), such as the construction of buildings, roads, bridges and ports etc. in performance of a building contract, earth-moving and planting of gardens, installation work (of central heating, for example) and repairs to buildings, other than current maintenance.

41Furthermore, Article 6 of the subsequent Proposal for a Sixth Council Directive on the harmonisation of legislation of Member States concerning turnover taxes (not subsequently included in the final text of the directive) listed as ‘works of construction’ all works relating to buildings, bridges, roads, ports and other structures fixed to the ground, such as demolition, construction, including foundations, supply of principal materials, fitting-out, incorporation of movable property in immovable property, including all installation works, extension, modification and renovation, repairs and maintenance, other than day-to-day maintenance, work on preparing and improving land, such as foundation for work on industrial and residential developments, division into plots, levelling, installation of water supply and sewers, electricity supply installations, supporting-walls and planting of gardens. ²⁰

42Lastly, in seeking, by its request of August 2003, ²¹ the grant of the derogation at issue in regard to ‘construction work’, the Federal Republic of Germany referred specifically to the abovementioned Paragraph 48 of the Einkommensteuergesetz which, in defining the term ‘construction work’, makes clear that it consists of all output for the construction, repair, maintenance, alteration or demolition of structures.

43I consider that, although they are not binding, the lists of ‘works of construction’ contained in the Second Directive and in the Proposal for a Sixth Directive are helpful for the purpose of interpreting the term ‘construction work’ employed in Decision 2004/290 because ‘construction work’ is nothing other than ‘works of construction’, which are characterised by the fact that they relate specifically to the construction sector (as is apparent from recital 2 in the preamble to that decision ²²) and, therefore, constitute ‘works of construction’ carried out by construction firms and involving the construction of buildings. ²³

44It may therefore be stated, in the light of the content of the Second Directive, of the Proposal for the Sixth Directive and of the request from the State concerned, which led to the adoption of Decision 2004/290, that ‘construction work’ consists of building work such as the construction, maintenance, repair, alteration and demolition of buildings and other similar structures (the present case concerns the construction of a building).

45It is, therefore, necessary to determine whether all the work referred to in points 43 and 44 must be classified as the supply of goods or as the supply of services, on the basis, as the Court has explained, of all the specific circumstances of the transactions at issue; that assessment must be made taking into account the characteristic and predominant elements of the supplies. ²⁴

46No problem arises if, in order to carry out that work, different traders provide different supplies, inasmuch as each will be independently assessed and, consequently, classified, depending on the circumstances, as the supply of goods or as the supply of services.

47However, the question at issue concerns a situation in which the work is carried out by a single taxable person who provides a single mixed supply consisting of elements that can be classified as the supply of goods and as the supply of services: it is in the context of a transaction of that nature that it is necessary to determine whether the predominant element is that of the supply of goods or that of the supply of services.

48It must first of all be borne in mind that the works of construction and construction work described above basically involve complex activities generally carried out using a business structure and, predominantly, the labour of those who carry out those activities.

49The very terminology employed in points 40 to 44 (construction, maintenance, repair, alteration, demolition and fitting-out) demonstrates that central to these transactions is the activity of the trader, the purpose of which is to fulfil the commitments entered into, consisting in the supply of services, usually the provision of a business structure and, in any event, of labour, whereas, if it exists (and in the case of demolition, in principle, it will not), the supply of goods is a secondary element.

50Moreover, if we consider the specific object to be achieved through those transactions and the way in which the latter are typically assessed by those who commission works, it is clear that the subject-matter of the contracts entered into is mainly the activity of those performing the contracts (and is therefore a supply of services), whereas the other aspects (linked to the supply of goods), such as, for instance, the handing over of the property constructed, remain ancillary and mark the point at which the contract has been met in full, but do not lie at its core.

51Those considerations are borne out by an analysis of the situation forming the subject-matter of this case, that is to say the construction by a contractor, using its own materials, of a building on land owned by the client.

52In this case, the two elements to be assessed, in determining which is the principal and which the subsidiary element within the single construction-based supply, are the activity carried out by the trader, who, according to the standard works contract, ²⁵ uses his organisation and labour and that of his employees (supply of services), and the use of the contractor’s materials which, on completion of the work, will become the client’s property (supply of goods).

53It is clear that the materials generally constitute the subsidiary element, if only because the purpose of the contract is not to transfer them to the client but definitively to transform them and produce an entirely new object. It would therefore be contradictory to attach principal significance to the materials, since they are simply a means of enabling the activity of construction to be carried out and, once it has been, they will cease to exist independently.

54The same conclusions are reached if we consider the handing over of the building constructed on the land. As set out in point 50 above, this constitutes the concluding and ancillary aspect of a more complex process, and property in the building usually passes to the customer on completion of the building on the land owned by the customer, without any deed of assignment on the part of the contractor, but by virtue of the principle of accession.

55These considerations clearly presuppose that, in actual fact, the elements of business structure and labour referred to in points 48, 49 and 52, which take the form of providing supplies of services, predominate over the element of the supply of goods, which, in the case at issue, takes the form of the materials supplied by the contractor.

56If the business structure and labour are the predominant elements – and this will generally entail use of the works contract format – then, as mentioned above, the supplies will be provided for the purpose of a substantive activity of production which will result in the construction of a structure that did not previously exist; it is an act of ‘doing’ that will be the main purpose of the activity and only in that case will there truly be a transaction involving ‘works of construction’ and, therefore, ‘construction work’.

57If, however, the core of the contract is the goods supplied or, at any event, not the activity of constructing but the acquiring of the property, then the essence of the contract will consist in giving and not in doing, and there will, in substance, be an act of transfer, usually a sale, that does not fall into the category of ‘works of construction’, and so ‘construction work’, but into that of the supply of goods.

58It is for the court to establish whether there is a supply of services or a supply of goods, and it will be able to use multiple criteria, provided that it takes account of the fact that there is no main criterion more important than the others, inasmuch as in individual cases different circumstances can come into play and must be the subject of a comprehensive assessment.

59For instance, the court may attach significance (a) to whether or not the element of the labour performed predominates over the physical materials, taking into account generally the value of the materials employed, ²⁶ and (b) to the intention of the parties, with reference to whether the provision of the materials is merely a means of bringing the work to fruition and it is the labour performed that forms the purpose of the contract (as in a works contract), or whether the labour performed is the instrument for transforming the material, while attaining the res is the ultimate purpose of the contract (as is characteristic of a sale); ²⁷ the court may, more generally, take notice of the obligations entered into by the parties and of the procedures for carrying out the transaction, such as the time taken, the [degree of] independence in carrying out the work and the nature of the guarantees accorded.

60In particular, account may be taken of whether the work finished and handed over is a product with original features, that is to say, something new (which is characteristic of works of construction and construction work), or whether, on the contrary, it is mass-produced, like a prefabricated building.

61Analysis of the wording of the Sixth Directive leads to the same conclusion as that set out in point 49 et seq.

62First of all, the argument that ‘construction work’ falls into the category of the supply of services finds a clear formal equivalent, as noted by the Finnish Government, in Article 5(5)(b) of the directive, according to which Member States may consider to be the supply of goods ‘the handing over of certain works of construction’.

63In point of fact, had the legislature regarded ‘works of construction’ as the supply of goods and not the supply of services, it would have had no reason to give the Member States the option of classifying ‘the handing over of certain works of construction’ as the supply of goods.

64If, however, the legislature had taken the view that such transactions could sometimes constitute the supply of goods and sometimes the supply of services, ²⁸ it ought logically, in contrast with what actually happened, to have accorded the Member States the power generally to treat such work as either supplies of goods or as supplies of services.

65I cannot therefore agree with the German Government’s contention that, in mentioning ‘the handing over of certain works of construction’, Article 5(5) of the Sixth Directive refers only to those works of construction that do not already constitute supplies of goods within the meaning of the Sixth Directive.

66That argument is actually based on the assumption that works of construction usually constitute, by their nature, a supply of goods pursuant to the general provision under Article 5(1), but, setting aside the observations set out above, it fails to take account of the fact that, as explained in points 62 to 64, the sole reason for a provision like Article 5(5)(b) is in fact that, within the scheme of the Sixth Directive, ‘works of construction’ ²⁹ constitute supplies of services. ³⁰

67Moreover, when, within the ambit of the Sixth Directive, the Union legislature decided to attach independent significance to the point at which new buildings (such as the building at issue here) are transferred, it specifically designated the transfer a ‘supply’, as, for example, in Article 4(3)(a), on the basis of which Member States may also treat as a taxable person anyone who carries out on an occasional basis ‘(a) the supply before first occupation of buildings or parts of buildings and the land on which they stand’. ³¹

68However, in circumstances in which the delivery takes place on completion of a contractual event such as that at issue, it is considered not independently, but as an ancillary stage in the context of a broader and more complex transaction which incorporates the essential elements of the supply of services, so that the Sixth Directive uses the expression ‘handing over’ rather than ‘supply’ (as in Article 5(5)(b)). ³²

69In addition, analysis of the text of Council Directives 2006/69 and 2006/112, both of which concern VAT, leads to classification of works of construction and construction work as supplies of services.

70Article 1(7) of Directive 2006/69 provides that in Article 21(2), in the version set out in Article 28g of the Sixth Directive, the following point is added:

where the following supplies are carried out, Member States may lay down that the person liable to pay tax is the taxable person to whom those supplies are made:

the supply of construction work ³³ including repair, cleaning, maintenance, alteration and demolition services in relation to immovable property, as well as the handing over of construction works considered to be a supply of goods by virtue of Article 5(5);

…’

71Under Article 199 of Directive 2006/112,

‘Member States may provide that the person liable for payment of VAT is the taxable person to whom any of the following supplies are made:

the supply of construction work ³⁴ including repair, cleaning, maintenance, alteration and demolition services in relation to immovable property, as well as the handing over of construction works regarded as a supply of goods pursuant to Article 14(3);

…’

72Even though those two directives postdate the Sixth Directive and do not govern the case at issue, I consider that, as observed by the Bundesfinanzhof, ³⁵ the decision to include, alongside the transactions specifically listed in the articles cited in points 70 and 71, a specific reference to the handing over of construction works considered by the Member States to be a supply of goods pursuant to Article 5(5) of the Sixth Directive and Article 14(3) of Directive 2006/12, ³⁶ demonstrates that works of construction and construction work are classified by the Union as the supply of services.

73That construction work is by nature a supply of services may then be inferred from Article 2 of Decision 2004/290 which, in laying down that, in the instances set out in Article 2(1) and (2), the recipient of the supply of goods and services may be designated as the person liable to pay VAT, includes construction work in Article 2(1), together with building-cleaning services, and not in Article 2(2), alongside immovable property supplied to a taxable person under Article 13(B)(g) and (h) of the Sixth Directive.

74Construction work is therefore listed in Article 2(1) of Decision 2004/290 relating to services (as is clear from the reference to cleaning services), in that it is regarded as a service, whereas the supplies for which the requested derogation was accorded were included in Article 2(2). ³⁷

75The selfsame conclusions are reached if account is taken of the Commission’s working document of 10 June 2004 ³⁸ which, as the Commission has acknowledged, ³⁹ formed the basis for the negotiations which resulted in the amendment of the Sixth Directive, in order to simplify the procedure for charging VAT and counter tax evasion and avoidance, and the repeal of the decision at issue.

76At paragraph 4.1 of that document, the Commission explains that the work in question (‘Arbeiten’) basically constitutes the supply of services ⁴⁰ and that the Member States which have implemented Article 5(5) of the Sixth Directive must also include in that definition the supplies of services which they have regarded as supplies of goods. ⁴¹

77Furthermore, paragraph 4.1 of the working document also contains a list of the derogations from the arrangements for determining the person liable for the tax laid down by the Sixth Directive, which were previously requested by some Member States and authorised by the Council (such as the derogation at issue), in order to make the recipient of the supply liable for the value added tax, with particular significance attaching to the derogation granted to Austria by Decision 2002/880/EC. ⁴²

78This is because recital 2 in the preamble to Decision 2004/290 cites, referring specifically to it, the derogation granted to Austria, which also encompasses construction work (‘Bauarbeiten’) and includes in that category a number of transactions, referred to in the abovementioned working document, in which the element of the supply of services clearly predominates as a result of the business structure employed, such as the case of a subcontractor who carried out work in the construction and the metal-working or shipbuilding sectors, and supplied labour to a general contractor, to another subcontractor or, generally, to a company which carries out its own construction work.

79A further argument in support of the view that works of construction and construction work are to be regarded as constituting supplies of services emerges from the Second Directive and from the proposal for the Sixth Directive cited in points 40 to 41.

80In fact, it turns out that, during the travaux préparatoires, works of construction were classified, in Article 5(e), as supplies of goods, in line with the solution that had already been adopted under the Second Directive (Article 5(2)(e)), but that this solution was not taken up when the Sixth Directive was adopted.

81This shows that the legislature at the time was perfectly aware of the problem in question and quite deliberately decided to change its earlier approach, set out in the Second Directive, whereby ‘works of construction’ were classified as supplies of goods.

82The argument that works of construction and construction work should be regarded as supplies of services is also confirmed by the Opinion of Advocate General Jacobs of 16 April 1995 in Armbrecht, ⁴³ according to which ‘the power of the Member States to treat as a supply of goods (rather than services) the supply by a builder of works of construction on land to which he does not hold the title arises from a specific provision in Article 5(5)(b)’, with the result that, without that provision and its application, works of construction would always constitute supplies of services.

83Lastly, although I am aware that this argument is not decisive for the purposes of answering the question referred, I note that, in principle, construction work constitutes a supply of services in many ⁴⁴ Member States. ⁴⁵

84It therefore follows that, in the light of the considerations set out above, particularly by reason of the fact that the business structure and labour elements predominate over the element of the supply of materials (see points 55 to 57), the works of construction and construction work referred to in Article 5(5) of the Sixth Directive and Article 2(1) of Decision 2004/290 must be regarded as supplies of services.

85Supported by the Commission, the German Government maintains that, in point of fact, the construction work under Decision 2004/290 could consist in supplies of goods and supplies of services without distinction and that, were they to be classified as supplies of services only, Decision 2004/290 would be deprived of all effectiveness, since much of the work at issue would not be encompassed by the derogation accorded, as it would consist in supplies of goods. This, therefore, would thwart the purpose of the decision at issue, namely, the prevention of tax evasion (some traders acting fraudulently might, for instance, fail to apply the reverse charge by recording the transaction as a supply of goods). ⁴⁶

86On that point, I consider it appropriate to set out a number of considerations concerning the relevant German legislation and case-law.

87According to Paragraph 3(4) of the UStG, the transactions at issue must be classified as supplies of goods if they are carried out by the trader using materials he has procured for himself, unless these are accessories or other subsidiary items.

88In practice, the distinction between supplies of goods and supplies of services depends on whether the supply of materials by the builder is a predominant rather than a subsidiary element, and German case-law has interpreted that provision to the effect that, when the trader uses material which he has himself procured to construct a building on land belonging to another person, a supply of goods has taken place.

89That explains why the German Government is inclined to the view that the effect of an interpretation that confines the scope of Decision 2004/290 to the supply of services only is to exclude from its ambit many transactions in the building sector.

90In fact, it is necessary to restate what has already been set out at point 48 et seq., namely, that works of construction and construction work constitute supplies of services, in that these are transactions carried out using a business structure and, in any event, with labour being the predominant factor, the purpose of which is not the supply of materials but the performance of building activity (in the case at issue).

91That finding presupposes that the elements characteristic of the supply of services actually predominate over the elements typical of the supply of goods; if they do not, then what we have is a supply of goods, and not works of construction and construction work.

92The problem raised by the Bundesfinanzhof turns on the fact that under German law, as is clear from the abovementioned law and case-law, account is not taken of all the elements of the individual case in assessing whether a transaction constitutes construction work, and thus a supply of services, or a supply of goods. Far from it, the law attaches exclusive significance to the materials supplied by the builder and the quantity of those materials, and the case-law takes no account of other criteria, but automatically classifies as supplies of goods transactions of the kind at issue in this case, merely because the contractor used his own materials.

93However, that legislation and that case-law conflict with the case-law of the Court of Justice mentioned in point 31 and footnotes 11 and 12, for they do not distinguish supplies of services from supplies of goods by specifically determining, among the many elements in the case, those that are predominant and those that are subsidiary, but take as their sole point of reference whether or not the builder used his own materials.

94In particular, although the national legislature may indicate to the courts the criteria to be applied to distinguish between supplies of goods and supplies of services, it may not impose just one criterion, nor may that distinction flow automatically from the presence or absence of just one specific element, without analysis of every other aspect of the case.

95In the case at issue, therefore, the effect of classifying the construction work as a supply of services is not to prejudice the effectiveness of Decision 2004/290, since such work encompasses all those construction activities which culminate in the handing over of a building and display the features described above and, therefore, any complex transaction, such as the transaction at issue in this case, ⁴⁷ with regard to which a problem of tax evasion may arise. ⁴⁸

96A problem of tax evasion would in fact arise, were the argument of the German Government and the Commission, which would curtail the scope of the derogation, to be followed.

97In point of fact, Article 199 of Directive 2006/112, which now regulates the reverse charge mechanism, specifically provides that it applies to transactions in the construction sector in relation to immovable property which are treated in the same way as the handing over of construction works regarded as a supply of goods pursuant to Article 14(3) (formerly Article 5(5) of the Sixth Directive).

98It follows that, since this clearly indicates that, as already set out in point 72, the abovementioned transactions constitute supplies of services, if the construction of buildings and other similar transactions were classified in Germany as supplies of goods, they could no longer be covered by the reverse charge mechanism and the objective of combating tax evasion would be thwarted. ⁴⁹

99In the light of the foregoing considerations, I therefore propose that the Court give the following answer to the first question referred by the Bundesfinanzhof:

the term ‘construction work’ within the meaning of Article 2(1) of Decision 2004/290 encompasses only supplies of services, in particular because the elements of business structure and labour predominate over the element of the supply of materials;

in assessing whether a transaction constitutes construction work and therefore a supply of services, or a supply of goods, the court must consider all the circumstances of the individual case;

Union law precludes national legislation and case-law which, for the purposes of the distinction in question, attach exclusive relevance to a single element, in particular the fact that the builder provided his own materials, and which automatically base the distinction between supplies of services and supplies of goods on the presence of that element;

the national legislature may certainly indicate to the courts criteria to be applied in distinguishing between supplies of goods and supplies of services, but may not restrict the courts’ power to distinguish between supplies of goods and supplies of services by specifically examining all the circumstances of the case.

100The answer given to the first question makes it unnecessary to consider the second, third and fourth questions, since the national court asked for them to be considered only if construction work were deemed to encompass supplies of goods.

VI – Limiting the temporal effects of the judgment

101The German Government has asked the Court, if it should find the national law at issue incompatible with Article 2(1) of Decision 2004/290, to limit the temporal effects of its judgment, for there would otherwise be serious economic repercussions for Germany’s budget and, in any event, both the national authorities and the economic operators concerned believed in good faith that the German legislation was consistent with European Union law.

102On that point, I would note that, according to the settled case-law of the Court of Justice, it is only exceptionally that the latter may, in application of the general principle of legal certainty inherent in the Community legal order, restrict for any person concerned the opportunity of relying on a provision which it has interpreted with a view to calling in question legal relationships established in good faith. This may take place only when two essential criteria are satisfied, namely, that ‘those concerned should have acted in good faith and there should be a risk of serious difficulties’. ⁵⁰

103The Court has had recourse to that solution only ‘in quite specific circumstances, where there was a risk of serious economic repercussions owing in particular to the large number of legal relationships entered into in good faith on the basis of rules considered to be validly in force and where it appeared that individuals and national authorities had been led to adopt practices which did not comply with Community legislation by reason of objective, significant uncertainty regarding the implications of Community provisions, to which the conduct of other Member States or the Commission of the European Communities may even have contributed.’ ⁵¹

104Moreover, it is settled case-law that the financial consequences which might ensue for a Member State from a preliminary ruling do not in themselves justify limiting the temporal effects of the ruling. ⁵²

105In that connection, I consider, first, that the economic consequences cited in the German Government’s observations will not arise or, at least, will not arise on the scale indicated; in point of fact, being supplies of services, transactions such as that forming the subject-matter of this case should generally fall within the scope of Decision 2004/290, with the consequent application of the reverse charge system, as they consist of construction work. ⁵³ In any event, in those rare cases in which it is no longer possible to apply the reverse charge mechanism, the provider of the supply could be asked to pay the tax, as emphasised by the Finnish Government, which pointed out that there would be a loophole in the field of taxation, if the tax were no longer paid by the recipient of the transaction and the payment no longer made by the person who had carried out the transaction, since the transaction would not be taxed and the persons concerned would benefit from an unjustified advantage. ⁵⁴

106Furthermore, in the light of the considerations set out above, to which I refer in full, I do not discern a situation of good faith on the part of the authorities and the economic operators concerned, for it was already apparent from Council Decision 2002/880 concerning Austria (to which Decision 2004/290 specifically refers) ⁵⁵ which transactions were involved, and it was clear from their description that those transactions were supplies of services.

107Due account must also be taken of the Commission’s subsequent working document of 10 June 2004 (see point 75 of this Opinion), at least as of that date, ⁵⁶ in which the Commission explained that the work at issue constituted, in essence, the supply of services.

108The text of Article 5(5) of the Sixth Directive then plainly precluded the classification of works of construction and construction work as supplies of goods, particularly when it is borne in mind that the Sixth Directive did not reproduce the provision in the Second Directive and in the proposal for a Sixth Directive which categorised works of construction and construction work as supplies of goods.

109I therefore consider that there are no valid reasons for the Court to limit the temporal effects of its judgment.

VII – Conclusion

Conclusion

110On the basis of the foregoing considerations, I suggest that the Court should reply as follows to the questions referred by the Bundesfinanzhof:

The term ‘construction work’ within the meaning of Article 2(1) of Decision 2004/290/EC of 30 March 2004 authorising Germany to apply a measure derogating from Article 21 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 encompasses only supplies of services, in particular because the elements of business structure and labour predominate over the element of the supply of materials.

In assessing whether a transaction constitutes construction work and therefore a supply of services, or a supply of goods, the court must consider all the circumstances of the individual case.

It is contrary to Union law for national legislation and case-law to attach, for the purposes of the distinction in question, exclusive relevance to a single element, in particular the fact that the builder provided his own materials, and automatically to base the distinction between supplies of services and supplies of goods on the existence of that element.

The national legislature may certainly indicate to the courts criteria to be applied in distinguishing supplies of goods from supplies of services, but may not restrict the courts’ power to distinguish between supplies of goods and supplies of services by specifically examining all the circumstances of the case.

¹ Original language: Italian.

² OJ 2004 L 94, p. 59.

³ OJ 1977 L 145, p. 1.

⁴ OJ 2006 L 221, p. 9.

⁵ OJ 2006 L 347, p. 1.

⁶ In the VAT system, it is usually the person who makes the supply who is required to invoice for and pay the tax. However, in certain sectors (and primarily the construction sector, particularly in relations between contractors and subcontractors, as subcontractors frequently invoice for but do not pay VAT) recourse is increasingly had to the so-called reverse charge mechanism whereby the recipient of the supply is deemed to be liable for the VAT (in the example mentioned, the contractor). Article 27 of the Sixth Directive permits the Council to authorise the Member States to derogate from the directive in order to simplify the procedure for charging the tax or prevent evasion. Decision 2004/290 contains the authorisation for Germany to make use of the mechanism which I have just described, derogating from the provisions of the Sixth Directive which instead require the person making the supply to be deemed liable for the tax.

⁷ In addition to imports of goods, transactions that are not relevant in this case.

⁸ Case C-320/88 Shipping & Forwarding Enterprise Safe [1990] ECR I-285, paragraph 7; see also Case C-435/03 British American Tobacco and Newman Shipping [2005] ECR I-7077, paragraph 35; and Case C-185/01 Auto Lease Holland [2003] ECR I-1317, paragraph 32.

⁹ Shipping & Forwarding Enterprise Safe, cited in footnote 8, paragraph 8.

¹⁰ Case C-349/96 CPP [1999] ECR I-973, paragraph 27.

¹¹ Case C-231/94 Faaborg-Gelting Linien [1996] ECR I-2395, paragraph 12. To the same effect, see also Case C-88/09 Graphic Procédé [2010] ECR I-1049, paragraph 18; Case C-41/04 Levob Verzekeringen [2005] ECR I-9433, paragraphs 19 and 27; and Joined Cases C-322/99 and C-323/99 Fischer and Brandenstein [2001] ECR I-4049, paragraph 62.

¹² Levob Verzekeringen, cited in footnote 11, paragraphs 27 and 29.

¹³ Levob Verzekeringen, cited in footnote 11, paragraph 19. In the same terms, see Case C-111/05 Aktiebolaget NN [2007] ECR I-2697, paragraph 23.

¹⁴ Levob Verzekeringen, cited in footnote 11, paragraph 20.

¹⁵ Levob Verzekeringen, cited in footnote 11, paragraph 20.

¹⁶ Case C-425/06 Part Service [2008] ECR I-897, paragraph 51.

¹⁷ Case C-276/09 Everything Everywhere [2010] ECR I-12359, paragraph 25; Aktiebolaget NN, cited in footnote 13, paragraph 28; and CPP, cited in footnote 10, paragraph 30.

¹⁸ Levob Verzekeringen, cited in footnote 11, paragraph 22; see also Case C-94/09 Commission v France [2010] ECR I-4261, paragraph 15; Graphic Procédé, cited in footnote 11, paragraph 19; and Case C-572/07 RLRE Tellmer Property [2009] ECR I-4983, paragraphs 17 to 19.

¹⁹ OJ, English Special Edition 1967, p. 16.

²⁰ That list differs little from those applied in this area by the Member States. In France, for example, in the absence of a statutory definition, the Conseil d’État (CE, sect., 17 December 1976, No 94852) regards works of construction as transactions which contribute directly to the construction of a building, and the tax authority (Instr. 4 January 2010: BOI 3 a-1-10, 11 January 2010, No 57 et seq.) explained that such work consists in construction, demolition, repair, redevelopment, improvement, conversion and fitting-out in relation to developed and undeveloped land (the planting of gardens and earth-moving are listed).

²¹ Submitted as Annex 1 to the German Government’s observations.

²² According to which: ‘[c]onsiderable value added tax (VAT) losses were established in the construction and in the building-cleaning businesses, where VAT was openly invoiced but not paid to the fiscal authorities, while the recipient exercised his right to deduct ...’.

²³ It should be emphasised that in the German versions of the Sixth Directive and Decision 2004/290, the terms ‘works of construction’ and ‘construction work’ are both rendered as ‘Bauleistungen’. Moreover, that term assumes a different shade of meaning in those two contexts given that, in the light of recital 2 in the preamble to Decision 2004/290, the ‘Bauleistungen’ in question concern the construction sector.

²⁴ Aktiebolaget NN, cited in footnote 13, paragraphs 21 and 27.

²⁵ The account contained in the order for reference indicates that the parties in question concluded a works contract. I shall therefore focus on that type of contract and not on other potentially relevant contracts.

²⁶ If the value of the material used were greatly to exceed the value of the work and constitute a significant component of the overall service, there might not be construction work but the sale of those materials.

²⁷ The court will assess whether the intention of the parties was the building itself or the building as the product of an activity; if it was the former, the supply will consist in the act of providing, if the latter, it will consist in the act of doing.

²⁸ Which ought plainly to have been determined by way of a specific assessment on a case-by-case basis.

²⁹ And thus also the ‘construction work’ which, as noted in point 43, is equated with ‘works of construction’.

³⁰ The reason for introducing a provision like Article 5(5)(b) is that ‘works of construction’ are often characterised by the presence of a business structure designed to provide services which are accompanied, particularly in the construction sector, by the supply of materials and the handing over of a building, with or without the land on which it stands. It is, therefore, logical that the Member States should have been accorded the option of classifying as supplies of goods these complex transactions which, if assessed as a single unit, would have to constitute a supply of services.

³¹ In fact, by using the expression ‘before first occupation’, that article refers to new buildings: see Case 73/85 Kerrutt [1986] ECR 2219, paragraph 16.

³² That terminological distinction occurs in several language versions of the Sixth Directive, namely, the French version, which refers to ‘livraison d’un bâtiment’ (Article 4(3)(a)) and to ‘délivrance de certains travaux immobiliers’ (Article 5(5)(b)); the English version which makes a distinction between ‘supply before first occupation of buildings’ (Article 4(3)(a)) and ‘the handing over of certain works of construction’ (Article 5(5)(b)); the German version which employs the expressions ‘die Lieferung von Gebäuden’ (Article 4(3)(a)) and ‘die Ablieferung bestimmter Bauleistungen’ (Article 5(5)(b)); the Dutch version, which refers to ‘de levering van een gebouw’ (Article 4(3)(a)) and ‘de oplevering van een werk in onroerende staat’ (Article 5(5)(b)); and the Italian version, which sets ‘la cessione, effettuata anteriormente alla prima occupazione, di un fabbricato’ (Article 4(3)(a)) against ‘la consegna di taluni lavori immobiliari’ (Article 5(5)(b)).

³³ I should point out that the English and French versions use the terms ‘work’ and ‘travaux’, and the German version the term ‘Bauleistungen’.

³⁴ Here too, the English and French versions use the terms ‘work’ and ‘travaux’, and the German version ‘Bauleistungen’.

³⁵ Section (b)(cc) of the arguments set out in the order for reference concerning the first question referred.

³⁶ Which, without that specific qualification, would have constituted a supply of services.

³⁷ The German Government contends that, in point of fact, Article 2 of Decision 2004/290 cannot be construed in that way because Article 1 refers generically, and without setting limitations, to the supplies of goods and services referred to in Article 2 of the decision. I note that Article 2 merely elaborates further on Article 1 and simply sets out in detail, distinguishing between them in paragraphs (1) and (2) respectively, the supplies of goods and services forming the subject-matter of the derogation in question. Nor can I accept the German Government’s assessment of the fact that, during the process of drawing up Decision 2004/290, the Council working group dealing with it included in Article 1 not only the term services but also the term goods. The reason for this was that Article 2(2) sets out the transactions which may be classified as supplies of goods.

³⁸ Annex 1 to the Commission’s observations.

³⁹ P. 4 of the Commission’s observations.

⁴⁰ Grundsätzlich nur Dienstleistungen gemeint sind.

⁴¹ Mitgliedstaaten, die Artikel 5 Absatz 5 der Sechsten MwSt-Richtilinie umgesetzt haben, müssen in diese Definition auch die Dienstleistungen einbeziehen, die sie als Lieferung von Gegenständen betrachten.

⁴² OJ 2002 L 306, p. 24. This is the Council Decision of 5 November 2002 authorising the Republic of Austria to apply a measure derogating from Article 21 of the Sixth Directive (77/388/EEC) on the harmonisation of the laws of the Member States relating to turnover taxes.

⁴³ Point 15 of the second Opinion in Case C-291/92 Armbrecht [1995] ECR I-2775.

⁴⁴ In Bulgaria, Finland, France, Italy, Poland, Romania, Sweden and the United Kingdom, for example. The Netherlands and Hungary have, however, opted to regard construction work as the supply of goods, specifically provided for under the Sixth Directive (Article 5(5)(b)) and confirmed by Directive 2006/112 (Article 14(3)); Spain has classified works of construction as supplies of services, unless the value of the materials used crosses the threshold of 33% of the statutory taxable amount, thus also availing itself of the option under Article 14(3) of Directive 2006/112. The decision by the Netherlands, Hungary and Spain to take advantage of the option provided for under Article 5(5)(b) of the Sixth Directive and Article 14(3) of Directive 2006/112 to classify works of construction and construction work as supplies of goods demonstrates that, in those countries also, without that derogation, such transactions would have constituted supplies of services.

⁴⁵ However, a different approach is apparently taken by Ireland, Greece, Portugal and Slovakia. Ireland applies the so-called 2/3 rule, according to which, if the value of the goods supplied under an agreement for the provision of services accounts for more than 2/3 of the total value of the agreement, the agreement is regarded as a supply of goods for the purposes of VAT. Greece classifies as the supply of goods work on immovable property under a building contract. Portugal, however, classifies the transaction as a supply of goods if the construction company provides all the materials, or the quantity of material supplied by the contractor is not significant. Slovakia, finally, regards construction work as the supply of services, but distinguishes from it the supply of construction work or part thereof under a building or similar contract, that is to say where a trader supplies the whole building and not specific services. Of those approaches, the approach taken by Slovakia remains consistent with the possibility of making use of the right to derogate under Article 5(5) of the Sixth Directive and Article 14(3) of Directive 2006/112, in a system within which that work constitutes the supply of services; the approach taken by Ireland and Portugal introduces a criterion distinguishing between the supply of goods and the supply of services, based on the significance automatically attached to a single criterion (the value of the goods) and one to which I shall return in points 92 to 94; whereas only the Greek approach takes a direction different from that indicated by the directives in the field.

⁴⁶ It is, furthermore, necessary to note that neither the German Government nor the Commission has specifically indicated what construction work should be regarded as by nature constituting a supply of goods (aside from the situation at issue in this case).

⁴⁷ Which, looking only at the elements set out in the order for reference, seems to fall into the category of the supply of services, concerning, prima facie, a contract for the construction of a building.

⁴⁸ I do not agree with the Commission’s contention that construction work includes supplies which, according to the definitions contained in the Sixth Directive, would be classified as supplies of goods, because it is based on the assumption, which must be rejected, that transactions such as the transaction at issue in this case always constitute supplies of goods.

⁴⁹ On that point, I must reiterate that I cannot accept the German Government’s claim that there are, in any event, supplies of goods other than those mentioned in Article 14(3) which would, however, fall within the category of works of construction and construction work. If that argument were well founded, there would in fact have been no reason for the specific reference to Article 14(3) contained in Article 199 of Directive 2006/112.

⁵⁰ Case C-2/09 Kalinchev [2010] ECR I-4939, paragraph 50; Case C-402/03 Skov and Bilka [2006] ECR I-199, paragraph 51; and Case C-57/93 Vroege [1994] ECR I-4541, paragraph 21.

⁵¹ Case C-423/04 Richards [2006] ECR I-3585, paragraph 42.

⁵² Kalinchev, cited in footnote 50, paragraph 52, and Case C-209/03 Bidar [2005] ECR I-2119, paragraph 68.

⁵³ It certainly remains possible that the court will take the view that it is not construction work, after examining all the circumstances of the case, but I consider that, in almost all cases, those transactions that are already subject to the reverse charge mechanism will continue to be so, without need of tax adjustments.

⁵⁴ I do not believe that the providers of the supplies would suffer the damage alleged by the German Government. Apart from the fact that its argument is theoretical, I note that the ordinary arrangements for charging VAT to which the undertakings are usually subject would, in any event, apply. Any disputes could then easily be resolved by the parties before the courts, without any repercussions for the tax authorities.

⁵⁵ See points 77 and 78.

⁵⁶ Decision 2004/290 is dated 30 March 2004.