C-409/99 Metropol and Stadler

JUDGMENT OF THE COURT (Fifth Chamber)

8 January 2002 *

In Case C-409/99,

REFERENCE to the Court under Article 234 EC by the Verwaltungsgerichtshof (Austria) for a preliminary ruling in the proceedings pending before that court between

Metropol Treuhand WirtschaftstreuhandgmbH

and

Finanzlandesdirektion für Steiermark and between Michael Stadler

and

Finanzlandesdirektion für Vorarlberg,

on the interpretation of Article 17(6) and (7) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member

* Language of the case: German.

States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1),

THE COURT (Fifth Chamber),

composed of: P. Jann, President of the Chamber, A. La Pergola, L. Sevón (Rapporteur), M. Wathelet and C.W.A. Timmermans, Judges,

Advocate General: L.A. Geelhoed,

Registrar: D. Louterman-Hubeau, Head of Division,

after considering the written observations submitted on behalf of:

— the Austrian Government, by A. Längle, acting as Agent,

— the Commission of the European Communities, by E. Traversa and K. Gross, acting as Agents,

having regard to the Report for the Hearing, after hearing the oral observations of the Austrian Government, represented by H. Dossi, acting as Agent, and A. Längle, and the Commission, represented by K. Gross, at the hearing on 5 July 2001,

after hearing the Opinion of the Advocate General at the sitting on 4 October 2001,

gives the following

Judgment

Legal context and the dispute

1By order of 22 September 1999, received at the Court on 26 October 1999, the Verwaltungsgerichtshof (Administrative Court) referred to the Court for a preliminary ruling under Article 234 EC two questions on the interpretation of Article 17(6) and (7) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, 'the Sixth Directive').

2The questions were raised in proceedings between Metropol Treuhand Wirts-chaftstreuhandgmbH ('Metropol') and the Finanzlandesdirektion für Steiermark, and in proceedings between Michael Stadler and the Finanzlandesdirektion für Vorarlberg, concerning the right to deduct input value added tax (VAT) paid for the use of a Pontiac TransSport vehicle and a Fiat Ulysse vehicle respectively. Community legislation

3The second paragraph of Article 2 of First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (OJ, English Special Edition 1967, p. 14, 'the First Directive') prescribes that '[o]n each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components'.

4Article 2(1) of the Sixth Directive prescribes that the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such is to be subject to VAT.

5Article 17 of the Sixth Directive, headed Origin and scope of the right to deduct', provides, in paragraph 2(a), that '[i]n so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay ... value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person'.

6Article 17(6) of the Sixth Directive provides:

'Before a period of four years at the latest has elapsed from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of value added tax. Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive comes into force.'

7Under Article 17(7) of the Sixth Directive:

'Subject to the consultation provided for in Article 29, each Member State may, for cyclical economic reasons, totally or partly exclude all or some capital goods or other goods from the system of deductions. To maintain identical conditions of competition, Member States may, instead of refusing deduction, tax the goods manufactured by the taxable person himself or which he has purchased in the country or imported, in such a way that the tax does not exceed the value added tax which would have been charged on the acquisition of similar goods.'

8Article 29(1) and (2) of the Sixth Directive provides:

' '1. An Advisory Committee on value added tax, hereinafter called "the Committee", is hereby set up.

2. The Committee shall consist of representatives of the Member States and of the Commission.

The chairman of the Committee shall be a representative of the Commission.

Secretarial services for the Committee shall be provided by the Commission.'

The national legal background

9Under Paragraph 12(1)(1) of the Umsatzsteuergesetz 1994 (Law on Turnover Taxes 1994, BGBl. 663/1994, 'the UStG 1994'), which entered into force on 1 January 1995, a trader may deduct from VAT 'the tax indicated separately in an invoice... addressed to him by other traders for supplies of goods or other services which have been effected for his undertaking within the country'.

io Under Paragraph 12(2)(2)(b) of the UStG 1994, however, supplies and other services 'in connection with the acquisition (manufacture), leasing or operation of cars, mixed vehicles or motor cycles, except for driving school vehicles, demonstration vehicles and vehicles which are intended exclusively for commercial resale and vehicles which are used to the extent of at least 80% for commercial passenger transport, are not regarded as effected for the undertaking'.

n As the order for reference shows, Paragraph 12(2)(2)(b) of the UStG 1994 re-enacts unchanged the provisions of Paragraph 12(2)(2)(c) of the Umsatzsteuergesetz 1972, as last amended in 1989 (BGBl. 419/1989, 'the UStG 1972').

12According to Circular Z 09 1202/4-IV/9/87 of the Federal Minister for Finance of 18 November 1987 (AÖF 1987/330, 'the 1987 circular'):

'Minibuses, according to the case-law of the Verwaltungsgerichtshof, do not fall within the restrictive tax provisions applicable to cars and mixed vehicles. For minibuses it is therefore possible in principle to deduct input [VAT] and claim investment benefits.

In the view of the Federal Ministry of Finance, a minibus is to be understood as a vehicle with a box-van-shaped exterior and the capacity to carry more than six persons (including the driver). For the purposes of assessing the passenger-carrying capacity, the relevant factor is not the number of seats actually present but the maximum number of persons permitted to be carried. It is also irrelevant whether a vehicle classified as a minibus on these criteria is used for transporting persons or goods or both. However, in order for the vehicle to be recognised for tax purposes, it must be shown to be used predominantly for business or commercial purposes.'

13Paragraph 44(4) of the Strukturanpassungsgesetz (Structural Adjustment Law) of 30 April 1996 (BGBl. 201/1996) inserted into Paragraph 12(2)(2)(b) of the UStG 1994 a provision authorising the Federal Minister for Finance to define the terms 'car' and 'mixed vehicle' by regulations which could be adopted with effect from

15 February 1996.

14The Verordnung des Bundesministers für Finanzen über die steuerliche Ein stufung von Fahrzeugen als Personenkraftwagen und Kombinationskraftwagen (Regulations of the Federal Minister for Finance on the classification for tax purposes of vehicles as cars and mixed vehicles) of 20 June 1996 (BGBl. 273/1996, 'the 1996 regulations'), adopted on the basis of the new provision, entered into force with retroactive effect from 15 February 1996.

15Paragraph 1 of the 1996 regulations states that 'heavy goods vehicles and small buses do not fall within the terms car or mixed vehicle'.

16Under Paragraph 10 of the 1996 regulations:

'Small buses are not cars or mixed vehicles for tax purposes, even if they are classified as cars or mixed vehicles for transport law and customs tariff purposes, if they have a form corresponding to a bus and in addition satisfy one of the following conditions:

1. The vehicle is licensed under transport law to carry at least nine persons (including the driver) and also has luggage space inside the vehicle. The front row of seats is provided by the manufacturer with three fixed seats.

2. The vehicle is licensed under transport law to carry at least seven persons (including the driver) and is provided by the manufacturer with a loading space at the rear at least 500 mm long behind the third row of seats. That length must be attained by the loading space on average up to a height of 500 mm above the floor of the space.'

The main proceedings and the questions referred for a preliminary ruling

17In its tax declarations for 1996 and 1997 Metropol applied to deduct the input VAT paid for the use of a Pontiac TransSport vehicle.

is By assessment of 27 April 1998 the Finanzamt (Tax Office) assessed the VAT due for 1996 without deducting the input VAT paid for use of the vehicle. On the other hand, by assessment of 6 November 1998, for calculating the VAT due for 1997, it deducted the input VAT paid for the use of the vehicle.

19By decision of 9 July 1998, the Finanzlandesdirektion für Steiermark dismissed as unfounded Metropol's appeal against to the 1996 assessment. It observed that, while Pontiac TransSport vehicles had indeed been classified as 'minibuses' and had consequently been eligible for deduction of VAT until the entry into force of the 1996 regulations, it was common ground that those vehicles did not fall within the definition of 'small buses' laid down by that order. Consequently, being regarded since 15 February 1996 as cars, they were now excluded from the right to deduct. According to the Finanzlandesdirektion für Steiermark, this new state of the law was consistent with the second subparagraph of Article 17(6) of the Sixth Directive, since the definition in the 1996 regulations was based on case-law of the Verwaltungsgerichtshof from before 1995. The regulations merely corrected an overly liberal administrative practice.

20By decision of 21 December 1998, the Finanzlandesdirektion für Steiermark, in the exercise of its supervisory power, of its own motion annulled the 1997 assessment on the ground that the deduction in question had been allowed contrary to the applicable legislation.

21Metropol brought proceedings in the Verwaltungsgerichtshof against the decisions of the Finanzlandesdirektion für Steiermark of 9 July and 21 December 1998.

22Mr Stadler applied, in his tax declarations for 1996, to deduct the input VAT paid for the use of a Fiat Ulysse vehicle. He claimed that the restrictions of the right to deduct input VAT paid for the use of minibuses introduced by the 1996 budgetary economy measures were contrary to the Sixth Directive.

23By assessment of 1 December 1997, the Finanzamt refused to allow deduction of the input VAT paid for the use of Mr Stadler's Fiat Ulysse vehicle.

24By decision of 8 March 1999, the Finanzlandesdirektion für Vorarlberg dismissed Mr Stadler's appeal against the assessment. In its decision it observed that the terms car and mixed vehicle used in Paragraph 12(2)(2)(b) of the UStG 1994 had been redefined by the 1996 regulations to reflect the case-law of the Verwaltungsgerichtshof. There had been no extension of the scope of the exclusions of the right to deduct VAT contrary to Article 17(6) of the Sixth Directive, because the 1996 regulations merely implemented that provision of the UStG 1994.

25Mr Stadler brought proceedings in the Verwaltungsgerichtshof against that decision.

26The Verwaltungsgerichtshof notes that since 1 January 1978 the VAT paid on the acquisition, hire or use of cars, mixed vehicles or motor cycles has in principle been excluded from the right to deduct in Austria.

27However, neither the definition of cars and mixed vehicles nor the distinction between that category and that of lorries and minibuses, for which VAT may be deducted, follows from Paragraph 12(2)(2)(c) of the UStG 1972, which was applicable until 31 December 1994, or from Paragraph 12(2)(2)(b) of the UStG 1994, which replaced it from 1 January 1995.

28In the 1987 circular addressed to the tax authorities, the Federal Minister for Finance set out the criteria by which a minibus could be distinguished from a car. That circular, which as a ministerial instruction was binding on the public authorities, formed the legal basis of a consistent administrative practice. If a motor vehicle satisfied the definition of a minibus in the 1987 circular and was used predominantly for business purposes, the tax authorities in practice systematically allowed the input VAT paid on that vehicle to be deducted.

29According to the Verwaltungsgerichtshof, on the basis of that administrative practice, deduction of the input VAT paid on Pontiac TransSport and Fiat Ulysse vehicles, which were regarded as minibuses, was allowed until 15 February 1996. From that date it was excluded by the 1996 regulations, which define the characteristics of minibuses more strictly than the previous administrative practice did. It is not disputed in the main proceedings that those vehicles do not satisfy the new conditions.

30The Verwaltungsgerichtshof states that the regulations classifying the vehicles for tax purposes are binding on the tax authorities and also on itself in the context of interpreting Paragraph 12(2)(2)(b) of the UStG 1994.

31It states that the explanations in the Government proposal which led to the Strukturanpassungsgesetz 1996 show that that law was thought of as part of a 'consolidation programme' intended to reduce the budget deficit and enable State debt to be repaid.

32In those circumstances, the Verwaltungsgerichtshof decided to stay the proceedings and refer the following questions to the Court for a preliminary ruling:

'1. Is the second subparagraph of Article 17(6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes to be interpreted as precluding a Member State from excluding the right to deduct input tax in respect of certain vehicles after the entry into force of the directive, if before its entry into force input tax was deductible in respect of those vehicles by virtue of the administrative authorities' actual practice?

2. If the answer to Question 1 is yes, is the first sentence of Article 17(7) 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 to be interpreted as authorising a Member State, without prior consultation as provided for in Article 29 of the directive, to extend the exclusions from the right to deduct input tax in the manner described in Question 1 for an indefinite period in order to consolidate its budget?'

Question 1

33By its first question the national court asks essentially whether the second subparagraph of Article 17(6) of the Sixth Directive precludes a Member State from excluding, after the entry into force of the Sixth Directive, expenditure relating to certain motor vehicles from the right to deduct VAT where, at the date of entry into force of that directive, that expenditure gave rise to the right to deduct VAT in accordance with a consistent practice of the public authorities of that State on the basis of a ministerial circular.

Observations submitted to the Court

34The Austrian Government notes that in a judgment of 20 June 1958 the Verwaltungsgerichtshof held that cars are used predominantly for private or business use by a limited number of persons, generally up to six, whereas a bus is used for the transport of a larger number of persons on the basis of business use. In that judgment the Verwaltungsgerichtshof found that a Volkswagen van resembled a bus rather than a car and that in everyday language a car did not mean a Volkswagen van.

35According to the Austrian Government, it was to follow that line of case-law that the 1987 circular recognised as buses, or minibuses, vehicles with a carrying capacity of more than six persons. However, according to the consistent case-law of the Verfassungsgerichtshof (Austrian Constitutional Court) and the Verwaltungsgerichtshof, circulars such as that of 1987 in which the Federal Minister for Finance states his position on a question of law have no legislative force. Consequently, unlike laws and regulations, such circulars do not form part of the 'national laws' within the meaning of the second subparagraph of Article 17(6) of the Sixth Directive.

36With the adoption of the 1996 regulations, criteria were fixed for the first time which were binding both on the courts and on the tax authorities, in order to distinguish minibuses from cars and mixed vehicles. Those regulations were adopted because of the appearance subsequent to the 1987 circular of new types of vehicles, such as minivans and MPVs or family carriers, not contemplated by that circular, not to extend the category of vehicles excluded from the deduction scheme, but to avoid the national legislation in force being interpreted in such a way that those new vehicles, such as the Pontiac TransSport and the Fiat Ulysse, which as a rule take the place of cars, are regarded as minibuses.

37Moreover, it is for the national court to determine whether, as the law stood in Austria on 1 January 1995, the two vehicles at issue in the main proceedings were classified as cars or mixed vehicles or, on the other hand, as minibuses. Similarly, as the Court held in Case C-302/97 Konle [1999] ECR I-3099, it is for the national courts to determine the content of the laws in force in Austria on 1 January 1995, so that it is not within the jurisdiction of the Court to hold that the administrative practice referred to in the main proceedings may be taken into account in answering the first question.

38The Commission submits that the provision in the second subparagraph of Article 17(6) of the Sixth Directive is a 'standstill' clause, in that it requires that an exclusion of the right to deduct must be based on provisions of national law which were already in existence at the date of entry into force of that directive. It follows from that provision, a contrario, that Member States are prohibited from introducing into national law new exclusions of the right to deduct.

39In the main proceedings, the relevant provision of national law, Paragraph 12(2)(2)(b) of the UStG 1994, has not been substantially amended in content since 1 January 1995. On the other hand, the 1996 regulations contained a much narrower definition of minibuses than the 1987 circular. It appears from the order for reference that the effect of that change to the criteria for classification was that the vehicles at issue in the main proceedings are no longer regarded as minibuses, as they were previously.

40As the new definition of minibuses differs clearly from the view previously taken, it entails a substantial change in the legal position. It is irrelevant in this respect that the former law was based only on a ministerial circular, that is, an administrative rule, since the new criteria which determine the scope of the exclusion of the right to deduct are, in any event, contained in a binding rule of law.

Grounds

Findings of the Court

41It should be noted, first, that the Sixth Directive entered into force for the Republic of Austria on the date of its accession to the European Union, 1 January 1995. That is therefore the material date for the purposes of the application of the second subparagraph of Article 17(6) of the Sixth Directive as regards that Member State.

42Second, according to the fundamental principle which underlies the VAT system and which follows from Article 2 of the First and Sixth Directives, VAT applies to each transaction by way of production or distribution after deduction has been made of the VAT which has been levied directly on transactions relating to inputs. It is settled case-law that the right of deduction provided for in Article 17 et seq. of the Sixth Directive is an integral part of the VAT scheme and in principle may not be limited. That right must be exercised immediately in respect of all the taxes charged on input transactions. Any limitation on the right to deduct VAT affects the level of the tax burden and must be applied in a similar manner in all the Member States. Consequently, derogations are permitted only in the cases expressly provided for in the Sixth Directive (see, inter alia, Joined Cases C-177/99 and C-181/99 Ampafrance and Sanofi [2000] ECR 1-7013, paragraph 34 and the case-law cited therein).

43Article 17(2) of the Sixth Directive sets out in express and specific terms the principle of the taxable person's right to deduct the amounts invoiced as VAT for goods supplied or services rendered to him, in so far as such goods or services are used for the purposes of his taxable transactions.

44The principle of the right to deduct VAT is none the less subject to the derogation in Article 17(6) of the Sixth Directive, and in particular the second subparagraph. The Member States are thereby authorised to retain their existing legislation as at the date of entry into force of the Sixth Directive in regard to exclusion from the right of deduction until such time as the Council has adopted the provisions envisaged by that article (see Case C-345/99 Commission v France [2001] ECR I-4493, paragraph 19). It is for the Community legislature to establish the Community system of exclusions from the right to deduct VAT and thereby to bring about the progressive harmonisation of national VAT legislation (see Case C-305/97 Royscot and Others [1999] ECR I-6671, paragraph 31).

45Therefore, as the Court has already held in Case C-345/99 Commission v France, paragraph 22, where, after the entry into force of the Sixth Directive, the legislation of a Member State is amended so as to reduce the scope of existing exemptions and thereby brings itself into line with the objective of the Sixth Directive, that legislation must be considered to be covered by the derogation in the second subparagraph of Article 17(6) of the Sixth Directive and is not in breach of Article 17(2).

46On the other hand, national legislation does not constitute a derogation permitted by the second subparagraph of Article 17(6) of the Sixth Directive, and infringes Article 17(2), if its effect is to increase, after the entry into force of the Sixth Directive, the extent of existing exclusions, thus diverging from the objective of that directive (Case C-40/00 Commission v France [2001] ECR I-4539, paragraph 17).

47Finally, interpretation of the national legislation in order to determine its content at the date of entry into force of the Sixth Directive and to establish whether the effect of the 1996 regulations was to extend, after the entry into force of the Sixth Directive, the scope of existing exclusions is in principle, as the Austrian Government rightly submitted, within the jurisdiction of the national court. It is, however, for the Court of Justice to supply the national court with guidance on interpreting the Community concept of 'national laws' within the meaning of the second subparagraph of Article 17(6) of the Sixth Directive, in order to enable it to carry out that determination.

48In this respect, first, the second subparagraph of Article 17(6) of the Sixth Directive contains a freezing (or 'standstill') clause which provides for the retention of national exclusions from the right to deduct VAT which were applicable before the Sixth Directive entered into force (Ampafrance and Sanofi, paragraph 5). The objective of that provision is to allow the Member States, pending the establishment by the Council of the Community system of exclusions from the right to deduct VAT, to maintain any rules of national law excluding the right to deduct which were actually applied by their public authorities at the date of entry into force of the Sixth Directive.

49In view of that objective, it follows that the term 'national laws' within the meaning of the second subparagraph of Article 17(6) of the Sixth Directive does not refer only to legislative acts in the strict sense, but also to administrative measures and practices of the public authorities of the Member State concerned.

50Second, where in a Member State deduction of the input VAT paid in respect of certain vehicles was allowed at the date of entry into force of the Sixth Directive, the subsequent adoption of national legislation excluding those vehicles from the right to deduct VAT has the effect of extending, after the entry into force of the Sixth Directive, the scope of existing exclusions.

51The answer to Question 1 must therefore be that the second subparagraph of Article 17(6) of the Sixth Directive precludes a Member State from excluding, after the entry into force of the Sixth Directive, expenditure relating to certain motor vehicles from the right to deduct VAT where, at the date of entry into force of that directive, that expenditure gave rise to the right to deduct VAT in accordance with a consistent practice of the public authorities of that State on the basis of a ministerial circular.

Question 2

52By its second question, which falls into two parts, the national court asks essentially whether the first sentence of Article 17(7) of the Sixth Directive must be interpreted as authorising a Member State to exclude goods from the system of VAT deductions

— without first consulting the Advisory Committee on value added tax ('the VAT Committee') provided for in Article 29 of the Sixth Directive, and

— without limitation in time, in order to consolidate its budget.

Observations submitted to the Court

53With respect to the first part of the second question, the Austrian Government submits that the procedure referred to in Article 29 of the Sixth Directive, to which the first sentence of Article 17(7) refers, has a purely consultative purpose and, unlike Article 27 of the Sixth Directive, does not provide for a decision of the Council. Failure to apply that procedure does not constitute a breach of essential procedural requirements which could make national legislation in the field of VAT inapplicable.

54The Commission, citing in particular Case 5/84 Direct Cosmetics [1985] ECR 617, paragraph 37, which concerned Article 27(2) of the Sixth Directive, submits that, by analogy, without prior consultation of the VAT Committee Article 17 (7) of the Sixth Directive may not be relied on.

55In view of the Sixth Directive's aim of harmonisation, it is essential for the VAT Committee to be involved whenever national law is amended to introduce a new exclusion of the right to deduct. Only such involvement can ensure the uniform application of the provisions of the Sixth Directive, within the meaning of the 16th recital of the preamble. Consulting the VAT Committee is also the only way of ascertaining, on a preventive basis, whether the national measure was indeed adopted for the cyclical economic reasons referred to in the first sentence of Article 17(7) of the Sixth Directive.

56With respect to the second part of the second question, concerning the absence of a temporal limitation of a measure adopted on the basis of the first sentence of Article 17(7) of the Sixth Directive, the Austrian Government submits that that provision, which gives Member States the right to exclude goods from the system of deductions for cyclical economic reasons, must allow them to correct macro-economic imbalances, and in particular reduce the budget deficit and repay State debt. Since such measures, according to the Government, produce results only in the long term and Article 17(7) of the Sixth Directive does not impose time-limits, that provision must also authorise measures which are not limited in time.

57The Commission points out that derogations such as Article 17(7) of the Sixth Directive are to be interpreted strictly. It is therefore only during periods of substantial divergence from the normal economic cycle that the first sentence of Article 17(7) of the Sixth Directive authorises a Member State to depart for a determined period from the Community system of deduction of VAT. That provision does not, therefore, allow derogations for unlimited periods based on budgetary reasons, such as that described in the order for reference.

Findings of the Court

58As noted in paragraph 42 above, the right of deduction provided for in Article 17 et seq. of the Sixth Directive is an integral part of the VAT scheme and in principle may not be limited. Derogations are permitted only in the cases expressly provided for in the Sixth Directive.

59Provisions laying down derogations from the principle of the right to deduct VAT, which ensures the neutrality of that tax, are to be interpreted strictly.

60As regards the first part of the second question, Article 17(7) of the Sixth Directive lays down one of the procedures in the directive for authorising derogations, giving Member States the right to exclude goods from the system of deductions '[s]ubject to the consultation provided for in Article 29'.

61That consultation enables the Commission and the other Member States to control the use by a Member State of the possibility of derogating from the general system of deducting VAT, by checking in particular whether the national measure in question satisfies the condition of adoption for cyclical economic reasons.

62Article 17(7) of the Sixth Directive thus lays down a procedural obligation which the Member States must observe in order to be able to make use of the derogation it sets out (see, by analogy, with respect to Article 27(5) of the Sixth Directive, which also provides for derogations from the scheme of the directive, Case 324/82 Commission v Belgium [1984] ECR 1861, paragraph 28).

63Consultation of the VAT Committee is thus clearly a condition precedent to the adoption of any measure on the basis of that provision.

64By virtue of the general duty stated in the third paragraph of Article 189 of the EC Treaty (now the third paragraph of Article 249 EC), Member States are bound to observe all the provisions of the Sixth Directive (see Case C-97/90 Lennartz [1991] ECR 1-3795, paragraph 33). In so far as an exclusion from the system of deductions has not been established in accordance with Article 17(7), which imposes a duty of consultation on the Member States, the national tax authorities may not rely as against a taxable person on a provision derogating from the principle of the right to deduct VAT set out in Article 17(1) of the Sixth Directive (see, by analogy, concerning Article 27(1) and (5) of the Sixth Directive, Lennartz, paragraph 33).

65In the main proceedings, it is common ground that the Austrian authorities did not consult the VAT Committee before adopting the 1996 regulations, contrary to the requirement in the first sentence of Article 17(7) of the directive. The Austrian Government may not therefore rely on those regulations to the detriment of taxable persons (see, by analogy, concerning Article 27(1) and (5) of the Sixth Directive, Lennartz, paragraph 34).

66As regards the second part of the second question, the first sentence of Article 17(7) of the Sixth Directive authorises Member States to exclude goods from the system of deductions 'for cyclical economic reasons'.

67That provision thus authorises a Member State to adopt measures of a temporary nature intended to cope with the temporary situation of its economy at a given moment. Application of the measures referred to in that provision must therefore be limited in time and, by definition, they may not be of a structural nature.

68It follows that the first sentence of Article 17(7) of the Sixth Directive does not authorise a Member State to adopt measures excluding goods from the system of deducting VAT which contain no indication as to their limitation in time and/or which form part of a package of structural adjustment measures whose aim is to reduce the budget deficit and allow State debt to be repaid.

69The answer to Question 2 must therefore be that the first sentence of Article 17(7) of the Sixth Directive must be interpreted as not authorising a Member State to exclude goods from the system of deducting VAT without first consulting the VAT Committee. That provision also does not authorise a Member State to adopt measures excluding goods from the system of deducting VAT which contain no indication as to their limitation in time and/or which form part of a package of structural adjustment measures whose aim is to reduce the budget deficit and allow State debt to be repaid.

Costs

Costs

70The costs incurred by the Austrian Government and by the Commission, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main actions, a step in the proceedings pending before the national court, the decision on costs is a matter for that court.

Operative part

On those grounds,

THE COURT (Fifth Chamber),

in answer to the questions referred to it by the Verwaltungsgerichtshof by order of 22 September 1999, hereby rules:

1. The second subparagraph of Article 17(6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment — precludes a Member State from excluding, after the entry into force of the Sixth Directive, expenditure relating to certain motor vehicles from the right to deduct value added tax where, at the date of entry into force of that directive, that expenditure gave rise to the right to deduct value added tax in accordance with a consistent practice of the public authorities of that State on the basis of a ministerial circular.

2. The first sentence of Article 17(7) of the Sixth Directive must be interpreted as not authorising a Member State to exclude goods from the system of deducting value added tax without first consulting the committee provided for in Article 29 of the directive. That provision also does not authorise a Member State to adopt measures excluding goods from the system of deducting value added tax which contain no indication as to their limitation in time and/or which form part of a package of structural adjustment measures whose aim is to reduce the budget deficit and allow State debt to be repaid.

Jann La Pergola Sevón

Wathelet Timmermans

Delivered in open court in Luxembourg on 8 January 2002.

P. Jann R. Grass

President of the Fifth Chamber Registrar

OPINION OF ADVOCATE GENERAL GEELHOED delivered on 4 October 2001 1

I — Introduction

1In the present case the Verwaltungsgerichtshof (Supreme Administrative Court) (Austria) has referred to the Court two questions concerning the interpretation of the second subparagraph of Article 17(6) and Article 17(7) 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 2 (hereinafter 'the Directive'). More particularly, these questions relate to the permissibility of an Austrian tax measure introduced in the course of 1996, that is to say well over a year after Austria's accession to the European Union. That measure excluded the deduction of value added tax for specified categories of minibuses.

II — The legal framework

European law

2The Directive is intended — within a harmonised system of turnover tax introducing value added tax (VAT) — inter alia to harmonise the rules governing deductions to the extent that they affect the actual amounts collected. 3

Thus, Article 17(2) of the Directive reads as follows:

'In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

(b) value added tax due or paid in respect of imported goods;

(c) value added tax due under Articles 5(7)(a) and 6(3).'

3According to Article 17(6) of the Directive:

'Before a period of four years at the latest has elapsed from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of value added tax. Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive comes into force.'

4Hitherto, no Community rules of the kind mentioned in Article 17(6) have been introduced, despite the fact that the period indicated in that paragraph has long since elapsed. In accordance with Article 1, the Directive was to enter into force in the Member States by no later than 1 January 1978.

In the case of Austria, the date of entry into force was 1 January 1995, the date on which Austria acceded to the European Union.

5Under Article 17(7) of the Directive:

'Subject to the consultation provided for in Article 29, each Member State may, for cyclical economic reasons, totally or partly exclude all or some capital goods or other goods from the system of deductions. To maintain identical conditions of competition, Member States may, instead of refusing deduction, tax the goods manufactured by the taxable person himself or which he has purchased in the country or imported, in such a way that the tax does not exceed the value added tax which would have been charged on the acquisition of similar goods'.

6The consultation to which, among other things, Article 17(7) refers is dealt with in Article 29 of the Directive as follows:

'1. An Advisory Committee on value added tax, hereinafter called "the Committee", is hereby set up.

2. The Committee shall consist of representatives of the Member States and of the Commission.

The chairman of the Committee shall be a representative of the Commission.

Secretarial services for the Committee shall be provided by the Commission.

3. The Committee shall adopt its own rules of procedure.

4. In addition to points subject to the consultation provided for under this Directive, the Committee shall examine questions raised by its chairman, on his own initiative or at the request of the representative of a Member State, which concern the application of the Community provisions on value added tax.'

National law

7In Austria, the Umsatzsteuergesetz (Law on Turnover Tax) 1994 4 (hereinafter the 'UStG 1994') has been in force since 1 January 1995 — the date on which Austria acceded to the European Union. Paragraph 12 of this law specifies the amounts which a trader may deduct from VAT. More particularly, Paragraph 12(2)(2)(b) stipulates that supplies and other services are not deductible in so far as they are connected with the purchase, leasing or use of cars, dual-purpose vehicles or motorcycles. These exclusions from deductibility are, in their turn, subject to certain exceptions which are of no relevance to the present case.

8Paragraph 12(2)(2) of the UStG 1994 was taken over unchanged from the Umsatzsteuergesetz 1972, as amended by the second Amendment Law 1977, which entered into force on 1 January 1978. These provisions were implemented by a decision issued to the tax authorities by the Federal Minister for Financial Affairs (hereinafter 'the Minister'). That decision, dated 18 November 1987, 5 decreed as follows:

'According to the case-law of the Verwaltungsgerichtshof, minibuses do not fall within the tax exclusions applicable to cars and dual-purpose vehicles. Minibuses are therefore, in principle, eligible for deduction of input tax and for capital aid.

The view of the Federal Ministry for Financial Affairs is that a minibus is understood to mean a four-sided vehicle with the capacity to carry more than six persons (including the driver). For the purposes of assessing the number of persons capable of being carried, the relevant factor is not the actual number of seats but the maximum number of persons permitted to be carried. It is not material whether a vehicle classified as a minibus on these criteria is used for carrying persons or goods or both. In each case, in order for the vehicle to be eligible for deduction of tax, it must be shown to be used primarily for business or commercial purposes.'

9Paragraph 44(4) of the Strukturanpass ungsgesetz (Restructuring Law) 1996 inserted the following subparagraph into Paragraph 12(2)(2)(b) of the UStG 1994: 'The Minister may by regulation lay down more detailed definitions of the terms "car" and "dual-purpose vehicle". Such a regulation may be issued with effect from 15 February 1996.' On that basis the Minister issued a regulation on 20 June 1996 7 (hereinafter 'the regulation') pursuant to Paragraph 12(2)(2)(b) of the UStG 1994; under it neither a heavy goods vehicle nor a minibus falls within the definition of a car or dual-purpose vehicle.

10Paragraph 10 of the regulation reads as follows:

'A minibus is not a car or dual-purpose vehicle for tax purposes, even if it is classified as a car or dual-purpose vehicle from the point of view of engine capacity and customs tariff purposes, where it is in the form of a bus and in addition satisfies the following conditions:

1. It is lawfully licensed to carry at least nine persons (including the driver), has luggage room inside the vehicle and as part of its standard equipment has three fixed seats in the front row.

2. It is lawfully licensed to carry at least seven persons (including the driver). Behind the third row it has a load compartment at least 500 mm long at the back. This length must be reached, on average, between the floor of the load compartment and a height of 500 mm above the floor.'

11According to the explanatory memorandum to the Government's bill, the Strukturanpassungsgesetz 1996 formed part of a Federal Government consolidation programme to reduce the budget deficit and repay State debt.

12In its order for reference, the Verwaltungsgerichtshof explains the national law as follows.

13Since 1 January 1978, that is to say before Austria acceded to the European Union, VAT has in principle not been deductible on the purchase, leasing or use of cars, dual-purpose vehicles and motor-bicycles. The Austrian legislation did not define those categories. Nor did it specify the characteristics which distinguish those vehicles from heavy-goods vehicles and minibuses, both of which were eligible for the deduction of VAT.

14The distinguishing characteristics were set out in a (non-binding) ministerial decree of 18 November 1987. Where a vehicle displayed the characteristics described in the ministerial decree and was used principally for commercial purposes, it was the consistent practice of the tax authorities to allow deduction of VAT. The Pontiac TransSport and Fiat Ulysee vehicles at issue in these proceedings were in practice treated by the tax authorities as 'minibuses' eligible for deduction of VAT.

15The 1996 regulation defined the characteristics of a 'minibus' considerably more narrowly than the administrative practice at that time, as established in the decree of

18 November 1987. In the present cases, it is common ground that vehicles of the Pontiac TransSport or the Fiat Ulysee types do not meet the new criteria.

16Moreover, the Verwaltungsgerichtshof has not had to decide, either before 1995 or since, whether a Pontiac TransSport or Fiat Ulysee is to be classified as a car or dual-purpose vehicle or as a minibus.

III— Facts and procedure

? re-litigation procedure

17This case arises out of two appeals pending before the Verwaltungsgerichtshof, namely Metropol Treuhand Wirts-chaftstreuhandgmbH (hereinafter 'Metropol') against Finanzlandesdirektion für Steiermark and Michael Stadler against Finanzlandesdirektion für Vorarlberg. In its VAT returns for 1996 and 1997, Metropol applied for deduction of VAT in respect of the commencement of use of a motor vehicle of the Pontiac TransSport type. In his VAT return for 1996 Mr Stadler applied for deduction of VAT in respect of the commencement of use of a motor vehicle of the Fiat Ulysee type. Both cases concerned vehicles designed to carry at most seven persons, including the driver. They contained three rows of seats with a small luggage compartment behind.

18In both cases deduction was refused, even after objections to the assessment, whereupon the complainants appealed to the Verwaltungsgerichtshof. Those appeals were based on the argument that the right to deduct VAT in respect of the abovementioned vehicles was derived from Community law, and in particular from Article 17(6) and (7) of the Directive.

19In its objection, Metropol had contended that, under the second subparagraph of Article 17(6) of the Directive, Austria was entitled to maintain in force only those exclusions from deductibility for VAT purposes which were in force on accession to the European Union on 1 January 1995. As at 1 January 1995, minibuses were fully eligible for deduction of VAT. Certain categories of minibus were rendered ineligible for deduction from VAT under the regulation. That exclusion could not, in Metropol's view, be based on the second subparagraph, of Article 17(6) of the Directive, or on Article 17(7), inasmuch as it was based on purely fiscal, rather than cyclical economic reasons. Moreover, the exclusion was for an unlimited period and the Committee had not been consulted, as required by Article 29 of the Directive.

20In its decision on the objection, the Finanzlandesdirektion für Steiermark acknowledged that before the entry into force of the regulation motor vehicles of the Pontiac TransSport make were classified as 'minibuses' and were thus eligible for deduction of VAT. It further stated that, on the facts, it was not disputed that the vehicle did not come within the category of 'minibuses' in the regulation and therefore, as a car, was not eligible for deduction of VAT. This consequence of the regulation was, in the opinion of the Finanzland esdirektion, compatible with the second subparagraph of Article 17(6) of the Directive. The definition of 'minibus' in the regulation followed the pre-1995 case-law. The regulation simply tightened up a lax administrative practice. Moreover, the Finanzlandesdirektion pointed out that most EU Member States did not allow deduction of VAT in respect of the acquisition costs of a car. It could also be inferred therefrom that the fact that under the regulation minibuses are excluded from the right to deduct input tax was consistent with the Directive. According to the Finanzlandesdirection, as long as exclusion from deductibility has not been harmonised in a directive, Austria was entitled under the second subparagraph of Article 17(6) of the Directive to treat minibuses as 'cars' and to exclude them from the right to deduct VAT.

21In the Stadler case, the Finanzland esdirektion für Vorarlberg justified its decision as follows. The terms 'car' and 'dual-purpose vehicle' used in Paragraph 12(2)(2)(b) of the UStG 1994 had been defined anew in the regulation. The new definitions had been necessary in the light of the Verwaltungsgerichtshof's case-law. After entry into force of the regulation, the vehicle at issue was no longer eligible for deduction of VAT.

22According to the Finanzlandesdirek tion, that consequence of the regulation could not be regarded as a breach of Community law. The regulation merely gave effect to Paragraph 12(2)(2)(b) of the UStG 1994. It did not unlawfully add to the exclusions from the right to deduct VAT under the second subparagraph of Article 17(6) of the Directive.

The questions referred for a preliminary ruling

23Subsequently, by order of 22 September 1999, received at the Court Registry on

26 October 1999, the Verwaltungsgerichtshof (Austria) requested a preliminary ruling on the following questions:

1. Is the second subparagraph of Article 17(6) of the Directive to be interpreted as precluding a Member State from excluding the right to deduct VAT in respect of certain vehicles after the entry into force of the Directive, if before its entry into force VAT was deductible in respect of those vehicles as a result of practice followed by the administrative authorities?

2. If the answer to Question 1 is yes, is the first sentence of Article 17(7) of the Directive to be interpreted as meaning that a Member State may, without prior consultation under Article 29 of the Directive, add to the exclusions from the right to deduct VAT in the manner described in Question 1 and for an unlimited period in order to consolidate the budget?

Procedure before the Court of justice

24Written observations were submitted to the Court by the Austrian Government and by the Commission. Both further elucidated their views at the hearing on 5 July 2001. On that occasion, the Commission explored in detail the consequences of two recent judgments of the Court in Commission v France, both delivered on 14 June 2001, 9 in which the terms of Article 17(6) of the Directive were clarified. Those judgments are of importance in connection with the reply to the first question referred for a preliminary ruling.

IV — The first question

25Before actually proceeding to answer the first question, I propose to deal with two preliminary issues. The reply which will follow will itself, to a considerable extent, be determined by the two judgments in Commission v France of 14 June 2001. In those judgments the Court shed light on the nature of the second subparagraph of Article 17(6). In answering the question raised, the Court should therefore consider the extent to which the Austrian regulation of 1996 changed the existing legal situation.

Preliminary issue: the meaning of the second subparagraph of Article 17(6) for Austria

26In its order for reference, the Verwaltungsgerichtshof considers whether, since it is a derogation, the transitional provision in the second subparagraph of Article 17(6)

1-91 can be applied to Member States such as Austria which acceded to the European Union only after the Directive came into force. The view amongst Austrian aca demics is that, since it is a derogation, the second subparagraph of Article 17(6) is to be interpreted narrowly so that only the original Member States were allowed to retain existing exclusions from entitlement to deduct VAT.

27The Verwaltungsgerichtshof considers that interpretation to be incorrect because, in the absence of specific provisions, new Member States not only assume all the obligations resulting from the acquis communautaire but also acquire all the rights, including the right to retain existing exclusions from entitlement to deduct VAT. 11I n addition, the Verwaltungsgerichtshof noted that, just as the founding Member States or the Member States who acceded prior to Austria, the Member States who joined later had to make extensive adjustments to their legal systems and therefore had just as great a need for transitional provisions. The Austrian Government and the Commission share the view expressed by the Verwaltungsgerichtshof.

28I too am of the opinion that under the second subparagraph of Article 17(6), Austria, as a Member State, has the right to retain the exclusions from entitlement to deduct VAT that existed at the time of its accession to the European Union, that is to say, on 1 January 1995. Like the Verwaltungsgerichtshof and the Commission, I consider the decisive factor to be that a new Member State takes over not only the obligations but also the rights stemming from the acquis communautaire. It is also important to note that the Council has not adopted any of the measures for which the first subparagraph of Article 17(6) of the Directive provides.

Preliminary issue: the competence of the Court

29According to Austria, it is not for the Court of Justice but for the national court to decide whether on 1 January 1995 there was an exclusion from entitlement to deduct VAT in respect of the vehicles in question. The Austrian Government bases this conclusion on the judgment in Konle, and more particularly on paragraph 27 of that judgment which reads as follows: 'Determination of the content of the existing legislation regarding secondary residences on 1 January 1995, the date of the accession of the Republic of Austria, is, in principle, a matter for the national court. It is, however, for the Court of Justice to supply it with guidance on interpreting the Community concept of "existing legis lation".' At the hearing, the Commission contested the Austrian Government's interpretation of the judgment in the Konle case. In the Commission's view, the Court is in fact competent to assess the content of the Austrian national legislation at accession.

30I share the view that the conclusion which the Austrian Government draws from the judgment cited is incorrect. According to Article 234 EC, in prelimi nary- reference proceedings the Court interprets Community law and not national law. In the paragraph of the judgment in question the Court explains how it views its task. In that connection, the Court states that it is required to give an interpretation of the Community concept of 'existing legislation'. Naturally, in order to do so, it must also examine the content of the existing legislation itself.

31That also is what the Court did in the Kotile judgment. In that case, one of the issues was whether national legislation of 1996, that is to say, following Austria's accession, was covered by the concept of 'existing legislation' in the Act of Accession. In order to enable it to answer that question, the Court had to assess the extent to which, in terms of content, the national legislation of 1996 was substantially the same as the legislation existing at the time of accession. It could not have made such an assessment without at the same time examining the content of the existing legislation. That aspect of the Konle case is identical to the situation in the present case. Since the Court considered itself to be competent in this respect in the Konle case, I fail to see why it should not be competent in the case now before it. Clearly, in the present instance the issue whether legislation such as the Austrian regulation is permitted by the second subparagraph of Article 17(6) of the Directive cannot be determined if the Court were not able to examine the existing legal situation.

The two judgments of 14 June 2001 in Commission v France

32The present case must be assessed by reference to the two judgments of 14 June 2001. First of all, I would refer to my Opinion in those two cases in which I wrote the following: '... in view of the nature of the Directive, the opportunities to derogate from the deductibility of VAT are limited. In its judgment in Lennartz, the Court ruled that the right of deduction must be exercised immediately in respect of all the taxes charged on transactions ... Such limitations on the right of deduction must be applied in a similar manner in all the Member States and therefore derogations are permitted only in the cases expressly provided for in the Directive'. Moreover, provisions which contain possible exceptions must be interpreted strictly.

33In the judgment in case C-345/99, the Court construed the competence of Member States to make use of the derogating provisions of the second subpagraph of Article 17(6), in the following terms:

'21. In order to assess whether the amendment of the national legislation at issue is compatible with the provisions of the Sixth Directive, reference should be made to the judgment in Case C-136/97 Norbury Developments [1999] ECR 1-2491, which concerned another transitional provision of the Sixth Directive, namely Article 28(3)(b) concerning VAT exemptions. In that judgment, the Court held that amendments made to the legislation of a Member State which did not increase the scope of VAT exemption but, rather, reduced it, did not breach the terms of that article. Whilst that article precludes the introduction of further exemptions or an increase in the scope of exemptions existing before the entry into force of the Sixth Directive, it does not prevent their reduction, since their abolition is the objective of Article 28(4) of the Sixth Directive (see Norbury Developments, cited above, paragraph 19).

22. The same reasoning can be applied in the interpretation of Article 17(6) of the Sixth Directive. Thus, where the legislation of a Member State, after the entry into force of the Sixth Directive, is amended so as to reduce the scope of existing exemptions and thereby brings itself into line with the objective of the Sixth Directive, that legislation must be considered to be covered by the derogation provided for by the second subparagraph of Article 17(6) of the Sixth Directive and is not in breach of Article 17(2).'

34It is plain that the provisions of the regulation do not have the effect of reducing the scope of the exemption. It is established that the minibuses in question are excluded from entitlement to deduct VAT. However, it does not immediately follow that the regulation is not permitted under the terms of the Directive. The case-law of the Court, and in particular the abovementioned judgments of 14 June 2001, show that the Directive does not preclude a national measure that has no effect on the existing legal situation. Thus, the second subparagraph of Article 17(6) only prohibits the 'introduction of further exemptions or an increase in the scope of [existing] exemptions'.

35Moreover, the Commission also refers to the judgment in Royscot and Others, from which, inter alia, it follows that Member States may retain exclusions under the second subparagraph of Article 17(6) of the Directive as long as the Council has adopted no rules under that article notwithstanding the fact that the four-year period mentioned in the first subparagraph thereof expired a considerable period previously.

The reply

36The nub of the matter is whether the regulation altered the existing legal situation.

37My answer to this question is affirmative, being guided by the following two considerations:

— in assessing the existing legal situation current administrative practice must also be taken into account;

— it follows from the facts of the case that by its content the regulation alters the existing legal situation.

38In regard to my first consideration, I would first refer to the Austrian Government's submission. The Government refers to the ministerial decision of 18 November 1987. That decision was consistent with existing Austrian case-law but was not binding. In the Austrian Government's view, that decision did not form part of existing national legislation for the purposes of the second subparagraph of Article 17(6) of the Directive. According to the Austrian Government, in answering the first question the Court may not have regard to an existing administrative practice. At the hearing the Government also pointed out that, according to the case-law of the Court, in transposing EC directives into national law, a Member State is obliged to lay down binding rules and administrative practices are not sufficient.

39I cannot share the views expressed by the Austrian Government. I would point out that the Court does not adjudge whether national law is consistent with Community law by reference only to national legislation but also by reference to whether the administrative practice in a Member State goes hand in hand with national legislation. The Court's broad test is necessary to ensure the practical effect of Community law in the Member States. A good illustration of this case-law in regard to the Directive is the recent judgment in Commission v France. That case concerned a VAT exemption for service charges in the French hotel and catering industry. That exemption — which was not provided for by French tax legislation — was based on an administrative circular issued by the French tax authorities. Application of this exemption resulted in a finding by the Court against the French Republic.

40The Austrian Government errs in drawing a comparison with the obligations imposed on the national legislature when transposing an EC directive. 'According to the settled case-law of the Court, mere administrative practices, which are alter able at the will of the administration and are not given adequate publicity, cannot be regarded as constituting adequate compliance with the obligation imposed on Member States to whom a directive is addressed by Article 189 of the EEC Treaty.' The condition thus applied to the implementation of directives follows from the requirement of legal certainty for the beneficiaries of a directive. The latter must be able to know their rights under Community law and, where necessary, be able to assert those rights in the national courts. However, the present case does not concern an obligation to be fulfilled by a Member State when implementing Community law but merely establishment of an existing practice.

41I now turn to my second consideration.

42The Commission asserts that the regulation led to a narrower definition of the term minibus. This resulted in the vehicles at issue no longer being treated as mini buses. Thus, the regulation brought about a change in the legal situation.

43The Austrian Government's argument is as follows. Throughout the European Union the rules applicable to these vehicles are those for cars and dual-purpose vehicles. That is not true of vehicles designed for more than nine persons. According to the Austrian Government, that test must also be applied in regard to tax law. It refers to a 1998 Commission proposal to amend the Directive which placed the dividing line at vehicles designed for more than nine persons, including the driver.

44However, so the Austrian Government continues, in recent years minibuses with a small capacity, such as the Pontiac Trans-Sport and the Fiat Ulysee, have appeared on the market. These vehicles are replacing cars rather than buses. It would therefore be inconsistent with the purpose of Paragraph 12(2)(2) of the UStG 1994 and with the case-law of the Verwaltungsgerichtshof to treat those vehicles as buses. Thus, Article 10 of the 1996 regulation stipulates that those vehicles must be regarded as cars or dual-purpose vehicles. In that regulation mandatory criteria are laid down for the first time. The purpose of that provision is not to extend the category of vehicles excluded from entitlement to deductibility of VAT but to establish a clear dividing line.

45I should begin by recalling that, according to the settled case-law of the Court, exceptions to the right to deduct must be interpreted restrictively. A restrictive interpretation implies that even ancillary changes concerning the right to deduct — which are not in furtherance of the objective of the Directive — are not permissible.

46The Austrian Government's justification for the regulation must be viewed in that light. The Austrian Government refers mainly to the function of the mini buses at issue. That function is comparable to that of a car rather than a bus. It is also said to be legally recognised elsewhere in the European Union. At first sight, the Austrian Government's description of the function of these minibuses appears to be correct. However, that function is not material to the answer to the first question posed by the national court. Nor is it material that minibuses with a small capacity such as the Pontiac TransSport and the Fiat Ulysee seem to have first appeared on the market after 1987.

47In view of the requirement for a restrictive interpretation, a decisive factor in determining the Court's answer is the fact that until entry into force of the regulation, minibuses with a capacity of fewer than nine persons benefited from the right to deduct whereas after that date they did not.

48I also note that the Strukturanpass ungsgesetz 1996 and the regulation based on it served merely to abolish certain opportunities for deduction. However, the aim of the new rules, from the explanation given in the Government's bill, was, inter alia, to reduce the budget deficit and repay State debt.

49I therefore suggest that the Court answer the first question as follows: On the basis of the second subparagraph of Article 17(6) of the Directive, a Member State is precluded from excluding the right to deduct VAT in respect of certain vehicles after the entry into force of the Directive, if at the time of its entry into force VAT was deductible under an established national administrative practice.

V — The second question

50The second question referred for a preliminary ruling can be divided into two parts. It is first necessary to examine the legal consequences of failure to follow the consultation procedure laid down in Article 29 of the Directive. Thereafter, the meaning of the expression 'cyclical economic reasons' has to be investigated.

The consultation procedure

51The Austrian Government points out that the Article 29 procedure is purely consultative and unlike, for example, Article 27 of the Directive, does not call for a decision by the Council. The aim is to ensure the consistent application of the Directive. A citizen cannot invoke non compliance with that provision.

52In the Commission's view, a Member State may not rely on Article 17(7) without first having followed the consultation procedure. It recalls that in the Direct Cosmetics case — concerning Article 27(2) of the Directive, which also provides for notification by a Member State wishing to adopt a derogating measure — the Court ruled as follows: 'By virtue of the third paragraph of Article 189 of the Treaty, Member States are bound to observe all the provisions of the Sixth Directive in so far as a derogation has not been established in accordance with Article 27. The tax authorities of a Member State may not therefore rely, as against a taxable person, on a provision derogating from the scheme of the Directive.' The Commission argues that this strict view also applies to Article 29. Consultation leads to the coordinated application of Article 17(7). Moreover, it provides a precautionary means of testing the extent to which the national measure has been adopted for cyclical economic reasons.

53In forming a view of this matter, I consider it important first to distinguish between the Article 29 procedure and the procedure under Article 27 of the Directive, to which the Direct Cosmetics judgment relates. The Article 27 procedure is directed to obtaining the authorisation of the Council before a derogating measure is taken, whereas no such procedure is provided for under Article 29. Contrary to the Commission's assertion, the Direct Cosmetics case has no direct bearing on the Article 29 procedure.

54For those reasons, I would recall the — extensive — case-law of the Court concerning the non-observance of procedural requirements. The case-law of the Court distinguishes between essential and nonessential procedural requirements. In the case of essential procedural requirements non-observance results in the annulment of the measure concerned. Moreover, the Court interprets the term 'essential procedural requirement' broadly.

55I am of the opinion that in this case the failure to follow the consultation procedure under Article 29 of the Directive may be regarded as a breach of an essential procedural requirement, which nullifies reliance on Article 17(7) of the Directive. I infer as much from the wording of Article 17(7) itself. An exclusion from the right to deduct is only allowed 'subject to the consultation provided for in Article 29'. In view of this wording, consultation of the Committee is a precondition for a national measure based on Article 17(7), even though in this case the consultation is no more than an exchange of information. Indeed, it is logical that the obligation to consult be accorded such importance. In this instance, the consultation procedure also affords the Commission an opportunity to monitor the use made of a possibility of derogation which — as I emphasised in my examination of the first question — must be interpreted narrowly.

inter alia,

56I find support for my point of view in the judgment of 30 April 1996 in CIA Security International. That case concerned the breach by a Member State of the obligation to notify under Council Directive 83/189/EEC of 28 March 1983 laying down a procedure for the provision of information in the field of technical standards and regulations. In its judgment the Court compared this notification obligation with 'an obligation to give prior notice which did not make entry into force of the envisaged rules subject to the Commission's agreement or lack of opposition'. Unlike the latter, the notification obligation in question was not intended 'simply to inform the Commission ... [but] has a more general aim of eliminating or restricting obstacles to trade, to inform other States of technical regulations envisaged by a State, to give the Commission and the other Member States time to react and to propose amendments for lessening restrictions to the free movement of goods arising from the envisaged measure and to afford the Commission time to propose a harmonising directive'. Because of this more general aim the Court regarded the obligation to notify as an essential formal requirement, in contrast to the general notification with which it was compared.

57From the standpoint of the criteria of the judgment in CIA Security International,

Security International the duty to consult under Article 17(7) must likewise be regarded as an essential procedural requirement. This obligation too has a more general aim, namely to enable the Commission to oversee the way in which Member States avail themselves of the opportunity to derogate and thus counter any abuse.

The 'cyclical economic reasons' criterion

58According to the Austrian Government, Member States may use Article 17(7) to correct macroeconomic imbalances, to reduce the budget deficit and to repay State debt. The national measures need not be limited in time. They may include measures already in existence when the Directive entered into force. The Commission, on the other hand, argues that Member States may not make indefinite use of derogating measures for purely budgetary reasons.

59A Member State may base an exclusion from the system of deductions under Article 17(7) on cyclical economic reasons only. There is no doubt in my mind that a regulation applicable for an indefinite period and, moreover, intended to reduce the budget deficit and repay State debt does not have a cyclical economic origin.

60The 'cyclical economic reasons' requirement means that the fiscal measure must be aimed at counteracting cyclical fluctuations. The measure forms part of the economic policy of a Member State. In this context, I understand economic policy to mean the influencing, through the government budget, of macroeconomic quantities such as production, consumption and import/export volumes over short periods of time, often no more than one or two years in length.

61There is no need to examine in detail the question of the extent to which attainment of Economic and Monetary Union still leaves room for Member States to conduct their own economic policy. However, I am assuming that since attainment of Economic and Monetary Union, policy within the Union must be coordinated. In this connection, I refer to the procedure under Article 99 EC. Consequently, there cannot be much scope for entirely unilateral reliance on Article 17(7) of the Directive.

62This brings me back to the national court's second question itself. In principle, a measure covered by Article 17(7) of the Directive must be of limited duration. A cyclical economic fluctuation is, by definition, a temporary effect. As I see it, the time limitation per se does not need to be explicitly expressed in the measure itself — a measure introduced for an indefinite period may in due course be revoked — but in this case it must be

63In any event, it is clear that a measure obvious from the explanatory mem which excludes the right to deduct for orandum or other accompanying docu cyclical economic reasons cannot be struc ments that the Member State genuinely tural in nature.

intends to revoke the measure once the economic situation allows.

VI — Conclusion

64In light of the foregoing, I propose that the Court should answer the questions referred for a preliminary ruling by the Verwaltungsgerichtshof as follows:

First question: On the basis of the second subparagraph of Article 17(6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, a Member State is precluded from excluding the right to deduct VAT in respect of certain vehicles after the entry into force of the Directive, if at the time of its entry into force VAT was deductible under an established national administrative practice.

Second question: Article 17(7) of the Directive does not allow an exclusion from the right to deduct VAT to be introduced for cyclical economic reasons without prior consultation of the committee provided for in Article 29 of the Directive. Moreover, the limitation in Article 17(7) to exclusions for cyclical economic reasons entails that, as a matter of principle, the exclusions must apply for a specific period of time and, in any case, may not be structural in nature.

Notes

(1) Original language: Dutch.

(2) OJ 1977 L 145, p. 1.

(3) See the preamble to the Directive.

(4) Published in BGBl. 663/1994.

(5) Decision Z 09 1202/4-IV/9/87, published in Amtsblatt der fmattzverwaltung (Official Gazette of the tax authorities), AÖF 1987/330.

(6) Law of 30 April 1996, BGBl. 201/1996.

(7) Published in BGBl. 273/1996. With retroactive effect from

(15) February 1996.

(8) Explanatory memorandum on the Government's bill, GP XX RV 72, p. 196.

(9) Case C-345/99 Commission v France [2001] ECR I-4493 and Case C-40/00 Commission v France [2001] ECR I-4539.

(10) See footnote 9.

(11) See point 6 of the Opinion of Advocate General Tesauro in Case C-35/90 Commission v Spain [1991] ECR I-5073.

(12) Judgment in Case C-302/97 [1999] ECR I-3099.

(13) The Act concerning the conditions of accession for the Republic of Austria, the Republic of Finland and the Kingdom of Sweden and the adaptation of the Treaties on which the European Union is based (OJ 1994 C 241, p. 21 andOJ 1995 L 1, p. 1).

(14) Opinion of 22 February 2001, points 47 and 50. The Lennartz judgment was delivered on 11 July 1991 (Case C-97/90 [1991] ECR 1-3795). In its written observations the Commission also refers to the judgments in Case

(348) /87 Stichting Uitvoering Financiële Acties [1989] ECR

(173) 7, paragraph 13, and in Case C-453/93 Bulthuis-Griffioen [1995] ECR 1-2341, paragraph 19.

(15) Judgment of the Court in Case C-305/97 Royscot AND Others [1999] ECR I-6671.

(16) See, for example. Case C-212/99 Commission v Italy [2001] ECR I-4923.

(17) Judgment in Case C-404/99 Commission v France [2001] ECR I-2667.

(18) See, for example, the judgment in Case C-131/88 Commission v Germany [1991] ECR I-825.

(19) See point 32 of this Opinion.

(20) Judgments in Case 5/84 Direct Cosmetics [1985] ECR 617, paragraph 37 and in Case C-97/90 Lennartz [1991], already cited in footnote 14, paragraph 33.

(2) 1 — T h u s, the Court regards as an essential procedural requirement the obligation to state the reasons for measures liudgment in Case C-17/99 France v Commission [2001Į ECR 1-2481, paragraph 35), the obligation to consult the European Parliament when introducing a Parliament regulation (judgment in Case C-392/95 v Council 11997| ECR 1-3213, paragraph 14) and the failure to send documents to Member States m good time before adoption of an opinion by the Standing Committee on Germany Construction (judgment in Case C-263/95 v Commission [1998] ECR 1-441, paragraph 32).

(22) C a se C-194/94 CM |1996] ECR

(1) 2201, paragraph 48.

(23) OJ 1983 L 109, p. 8.