C-414/97 Commission v Spain

JUDGMENT OF THE COURT (Sixth Chamber)

16 September 1999 *

In Case C-414/97,

Commission of the European Communities, represented by Miguel Díaz-Llanos La Roche, Legal Adviser, and Carlos Gómez de la Cruz, of its Legal Service, acting as Agents, with an address for service in Luxembourg at the office of the latter, Wagner Centre, Kirchberg,

applicant,

v

Kingdom of Spain, represented by Nuria Díaz Abad, Abogado del Estado, acting as Agent, with an address for service in Luxembourg at the Spanish Embassy, 4-6 Boulevard E. Servais,

defendant,

APPLICATION for a declaration that, by exempting from value added tax intra-Community imports and acquisitions of arms, ammunition and equipment exclusively for military use, other than the aircraft and warships mentioned in points 23 and 25 of Annex F to Sixth Council Directive 77/388/EEC of 17 May

* Language of the case: Spanish.

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), notwithstanding the provisions of Articles 2(2), 14, 28a and 28c(B) of that directive, the Kingdom of Spain has failed to fulfil its obligations under the EC Treaty,

THE COURT (Sixth Chamber),

composed of: P.J.G. Kapteyn, President of the Chamber, G. Hirsch and J.L. Murray (Rapporteur), Judges,

Advocate General: A. Saggio, Registrar: R. Grass,

having regard to the report of the Judge-Rapporteur,

after hearing the Opinion of the Advocate General at the sitting on 18 March 1999,

gives the following

Judgment

Grounds

1By application lodged at the Court Registry on 5 December 1997, the Commission of the European Communities brought an action under Article 169 of the EC Treaty (now Article 226 EC) for a declaration that, by exempting from value added tax (hereinafter 'VAT') intra-Community imports and acquisitions of arms, ammunition and equipment exclusively for military use, other than the aircraft and warships mentioned in points 23 and 25 of Annex F to Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, hereinafter 'the Sixth Directive'), notwithstanding the provisions of Articles 2(2), 14, 28a, and 28c(B) of that directive, the Kingdom of Spain has failed to fulfil its obligations under the EC Treaty.

2Under the Sixth Directive, the following are subject to VAT:

— the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such (Article 2(1));

— the importation of goods (Article 2(2));

— intra-Community acquisitions of goods (Article 28a inserted by Council Directive 91/680/EEC of 16 December 1991 supplementing the common system of value added tax and amending Directive 77/388/EEC with a view to the abolition of fiscal frontiers (OJ 1991 L 376, p. 1)).

3Article 14 of the Sixth Directive lists exemptions on importation. Article 28c(B) (inserted by Directive 91/680) lists exempt intra-Community acquisitions of goods.

4Under the provisions of the Act concerning the conditions of accession of the Kingdom of Spain and the Portuguese Republic and the adjustments to the Treaties (OJ 1985 L 302, p. 23, hereinafter 'the Act of Accession'), the Sixth Directive is applicable to Spain, with the exception of the Canary Isles, Ceuta and Melilla.

5Under Law No 6/87 of 14 May 1987 concerning budgetary appropriations for investments and operating costs of the armed forces (BOE of 19 May 1987, hereinafter 'the Spanish Law'), imports into Spain of products from other Member States, including supplies of armaments, munitions and equipment exclusively for military use are exempt from VAT with retrospective effect from 1 January 1986.

6Under the Spanish Law, the Kingdom of Spain does not impose VAT on certain intra-Community imports and acquisitions of goods, which, according to the Commission, should be subject to it since no exemption is provided for either by Articles 14 and 28c of the Sixth Directive or by the Act of Accession.

7Taking the view that this exemption was contrary to Article 2(2) of the Sixth Directive, the Commission, by letter of 7 February 1990, gave the Spanish Government formal notice to submit its observations within two months.

8The Spanish authorities replied by letter of 7 May 1990. The Commission none the less considered that, despite the arguments raised by the Spanish authorities, the introduction of the exemption at issue into the Spanish legal order constituted an infringement of the provisions of the Sixth Directive.

9Having found, however, that since 1 January 1993 the Kingdom of Spain was entitled, under Directive 91/680, to exempt from VAT certain transactions relating to aircraft and warships mentioned in points 23 and 25 of Annex F to the Sixth Directive, the Commission took the view that, although the Kingdom of Spain had infringed that directive as regards military equipment until 1 January 1993, that infringement ceased thereafter in respect of the equipment mentioned in points 23 and 25 of that annex.

10On 6 August 1996, the Commission sent the Kingdom of Spain a reasoned opinion calling on it to take the necessary measures to comply therewith within two months of its notification.

11By letter of 16 June 1997, the Kingdom of Spain replied to that opinion, essentially reiterating its position.

12In the light of the evidence furnished by the Spanish authorities, the Commission, taking the view that the Kingdom of Spain had not complied with the reasoned opinion, brought this action.

13The Commission argues that, under the Sixth Directive, all intra-Community imports and acquisitions of goods are subject to VAT. There are three situations in which there is no VAT liability: first, in the case of the exemptions listed exhaustively in Articles 14 or 28c of the Sixth Directive; second, in cases covered by Article 28(3) of that directive, which allows a temporary exemption to be applied during the transitional period mentioned in Article 28(4); and, finally, in cases where an exemption is provided for by the Act of Accession.

14The Commission maintains that Articles 14 and 28c contain a list of the exemptions which the Member States must — or may — allow. In its view, no exemption relating to armaments, munitions or equipment exclusively for military use, such as that provided for by the Spanish Law, appears in that list.

15The Commission takes the view that the Act of Accession required the Kingdom of Spain to bring into force the measures necessary to comply with directives from the time of its accession. It points out that the Kingdom of Spain introduced VAT by Law No 30/85 of 2 August 1985 (BOE of 9 August 1985), which took effect on 1 January 1986.

16The Commission considers that, at the time of the introduction of VAT, the Kingdom of Spain had thus made provision for the imposition of the tax on all intra-Community imports or acquisitions of military equipment and that the exemption of such transactions was only decided on more than a year later with retrospective effect from the date on which VAT was first levied in Spain.

i7 The Kingdom of Spain submits that its national legislation complies with Community law, and, in particular, with Article 223(1 )(b) of the EC Treaty (now, after amendment, Article 296(l)(b) EC), which provides for a safeguard clause whereby Member States may take the measures they consider necessary for the protection of the essential interests of their security which are connected with the production of or trade in arms, munitions and war material. It notes that the Spanish Law, extended by Law No 9/90, must be understood as having been adopted on the basis of that article, since exemption from VAT constitutes a necessary measure for the purposes of guaranteeing the achievement of the essential objectives of its overall strategic plan and, in particular, to ensure the effectiveness of the Spanish armed forces both in national defence and as part of the North Atlantic Treaty Organisation.

18As a preliminary matter, the Commission observes that the plea raised by the Kingdom of Spain in its defence is out of time since it was not advanced at any time during the pre-litigation procedure. It points out that, according to the case-law of the Court, the allegations made by the Commission against a Member State must be the same during the different stages of the procedure, the Commission being entitled only to add further details in support of its argument. The Commission submits that such a requirement is applicable mutatis mutandis in this case.

19In that connection, suffice it to note that such a requirement would be contrary to the general principle of respect for the rights of the defence. According to the case-law of the Court, the proper conduct of the pre-litigation procedure constitutes an essential guarantee required by the Treaty not only in order to protect the rights of the Member State concerned, but also to ensure that any contentious procedure will have a clearly defined dispute as its subject-matter (see the order of 11 July 1995 in Case C-266/94 Commission v Spain [1995] ECR I-1975, paragraph 17). Thus, once the subject-matter has been defined, the Member State has the right to raise all the pleas available to it in order to defend itself. Moreover, there is no rule of procedure which requires the Member State concerned to put forward, during the pre-litigation procedure, all the arguments in its defence, in an application based on Article 169 of the EC Treaty.

20The Commission takes the view that, in so far as it constitutes an exception to the rule regarding VAT liability, the measure which the Kingdom of Spain adopted purportedly because it was 'necessary', on the basis of the safeguard clause in Article 223(1 )(b) of the Treaty, must be interpreted strictly. The Commission argues that it was for the Kingdom of Spain to establish to what extent VAT liability could affect the essential interests of its national security. It cites case-law of the Court according to which a Member State may not plead provisions, practices or circumstances existing in its internal legal system in order to justify a failure to comply with the obligations and time-limits laid down in a directive.

21It must be observed in that regard, as the Court has already held in Case 222/84 Johnston [1986] ECR 1651, paragraph 26, that the only articles in which the Treaty provides for derogations applicable in situations which may involve public safety are Articles 36, 48, 56, 223 and 224 of the EC Treaty (now, after amendment, Articles 30 EC, 39 EC, 46 EC, 296 EC and 297 EC), which deal with exceptional and clearly defined cases. Because of their limited character, those articles do not lend themselves to a wide interpretation.

22Accordingly, it is for the Member State which seeks to rely on those exceptions to furnish evidence that the exemptions in question do not go beyond the limits of such cases. In the present case, the Kingdom of Spain has not demonstrated that the exemptions provided for by the Spanish Law are necessary for the protection of the essential interests of its security. It is clear from the preamble to that Law that its principal objective is to determine and allocate the financial resources for the reinforcement and modernisation of the Spanish armed forces by laying the economic and financial basis for its overall strategic plan. It follows that the VAT exemptions are not necessary in order to achieve the objective of protecting the essential interests of the security of the Kingdom of Spain.

23Furthermore, as the Advocate General pointed out at point 12 of his Opinion, the imposition of VAT on imports and acquisitions of armaments would not compromise that objective since the income from payments of VAT on the transactions in question would flow into the State's coffers apart from a small percentage which would be diverted to the Community as own resources.

24Consequently, it must be held that the Spanish Government has not established that the abolition of the exemption from VAT on imports and acquisitions of armaments, munitions and equipment exclusively for military use, provided for by the Spanish Law, constituted a measure which would undermine the protection of the essential interests of the security of the Kingdom of Spain and that those exemptions were therefore justified under Article 223(1)(b) of the Treaty.

25To justify the exemptions provided for by the Spanish Law, the Kingdom of Spain refers, further, to Article 28(3)(b) of the Sixth Directive, which allows Member States to continue to exempt, during a transitional period, the activities set out in Annex F, including, in paragraphs 23 and 25, 'the supply, modification, repair, maintenance, chartering and hiring of aircraft, including equipment incorporated or used therein, used by State institutions', and 'the supply, modification, repair, maintenance, chartering and hiring of warships'.

26According to the Kingdom of Spain, Article 28(3) of the Sixth Directive does not govern the transitional arrangements applicable to Member States which joined the Community after 31 December 1977. However, it considers that it would be inequitable to treat new Member States acceding to the European Communities less favourably than those which were already members on that date, so that the new Member States can also exercise the rights conferred by Article 28 of the Sixth Directive from the time of their accession to the Community even though that right is not expressly provided for in the Act of Accession.

27The Kingdom of Spain observes that Article 9 of Law No 44/82 of 7 July 1982 on budgetary appropriations for investments and operating costs of the armed forces (BOE of 21 July 1982) exempted from equalisation tax imports of every type of equipment necessary for the investment plan of the Spanish armed forces. It points out that this tax disappeared when VAT was introduced and was absorbed by VAT following the accession of the Kingdom of Spain to the Communities. Therefore, it considers that the exemption at issue was in existence at the time of its accession and could be maintained on the basis of Article 28 of the Sixth Directive.

28On the other hand, the Commission takes the view that equalisation tax disappeared with the introduction of VAT by Law No 30/85 which took effect on 1 January 1986, the date of the accession of the Kingdom of Spain to the European Communities. From that, the Commission therefore concludes that, at the time of the introduction of VAT, the Kingdom of Spain provided for the imposition of the tax on all intra-Community imports or acquisitions of military equipment. The Commission asserts that the exemption of such transactions was decided on subsequently by the Kingdom of Spain in the Spanish Law (but with retrospective effect from 1 January 1986).

29In that regard, suffice it to note that, according to the case-law of the Court (Case C-35/90 Commission ν Spain [1991] ECR I-5073, paragraph 7), since the Kingdom of Spain subjected supplies of armaments, munitions and equipment exclusively for military use from other Member States to the general scheme of VAT by means of Law No 30/85 which entered into force on 1 January 1986, it could no longer subsequently claim the right to continue to exempt those activities pursuant to Article 28(3)(b) of the Sixth Directive.

30Furthermore, a retrospective exemption of the kind provided for by the Spanish legislation would be contrary to the purpose of the relevant Community provisions. It is settled case-law that the very wording of Article 28(3)(b) of the Sixth Directive precludes the introduction of new exemptions (Case 73/85 Kerrutt [1986] ECR 2219, paragraph 17, and Case C-74/91 Commission v Germany [1992] ECR 1-5437, paragraph 15).

31As regards the scope of Article 28(3a) inserted by Directive 91/680 which authorises the Kingdom of Spain to exempt from VAT the activities set out in paragraphs 23 and 25 of Annex F, it must be observed that this exemption, being an exception, is to be interpreted strictly (see Case C-35/90 Commission v Spain, cited above, paragraph 9) and only partially remedies the failure by the Kingdom of Spain to fulfil its obligations. First, the failure persisted in its entirety until 1 January 1993, the date of the entry into force of Directive 91/680, and second, the derogation provided for by that directive only concerned aircraft and warships.

32Accordingly, it must be held that, by exempting intra-Community imports and acquisitions of arms, ammunition and equipment exclusively for military use, other than the aircraft and warships mentioned in points 23 and 25 of Annex F to the Sixth Directive from VAT, notwithstanding the provisions of Articles 2(2), 14, 28a, and 28c(B) of that directive, the Kingdom of Spain has failed to fulfil its obligations under that directive.

Costs

33Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs, if they have been applied for in the successful party's pleadings. Since the Kingdom of Spain has been unsuccessful and the Commission has applied for costs to be awarded against it, the Kingdom of Spain must be ordered to pay the costs.

Operative part

On those grounds,

THE COURT (Sixth Chamber),

hereby:

1. Declares that, by exempting from value added tax intra-Community imports and acquisitions of arms, ammunition and equipment exclusively for military use, other than the aircraft and warships mentioned in points 23 and 25 of Annex F to 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, in the version resulting from Council Directive 91/680/EEC of 16 December 1991 supplementing the common system of value added tax and amending Directive 77/388/EEC with a view to the abolition of fiscal frontiers, notwithstanding the provisions of Articles 2(2), 14, 28a, and 28c(B) of that directive, the Kingdom of Spain has failed to fulfil its obligations under that directive;

2. Orders the Kingdom of Spain to pay the costs.

Kapteyn Hirsch Murray

Delivered in open court in Luxembourg on 16 September 1999.

R. Grass P.J.G. Kapteyn

Registrar President of the Sixth Chamber

OPINION OF ADVOCATE GENERAL SAGGIO delivered on 18 March 1999 *

1The action in this case is for a declaration that, by exempting from value added tax (hereinafter 'VAT') intra-Community imports and acquisitions of arms, ammuni tion and equipment exclusively for military use, the Kingdom of Spain infringed 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 (hereinafter the 'Sixth VAT Directive'), and that therefore it failed to fulfil its obligations under the EC Treaty.

Legislative framework, facts of the case and procedure

2The aforementioned directive — as amended by Council Directive 91/680/ EEC of 16 December 1991, supplementing the common system of value added tax and amending Directive 77/388/EEC, with a view to the abolition of fiscal frontiers — provides in Article 2(2) and Article 28a

* Original language: Italian.

that imports of goods (into the territory of the Community) and intra-Community acquisitions of goods are to be subject to VAT. Article 14 of the same directive then lists the exemptions laid down for the importing of certain goods into the territory of the Community and Article 28c(B) those allowed for intra-Community acquisitions of goods. Article 28(3)(b) also provides that, during the transitional period, the Member States may 'continue to exempt the activities set out in Annex F under conditions existing in the Member State concerned' at the time when the Sixth Directive entered into force, that is on 1 January 1978. Points 23 and 25 of that Annex list, among others, the operations relating to aircraft used by State institutions and warships. Paragraph 4 of the same article states that 'the transitional period shall last initially for five years, as from 1 January 1978.' Finally, paragraph 3a of the same article, introduced by Directive 91/680, already mentioned above, authorised Spain to exempt the operations described in points 23 and 25 of Annex F from VAT.

3On 1 January 1986, in order to comply with the conditions for accession to the Community and in particular those stated in Article 395 of the Treaty of Accession, Spain introduced value added tax into its own legal system, by Law No 30/85 of 2 August 1985, 6 but without stating any specific exemption for intra-Community imports and acquisitions of armaments. In addition, in the Act of Accession no exemptions were stated, in favour of Spain, for operations relating to the aforementioned goods. Exemptions to that effect were, however, introduced unilaterally by Spain by Law No 6 of 14 May 1987. Under that law, concerning budgetary appropriations for investments and operating costs of the armed forces, intra-Com munity imports and acquisitions 'of arms, ammunition and equipment exclusively for military use' which were necessary to carry out the programme to modernise the material, equipment and armaments of the armed forces for the period 1986/1994 were exempt from VAT. That law entered into force on 14 May 1987, but was effective as from 1 January 1986.

4By notice of 7 February 1990, the Commission initiated an infringement procedure against Spain, charging it with having exempted from VAT, by the aforementioned law of 1987, a number of intra-Community acquisitions and imports of military equipment, contrary to Article 2(2) of the Sixth Directive. The Spanish authorities replied by letter of 7 May 1990. In a reasoned opinion sent on 6 August 1996, the Commission charged Spain with breach of its obligations under the Sixth Directive for having introduced those exemptions. As Spain did not comply with the opinion within the time prescribed, the Commission brought this action on

5 December 1997.

The merits of the case

Arguments of the parties

5The Commission submits that, under the Sixth Directive, intra-Community imports and acquisitions are subject to VAT, save for the operations listed in Articles 14 and 28c and subject to the exemptions stated in Article 28(3)(b). This last provision gives the Member States the right to continue to exempt certain operations, mentioned in Annex F of the directive, during the transitional period. The only other exemptions allowed are, according to the Commission, those which may be provided for by the Acts of Accession of the new States to the European Community. According to the Commission, none of these exemptions applies in this case. On one hand, neither Article 14 nor Article 28c deals with operations similar to those in point in Spanish Law No 6/87, nor, on the other hand, could Article 28(3)(b) — which, as has already been stated, concerns the possibility of maintaining some exemptions existing in the Member State concerned at the time the directive entered into force — legitimise the exemptions in question since the aforementioned law which introduced them was enacted in May 1987 and therefore after the Act of Accession entered into force. The Commission points out that the situation would have been different if a clause had been inserted in the Act of Accession allowing Spain such a possibility.

According to the Commission, the possibility allowed to Spain under Directive 91/680 of exempting the operations mentioned in points 23 and 25 of Annex F to the Sixth Directive (operations concerning warships and aircraft) does not totally eliminate Spain's failure to fulfil the Community obligations deriving from the enactment of Law No 6/87. The granting of such a possibility in any event left the failure of Spain to fulfil its obligations unaltered and undiminished in respect of the period from the entry into force of Law No 6/87 to the date on which the Spanish Government obtained authorisation to allow the aforementioned limited exemption.

6The Spanish Government contends, primarily, that the exemptions from VAT for operations relating to military equipment contained in Law No 6/87 are compatible with Community law since they constitute safeguard measures under Article 223(l)(b) of the EC Treaty because they are 'necessary for the protection of the essential interests of their security' and refer to 'the production of or trade in arms, munitions and war material'. The purpose of the exemptions in the Spanish Law of 1987 was to guarantee the attainment of the essential objectives of the overall strategic plan (Plan Estrategico Conjunto), ensuring the effectiveness of the Spanish armed forces in relation to their duties of national defence, and also in carrying out the commitments undertaken by Spain as part of NATO. In support of its contention the Spanish Government referred to the preamble to Law No 6/87, which states that the main objective of the law in question is to 'define and allocate the necessary financial resources to achieve the process of reinforcing and modernising... the armed forces, creating the economic and financial basis of the overall strategic plan'. The Spanish Government also argues that the abolition of the exemption from VAT for armaments would, contrary to the Commission's assertion, have considerable financial consequences and points out in this respect that the increase in costs which this abolition would have involved would have been about ESP 3 million for 1998.

The Commission disputes that contention, stating that it cannot be taken into consideration in these proceedings as it had not been made in the pre-litigation phase. It then submits, on the merits, that the imposition of VAT on imports of armaments would not prejudice Spanish interests because the burden for the State would be quite modest and because, in any case, even though they were required to do so, the Spanish authorities did provide any evidence of the damage which the imposition of VAT on the operations in question could have caused to the essential interests of national security.

7The Spanish Government then submits that, in any case, the exemptions from VAT contained in Law No 6/87 must be regarded as legitimate under Article 28(3)(b) of the Sixth Directive, which allows Member States to continue to exempt the operations stated in Annex F from VAT under the conditions applicable under their law at the time when the Directive entered into force, and that is on 1 January 1978. Article 28(3)(b) must also apply in favour of those States which, like Spain, became Members of the Community after that date, as otherwise there would be discrimination in treatment between 'old' and 'new' Member States in the conditions of competition which are the inspiration behind the Community rules on fiscal harmonisation and this would give considerable competitive advantages to the 'old' Member States, without any justification. According to Spain, therefore, the new Member States must also be able to make use of the right described in Article 28(3)(b) of the Sixth Directive, even if it is not specifically laid down in the Treaty of Accession.

8Finally the Spanish Government points out that the exemptions in question were introduced into its domestic legal system by Law No 44 of 7 July 1982, 9 which exempted imports of materials for the armed forces from equalisation tax, and that the national legislation (Law No 30/1985, mentioned above) which introduced VAT following the accession of Spain to the Community carried over, as from its entry into force, that is from 1 January 1986, this favourable regime. The exemptions from VAT for operations concerning military equipment therefore already existed in Spain at the time when it joined the Community and for that reason, under Article 28(3)(b), they must be regarded as complying with the Directive as from 1 January 1986.

The existence of the failure to fulfil obligations

9Under Article 2(2) of the Sixth Directive all imports of goods into the territory of the European Community are to be subject to VAT, with the exception of those exempted under Article 14 of the same Directive. Under Article 28a, all intra-Community acquisitions which are imported for a valuable consideration into the country by a taxable person acting as such are also subject to VAT, with the exception of the operations exempted in accordance with the aforementioned Article 28c(B). There can be no doubt that the imports and acquisitions of military equipment, to which Spanish Law No 6/87 applies, fall within the scope of the Sixth Directive.

10That point having been settled, it must first be established whether those operations may — in accordance with the Spanish Government's primary submission — be considered to be justified under the safeguard clause in Article 223(l)(b) of the EC Treaty, and second, whether, as contended by that Government in the alternative, those operations can be brought within one or more of the cases in which the Directive allows States to provide for exemptions and therefore be considered lawful within those limits.

11With regard to the alleged application of-the safeguard clause in Article 223(l)(b) of the EC Treaty to the imports and acquisitions of arms, referred to in Spanish Law No 6/87, I would recall that this provision states that 'every Member State may take the measures it considers necessary for the protection of the essential interests of their security which are connected with the production of or trade in arms, munitions and war material.'

On this point the Commission first raises the objection that the Spanish Government cannot request the application of this provision in these proceedings, as it did not make a similar request at any time during the pre-litigation procedure. In other words, according to the Commission, this issue raised by Spain is out of time and cannot therefore be taken into consideration here. The Commission's objection does not appear to me to be well founded as there is no ad hoc procedural provision which requires a correspondence between the arguments put forward in the pre-litigation phase and those put forward subsequently before the Court; furthermore, it does not appear to be possible for such a rule to be elaborated by case-law, because this would offend against the general principle of the free and full exercise of the rights of defence before the Court. It should be added that the case-law relied on by the Commission in support of its submission is not relevant. It refers to a different situation, which is not comparable, namely that of a State against which an action is brought under Article 169 of the EC Treaty and to which the rights of defence are guaranteed; it is only with reference to that specific situation that it states that 'the action cannot be founded on any complaints other than those formulated in the reasoned opinion.' 1 In the case before us, however, application of the same principle would entail a converse reasoning, designed to limit, and not to reinforce, the rights of defence of the State in proceedings brought by it against the institution.

12Moving on to examine the merits of the question whether the safeguard clause stated in Article 223(l)(b) applies to this case, we should remember first of all that the safeguard clauses in the EC Treaty must be interpreted restrictively given their function of derogation from the ordinary rules and that, according to the ordinary rules on the burden of proof, States which contend for the application of that provision must demonstrate that the measures adopted are necessary for the protection of the national security interests. It must therefore be determined whether or not Spain has furnished proof that the exemptions stated in Law No 6/87 are necessary in order to attain that objective. In this case, it does not seem to me that this proof has been furnished. And even if, contrary to the Commission's assertion, the intention of the Spanish legislature to protect national interests in the matter of security by guaranteeing the process of reinforcing and modernising the armed forces were evident from the preamble to that law, it is hard to see why the exemptions from VAT would be necessary to attain that objective, in other words how it could be that the imposition of VAT on imports and acquisitions of armaments would entail for the finances of the State a burden of such dimensions as to jeopardise the objective in point. It should be observed that the revenue deriving from the VAT which would be charged on the operations in question would flow into the coffers of the State incurring the expenditure, with the exception of a trifling percentage which would be diverted to the Community coffers as own resources. The calculation presented by Spain in its defence does not appear to take into consideration the fact that, while the amount relating to VAT on military equipment constitutes State expenditure relating to the Ministry of Defence, it ultimately, to a large extent, ends up in the pocket of the State itself and cannot therefore have any impact on the shaping of the decision in the present case.

13It must therefore be concluded that the Spanish Government has not demonstrated that the abolition, in Law No 6/87, on the exemption from VAT of imports and acquisitions of armaments, ammunition and other military equipment constitutes a measure which can compromise the protection of the essential interests of the security of Spain, with the result that the exemptions contained in Spanish Law No 6/87 cannot be considered justified under Article 233(l)(b) of the EC Treaty. It is even unnecessary to add that, as the safeguard clause stated in Article 223(l)(b) of the EC Treaty has been found to be applicable to this case, there is no need, contrary to what is stated by the Commission, to determine whether Spain has abused, in the sense contemplated in Article 222 of the Treaty, the powers referred to in that provision.

14Next, as regards the possibility of bringing the operations concerning military equipment which are in point in Spanish Law No 6/87 within one of the exemptions which the Community legislation allows the Member States to introduce in whole or in part, it may be noted, as a preliminary point, that Articles 14 and 28c(b) of the Sixth Directive, which list the intra-Community imports and acquisitions which are exempt, cannot in any way be made to relate to the operations concerning military equipment in point in the Spanish law in question. The provision of the Directive which concerns the exemptions, and to which the Spanish Government essentially refers as a basis for demonstrating the legality of its own legislation relating to military equipment, is Article 28(3)(b), under which the Member States may continue to exempt the operations stated in Annex F during the transitional period, and these include, in points 23 and 25, those relating to aircraft used by State institutions and warships. The operations indicated concern, (a) 'the supply, modification, repair, maintenance, chartering and hiring of aircraft, used by State institutions and also the supply, modification, repair, maintenance, chartering and hiring of equipment incorporated or used therein' and (b) 'the supply, modification, repair, maintenance, chartering and hiring of warships.'

The Spanish Government contends that the provision under discussion should be interpreted widely, so as to include all the operations in point in Spanish Law No 6/87 in the exemption from VAT of the operations mentioned in points 23 and 25.1 cannot support that contention, as the items mentioned in points 23 and 25 concern operations regarding military equipment which are well defined and, which because of their content can fall within the ambit of only some of the operations on military equipment that are exempted by the Spanish law, specifically only those that concern aircraft used by State institutions and warships. A wide interpretation of these exemptions would conflict with the rule of ordinary law according to which provisions containing exceptions (the provisions on exemption from VAT are in this category) are to be interpreted strictly. The Court has repeatedly stated that 'the terms used to describe the exemptions... of the Sixth Directive are to be interpreted strictly since these constitute exceptions' to a general principle. In addition, the Spanish Government does not provide any analytical demonstration with regard to relating the exceptions stated in points 23 and 25 to the legislation in Law No 6/87.

As regards the temporal scope of the exception stated in Article 28(3)(b), an exception which, given the wording of the provision, would only be valid for exemptions existing in the State concerned at the time when the Sixth Directive entered into force, the Spanish Government argues that this provision should be interpreted widely, so as to allow the operations stated in points 23 and 25 of Annex F to be exempt from VAT even if similar exemptions did not exist under Spanish law at the time of Spain's accession to the Community. Such an interpretation would guarantee equal treatment of 'old' and 'new' Member States. That argument is not convincing. It should be emphasised that the 'new' Member State has the right to introduce the exemptions in question even if it joined the Community after the Sixth Directive entered into force and even if that right was not contemplated in the Act of Accession, but provided that, from the date of accession, the legal system of the 'new' State provides for exemptions similar to those appearing in Annex F to the Sixth Directive. This interpretation does not give rise to discrimination between 'old' and 'new' States belonging to the Community, as the system applicable is the same for all States from the moment they become members of the Community.

15The Spanish Government then tries to demonstrate, by means of various arguments, that the exemptions in point in Spanish Law No 6/87 which can be brought under points 23 and 25 of Annex F already existed at the time when Spain joined the Community and that, consequently, they are lawful from the point of view of Community law.

16On this point, the Spanish Government refers first of all to Law No 44/82, already mentioned, which exempted imports of equipment for the armed forces from equalisation tax, pointing out that Law No 30/85, which introduced VAT, implicitly carried over this favourable regime, as from 1 January 1986, the date of its entry into force. This, according to the Spanish Government, means that Article 28(3)(b) is applicable in this case in view of the (alleged) existence of the exemptions at the time when the new tax system came into effect. That argument cannot be accepted because, first, the exemption stated in Law No 44/82 concerns a tax which does not correspond to value added tax, and second, Article 28 contains a derogation from the ordinary VAT system and therefore can only be interpreted strictly.

17On the same point, the Spanish Government appears to go on to argue that Spanish Law No 6/87 is retrospective to the time when Spain joined the Community and that, consequently, the exemptions contained in that law must be regarded as in existence from 1 January 1986 and that therefore Article 28(3)(b) is applicable to them. However, this argument is not convincing. It is based on an interpretation of the provision which is manifestly contrary to its purpose — to allow limited exemptions for a transitional period in order to enable a progressive adjustment of the national laws to the directive — and essentially amounts to according, irrationally, to the new Member States the power to circumvent requirements of the Directive.

18Finally, the Spanish Government relies on Directive 91/680 which widely amended and supplemented the basic directive and, among other things, inserted in Article 28 a new paragraph, 3a, which specifically allows Spain to grant exemption from VAT to the operations described in points 23 and 25, that is to say, operations relating to aircraft and warships. The Spanish Government claims that, in this way, the exemptions specified in Spanish Law No 6/87 were rendered lawful in so far, of course, as they could be brought within the ambit of those set out in the aforementioned points in Annex F.

That argument can be accepted subject to a qualification as to the starting date of the legitimising effect. It should be held that the circumstance that, on the basis of Directive 91/680, Spain could have benefited from the exemptions stated in points 23 and 25 of Annex F does not fully eradicate Spain's failure to fulfil the obligations arising from the Sixth Directive, both because the exemptions laid down by the Spanish legislation can only partly be brought within the ambit of those which appear in the above points, and because in any case, for the whole of the period from the entry of Spain into the Community until Directive 91/680 entered into force, the Spanish authorities were not entitled to introduce into their legislation any exemption in relation to operations concerning military equipment, including the material specified in points 23 and 25.

19In conclusion, my opinion is that the operations which Spanish Law No 6/87 exempts from VAT are lawful from the point of view of Community law only in so far as they concern aircraft and warships used for military purposes and only from the entry into force of Directive 91/680. Outside this limited sphere, the failure to fulfil obligations with which Spain is charged, as regards both the question of materials and the application ratio temporis of the exemption, continues to exist and must be the subject of a declaration to that effect.

20For all the above reasons, the action brought by the Commission against the Kingdom of Spain must succeed.

Costs

21The Kingdom of Spain is the unsuccessful party. Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for. As the Commission has asked for costs, the Kingdom of Spain must be ordered to pay them.

Conclusion

22In view of the foregoing, I propose that the Court:

— declare that, by exempting from value added tax intra-Community imports and acquisitions of arms, ammunition and equipment exclusively for military use, other than the aircraft and warships mentioned in points 23 and 25 of Annex F to 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, and the provisions of Articles 2(2), 28a, 14 and 28c(B) of that directive, the Kingdom of Spain has failed to fulfil its obligations under that directive and the EC Treaty;

— order the Kingdom of Spain to pay the costs.

Notes

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

(2) OJ 1991 L 376, p. 1.

(3) The transitional period was extended and consequently the Member State which exempted the operations described in Annex F were able to continue to do so.

(4) The right to grant this exemption was given to Spain 'while awaiting a decision from the Council, which, under Article 3 of Directive 89/465/EEC', (OJ 1989 L 226, p. 21), 'must decide on the abolition of the transitional derogations stated in paragraph 2' of Article 28.

(5) The Treaty of Accession of the Kingdom of Spain and the Portuguese Republic to the European Communities was signed on 1 June 1985 (OJ 1985 L 302) and entered into force on 1 January 1986.

(6) BOE of 9 August 1985. Article 20 of that law extends the VAT system to all imports of goods. That article states that, 'for the purposes of the tax, an import is defined as the introduction of goods into the territory of the Spanish peninsula or the Balearic islands, whatever the use for which they are intended or the status of the importer.'

(7) BOE of 19 May 1987.

(8) This period was extended until 1998 by Law No 9 of

(15) October 1990.

(9) BOE of 21 July 1982.

(10) According to the Court (Case 15/81 Schul [1982] ECR

(140) 9, paragraph 14) the generating fact for VAT on imports 'is the mere entry or goods into a Member State, whether or not there is a transaction and irrespective of whether the transaction is carried out for valuable consideration or free of charge, be it by a taxable person or a private person.' This is confirmed by Case 39/85 Bergeres-Becque ν Service Interregional des Douanes [1986] ECR 259, paragraph 7.

(11) Case C-207/96 Commission v Italy [1997] ECR I-6869, paragraphs 17 and 18. See also Case C-306/91 Commission v Italy [1993] ECR I-2133, paragraph 22; Case

(274) /83 Commission v Italy [1985] ECR 1077, and Case

(51) /83 Commission v Italy [1984] ECR 2793, paragraph 5.

(12) See judgment in Case 13/68 Salgoil [1968] ECR 602, in which the Court, referring to Articles 36, 224 and 226 of the EC Treaty, states that 'although these provisions attach particular importance to the interests of Member States, it must be observed that they deal with exceptional cases which are clearly defined and which do not lend themselves to any wide interpretation.'

(13) See Council Decision 94/728/EC, Euratom of 31 October

(199) 4, relating to the system of own resources of the European Communities (OJ 1994 L 293, p. 9). In Article 2(4) of this decision it is stated that 'the uniform rate... shall correspond to the rate calculated as follows: application of... 1.08% in 1998, 1.00% in 1999 to the VAT assessment based for the Member States' and that 'the rate of 1.00% laid down for 1999 shall remain applicable until the... Decision is amended'.

(14) Case C-2/95 SDC [1997] ECR 1-3017, paragraph 20. See also Case 348/87 Stichting Uitvoering Financiële Acties [1989] ECR 1737, paragraph 13. This principle was stated with reference to the exemption laid down in Article 13 of the Sixth Directive for services carried out for valuable consideration, but it is clearly applicable also to the exemptions stated in Article 28(3)(b) (see Opinion of Advocate General Cruz Vilaça in Case 122/87 Commission v Italy [1988] ECR 2685, paragraph 22).

(15) In Case 73/85 Kerrutt [1986] ECR 2219, paragraph 17, the Court precluded 'by its wording, the introduction of new exemptions or the extension of the scope of existing exemptions after the date of entry into force of the Directive.' In addition, in Case C-35/90 Commission v Spain [1991] ECR 1-5073, paragraph 9, without distinguishing between 'old' ana 'new' Member States, the Court stated that 'the extension of the transitional scheme of exemptions from VAT beyond the period originally provided for cannot justify the right of Member States to grant exemptions which they were not authorised to grant'; this is because such a right, according to the Court, 'would compromise the object of Article 28(3)(b) which is to enable a progressive adjustment of the national laws in the areas in question'.