C-439/04 Kittel and Recolta Recycling

JUDGMENT OF THE COURT (Third 6 July 2006

In Joined Cases C-439/04 and C-440/04,

REFERENCES for a preliminary ruling under Article Chamber)

*

234 EC from the Cour de cassation (Belgium), made by decision of 7 October 2004, received at the Court on 19 October 2004, in the proceedings

Axel Kittel (C-439/04)

v

État belge,

and

État belge (C-440/04)

v

Recolta Recycling SPRL,

* Language of the case: French.

THE COURT (Third Chamber),

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

Advocate General: D. Ruiz-Jarabo Colomer, Registrar: B. Fülöp, Administrator,

having regard to the written procedure and further to the hearing on 9 February 2006,

after considering the observations submitted on behalf of:

— Axel Kittel, by J. Bublot, avocat (C-439/04),

— Recolta Recycling SPRL, by T. Afschrift and A. Rayet, avocats (C-440/04),

— the État belge, by E. Dominkovits, and subsequently by L. Van den Broeck, acting as Agents, and by B. van de Walle de Ghelcke, avocat,

— the Italian Government, by I.M. Braguglia, acting as Agent, and by G. De Bellis, avvocato dello stato, — the Commission of the European Communities, by J.-P. Keppenne and M. Afonso, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 14 March 2006,

gives the following

Judgment

Legal context and the dispute

1These references for a preliminary ruling concern the interpretation of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1), as amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18) ('the Sixth Directive').

2The references were made in connection with two sets of proceedings between Mr Kittel and Recolta Recycling SPRL ('Recolta') respectively and the État belge (Belgian State) concerning the Belgian tax authorities' refusal to allow the right to deduct the value added tax ('VAT') paid on transactions allegedly connected with 'carousel' fraud.

Legal context

Community legislation

3Article 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), as amended by the Sixth Directive ('the First Directive'), provides:

'The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.

On 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.

The common system of value added tax shall be applied up to and including the retail trade stage.'

4Article 2(1) of the Sixth Directive provides:

'The following shall be subject to value added tax:

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

5As set out in Article 4(1) and (2) of that directive:

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

2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.'

6According to Article 5(1) of the same directive, '"[s]upply of goods" shall mean the transfer of the right to dispose of tangible property as owner'.

7Article 17(1) and (2)(a) of the Sixth Directive provides:

'1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2. 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'.

National legislation

8Article 1131 of the Belgian Civil Code provides that 'an obligation with no basis or with a false or unlawful basis can give rise to no effect whatsoever'.

9In the words of Article 1133 of the same code, 'the basis is unlawful when it is contrary to law, morality or public policy'.

The main proceedings

Case C-439/04

10The referring court states that the limited company Ang Computime Belgium ('Computime') bought and resold computer components and that, following a report drawn up by the tax authorities, those authorities decided that Computime had knowingly participated in a VAT 'carousel' fraud intended to recover one or more times amounts of VAT invoiced by suppliers for the same goods and that the supplies effected to Computime were fictitious. For those reasons, the tax authorities refused to allow Computime the right to deduct the VAT paid on those supplies.

11The file shows that the Verviers VAT collector issued Computime with a demand for payment dated 13 October 1997. The sums claimed amounted to approximately BEF 240 million in respect of taxes and nearly BEF 480 million in respect of fines (approximately EUR 18 million in total).

12Computime applied to the Tribunal de première instance de Verviers (Verviers Court of First Instance) to have that demand for payment set aside. By a judgment of 28 July 1999, that court declared the application to be unfounded. That ruling was upheld by a judgment of the Cour d'appel de Liège (Liège Court of Appeal) of 29 May 2002.

13Mr Kittel, acting in his capacity as Computime's receiver, subsequently brought an appeal against that judgment before the Cour de cassation (Court of Cassation). Case C-440/04

14The referring court states that Recolta bought from a certain Mr Ailliaud 16 luxury vehicles, which the latter had himself purchased from the company Auto-Mail. The purchases by Mr Ailliaud did not give rise to any VAT payable to the Treasury and Mr Ailliaud did not pass on to the Belgian State the VAT paid by Recolta, which resold the vehicles free of VAT to Auto-Mail under an authorisation for export sale.

15The documents in the file show that, according to an investigation by the Special Inspectorate of Taxes, Mr Ailliaud and Auto-Mail had set up a scheme for 'carousel' tax fraud, of which the transactions with Recolta formed part.

1 6. On 26 October 1989, the Verviers VAT collector issued Recolta with a demand for payment of a sum in excess of BEF 4.8 million in respect of taxes and just over BEF 9.7 million in respect of fines (approximately EUR 360 000 in total).

17Recolta brought opposition proceedings against that demand for payment before the Tribunal de première instance de Verviers. By a judgment of 1 October 1996, that court, after having found that there was nothing to suggest that Recolta and its directors knew or had any suspicion that they were involved in a major fraud scheme, declared that the demand for payment issued by the collector had no lawful basis and was therefore null and void. The case also gave rise to criminal proceedings, in the course of which the Tribunal correctionnel de Bruxelles (Brussels Criminal Court) made an order on 7 January 1994 discharging the manager of Recolta.

18The Belgian State brought an appeal against that judgment before the Cour d'appel de Liège, submitting that the agreements on which those invoices were based were incurably void under domestic law because Mr Ailliaud's main purpose in entering into a contract with Recolta was to effect transactions which were contrary to the workings of VAT. As the transactions at issue had an unlawful basis, under Article 1131 of the Civil Code, the conditions required for entitlement to the right to deduct, inter alia that there should be a supply of goods, were not fulfilled.

19The Cour d'appel de Liège upheld the judgment, whereupon the Belgian State appealed to the Cour de cassation.

The questions referred

20The referring court observes, first, that the provisions of the Belgian VAT Code at issue in the main proceedings transpose Article 2, Article 4(1), Article 5(1) and Article 17(2) of the Sixth Directive into domestic law.

21Next it notes that, in accordance with the Court of Justice's settled case-law, the Sixth Directive is based on the principle of fiscal neutrality, which, as regards the levying of VAT, precludes any general distinction between lawful and unlawful transactions, with the exception of those circumstances, unrelated to the present case, where because of the special characteristics of certain products all competition between a lawful economic sector and an unlawful sector is precluded.

22The referring court also observes that, in domestic law, an agreement intended to defraud a third party, in the present case the Belgian State, whose rights are protected by public policy legislation, has an unlawful basis and is incurably void. Since the matter concerns the general interest, it is enough that one party has contracted for unlawful purposes and it is not necessary for the other party to the contract to know of those purposes.

23In Case C-439/04, the Cour de cassation notes that the Cour d'appel de Liège declared that a void agreement cannot have any legal effect, such as the deduction of VAT, where the unlawful basis is the fraudulent evasion of the tax itself, and that Mr Kittel submits, in support of his ground of appeal, that the VAT invoiced by a taxable person in respect of a supply of goods is deductible even if the supply occurs in connection with an agreement which is incurably void under domestic law and that the right to deduct tax persists even where the unlawful basis is a fraudulent evasion of VAT itself.

24In Case C-440/04, the Belgian State maintains, in support of its ground of appeal, that the VAT invoiced by a taxable person for the supply of goods is not deductible where the supply, albeit physically effected, took place under an agreement which was, in domestic law, incurably void, even if the purchase was made in good faith.

25It is in those circumstances that the Cour de cassation decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:

In Case C-439/04:

'(1) Where the recipient of a supply of goods is a taxable person who has entered into a contract in good faith without knowledge of a fraud committed by the seller, does the principle of fiscal neutrality in respect of [VAT] mean that the fact that the contract of sale is void — by reason of a rule of domestic civil law which renders the contract incurably void as contrary to public policy on the ground that the basis of the contract is unlawful by reason of a matter which is attributable to the seller — cannot cause that taxable person to lose the right to deduct that tax?

(2) Is the answer different where the contract is incurably void for fraudulent evasion of [VAT] itself?

(3) Is the answer different where the unlawful basis of the contract of sale which renders it incurably void under domestic law is a fraudulent evasion of [VAT] known to both parties to the contract?'

In Case C-440/04:

'(1) Where the recipient of a supply of goods is a taxable person who has entered into a contract in good faith without knowledge of a fraud committed by the seller, does the principle of fiscal neutrality in respect of [VAT] mean that the fact that the contract of sale is void — by reason of a rule of domestic civil law which renders the contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller — cannot cause that taxable person to lose the right to deduct that tax?

(2) Is the answer different where the contract is incurably void for fraudulent evasion of [VAT] itself?'

26By order of the President of the Court of 28 January 2005, Cases C-439/04 and C-440/04 were joined for the purposes of the written procedure, the oral procedure and the judgment.

The questions

27By its questions, which must be considered together, the referring court asks essentially whether, where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was part of a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void, by reason of a civil law provision which renders the contract incurably void as contrary to public policy on the ground that the basis of the contract is unlawful by reason of a matter which is attributable to the seller, causes that taxable person to lose his right to deduct that tax. That court asks whether the answer to that question is different where the contract is incurably void for fraudulent evasion of VAT.

28The referring court also asks whether the answer to that question is different where the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT.

Observations submitted to the Court

29Mr Kittel submits that the principle of fiscal neutrality stemming from, inter alia, Article 2 of the First Directive and Article 17(2)(a) of the Sixth Directive prevents a taxable person from losing the right to deduct merely on account of the fact that a transaction is void in national law.

30In addition, Article 5 of the Sixth Directive does not preclude a transaction which, by virtue of its specific characteristics, takes place within competitive economic channels from being regarded as a supply of goods even if part of that supply is carried out with aim of fraudulently evading VAT. In those circumstances, Article 17(2) of the Sixth Directive must be interpreted as meaning that it allows the recipient the right to deduct where he is not acting with the aim of fraudulently evading VAT.

31Likewise, that article allows the right to deduct in the case of a recipient who is not acting with the aim of fraudulently evading VAT even if he knows of the fraudulent motives of his supplier, whether or not he profits by that fraud. Article 17(2) of the Sixth Directive must thus be interpreted as meaning that it allows the recipient a right to deduct even if he knows of the fraudulent motives of his supplier, whether or not he profits by that fraud.

32The Belgian State maintains that where the transfer of goods is to a taxable person who has contracted in good faith, without knowledge of the fraud committed by the seller, the principle of fiscal neutrality in respect of VAT does not preclude that taxable person from being refused the right to deduct to the extent that it can be established that he does not meet the substantive requirements governing entitlement to that right.

33That is so in particular where the taxable person is an unwitting participant in a 'carousel' fraud, since he cannot be considered to be the recipient of a supply of goods within the meaning of Article 5 of the Sixth Directive or to be using the goods concerned for the purposes of his taxable transactions, and also where the taxable person does not hold an invoice in accordance with the provisions of Articles 18(1) and 22(3) of that directive.

34Exercise of the right to deduct can also be refused where it is proved that that right has been claimed fraudulently or unreasonably.

35Recolta and the Italian Government submit that the first question should be answered in the affirmative and the second in the negative.

36However, where the unlawful basis of the contract of sale is fraudulent evasion of VAT known to the two contracting parties, the Italian Government takes the view that the principle prohibiting abuse of Community law precludes the transferee from being allowed the right to deduct the tax paid.

37The Commission of the European Communities maintains that the supply of goods to a taxable person who has contracted in good faith, without knowledge of the fraud committed by the seller, constitutes a supply of goods within the meaning of Article 5(1) of the Sixth Directive, giving entitlement to the right to deduct under Article 17(2) of that directive, and that the principle of the neutrality of that tax precludes the taxable person from being refused the right to deduct VAT because of a rule of national law which renders the contract incurably void as contrary to public policy on the ground that the basis of the contract is unlawful by reason of a matter which is attributable to the seller.

38In the Commissions opinion, the same answer should be given to the referring court's questions where the unlawful basis of the contract of sale, which renders it incurably void under domestic law, is fraudulent evasion of VAT known to both parties to the contract, unless it is proven that the exercise of the right to deduct would constitute an unreasonable use of that right on the part of the purchaser.

Grounds

Findings of the Court

39The Sixth Directive establishes a common system of VAT based, inter alia, on a uniform definition of taxable transactions (see, inter alia, Case C-305/01 MKG-Kraftfahrzeuge-Factoring [2003] ECR I-6729, paragraph 38, and Joined Cases C-354/03, C-355/03 and C-484/03 Optigen and Others [2006] ECR I-483, paragraph 36).

40That directive assigns a very wide scope to VAT by mentioning in Article 2 on taxable transactions, in addition to importation of goods, supplies of goods and services effected for consideration within the territory of the country by a taxable person acting as such {Optigen, paragraph 37).

41In fact, an analysis of the definitions of 'supply of goods effected by a taxable person acting as such' and 'economic activities' shows that those terms, which define taxable transactions for the purposes of the Sixth Directive, are objective in nature and apply without regard to the purpose or results of the transactions concerned (see, to that effect, Optigen, paragraphs 43 and 44).

42As the Court held at paragraph 24 of the judgment in Case C-4/94 BLP Group [1995] ECR I-983, requiring the tax authorities to carry out inquiries to determine the intention of the taxable person would be contrary to the objectives of the common system of VAT of ensuring legal certainty and facilitating the measures necessary for the application of VAT by having regard, save in exceptional cases, to the objective character of the transaction concerned.

43A fortiori, requiring the tax authorities, in order to determine whether a given transaction constitutes a supply by a taxable person acting as such and an economic activity, to take account of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge, would be contrary to those objectives (Optigen, paragraph 46).

44The Court drew the conclusion, at paragraph 51 of Optigen, that transactions which are not themselves vitiated by VAT fraud constitute supplies of goods effected by a taxable person acting as such and an economic activity within the meaning of Article 2(1), Article 4 and Article 5(1) of the Sixth Directive where they fulfil the objective criteria on which the definitions of those terms are based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge.

45The Court observed that the right to deduct input VAT of a taxable person who carries out such transactions likewise cannot be affected by the fact that, in the chain of supply of which those transactions form part, another prior or subsequent transaction is vitiated by VAT fraud, without that taxable person knowing or having any means of knowing (Optigen, paragraph 52).

46The same conclusion applies where such transactions, without that taxable person knowing or having any means of knowing, are carried out in connection with fraud committed by the seller.

47In fact, the right to deduct 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. The right to deduct is exercisable immediately in respect of all the taxes charged on transactions relating to inputs (see, in particular, Case C-62/93 BP Soupergaz [1995] ECR I-1883, paragraph 18, and Joined Cases C-110/98 to C-147/98 Gabalfiisa and Others [2000] ECR I-1577, paragraph 43).

48The rules governing deduction are meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures neutrality of taxation of all economic activities, whatever their purpose or results, provided that those activities are themselves subject in principle to VAT (see, inter alia, Case C-408/98 Abbey National [2001] ECR I-1361, paragraph 24, and Case C-25/03 HE [2005] ECR I-3123, paragraph 70).

49The question whether the VAT payable on prior or subsequent sales of the goods concerned has or has not been paid to the Treasury is irrelevant to the right of the taxable person to deduct input VAT (see, to that effect, the order of the Court in Case C-395/02 Transport Service [2004] ECR I-1991, paragraph 26). According to the fundamental principle which underlies the common system of VAT, 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 of the VAT directly borne by the various cost components (see, inter alia, Case C-98/98 Midland Bank [2000] ECR I-4177, paragraph 29; Case C-497/01 Zita Modes [2003] ECR I-14393, paragraph 37; and Optigen, paragraph 54).

50In that context, as the referring court observed, it is settled case-law that the principle of fiscal neutrality prevents any general distinction between lawful and unlawful transactions. Consequently, the mere fact that conduct amounts to an offence does not entail exemption from tax; that exemption applies only in specific circumstances where, owing to the special characteristics of certain goods or services, any competition between a lawful economic sector and an unlawful sector is precluded (see, inter alia, Case C-158/98 Coffeeshop 'Siberië [1999] ECR I-3971, paragraphs 14 and 21, and Case C-455/98 Salumets and Others [2000] ECR I-4993, paragraph 19). It is common ground, however, that that is not the case with either the computer components or the vehicles at issue in the main proceedings.

51In the light of the foregoing, it is apparent that traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT (see, to that effect, Case C-384/04 Federation of Technological Industries and Others [2006] ECR I-4191, paragraph 33).

52It follows that, where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void, by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller, causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.

53By contrast, the objective criteria which form the basis of the concepts of 'supply of goods effected by a taxable person acting as such' and 'economic activity' are not met where tax is evaded by the taxable person himself (see Case C-255/02 Halifax and Others [2006] ECR I-1609, paragraph 59).

54As the Court has already observed, preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see Joined Cases C-487/01 and C-7/02 Gemeente Leusden and Holin Groep [2004] ECR I-5337, paragraph 76). Community law cannot be relied on for abusive or fraudulent ends (see, inter alia, Case C-367/96 Kefalas and Others [1998] ECR I-2843, paragraph 20; Case C-373/97 Diamantis [2000] ECR I-1705, paragraph 33; and Case C-32/03 Fini H [2005] ECR I-1599, paragraph 32).

55Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively (see, inter alia, Case 268/83 Rompelman [1985] ECR 655, paragraph 24; Case C-110/94INZO [1996] ECR I-857, paragraph 24; and Gabalfrisa, paragraph 46). It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends (see Fini H, paragraph 34).

56In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.

57That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.

58In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.

59Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of 'supply of goods effected by a taxable person acting as such' and 'economic activity'.

60It follows from the foregoing that the answer to the questions must be that where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void — by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller — causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.

61By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.

Costs

Costs

62Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

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

Where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void — by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller — causes that taxable person to lose the right to deduct the value added tax he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of value added tax or to other fraud.

By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of value added tax, it is for the national court to refuse that taxable person entitlement to the right to deduct.

[Signatures]

OPINION OF ADVOCATE GENERAL

RUIZ-JARABO COLOMER delivered on 14 March 2006 1

I — Introduction

1The Cour de cassation (Court of Cassation) (Belgium) asks the Court of Justice about the implications for the common system of value added tax ('VAT') of national legislation which provides that contracts which have an unlawful basis, and therefore those devised to deceive the State in the administration and levy of that tax, are incurably void.

2It asks specifically whether, in a 'carousel' fraud, that effect on the validity of a contract of sale precludes the deduction of input VAT, in two situations, according to whether the buyer acts in good faith (Case C-440/04) or participates in the scheme (Case C-439/04). 2

1 — Original language: Spanish.

2 — The Belgian Cour de cassation has made two further orders for reference (Case C-12/05 Ring Occasions and Fonts Banque and Case C-378 05 Samotor) on the sante lines as those being considered Itere.

3The judgment of 12 January 2006 in 3 Optigen and Others provided an answer in the first situation, allowing the taxable person to deduct the VAT if he is unaware that the transaction is part of a broader stratagem to defraud the Treasury of funds.

4In order to clarify the matter in the second situation, in which the taxable person actively participates in the scheme, the recent judgments of 21 February 2006 in Halifax and Others, BUPA Hospitals and Goldsborough Developments, and University of Huddersfield 4 offers suitable criteria for interpretation.

3 - Joined cases C 354/03. C 35503 and C-181/03 [2006] ECK I-483.

4 - Case C-255/02 [2006] ECR I-1609. Case C-419/02 [2006] ECR I-1685. and Case C-223/03 [2006] ECR I-1759

II — Legal framework

A — Community law concerning VAT

5

5Article 2 of the First Directive provides:

'The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.

On 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.

The common system of value added tax shall be applied up to and including the retail trade stage.'

5 — 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 (I), p. 14).

6In keeping with this legislation, the Sixth 6 Directive refers to two categories of taxable transaction: 'supply of goods' and 'supply of services', defining the former as the transfer of the right to dispose of tangible property as owner (Article 5(1)).

7Those transactions are subject to value added tax if effected for consideration within the territory of the country by persons who independently carry out activities as producers or traders and persons supplying services or exercising liberal or similar professions (Articles 2(1) and 4(1) and (2)).

8Article 17 provides that the right to deduct arises at the time when VAT becomes chargeable and lays down the conditions for deduction.

9In the provisions governing exemptions (Articles 13 to 16), the Sixth Directive refers to the need to prevent 'any possible evasion, avoidance or abuse', an aim which justifies authorising a Member State not to apply it (Article 27(1)).

6 — 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).

B — Belgian law

10Under the Belgian Civil Code, contracts are void if they have no legal basis or have a false or unlawful basis (Article 1131); the latter group includes those which are contrary to law, morality or public policy (Article 1133).

11On the basis of those principles, the to Article 45(1) of the Code (transposing Article 17(2) of the Directive), even if he is unaware of the seller's unlawful motive.

III — The facts in the main actions

A - Case C-439/04

Cour de cassation making the reference 7 has held a contract designed to evade VAT incurably void and found it sufficient that one of the parties contract for unlawful purposes, even if the other party is unaware of those purposes.

12As a corollary, the Cour de cassation maintains that a transfer of ownership effected for that purpose is void, and that it is not necessary to classify it as a 'supply of goods' within the meaning of Article 10(1) of the VAT Code 8 (transposing Article 5(1) of the Sixth Directive), so that the buyer does not become entitled to deduct VAT, pursuant

7 - Judgment of 12 October 2000 in Case No C.99.0136.F (Bull., I. No 543).

8 — Code de la taxe sur la valeur aioutee. approved by the Law of 3 July 1969 (Moniteur belge. 17 July 1969) and amended by the Law of 28 December 1992 (Moniteur beige. 31 December 1992).

13Computime Belgium ('Computime'), a company in liquidation represented by Mr Kittel, traded wholesale in computer components, which it acquired in Belgium and exported to other States in the European Union, particularly Luxembourg.

14The addressee in Luxembourg forwarded the parts to a third party also established in the Grand Duchy, who in turn sent them back to the neighbouring country, dispatching them to Computime's supplier. 9

9 — The inspectors found that, within a short period of time (from 10 January to 30 june 1997). Computime traded repeatedly with the same packages of Pentium Intel CPU microproces sors. Of 3 290 transactions, 736 were found to have been effected m boxes transferred again and again, some of them as many as six tunes.

15That supplier never paid the VAT invoiced to Computime, but systematically deducted the amount from the tax payable by him.

16The Cour de cassation is of the opinion that Computime was aware of the scheme.

B — Case C-440/04

17Mr Aillaud transferred 16 luxury cars, which he had bought from Auto Mail, to Recolta Recycling ('Recolta'), charging the corresponding VAT.

18Recolta immediately transferred them to Auto Mail, for distribution in other Member States, a transaction which at the time was exempt from VAT under the former Article 43 of the VAT Code.

19In fact, the vehicles never left Belgium; they were put into various chains specialising in evading tax duties. Mr Aillaud and Auto Mail therefore collaborated so that the VAT invoiced should not be paid.

20The criminal proceedings initiated in respect of these events have been stayed in respect of the manager of Recolta.

IV — The questions referred for a preliminary ruling

21The authorities refused to allow Computime and Recolta to deduct the input VAT; they both appealed against the decision, with different results, since the Tribunal de première instance (Court of First Instance), Verviers, by judgment of 28 July 1999, dismissed Computime's claim, whereas, by judgment of 1 October 1999, it allowed Recolta's claim; those decisions were upheld by the Cour d'appel (Court of Appeal), Liège, on 29 May 2002 and 9 November 2001 respectively.

22Appeals have been brought in both cases; the Cour de cassation has stayed the proceedings and referred the following questions to the Court of Justice pursuant to Article 234 EC:

'(1) Where the recipient of a supply of goods is a taxable person who has entered into a contract in good faith without knowledge of a fraud committed by the seller, does the principle of fiscal neutrality in respect of value added tax mean that the fact that the contract of sale is void, by reason of a rule of domestic civil law, which renders the contract incurably void as contrary to public policy on the ground of illegal basis of the contract attributable to the seller, cannot cause that taxable person to lose his right to deduct that tax?

(2) Is the answer different where the contract is incurably void for fraudulent evasion of VAT itself?

(3) Is the answer different where the unlawful basis of the contract of sale which renders it incurably void under domestic law is a fraudulent evasion of value added tax known to both parties to the contract?'

23The first two questions are common to the present cases, whereas the third is raised in respect of Case C-439/04 Kittel.

V — Procedure before the Court of Justice

24, By order of 28 January 2005, the President of the Court of Justice joined Case C-439/04 and Case-440/04, since they concern the same subject-matter.

25Written observations have been submitted, within the time-limit prescribed for that purpose by Article 23 of the Statute of the Court of Justice, by Mr Kittel, Recolta, the Commission and the Belgian and Italian Governments.

26All the parties concerned, with the exception of the Italian Government, presented oral argument at the hearing held on 9 February 2006.

VI — The operation of a carousel fraud

27It appears that intra-Community trade is fertile ground for VAT evasion, which may work in various ways, but always in a 'chain' formation.

28In its simplest form, it works as 10 follows:

— A ('conduit company') makes an exempt supply to B ('carousel trader' or 'missing trader'), from Member State X to Member State Y;

— B, which has acquired the goods without paying VAT, transfers them, within Member State Y, to C ('broker'), from whom it collects VAT, disappearing shortly afterwards without paying it to the Treasury; 11

— C deducts the VAT on its purchases from B and distributes the goods on the market in country Y, collecting VAT.

29The loss to the public purse equals the VAT paid by C to B, who does not pay it in.

10 — Report from the Commission to the Council and the European Parliament on the use of administrative cooperation arrangements in the fight against VAT fraud, Brussels, 16 April 2004, COM(2004) 260 final, pp. 6 and 7.

11 — This fact suggests that B be given the nickname 'eel', because it is so slippery.

30Sometimes, one or more D companies ('intermediary companies' or 'buffers') are used to conceal the relationship between B and C.

31The 'chain' becomes a 'carousel' when the broker C, instead of confining its activities to the territory of Y, makes an exempt supply to a company established in the State from which the goods originated, X, which might even be the conduit company, A. In that State, the pattern may be repeated indefinitely. The deception comes to light 12 when C claims the refund.

32The ruse is best illustrated by this diagram:

12 — In the so-called 'documentary carousel fraud', there are not even any goods; instead invoices are simply passed around.

33In Case C-439/04, there was no intermediary, D. Computime — apparently knowingly — played the part of the broker, C, while its Belgian supplier took the role of the carousel trader, B, and the Luxembourg companies were the conduit companies, A.

34In the other reference (C-440/04), the scheme was implemented entirely in Belgium, but the unlawful advantage was obtained by setting up an intra-Community transaction which was never meant to be carried out. The operation was made up of two circuits. In one, the simpler of the two, Auto Mail (carousel operator B) failed to pay in the VAT collected on the sale of the cars to Mr Aillaud (broker C). The vehicles had been transferred, in a VAT-exempt transaction, by Recolta (conduit company A), which was unaware of the subterfuge, to Auto Mail, with the particular circumstance that Recolta had bought them from Mr Aillaud, paying VAT on the purchase. The other route was complicated by the presence of third parties as brokers, C, relegating Mr Aillaud to the status of intermediary, D, but in a different position from in the diagram above, as the person liable to pay VAT to the conduit company, A.

35In reality, the methods used are as fanciful and complicated as the imaginations of the people who think them up. I therefore agree with Advocate General Poiares Maduro who, in point 8 of his Opinion in Optigen and Others, finds that in every case the bottom line is that an amount received in respect of VAT is not declared.

VII — Analysis of the questions referred for a preliminary ruling

36The Belgian Cour de cassation wishes to know whether taxable persons who do not 1 operate the stratagem, 3 even though they 14 facilitate it, either on purpose or inadvert ently, are entitled to deduct VAT.

A — The first two questions referred for a preliminary ruling (taxable persons acting in good faith)

37As I mentioned in the introduction to this Opinion, the solution to this dilemma is provided in the judgment in Optigen and

13 — The loss to the Treasury is personified by the carousel trader. 14 — As conduit company, broker or merely an intermediary. Others which, in that situation, left the right to deduct intact.

38There is little or nothing to add at this point, not only because that judgment is recent but also, fundamentally, because it is correct. Referring to the objectivity of the terms of the Sixth Directive (paragraphs 43 to 45) and to the general organisation of VAT, which is governed by the principle of neutrality and precludes any distinction as between lawful and unlawful transactions (paragraph 49), the Court of Justice held that transactions unconnected with the fraud are taxable transactions, inasmuch as they are effected by a taxable person, who does not lose his right to deduct it if, without his knowledge, those transactions form part of a chain of unlawful trade (paragraphs 51 to 54).

39It may be inferred from this precedent that the common system of VAT does not 15 permit that a person who, in good faith, buys goods without knowledge of the scheme operated by the seller should be denied that advantage on the ground that, under the Belgian Civil Code, the agreement is incurably void.

15 — This point, which is subjective, must be ascertained according to the rules of evidence of each national legal code, subject to observance of Community provisions (see point 57 of this Opinion).

B — The third question (taxable persons aware of the fraud)

40The solution is not so clear-cut where the buyer is aware of the ruse. In this situation, there are two possibilities: (1) he knows about it but does not participate in it or derive any benefit from it, or (2) he participates in the fraud, and profits unlawfully.

1. The first possibility

41Here the reply should not differ from the reply in respect of a taxable person who is unaware of the deceit.

42The arguments put forward in the judgment in Optigen and Others are very pertinent here: an activity does not become financially unlawful because the person exercising it knows that the businessman with whom he is trading has an unlawful purpose, since that transaction, subject to VAT, gives rise to the subsequent right to deduct.

43The neutrality which governs this tax precludes the exclusion from the scope of its rules of business transactions which are part of its subject-matter. The judgment in Optigen and Others reiterated that the right to deduct is exercised regardless of whether the VAT on other previous or subsequent transactions has been paid or not (paragraph 54).

44The conduct of the 'disloyal' taxpayer, who does not inform the Treasury of the 16 stratagem, has various consequences but it never causes the setting aside of a fundamental rule of the VAT scheme, which is that at each stage of the production or distribution process the tax is levied and the VAT 17 paid at the previous stages is deducted.

2. The second possibility

(a) An appropriate perspective for the analysis

45If everyone participates, the scheme in itself constitutes a fraud, since it is designed to evade tax.

16 — For example, he may be made liable for the payment which has been evaded (see point -16 of this Opinion).

17 — In point 58 et seq. of this Opinion. 1 analyse the crucial role played by this right m the VAT structure.

46In a situation of this kind, the Member States must take action and, if necessary, adopt special derogatory measures pursuant to Article 27(1) of the Sixth Directive, or, 18 under Article 21(3), hold them jointly and severally liable for payment of the tax, in accordance with the principles of proportionality and legal certainty. 19

47In any event, these measures are necessary but inadequate since, as they would be adopted in different States, they might differ and undermine the uniformity of the common system of VAT.

48Furthermore, if a Member State fails to take action, it would be contrary to the most basic logic to tolerate the deceitful conduct 20 and leave it free of legal penalty.

18 — Council Directive 2000/65/EC of 17 October 2000 amending Directive 77/388/EEC as regards the determination of the person liable for payment of value added tax (Ol 2000 L 269, p. 44) revised Article 21, adding paragraph 3.

19 — In his Opinion delivered on 7 December 2005 in Case C-384/04 Federation of Technological Industries [2006] ECR I-4191. Advocate General Poiares Maduro suggests that the Court of lustice declare that, m light of Article 21(3) and of those principles, Member States may hold a person jointly and severally liable for payment of VAT when, at the time he effected a transaction in a carousel, he knew or ought to have known that the tax would go unpaid (point 39(1), second subparagraph)

20 — Advocate General Poiares Maduro warned of this risk in point 76 of his Opinion delivered on 7 April 2005 in Halifax and Others.

49It must therefore be established whether there is a general rule of Community law which requires a uniform reaction to situations like those in this case, where the protagonists are aware that they are unlawful.

50Networks in which one of the participants does not pay to the public purse the VAT collected and another deducts it involve an abuse of rights, since they employ a legal rule (Article 17 of the Sixth Directive) to acquire unlawfully an advantage which is contrary to the aims of the Directive: an operation is carried out without adhering to normal trade conditions, with the aim of making an unlawful profit.

51The crux of the matter is therefore to clarify whether the prohibition against abuse of rights also applies to VAT.

(b) Abuse of rights and the common system of VAT

52This matter was examined, specifically, in the judgment of 21 February 2006 in Halifax and Others; in the Opinion in that case, Advocate General Poiares Maduro examines (point 60 et seq.) various judg 21 ments of the Court of Justice, and infers the rule that 'rights conferred under Community law may not be relied on for 22 fraudulent or abusive ends'.

53I agree with my colleague that there is nothing to prevent that maxim applying to the VAT sector. What is more, preventing tax evasion is an objective recognised and encouraged by the Sixth Directive in the articles devoted to exemptions, as was pointed out in the judgment in Gemeente 23 Leusden and Holin Groep and later reiterated in the judgment in Halifax and 2 Others. 4 Taxable persons must not be allowed to rely on the Community VAT provisions in order to obtain an advantage which is contrary to their purposes.

54The difficulty lies not in pointing out an abuse of rights but in establishing the criteria

21 — Community case-law has considered abuse of rights in the following sectors: (a) fundamental freedoms (judgments in Case 33/74 Van Binsbergen [1974] ECR 1299, paragraph 13; Case 115/78 Knoors [1979] ECR 399, paragraph 25; and Case C-212/97 Centros [1999] ECR I-1459, paragraph 24); (b) social security (judgment in Case C-206/94 Palletta [1996] ECR I-2357, paragraph 24); (c) common agricultural policy (judgments in Case 125/76 Cremer [1977] ECR 1593, paragraph 21; and Case C-8/92 General Milk Products [1993] ECR I-779, paragraph 21); (d) company law (judgments in Case C-367/96 Refalas and Others [1998] ECR I-2843, paragraphs 20 and 28; and Case C-373/97 Diamantis [2000] ECR I-1705, paragraph 33).

22 — These are the words of Advocate General La Pergola in his Opinion in Centros, point 20.

23 — Joined Cases C-487/01 and C-7/02 [2004] ECR I-5337, paragraph 76.

24 — Paragraph 71.

according to which it must be defined. Not for nothing, in this matter, which is governed by the principle of legality, do legal certainty and one of its manifestations, the principle of legitimate expectations, play a crucial role in order that those concerned may know beforehand the precise extent of their 25 obligations. On the other hand, they are also entitled to structure their business so as 2 6 to limit their tax liability, making a choice, for financial reasons, between exempt transactions and taxable transactions so as to 27 reduce the burden; therefore, a taxpayer cannot be censured for taking advantage of a provision or a lacuna in the legislation in 28 order to pay less tax.

55The above observations provide the tools for pinpointing the meaning of abuse of

Sudholz 25 - The judgment in Case C-17/01 |2004| ECR I-4243. referring to n previous judgment, stated this m paragraph 34. Hccrma 26 — For example, m the Opinion in Case C-23/98 [20001 ECR I-419. to which the Commission referred in its written observations. Advocate General Cosmas stressed that any natural person has the right to set up partnerships and there is nothing to prevent those natural persons or partnerships from supplying goods or services to the associated persons and simultaneously being classified as taxable persons with respect to VAT (point 28). BLP Group 27 - Judgments m Case C-4/94 [1995] ECR 1 983. paragraph 26; and Case C 108'99 Cantor Fitzgerald International [2001] ECR I-7257. paragraph 33. Advocate General Poiares Maduro, in his Opinion in Halifax and Otiten, speaks eloquently on this point, saying that there is no legal obligation to run a business m such a way as to maximise tax revenue for the State. 28 — This was stated in the Įudgment in Gemeente Lensden and Holm Groep, paragraph 79. rights in relation to VAT. First of all, it is essential that the taxable person exercise his right to structure his business in compliance with the advantages of the VAT legal regime. In other words, he must respect the legislature's intention, which he does not do if, while ostensibly complying with conditions of the legislation, he seeks and obtains an outcome contrary to its provisions. 29

56The second element relates to the purpose of the operation, which is none 30 other than to create the right claimed, and 31 obtain an undeserved profit. It appears to be essential that the person claiming the discount be both aware of the fraud and in agreement with the other participants, so that the contract, having no independent

29 — Advocate General Poiares Maduro says it is a question of comparing the purpose of the rules with the results achieved by the activity; there is no abuse if those results are the consequence of a choice between lawful alternatives (opinion Halifax and Others, in point 88). 30 — If another explanation is given, there is no abuse of rights. In such circumstances, to interpret a legal provision as not conferring such an advantage on the basis of an unwritten general principle would grant an excessively broad discretion to tax authorities in deciding which of the purposes of a given transaction ought to be considered predominant (opinion in Halifax and Others, point 89). to the detriment of unrelinquishable legal certainty. 31 — These two parameters, applied in Case C-H0/99 Emsland-Starkc [20001 ECR I-11569. which allowed an exporter to be deprived of his right to a refund even though the formal requirements had been met (paragraphs 52 and 53), have Halifax and Others been taken into account in (paragraphs 74 and 75). financial content, is simply a smokescreen for the profit.

57It is for the national court to establish the existence of those elements in a specific case, in accordance with the rules of national law, provided that the effectiveness of Com 32 munity law is not thereby undermined, In that investigation, the legal, commercial and personal links of the operators involved must 33 be taken into account; two factors are especially pertinent: one is the unlawful profit of the person claiming the right to deduct; the other is his position in the stratagem, because the closer he is to the false transaction, the greater the suspicion that he has participated in the fraud.

(c) The right to deduct in a carousel fraud

58Deduction lies at the heart of the common system of VAT; it releases the trader from the burden of the levy, which he receives and pays in the course of his activity, by charging it to the consumer. It observes the principle of neutrality, since it enables the intermediate links to deduct from their own taxable amount the sums paid by each to his own supplier in respect of VAT and thus pass on to the tax authorities the part of the VAT representing the difference between their sale and nurchase prices. 34

59These digressions support the conclusion that the aforementioned right to deduct arises at the time when VAT is paid on the transfer of the goods and services used for the purposes of the taxable transactions (Article 17(1) and (2) of the Sixth Directive). Where, on the other hand, they are connected with operations which are not subject to VAT or, if they are, are exempt, there is no levy and no reason for a discount, which is warranted only when there is a tax liability to which it applies. If there is no tax liability, because a stratagem has been created for the sole purpose of creating the right artificially, there is no need to compensate for a tax which, in fact, has not been paid. These considerations explain why the Court of Justice recognises the possibility that a right, even if it has arisen, may not be acquired, since, apart from it being subject to adjustments which may be made in accordance with the conditions laid down in Article 20 32 — Emsland-Stärke, paragraph 54; also Case C-515/03 Eichs-felder Schlachbetrieb [2005] ECR I-7355, paragraph 40; and Halifax and Others, paragraph 76.

33 — Emsland-Stärke, paragraph 58, and Halifax and Others, paragraph 81.

34 — This was the line taken in Case C-317/94 Elida Gibbs [1996] ECR I-5339, paragraph 33; Case C-427/98 Commission v Germany [2002] ECR I-8315, paragraph 42; and Case C-152/02 Terra Banbedarf-Handel [2004] ECR I-5583, paragraph 36.

of the Sixth Directive, it is necessary that there be no fraud or abuse.

60Thus, given the pivotal role attributed to that right, to deny it to a taxable person who is part of a chain in which, without his cooperation and without his consent, another of the persons concerned does not pay in the tax collected, would break the chain and remove the objectivity of the tax, thereby thwarting the objective professed since the First Directive of applying to trade a general tax on consumption. In those circumstances, there are no artifices contrived in order to evade payment, but ordinary transactions and, consequently, economic activities within the meaning of the Sixth Directive, into which fraudulent conduct is introduced. For this reason, where the taxable person is unaware that he is immersed in a broader scheme, intended to avoid the tax liability, or where he is aware of it, but keeps out of the unlawful agreement, his right to deduct is unaffected. As we have seen, that was the approach taken by the Court of Justice in the judgment in Optigen, which I am following in this Opinion.

61At the other extreme, the same distortion would mean that the right to deduct

35 — Case C-400/98 Breitsohl [2000] ECR I-1321. paragraph 41, and Case C-396/98 Schlosstraße [2000] ECR I-4271. para¬ graph 42. took this approach, as did the aforementioned judgment in Halifax and Others, paragraph 84.

would be exercised by a person who knowingly participates in carousel schemes, which are fictitious transactions designed to reduce the tax liability without good reason. I have already pointed out that, on occasions, the stratagem is arranged simply by moving invoices around, with no actual transfer of goods. However, although their financial significance is clear, from a legal point of view they are without substance. The Belgian Government rightly asserts that stratagems of this kind do not have the characteristics of the taxable transaction defined in Article 5 of the Sixth Directive, because they are not part of the trader's commercial activities.

62In short, the First and Sixth VAT Directives not only authorise, but demand that the holder lose this right if he knowingly participates in fraudulent chains of this kind, for the assessment of which the criteria set out above must be followed. On these lines, 3 the judgment in Fini H 6 held that it is a matter for the national court to refuse to allow the right to deduct where it is established that that right is being relied on for unlawful ends (paragraph 34).

36 - Case C-32/03 Fun H [2005] ECR I-1599

VIII — Conclusion

63On those grounds, I suggest that the Court of Justice give the following reply to the questions raised by the Belgian Cour de cassation:

(1) It is contrary to First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes, and 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, to deny a taxable person who buys goods without knowledge of the fraud perpetrated by the seller, the right to deduct VAT, on the ground that under domestic civil law that contract is incurably void.

(2) The answer is the same where the taxable person is aware of the fraud, but neither participates in it nor derives a financial advantage from it.

(3) If he knowingly participates in an operation of that kind, planned for the sole purpose of reducing the tax burden, thus committing an abuse of rights, the aforementioned common system requires that he lose the right to deduct.