C-442/01 KapHag

JUDGMENT OF THE COURT (Sixth Chamber)

26 June 2003 *

In Case C-442/01,

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

KapHag Renditefonds 35 Spreecenter Berlin-Hellersdorf 3. Tranche GbR

and

Finanzamt Charlottenburg,

on 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),

* Language of the case: German.

THE COURT (Sixth Chamber),

composed of: J.-P. Puissochet, President of the Chamber, C. Gulmann, F. Macken, N. Cokerie and J.N. Cunha Rodrigues (Rapporteur), Judges,

Advocate General: D. Ruiz-Jarabo Colomer, Registrar: L. Hewlett, Principal Administrator,

after considering the written observations submitted on behalf of:

— KapHag Renditefonds 35 Spreecenter Berlin-Hellersdorf 3. Tranche GbR, by D. Ulrich, Rechtsanwalt,

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

having regard to the Report for the Hearing,

after hearing the oral observations of the German Government, represented by W.-D. Plessing, acting as Agent, and of the Commission, represented by K. Gross with A. Böhlke, at the hearing on 15 January 2003,

after hearing the Opinion of the Advocate General at the sitting on 6 February gives the following

Judgment

Grounds

1By order of 27 September 2001, received at the Court on 16 November 2001, the Bundesfinanzhof (Federal Finance Court) referred to the Court for a preliminary ruling under Article 234 EC two questions on the interpretation of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1; 'the Sixth Directive').

2Those questions were raised in proceedings between KapHag Renditefonds 35 Spreecenter Berlin-Hellersdorf 3. Tranche GbR ('KapHag') and the Finanzamt Charlottenburg, a tax authority, concerning the applicability of value added tax ('VAT') where a partnership admits a partner in consideration for a contribution in cash.

Legal background

Community legislation

3Under Article 2(1) of the Sixth Directive, VAT is chargeable on 'the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such'.

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

'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.'

5Article 13B(d)(5) of the Sixth Directive provides as follows:

'Without prejudice to other Community provisions, Member States shall exempt...:

(d) the following transactions:

5. transactions, including negotiation, excluding management and safekeeping, in shares, interests in companies or associations, debentures and other securities....'

6Article 17(2) and (5) of the Sixth Directive reads as follows:

'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;

5. As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person.

However, Member States may:

(a) authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;

(b) compel the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;

(c) authorise or compel the taxable person to make the deduction on the basis of the use of all or part of the goods and services;

(d) authorise or compel the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph, in respect of all goods and services used for all transactions referred to therein;

(e) provide that where the value added tax which is not deductible by the taxable person is insignificant it shall be treated as nil.'

7Article 19(1) and (2) of the Sixth Directive provides:

'1. The proportion deductible under the first subparagraph of Article 17(5) shall be made up of a fraction having:

— as numerator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions in respect of which value added tax is deductible under Article 17(2) and (3),

— as denominator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which value added tax is not deductible. The Member States may also include in the denominator the amount of subsidies, other than those specified in Article HA(1)(a).

The proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next unit.

2. By way of derogation from the provisions of paragraph 1, there shall be excluded from the calculation of the deductible proportion, amounts of turnover attributable to the supplies of capital goods used by the taxable person for the purposes of his business. Amounts of turnover attributable to transactions specified in Article 13B(d), in so far as these are incidental transactions, and to incidental real estate and financial transactions shall also be excluded....' National legislation

8Paragraph 1(1) of the Umsatzsteuergesetz (Law on turnover tax, BGBl. 1991 I, p. 351, 'the UStG') provides:

'1. The following transactions are subject to turnover tax:

(1) Supplies of goods or services effected for consideration by a business within the territory of the country in the course of its business....'

9Paragraph 4 of the UStG provides:

'Among the transactions referred to in Paragraph 1(1), number 1, the following are exempted:

8. ...

(f) transactions, including the negotiation companies and other associations,

… '

10Paragraph 15 of the UStG provides:

of transactions, in interests in 2. There is no deduction of tax in respect of supplies of goods and the import of goods, and in respect of supplies of services, which the business uses for effecting the following transactions:

(1) exempt transactions;

4. If a business uses any goods supplied or imported for the purposes of his business, or a service supplied to him, only in part for effecting transactions which exclude the right to deduct, then there shall not be deducted such part of the input tax as is to be attributed economically to transactions which result in the exclusion of the right to deduct. The business is entitled to make a fair estimate of the non-deductible parts.

...'

Main proceedings and questions referred to the Court

11KapHag is a partnership ('Gesellschaft bürgerlichen Rechts') governed by German civil law; its partners are LOGOS Grundstücks-Treuhand GmbH ('LOGOS l'), LOGOS Zweite Grundstücks-Treuhand GmbH ('LOGOS 2') and Dr Moegelin, Dr Tiemann and Dr Mehnert.

12KapHag's object was to acquire a development right ('Erbbaurecht') in respect of a plot of land in Berlin (Germany), to erect thereon buildings forming part of a shopping centre, to exploit those buildings by leasing or managing them and to maintain them. This development right was acquired by LOGOS 1 and LOGOS 2, within KapHag. On 2 August 1991, Dr Moegelin and Dr Tiemann became partners in KapHag.

13KapHag was intended to take the form of a closed property fund. Partners could be admitted up to a total amount of DEM 38 402 000, plus 5% premium. The general contractual terms ('general terms') agreed on 1 October 1991 referred to KapHag's partnership agreement and to other agreements concluded or to be concluded by it.

14On 12 November 1991, Dr Mehnert announced his intention to join KapHag and to contribute a total amount of DEM 38 402 000. On 13 November 1991, the partners in KapHag decided to delete a part of the general terms and agreed on a definitive version of KapHag's partnership agreement and on other parts of the general terms.

15By a fee note of 19 December 1991, Dr Severin, a lawyer, invoiced the plaintiff for DEM 75 000, plus VAT of DEM 10 5000, for providing legal advice and drafting the partnership agreement. The legal advice related to the fund concept and the formation of the partnership.

16In its 1991 VAT return, KapHag deducted the abovementioned VAT payment as input tax.

17Following an audit, the Finanzamt Charlottenburg, by decision of 17 February 1998, disallowed that deduction; it relied on paragraphs 4(8)(f) and 15(2) of the UStG.

18KapHag lodged an objection and then an appeal, both of which were rejected.

19KapHag then appealed to the Bundesfinanzhof on a point of law.

20The Bundesfinanzhof took the view that when a partnership admits a partner in consideration of a contribution in cash or in kind, it makes a supply of services effected for consideration within the meaning of Article 2(1) of the Sixth Directive which is exempt under Article 13B(d)(5) of that directive. However, it considers that that concept is questionable, since a partner is admitted not on the basis of a bilateral contract between the new partner and the partnership but on the basis of a partnership agreement concluded between partners, so that, from the viewpoint of civil law, the new partner might be regarded as obtaining his share in the partnership not from the partnership but from the other partners. It is for that reason, in particular, that legal commentators conclude that there is no supply for consideration by the partnership in such a situation.

21On the assumption that there is a supply by the partnership and that this supply must be exempt in accordance with Article 13B(d)(5) of the Sixth Directive, the question arises as to whether it constitutes a transaction in respect of which Articles 17 and 19 of the Sixth Directive provide for deduction of input tax. That would not be so if the issue of shares in the partnership constituted an incidental transaction within the meaning of the second sentence of Article 19(2) of the Sixth Directive. The Bundesfinanzhof inclines to the view that there was such an incidental transaction in the present case, but points out that it would be contrary to the common market, with free movement of capital, if the raising of a partnership's own capital by the issue of partnership shares were to have different fiscal consequences in the various Member States.

22Taking the view that the outcome of the main proceedings called for an interpretation of the Sixth Directive, the Bundesfinanzhof decided to stay proceedings and to refer the following two questions to the Court for a preliminary ruling:

'1. Where a partnership admits a partner on payment of a capital contribution in cash, does it effect a supply to him for consideration within the meaning of Article 2(1) of Directive 77/388/EEC?

2. If so, is it an incidental transaction for the purposes of the second sentence of Article 19(2) of Directive 77/388/EEC, and is the taxable person entitled to rely on that provision, according to which such incidental transactions do not exclude deduction of input tax?'

First question

Observations submitted to the Court

23KapHag maintains that a partnership is not in a position to hold its own shares, still less to transfer or grant them. In partnerships, only the partners hold shares. Accordingly, only the partners are able to issue shares to a new partner. The entry of a new partner into an existing partnership is effected under a contract concluded not between the incoming partner and the partnership but between the new partner and the other partners. It follows that the grant of shares to a new partner in a partnership does not constitute a supply of services by the partnership.

24Nor can the prospects of profit represented by a share form the subject-matter of a supply of services by the partnership. According to the Court's case-law, the obtaining of income in the form of a share in the profits does not constitute consideration for the acquisition of a share.

25Nor is the new partner's contribution effected for consideration. That contribution is not regarded as the acquisition 'for consideration' of a share in the partnership but is conceived as performance of the general obligation to favour the object of the partnership, which follows solely from that acquisition.

26For those reasons, the first question must be answered in the negative.

27The German Government claims that where a partnership issues new shares it is effecting a supply of services for consideration within the meaning of Article 2 of the Sixth Directive.

28First, there exists between the provider and the recipient of the supply a legal relationship within which a mutual exchange of supplies is effected. The remuneration paid by the recipient, namely the payment in cash, constitutes consideration for the service rendered by the supplier, namely the grant of a share in the partnership. Second, there is an intrinsic link between the supply made and the remuneration obtained. The new partner makes a payment to the partnership with the objective of participating in the activities of the partnership qua undertaking. Payment of his contribution in cash is the condition of the acquisition of his status as a partner. A taxable transaction for the purposes of Article 2(1) of the Sixth Directive therefore takes place.

29However, that transaction is exempt under Article 13B(d)(5) of the Sixth Directive, which provides that 'transactions... in shares... in companies or associations' are to be exempted.

30In that context, the input tax cannot be deducted. It follows from the Court's case-law that where a taxable person supplies a service to another taxable person who uses it for an exempt transaction, the latter is not entitled to deduct the VAT already paid.

31The Commission submits that, according to settled case-law, the mere acquisition and the mere holding of shares do not constitute an economic activity for the purposes of the Sixth Directive. Although the case in which that principle was established concerned holdings, the same conclusion holds good for the admission of a partner to a partnership, as in the present case.

32The Commission raises the question whether the position might be different in the case of direct or indirect involvement in the management of the company in which the investment is made. In its view, such involvement cannot result solely from the acquisition or exercise of the status of partner. It would be necessary in that regard for the partner to carry out additional activities, which was not the position in the case before the national court.

33Furthermore, Article 13B(d)(5) of the Sixth Directive has no relevance to the mere acquisition of shares. That provision does not apply to the creation of shares upon initial acquisition, but concerns transactions relating to shares already in existence.

34The Commission therefore proposes that the Court answer the first question by stating that a partnership which admits a partner in consideration for payment of a contribution in cash does not effect a supply to the incoming partner of services for consideration for the purposes of Article 2(1) of the Sixth Directive. Findings of the Court

35The first question is intended to establish whether a partnership which admits a partner in consideration for payment of a contribution in cash effects towards the new partner a supply of services for consideration within the meaning of Article 2(1) of the Sixth Directive.

36It follows from Article 2 of the Sixth Directive, which defines the scope of VAT, that within a Member State only activities of an economic nature are subject to VAT. Under Article 4(1) of that directive, a taxable person means any person who independently carries any economic activity. Economic activities are defined in Article 4(2) of the Sixth Directive as encompassing all activities of producers, traders and persons supplying services, in particular the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis.

37According to the Court's case-law (Case C-60/90 Polysar Investments Netherlands [1991] ECR I-3111, paragraph 12, and Case C-80/95 Hamas & Helm [1997] ECR I-745, paragraphs 13 and 14), Article 4 of the Sixth Directive confers a very wide scope on VAT. The Court has held that the concept of 'exploitation' within the meaning of Article 4(2) refers, in accordance with the requirements of the principle of neutrality of the system of VAT, to all transactions, whatever their legal form, by which it is sought to obtain income from the property in question on a continuing basis.

38However, the Court has also specified that the mere acquisition and holding of shares in a company is not to be regarded as an economic activity, within the meaning of the Sixth Directive, conferring on the holder the status of a taxable person. The mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property (see Hamas & Helm, cited above, paragraph 15).

39It follows that the entry of a new partner into a partnership in consideration for a contribution in cash, in circumstances such as those of the main case, does not constitute an economic activity, within the meaning of the Sixth Directive, on the part of the partner.

40If the taking of shares does not in itself constitute an economic activity within the meaning of the Sixth Directive, the same must be true of activities consisting in the transfer of such shares (Case C-155/94 Wellcome Trust [1996] ECR I-3013, paragraph 33).

41The admission of a new partner into a partnership does not therefore constitute a supply of services to him.

42In that context, it is irrelevant whether the admission of the new partner must be regarded as the act of the partnership itself or as that of the other partners, since the admission of a new partner does not in any event constitute a supply of services for consideration for the purposes of the directive.

43In the light of the foregoing, the answer to the first question must be that a partnership which admits a partner in consideration of payment of a contribution in cash does not effect towards that person a supply of services for consideration within the meaning of Article 2(1) of the Sixth Directive.

Second question

44In view of the answer given to the first question, it is unnecessary to answer the second question.

Costs

Costs

45The costs incurred by the German Government and by the Commission, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main proceedings, a step in the proceedings pending before the national court, the decision on costs is a matter for that court. On those grounds,

THE COURT (Sixth Chamber),

in answer to the questions referred to it by the Bundesfinanzhof by order of 27 September 2001, hereby rules:

A partnership which admits a partner in consideration of payment of a contribution in cash does not effect towards that person a supply of services for consideration within the meaning of Article 2(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment.

Puissochet Gulmann Macken

Colneric Cunha Rodrigues

Delivered in open court in Luxembourg on 26 June 2003.

J.-P. Puissochet R. Grass

President of the Sixth Chamber Registrar

OPINION OF ADVOCATE GENERAL RUIZ-JARABO COLOMER delivered on 6 February 2003 1

Introduction

1In these preliminary reference proceedings, the doubts harboured by the Bundesfinanzhof (the highest German court with jurisdiction in tax matters) relate to the interpretation of Articles 2(1) and 19(2) of the Sixth Directive on value added tax ('the Sixth Directive').

2The German court is seeking to ascertain whether the concept of 'consideration' in the first of those provisions includes the admission of a new partner to a partnership in consideration for a contribution in cash. Should that first question be answered in the positive, the national court asks whether the transaction is one of the incidental transactions referred to in Article 19(2) of the Sixth Directive and may therefore be excluded from the deductible proportion of the tax.

I — Facts, main proceedings and question referred to the Court

3KapHag Renditefonds ('KapHag') is a partnership whose partners are LOGOS Grundstücks-Treuhand GmbH, LOGOS Zweite Grundstücks-Treuhand GmbH ('LOGOS 1' and 'LOGOS 2' respectively) and three natural persons, Dr Moegelin, Dr Tiemann and Dr Mehnert.

4KapHag's object was to acquire a development right in respect of a plot in Berlin and to construct thereon and maintain certain buildings forming a unit within a shopping centre. The partnership is managed as a closed real investment fund.

5In order to be admitted as a partner, it was necessary to pay DEM 38 402 000, plus 5% premium.

6Initially, KapHag consisted of only two members, LOGOS 1 and LOGOS 2, which acquired the right to develop the site. Dr Moegelin and Dr Tiemann became partners later, on 2 August 1991.

7On 12 November of that year, Dr Mehnert announced his intention to join the company in consideration for making the necessary contribution.

8On 19 December 1991 Dr Severin, a lawyer, presented a fee note for DEM 75 000, plus DEM 10 500 value added tax ('VAT'), for providing legal advice.

9KapHag deducted that tax in its 1991 VAT return but by decision of 17 February 1998 the Finanzamt Charlottenburg disallowed the deduction, in reliance on Articles 15(2) and 4(8)(f) of the Umsatzsteuergesetz 1991 (Law on value added tax; hereinafter 'the UStG'). 3 That decision was confirmed in administrative proceedings and then upheld by the Finanzgericht Berlin in judicial proceedings.

10The Finanzgericht Berlin considered that, by means of an exchange of services, KapHag transferred to the new partner a share in the partnership, a transaction which, under Article 4(8)(f) of the UStG, was exempt from tax, and took into account the case-law of the Bundesfinanzhof, which has held that the admission of partners to a partnership open to the public is an exempt transaction. In its view, the partial deduction referred to in Article 15(4) of the UStG 4 is not applicable, since the services provided by the lawyer related solely to the acquisition of new partners.

11KapHag did not agree with that decision and appealed to the Bundesfinanzhof on a point of law. In support of its claim, it submitted that it is not a partnership open to the public, so that the admission of Dr Mehnert as a partner is a taxable transaction, and that the services supplied by the lawyer were not intended exclusively to bring about the admission of that new member but were also used for the subsequent leasing activities, which are taxable.

12The Bundesfinanzhof considers that when a partnership is formed or when it admits a new partner in consideration of payment of a contribution in cash or in kind, it makes a supply of services for consideration within the meaning of Article 2(1) of the Sixth Directive. However, it believes that in the circumstances of the case before it, that approach may be open to question if account is taken of the fact that the partner did not join the partnership under a bilateral agreement concluded with the partnership but under a partnership agreement concluded between the members. In order to dispel that doubt, the Bundesfinanzhof, by order of 27 September 2001, referred the following question to the Court:

'Where a partnership admits a partner on payment of a capital contribution in cash, does it effect a supply to him for consideration within the meaning of Article 2(1) of Directive 77/388/EEC?'

13If that question should be answered in the positive, the Bundesfinanzhof considers that the supply should be exempt, pursuant to Article 13(B)(d)(5) of the Sixth Directive, thus raising the question whether it constitutes an incidental transaction within the meaning of the second sentence of Article 19(2) of that directive. In order to resolve the uncertainty, the Bundesfinanzhof requests the Court to rule on the following question:

'Is [the transaction] an incidental transaction for the purposes of the second sentence of Article 19(2) of Directive 77/388/EEC, and is the taxable person entitled to rely on that provision, according to which such incidental transactions do not exclude deduction of input tax?'

II — Procedure before the Court

14The Commission and KapHag presented written observations within the period prescribed for that purpose by Article 20 of the EC Statute of the Court of Justice.

15None of the parties who participated in the written procedure sought to present oral observations, but the German Government, which did not participate in the written procedure, sought leave to present oral argument and the Court therefore decided to hold a hearing.

OPINION OP MR RUIZ-JARABO — CASE C-442/01

16The hearing took place on 15 January 2003. The German Government and the Commission presented their observations.

III — The relevant provisions of the Sixth Directive

17Article 2 defines the taxable event:

'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;

2. ...'

18Article 4(1) defines 'taxable person' as follows:

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

19Those economic activities are, pursuant to Article 4(2):

'... 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.'

20Article 13 of the Sixth Directive regulates the exemptions relating to internal transactions. For the purposes of the present question, the relevant provision is Article 13(B)(d)(5), which provides that the following are exempt from tax:

'transactions, including negotiation, excluding management and safekeeping, in shares, interests in companies or associations, debentures and other securities, excluding:

— documents establishing title to goods,

—· the rights or securities referred to in Article 5(3)'.

21Article 17 defines the circumstances in which the right to deduct VAT arises and the scope of that right:

'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;

(b)...

3. Member States shall also grant to every taxable person the right to a deduction or refund of the value added tax referred to in paragraph 2 in so far as the goods and services are used for the purposes of:

(c) any of the transactions exempted under Article 13B(a) and (d), paragraphs 1 to 5, when the customer is established outside the Community or when these transactions are directly linked with goods intended to be exported to a country outside the Community.

5. As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person.

22Article 19, under the heading 'Calculation of the deductible proportion', provides:

'1. The proportion deductible under the first subparagraph of Article 17(5) shall be made up of a fraction having:

— as numerator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions in respect of which value added tax is deductible under Article 17(2) and (3),

— as denominator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which value added tax is not deductible. The Member States may also include in the denominator the amount of subsidies, other than those specified in Article HA(l)(a).

The proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next unit.

2. By way of derogation from the provisions of paragraph 1, there shall be excluded from the calculation of the deductible proportion, amounts of turnover attributable to the supplies of capital goods used by the taxable person for the purposes of his business. Amounts of turnover attributable to transactions specified in Article 13B(d), in so far as these are incidental transactions, and to incidental real estate and financial transactions shall also be excluded. Where Member States exercise the option provided under Article 20(5) not to require adjustment in respect of capital goods, they may include disposals of capital goods in the calculation of the deductible proportion.

IV — Analysis of the questions

A. First question

23The Bundesfinanzhof wishes to know whether admission to a partnership in consideration of payment of a contribution in cash is a taxable transaction, since otherwise the tax charged by the lawyer, Dr Severin, 5 will not be deductible, under the provisions to the contrary set out in Article 17(1) of the Sixth Directive.

24The Court's answer must proceed from a premiss which, although obvious, must not be forgotten: what the Community legislature intended was that all supplies of goods and all supplies of services effected for consideration within each Member State by persons exercising the economic activities referred to in Article 4(2) of the Sixth Directive should be subject to VAT, since the latter is a general tax on consumption.

25In order to determine the transactions subject to VAT, it is necessary to define the concept of taxable person, a task which, given the philosophy of the Sixth Directive, requires a definition of the concept of 'economic activity'.

26The concept is a very wide one. 8 It encompasses all stages of the production and distribution of goods and also the supply of services, 9 irrespective of who carries them out and of their legal form. The decisive factor is that the purpose is to obtain income on an ongoing basis, irrespective of the results. The objective nature 11 of the concept is a requirement of the principle of the neutrality of the common system of VAT. This double concept of the wide application and the objectivity of the definition has recently been reiterated by the Court in its judgments on the tolls charged for the use of toll roads.

27The concept has also been defined negatively. Thus, the mere exercise of the right of ownership by its holder cannot, in itself, be regarded as constituting an economic activity. For that reason, the Community case-law does not recognise that the mere acquisition and the mere holding of shares constitute an economic activity, since they do correspond to the exploitation of an asset for the purpose of obtaining a income therefrom on an ongoing basis, since any dividend yielded by that holding is merely the result of ownership of the property. Exceptionally, where the holding is accompanied by direct or indirect involvement in the management of the company, without prejudice to the rights inherent in the capacity of shareholder or partner, the transaction may be taxable.

28If the acquisition of shares does not constitute an economic activity, nor does the transfer of shares.

29The concept of a reciprocal exchange 18 of services is fundamental and brings out the full meaning of the case-law of the Court which I have just cited. For example, the grant to a third party of a surface right by the owner of land is taxable provided that the right is transferred for consideration.

30For the same reason, a holding company which restricts its activity to acquiring shares in other undertakings is not entitled to deduct input VAT, since it is not a taxable person in the sense that, in the absence of consideration, it does not carry out an economic activity within the meaning of the Sixth Directive; nor is it a taxable person when it receives dividends, which therefore fall outside the system of deductions provided for in the Community rules. In such situations the only activity consists in the administration of an asset. The same applies to the acquisition and holding of obligations, and also to the purchase and transfer of shares and other titles with the aim of maximising dividends and returns on capital, which are intended to encourage medical research.

31Even where, in addition to participating in a company and being for that reason entitled to receive the dividends or benefits resulting from its exploitation, the person concerned is directly or indirectly involved in its management, there is not an 'economic activity' within the meaning of Article 4(2) of the Sixth Directive if the return on the amounts invested in the undertaking is not consideration for the management, that is to say, if there is not a direct relationship between the activity and the sums received. On the other hand, where there is such a link, where the placements which attract interest originate in funds provided by clients in the context of a supply of services for payment, which are therefore taxable (the management of immoveable property), the interest falls within the scope of VAT. 5

32Consequently, in order to dispel the mystery as requested by the referring court, the Court will have to examine the legal nature of the relationship which is established between a partnership and the new partner when, in order to acquire that capacity, the new partner makes an economic contribution to the partnership which he is joining.

33I have not the slightest doubt that the future partner performs an act involving the disposal of his assets, of which becoming a member of the partnership is not the counterpart. Or, in other words, the fact of joining a partnership does not constitute a supply of services whereby the partnership confers an economic advantage on the new partner.

34I do not agree with the case-law of the Bundesfinanzhof cited in the order for reference, according to which, since the founding member of a partnership obtains rights in consideration for his contribution, the new partnership makes a supply for consideration, which would be subject to VAT.

35The formation of a partnership (the partnership agreement being the founding act) or the incorporation within a partnership of new partners who subsequently join (variation of the agreement) constitute an agreement whereby various persons (natural or legal) form an organisation which the law recognises as having legal personality, and extend or amend its subjective basis. It is true that in the agreement the partners undertake to make contributions in common, which may consist of goods or services, in order to attain a shared objective, generally that of making a profit. No matter how widely it may be interpreted, however, that objective does not contain the notion of consumption in exchange for consideration, within the framework of a bilateral legal relationship, which is the basis of the Community rules on VAT. At most, as the case-law of the Court which I have cited makes abundantly clear, there is an expectation of obtaining advantages, which are the consequence of the ownership of a share in the partnership acquired by means of the disposal of assets but do not constitute payment for that share.

36In short, I propose that the Court, in answer to the first of the questions referred to it by the Bundesfinanzhof, should rule that when a partnership admits a partner in consideration for a contribution in cash, it is not making a supply for consideration within the meaning of Article 2(1) of the Sixth Directive. That is to say, it is not carrying out a taxable transaction.

37Nor is that assertion undermined by the fact that Article 13(B)(d)(5) of the Sixth Directive states that, among other transactions, those in interests in companies are exempt from VAT, an exception which assumes that they were previously taxable transactions. It is not to be inferred from that provision that the acquisition of an interest in a company is always, and in every case, subject to VAT.

38A transaction is 'exempt' where it satisfies the conditions laid down to be subject to tax but it is not taxable by decision of the legislature. If those requirements are not satisfied a transaction is not exempt; it is simply not a taxable transaction. That is to say, the exemption provided for in Article 13(B)(d)(5) of the Sixth Directive does not assume that all the classes of transactions in respect of securities to which it refers will be taxable, since transactions in those securities, which are taxable because they satisfy the conditions laid down in Article 2(1) in conjunction with Article 4(2) of the Sixth Directive, are exempt from tax.

39There is no inconsistency, therefore, between the solution which I propose and the terms of Article 13(B)(d)(5) of the Sixth Directive. That has been decided by the Court, which considers that there are transactions in shares, interests in companies or associations, debentures and other securities which may fall within the scope of VAT, but nothing more, just as, I would add, there are other transactions, such as the transaction in the main proceedings, whicri_remain outside its scope.

40I am unable to understand the argument based on Article 5(8) of the Sixth Directive which the representative of the German Government put forward at the hearing. In his submission, that provision supports the theory that transactions relating to companies such as that in the main proceedings are taxable, since it allows the Member States to take the view that transfers in the form of a contribution to a company are not supplies of goods. What I have said in respect of Article 13(B)(d)(5) of the Sixth Directive applies to Article 5(8) too. The fact that Member States may exclude the transactions concerned from that concept does not mean that every contribution to a company is in every case and inevitably a 'supply of goods' within the meaning of Article 2(1) of the Sixth Directive.

41Nor is the German Government's position supported by the judgment in Heerma, where the Court held that a partner who leases immovable property to the partnership of which he is a member carries out an independent activity for the purposes of Article 4(1) of the Sixth Directive. It does not follow from that assertion that the incorporation of a new partner in a partnership in exchange for a contribution in cash is a taxable transaction. There are two distinct activities with nothing in common; one is accession to the partnership and the other is an act for the administration of the immovable asset, the only singular feature of which is that the person transferring the use and enjoyment of the asset is not a third party but a member of the partnership who, in such a case, acts for that purpose as a stranger.

B. Second question

42Should the Court follow my suggestion in regard to the first question referred by the Bundesfinanzhof, there will be no need to examine the second question.

43However, even if it considers that admission to a partnership in consideration for a contribution in cash is subject to VAT, there will still be no need to examine the second question, since, as the Bundesfinanzhof itself states in the order for reference, the transaction will be exempt under Article 13(B)(d)(5) of the Sixth Directive.

44Consequently, the question whether the transactions in the main proceedings constitute incidental transactions referred to in the second sentence of Article 19(2) of the Sixth Directive has no bearing on the outcome of the dispute and the question referred by the German court is devoid of purpose.

45The principle of neutrality which governs the Community rules on VAT requires that the taxable person deduct the amounts of VAT paid in respect of the acquisition of goods and services which are used for the purposes of the taxable transactions. It requires that when paying the tax the taxable person is allowed to deduct the VAT already charged on those goods or services. The first consequence of the application of that principle to the deductions is that its objective content must be 'coextensive' with that of the activity of the taxable person. In other words, the 'deduction system' must be applied in such a way that 'its scope corresponds... to the sphere of the taxable person's business activity'.

46Consequently, where a taxable person acts as a final consumer and acquires goods or uses services for private purposes he is not entitled to deduct and where he uses them for the purposes of his taxable transactions the right to deduct arises only to the extent to which they are used for those purposes.

47The foregoing considerations explain Article 17(5) of the Sixth Directive. As regards goods and services used by the taxable person in order to effect both transactions giving rise to the right to deduct and transactions not giving rise to that right, the VAT borne may be deducted only in proportion to the amount of the former transactions. The allocation is calculated by means of a fraction whose numerator is the total turnover for the fiscal year, excluding VAT, in respect of transactions giving rise to the right to deduct and the denominator is the total amount for the same period, also excluding VAT, of all transactions carried out by the taxable person, including those not giving rise to the right to deduct. However, according to Article 19(2), incidental transactions are not taken into account in either of the parts of the fraction. That provision is also designed to ensure the neutrality of the common system of VAT.

48In short, the provision to which the second question relates forms part of the system of deductions provided for in the Sixth Directive. In order for it to apply, the right to deduct must have arisen and, in accordance with Article 17(1) and (2), that event comes about only when the tax is payable in respect of the acquisition of goods and services used for the purposes of the taxable transactions. If, on the other hand, they are connected with transactions which are not taxable or are taxable but exempt, there is no payment and the right to deduct does not arise. The right to deduct arises only where there is a tax obligation to which it can be applied. The proof is to be found in Article 17(3)(b) and (c), which, exceptionally, permit deduction of the VAT charged in respect of the acquisition of goods and services used for the purposes of certain exempt t r a n s a c t i o n s, including that in Article 13(B)(d)(5) when they are directly connected with goods to be exported to a country outside the Community or when the recipient is established outside the Community.

49In its judgment in BLP Group, the Court held that, except in the cases expressly provided for by the First and Sixth Directives, where a taxable person supplies services to another taxable person who uses them for an exempt transaction, the latter person is not entitled to deduct the input VAT paid, even if the ultimate purpose of the transaction is the carrying out of a taxable transaction.

50On the basis of the foregoing reasoning, I can assert that the admission of a partner into a partnership in consideration for a contribution in cash falls in any event outside the scope of VAT, so that in the mairi proceedings there is no need to deduct the VAT paid in respect of the supply of services placed at the disposal of the partnership. Consequently, the pro rata rule and the rule in the second sentence of Article 19 of the Sixth Directive are not applicable to the dispute and the second question referred by the Bundesfinanzhof is thus devoid of purpose.

V — Conclusion

51In the light of the foregoing considerations, I propose that the Court should:

(1) Answer the first question as follows: 'Where a partnership admits a partner in exchange for a contribution in cash, it is not making a supply for consideration within the meaning of Article 2(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment and, accordingly, it is not carrying out a taxable transaction'.

(2) Not answer the second question, as it is devoid of purpose.

Notes

(1) Original language: Spanish.

(2) Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member Slates relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 19 7 L 145. p. 1).

(3) BGBl. 1991 I, p. 351. Article 4(8)(r) provides that 'transactions, including the negotiation of transactions, in interests in companies and other associations' are to be exempt from tax. Article 15(2) provides that '[t]here is no deduction of tax in respect of supplies of goods and the import of goods, and in respect of supplies of services, which the business uses for effecting... exempt transactions'.

(4) According to that provision, 'If a business uses any goods supplied or imported for the purposes of its business, or a service supplied to it, only in part for effecting transactions which exclude the right to deduct, then there shall not be deducted such part of the input tax as is to be attributed economically to transactions which result in the exclusion of the right to deduct. The business is entitled to make a fair estimate of the non-deductible parts.'

(5) The discussion as to whether the fees charged by Dr Severin were in respect of his services relating to the admission of the new partner or whether, more widely, they also included other services in respect of the formation and operation of the partnership must remam outside the limits of the question. The German court seeks to know whether the tax charged by Dr Severin is deductible and, for that purpose, it seeks to ascertain whether the admission of a new partner to a partnership is a supply subject to VAT. When the Court has provided an answer, the national court will have to determine the dispute in the light of the answer it receives and of the factual background to the case, in respect of which the Community Court has nothing to say.

(6) Sec Case C-384/95 Landboden-Agrardienste [1997] ECR I-7387, paragraph 13.

(7) Advocate General Léger has recently performed that task in his Opinion of 12 September 2002in Case C-77/01 EDM, in which judgment has not thus far been delivered.

(8) See Case C-186/89 Van Tiem [1990] ECR I-4363, paragraph 17.

(9) Sec the judgment cited in the previous footnote (same paragraph); see also the judgment in Case C-80/95 Harnas & Helm 11997) ECR I-745, paragraph 13.

(10) It will be remembered that the Court regarded the exercise of public functions by notaries as an 'economic activity' for the purposes of the Sixth Directive, since they supply services to individuals on a permanent basis and in consideration for remuneration (see Case C-235/85 Commission v Netherlands [1987] ECR 1471, paragraph 9).

(11) See paragraph 8 of the judgment in Commission v Netherlands, cited above.

(12) See Van Tiem, cited above, paragraph 18, and Harnas & Helm, also cited above, paragraph 14. Reference may also lie made to Case C-60/90 Polysar Investments Netherlands [1991] ECR I-3111, paragraph 12.

(13) Case C-276/97 Commission v France [20001 ECR I-6251, paragraph 31; Case C-358/97 Commission v Ireland [2000] ECR I-6301, paragraph 29; Case C-359/97 Commission v United Kingdom [2000] ECR I-6355, paragraph

(41) ; Case C-408/97 Commission v Netherlands [2000] ECR I-6417, paragraph 25; and Case C-260/98 Commission v Greece [2000] ECR I-6537, paragraph 26.

(14) See Case C-155/94 Wellcome Trust [1996] ECR I-3013, paragraph 32.

(15) See Polysar Investments Netherlands, cited above, paragraph 13. Reference may likewise be made to the judgments in Case C-333/91 Sofitam [1993] ECR I-3513, paragraph 12; Hamas & Helm, cited above, paragraph 15; Case C-142/99 Floridienne and Berginvest [2000] ECR I-9567, paragraph 17; and Case C-16/00 Cibo Participations [2001] ECR I-6663, paragraph 19. See also, on this point, order of 12 July 2001 in Case C-102/00 Welthgrove [2001] ECR I-5679, paragraph 14.

(16) See Polysar Investments Netherlands, paragraph 14; Floridienne and Berginvest, paragraph 18; and Cibo Participations, paragraph 20. See also the order in Welthgrove, paragraph 15.

(17) See Wellcome Trust, paragraph 33.

(18) See Case C-16/93 Tolsina [1994] ECR I-743, paragraph

(19) Judgment in Van Tiem.

(20) Judgment in Polysar Investments Netherlands.

(21) Judgment in Sofitam.

(22) Judgment in Hamas Sc Helm.

(23) Judgment in Wellcome Trust.

(26) To my mind, it is irrelevant whether payment is in cash or in kind.

(27) It will be recalled that, according to the first paragraph of Article 2 of First Council Directive 67/227/EEC of 11 April

(196) 7 on the harmonisation of legislation of Member States concerning turnover taxes (OJ, English Special Edition

(196) 7 (I), p. 14), '|t]he 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

(24) Judgment in Floridienne and Berginvest; judgment in Cibo number of transactions which take place in the production Participations.

(25) Case C-306/94 Régie Dauphinoise (1996] ECR I-3695. and distribution process before the stage at which tax is charged.'

(28) 1 must confess that I am unable to understand the Bundesfinanzhofs reference in the order for reference to Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital (OJ, English Special Edition 1969 (II), p. 412), since it is irrelevant to the outcome of the dispute whether the transaction in issue may be subiect to tax of this kind, since the fact that it is subject to that tax does not determine that it is subject to VAT, as that directive merely does not preclude the charging of VAT (see Article 12(1)(f)).

(29) See Wellcome Trust, paragraph 35, and Hamas & Helm, paragraph 16.

(30) Case C-23/98 [2000] ECR I-419.

(31) As stated in paragraph 2 of Article 17 of the Sixth Directive. On the system of deductions as a means of ensuring the neutrality of the tax, see Case 268/83 Rompehnan [1985] ECR 655, paragraph 19; Case 50/87 Commission v France [1988] ECR 4797, paragraph 15· Case C-37/95 Ghent Coal Terminal [1998] ECR I-1, paragraph 15; Joined Cases C-110/98 to C-147/98 Gabalfrisa and Others [2000] ECR I-1577, paragraph 44; and Case C-78/00 Commission v Italy |2001] ECR I-8195, paragraph 30.

(32) See Case C-318/96 Spar 11998] ECR I-785, paragraph 23.

(33) See Case 165/86 Intiem [1988] ECR 1471, paragraph 14. See also, to the same effect, Sofitam, cited above, paragraph 11.

(34) See Case C-97/90 Lennartz [1991] ECR I-3795, paragraph

(35) See Case C-291/92 Ambrecht [1995] ECR I-2775, paragraph 27.

(36) See Régie Dauphinoise, cited above, paragraph 21.

(37) In reality, the right to deduct arises as a consequence of two factors: the amount of the deductible tax and the use of the goods or services for the purposes of the taxable transactions (see P. Alguacil Marí and G. Orón Moratal, 'La deducción en el IVA español y su adecuación a la Sexta Directiva', in Noticia/C.E.E., Nos 67 and 68, August/ September 1990, p. 96.

(38) As I have already stated in footnote 3, Article 15(2) of the UStG precludes the right to deduction of tax in respect of supplies of goods and services used for effecting exempt transactions. The Spanish Law on Value Added Tax (Law

(37) /1992 of 28 December 1992; Boletín Oficial del Estado,

(29) December 1992, p. 44247, is quite clear on that point; Article 94(1)(1)(a) of that law provides that the taxable person may deduct the amounts of VAT paid on the acquisition or import of goods and services used for transactions which are taxable and not exempt from VAT (emphasis added).

(39) See P. Alguacil Marí and G. Orón Moratal, op. cit., p. 101. S. Colmenar Valdés, in 'El derecho a la deducción en el IVA', in Revista de Derecho financiero y Hacienda Pública, No 157, 1982, p. 327, states that, 'as the deduction of the input tax is linked to the output tax, it appears that where there is no tax obligation there can be no right to deduct the input tax, since the ultimate reason on which the right to deduct was based no longer exists'.

(40) Case C-4/94 (1995) ECR I-983.