C-460/07 Puffer

JUDGMENT OF THE COURT (Third Chamber)

23 April 2009 *

In Case C-460/07,

REFERENCE for a preliminary ruling under Article 234 EC, from the Verwaltungsgerichtshof (Austria), made by decision of 24 September 2007, received at the Court on 11 October 2007, in the proceedings

Sandra Puffer

v

Unabhängiger Finanzsenat, Außenstelle Linz,

THE COURT (Third Chamber),

č composed of A. Rosas, President of Chamber, J.N. Cunha Rodrigues, J. Klu ka, P. Lindh and A. Arabadjiev (Rapporteur), Judges,

* Language of the case: German.

Advocate General: E. Sharpston, Registrar: B. Fülöp, Administrator,

having regard to the written procedure and further to the hearing on 16 October 2008,

after considering the observations submitted on behalf of:

S. Puffer, by F. Schubert and W.-D. Arnold, Rechtsanwälte, and by C. Prodinger, Steuerberater,

the Unabhängiger Finanzsenat, Außenstelle Linz, by T. Krumenacker, acting as Agent,

the Austrian Government, by J. Bauer, acting as Agent,

the Commission of the European Communities, by K. Gross and D. Triantafyllou, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 11 December 2008, gives the following

Judgment

Legal context and the dispute

1The reference for a preliminary ruling concerns the interpretation of 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 (OJ 1977 L 145, p. 1; the Sixth Directive ), and its compatibility with the general principle of equal treatment under Community law.

2That reference was made in proceedings between Ms Puffer and the Unabhängiger ‘ Finanzsenat, Außenstelle Linz (the Linz Division of the Independent Tax Tribunal; the ’

Unabhängiger Finanzsenat ), with regard to the right to deduct input value added tax ‘ ’

( VAT ) paid for the years 2002 and 2003 on the building costs of a building treated as ’

forming, in its entirety, part of the assets of Ms Puffer s business, but which is partly in private use.

Legal framework

Community legislation

‘ …

3Under Article 2 of the Sixth Directive the following shall be subject to [VAT]: the supply of goods or services effected for consideration within the territory of the country ’

by a taxable person acting as such .

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

‘ “ ”

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 6(2)(a) of the Sixth Directive treats the following as a supply of services for ‘ consideration: the use of goods forming part of the assets of a business for the private use of the taxable person or of his staff or more generally for purposes other than those ’ of his business where the [VAT] on such goods is wholly or partly deductible.

‘

6Under Article 11A(1)(c) of the Sixth Directive, the taxable amount is to be: in respect of supplies referred to in Article 6(2), the full cost to the taxable person of providing the ’

services.

7According to Article 13B(b) of the Sixth Directive, the Member States are to exempt ‘ ’

the leasing or letting of immovable property , subject to certain exceptions which are not relevant in the present case.

8Article 17 of the Sixth Directive, as amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18) 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) [VAT] due or paid within the territory of the country 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 [VAT] is deductible, and for transactions in respect of which [VAT] 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.

…

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

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

…’

9Article 20 of the Sixth Directive, as amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18), provides:

‘ 1. The initial deduction shall be adjusted according to the procedures laid down by the Member States, in particular:

(a) where that deduction was higher or lower than that to which the taxable person was entitled;

(b) where after the return is made some change occurs in the factors used to determine … the amount to be deducted

2. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured. The annual adjustment shall be made only in respect of one-fifth of the tax imposed on the goods. The adjustment shall be made on the basis of the variations in the deduction entitlement in subsequent years in relation to that for the year in which the goods were acquired or manufactured.

By way of derogation from the preceding subparagraph, Member States may base the adjustment on a period of five full years starting from the time at which the goods are first used.

In the case of immovable property acquired as capital goods, the adjustment period may ’

be extended up to 20 years.

National legislation

10Paragraph 12(2)(1) and 12(2)(2)(a) of the 1994 Law on Turnover Tax (Umsatzsteuer-‘ ’

gesetz 1994, BGBl. 663/1994; the UStG 1994 ), in the version in force when the Republic of Austria acceded to the European Union, that is 1 January 1995, was worded as follows:

‘ 1. Supplies or other services connected with the acquisition, construction or maintenance of buildings shall be regarded as being carried out for business purposes in so far as the consideration given for them constitutes operating costs or business expenses under the rules governing income tax.

2. Supplies or services shall not be regarded as being carried out for business purposes:

(a) where the consideration does not consist principally of deductible expenses (costs) within the meaning of Paragraph 20(1), points (1) to (5), of the 1988 Law on Income Tax (Einkommensteuergesetz [1988], BGBl. 400/1988) or of Paragraphs 8(2) and 12(1), points (1) to (5) of the 1988 Law on Corporation Tax (Körperschaft-’

steuergesetz [1988], BGBl. 401/1988) .

11According to the order for reference, because Paragraph 20(1), points 1 to 5 of the 1988 Law on Income Tax excluded the deduction of living expenses, including those for accommodation, from taxable income, the effect of Paragraph 12(2)(1) and 12(2)(2)(a) of the UStG 1994 was that theVAT deduction was granted only in respect of the part of a building used for business purposes and not that used as a private residence.

12Pursuant to the Tax Amendment Law of 1997 (Abgabenänderungsgesetz 1997, BGBl. I, ‘ ’

9/1998; the AbgÄG 1997 ), first, Paragraph 12(2)(1) of the UStG 1994 was amended so that mixed-use buildings could be treated as forming, in their entirety, part of the assets of the business. Secondly, it was laid down in Paragraph 6(1)(16), in conjunction with Paragraph 6(2) and Paragraph 12(3), of the UStG 1994 that the use of parts of the ‘ ’

building as a private residence was to constitute an exempt transaction within the meaning of Article 13B(b) of the Sixth Directive, thus excluding deductions.

13According to the order for reference, by means of those amendments, the Austrian legislature wished to retain the exclusion of the VAT deductions for the parts of buildings used as a private residence, while recognising the possibility, deriving from Case C-269/00 Seeling [2003] ECR I-4101, of treating a mixed-use building as forming, in its entirety, part of the assets of the business.

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

14Over the period from November 2002 to June 2004, Ms Puffer built a single-family house with a swimming pool. From 2003, she used the house as a private residence, with the exception of one part, covering approximately 11% of the building, which she let for business purposes.

15Ms Puffer treated the building as forming, in its entirety, part of her business and claimed the deduction of the full amount of input taxes charged on the construction of the building.

16Pursuant to amended VAT assessment notices for the years 2002 and 2003, the Finanzamt (Tax Office), first, refused to take into account for deduction purposes the taxes paid on construction of the swimming pool. Second, in relation to the other building costs, it allowed a deduction of the input tax paid only to the extent of the use of the building for business purposes, that is, 11%.

17Ms Puffer lodged an objection to those notices which was rejected by the Unabhängiger Finanzsenat on the ground, in particular, that when the Sixth Directive entered into force in Austria, the national legislation excluded the right to deduct input VAT payable in respect of the building costs of the parts of buildings used for private residential purposes and that the national legislature had not waived the option, provided for in Article 17(6) of the Sixth Directive, to retain that exclusion.

18Ms Puffer then appealed against that decision to the Verwaltungsgerichtshof (Administrative Court). She claims, first, that the treatment of an asset as forming, in its entirety, part of the assets of the business confers a right, pursuant to the case-law of the Court, to the full deduction of VAT and, second, that the conditions set out in Article 17(6) of the Sixth Directive, allowing the Member States to retain an exclusion of the deductions existing when the Sixth Directive came into force, are not satisfied in the present case.

19Having found that, contrary to Article 17(2) of the Sixth Directive, the Austrian legislation does not allow the full and immediate deduction of VAT on the building costs of a mixed-use building treated as forming, in its entirety, part of the assets of a business, the national court questions whether that provision is compatible with the general principle of equal treatment under Community law.

20In that regard, the national court points out that the full and immediate deduction of VAT on the building costs of such a mixed-use building and the subsequent imposition of VAT on the expenses pertaining to the part of the building used as a private residence, spread over 10 years, have the effect of granting the taxable person, in respect of that ‘ ’

period, an interest-free loan not available to a non-taxable person.

21Consequently, it asks whether the resulting financial advantage, quantified by it at 5% of the net costs of construction of the part of the building used for private purposes, gives rise to the unequal treatment of taxable and non-taxable persons and, within the category of taxable persons, between those who construct a building for purely private purposes and those who construct it, in part, for their business.

22In addition, the national court asks whether that financial advantage, which is offered to taxable persons carrying out taxable transactions and not to those carrying out only exempt transactions, can constitute a State aid under Article 87 EC in so far as it results from a national measure transposing the Sixth Directive and those two categories of taxable persons are in competition with each other.

23Finally, the national court raises the question whether, notwithstanding the amendments made by the AbgÄG 1997, the national legislation excluding the deduction of input VAT is covered, as the Austrian tax administration claims, by Article 17(6) of the Sixth Directive.

24In those circumstances, the Verwaltungsgerichtshof decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:

‘ 1. Does [the Sixth Directive], in particular Article 17 thereof, infringe fundamental rights under Community law (the Community-law principle of equal treatment) because it has the effect of enabling taxable persons to acquire ownership of residential properties for their own private residential purposes (consumption) for approximately 5% less than other EU citizens, with the final value of that advantage rising indefinitely in line with the level of acquisition and construction costs of the residential property in question? Does such an infringement arise also as a result of the fact that taxable persons can acquire ownership of residential properties used for their own private residential purposes where such properties are used, even minimally, in connection with their business for approximately 5% less than other taxable persons who do not use their private dwellings, even minimally, in connection with their business?

2. Does national legislation transposing the Sixth Directive, in particular Article 17 thereof, infringe Article 87 EC because, while the legislation does allow taxable persons who carry out taxable transactions the advantage referred to in Question 1 in respect of properties which they use for private residential purposes, that advantage is not available to taxable persons whose transactions are exempt?

3. Does Article 17(6) of the Sixth Directive continue to have effect if the national legislature amends a national provision for the exclusion from the right to deduct (in this case, Paragraph 12(2)(1) of the UStG 1994), which is based on Article 17(6) of the Sixth Directive, with the express intention of retaining that exclusion from the right to deduct, and the national law would indeed result in the retention of an exclusion from the right to deduct, but owing to an error in the interpretation of Community law (in the present case Article 13B(b) of the Sixth Directive) which was only subsequently identified the national legislature introduced a provision which, viewed in isolation, would, under Community law (according to the interpretation given of Article 13B(b) of the Sixth Directive in Seeling) allow a deduction to be made?

4. If the answer to Question 3 is in the negative, could the effect of an exclusion from the right to deduct (Paragraph 12(2)(2)(a) of the UStG 1994) which is based on the “ ”

standstill clause laid down in Article 17(6) of the Sixth Directive be restricted if the national legislature amends one of two overlapping national provisions excluding deductions (Paragraph 12(2)(2)(a) of the UStG 1994 and Paragraph 12(2)(1) of the UStG 1994) and subsequently does not proceed further because it ’

finds that it has erred in law?

The questions referred for a preliminary ruling

The first question, concerning the compatibility of Article 17(2)(a) of the Sixth Directive with the general principle of equal treatment under Community law

25By its first question, the referring court asks, essentially, whether Articles 17(2)(a) and 6(2)(a) of the Sixth Directive infringe the general principle of equal treatment under Community law by conferring on taxable persons, by means of a full and immediate right to deduct input VAT payable on the construction of a mixed-use building and the subsequent staggered imposition of that tax on the private use of the building, a financial advantage compared to non-taxable persons and to taxable persons who use their building only as a private residence.

Observations submitted to the Court

26Ms Puffer claims that a trader may choose to treat mixed-use goods as forming, in their entirety, part of the assets of the business in order to maintain the possibility of deducting input VAT when the business use of those goods subsequently becomes more significant.

27According to her, where the asset is initially allocated, even in part, to private use and is thereafter reallocated to business use, the Sixth Directive clearly no longer allows the deduction of the input tax. The immediate and full deduction of VAT and the subsequent staggered imposition of VAT on the private use of the goods follow from the scheme of the Sixth Directive and the Court has borne the implications of that scheme in mind in its case-law. Therefore, there is no reason to doubt the compatibility of that system with the general principle of equal treatment under Community law.

28The Unabhängiger Finanzsenat points out that Article 17(2)(a) of the Sixth Directive allows the deduction of input VAT only in so far as the goods and services are used for ’

the purposes of the trader s taxable transactions. It follows that the Sixth Directive does not confer a right to deduct in respect of the proportion of private use of the goods.

29According to it, in accordance with the clear wording of Article 17(2)(a) of the Sixth Directive, the extent of the deduction permitted on the basis of the use of the goods for taxable transactions must first of all be established. Only thereafter is it necessary to verify whether private use of a part of goods initially allocated for use in taxable transactions must be treated as a supply of services for consideration under Article 6(2)(a) of the Sixth Directive.

30Consequently, according to the Unabhängiger Finanzsenat, neither the treatment of an asset as part of the assets of the business nor the status of trader can alone establish a right to deduct input VAT payable. Those are only two conditions among others which have to be met.

31In particular, if those two conditions were sufficient, that would create circular reasoning and systemic inconsistencies. In that regard, the Unabhängiger Finanzsenat points out that traders who carry out only exempt transactions and who, therefore, may not deduct, as a rule, any input tax, could nevertheless claim deductions for goods subject to mixed use to the extent of their use for private purposes.

32The Unabhängiger Finanzsenat also observes that traders carrying out partly exempt transactions and partly taxable transactions may deduct VAT from their taxable transactions only on a proportionate basis, in accordance with Article 17(5) of the Sixth Directive. That proportion may differ considerably from the relative proportions of private and business use.

33The Austrian Government concurred, at the hearing, with the interpretation of Article 17(2)(a) of the Sixth Directive supported by the Unabhängiger Finanzsenat. That government takes the view that the wording of that provision authorises deductions only in respect of the part of a building intended for use in taxable transactions and not in respect of the part intended for private use. In short, it is not necessary, according to that government, to answer the first question, since, applying that interpretation, no problem of unequal treatment would arise.

34The Commission states that the possibility for the taxable person to treat mixed-use goods, in their entirety, as forming part of the assets of the business, is based on the principle of fiscal neutrality which serves to guarantee the free and unhindered exercise of economic activities. The corresponding obligation, on the taxable person, to pay VAT on the expenses incurred in private use of the goods, treated as a service provided for consideration, aims precisely to ensure the equal treatment of taxable persons and non-taxable persons.

35The slight financial advantage which taxable persons may retain under that system, first, is the result of their economic activity and their legal status which means that they collect and pay VAT to the tax authorities and, second, is the corollary of the fact that the business use of a mixed-use asset may increase in time. Thus, the existence of that advantage cannot permit the inference that there has been an infringement of the general principle of equal treatment under Community law.

36It is only where any business use is ruled out at the outset, be it for objective reasons or because the taxable person himself has excluded such use, that allocation to business assets and the related deduction of input VAT are excluded.

37In addition, the Commission considers that the principle of equal treatment is not infringed by the fact that a taxable person who has not elected to treat goods as forming part of the assets of his business cannot deduct input VAT payable, since the taxable person had that opportunity and did not use it. As the taxable person did not exercise that option, he cannot claim to have suffered unequal treatment.

38Finally, the difference in treatment of taxable persons carrying out taxable transactions and those carrying out exempt transactions results, according to the Commission, in short, from the principle of neutrality with allows VAT to be deducted only in respect of taxable transactions.

Answer of the Court

39First, it must be pointed out that it is settled case-law that, where capital goods are used both for business and for private purposes the taxpayer has the choice, for the purposes of VAT, of (i) allocating those goods wholly to the assets of his business, (ii) retaining them wholly within his private assets, thereby excluding them entirely from the system of VAT, or (iii) integrating them into his business only to the extent to which they are actually used for business purposes (Case C-434/03 Charles and Charles-Tijmens [2005] ECR I-7037, paragraph 23 and case-law cited, and Case C-72/05 Wollny [2006] ECR I-8297, paragraph 21).

40Should the taxable person choose to treat capital goods used for both business and private purposes as business goods, the input VAT due on the acquisition of those goods is, in principle, immediately deductible in full (Charles and Charles-Tijmens, paragraph 24, and Wollny, paragraph 22).

41However, it follows from Article 6(2)(a) of the Sixth Directive that when the input VAT paid on goods forming part of the assets of a business is wholly or partly deductible, their use for the private purposes of the taxable person or of his staff or for purposes other than those of his business is treated as a supply of services for consideration. That ‘ ’

use, which is therefore a taxable transaction within the meaning of Article 17(2) of that directive is, under Article 11A(1)(c) thereof, taxed on the basis of the cost of providing the services (Charles and Charles-Tijmens, paragraph 25, and Wollny, paragraph 23).

42Consequently, where a taxable person chooses to treat an entire building as forming part of the assets of his business and uses part of that building for private purposes he is both entitled to deduct the input VAT paid on all construction costs relating to that building and subject to the corresponding obligation to pay VAT on the amount of expenditure incurred to effect such use (Wollny, paragraph 24).

43By contrast, if the taxable person chooses, when acquiring capital goods, to allocate those goods entirely to his private assets or to allocate only part of them to his business activities, no right to deduct can arise in relation to the part allocated to his private assets (see, to that effect, Case C-97/90 Lennartz [1991] ECR I-3795, paragraphs 8 and 9, and Case C-25/03 HE [2005] ECR I-3123, paragraph 43).

44Equally, on that hypothesis, subsequent use for business purposes of the part of the goods allocated to private assets is not capable of giving rise to a right to deduct, because Article 17(1) of the Sixth Directive lays down that the right to deduct is to arise at the time when the deductible tax becomes chargeable. There is no adjustment mechanism to that effect under Community legislation as it stands, as the Advocate General states in point 50 of her Opinion.

45In the case of capital goods the mixed use of which varies over time, the interpretation of Article 17(1) and (2) of the Sixth Directive supported by the Unabhängiger Finanzsenat and the Austrian Government could lead to the taxable person being denied deduction of VAT input tax payable for subsequent taxable business uses, despite the taxable ’

persons initial wish to treat the goods in question, in their entirety, as forming part of the assets of the business, with future transactions in mind.

46In such a situation, the taxable person is not relieved entirely of the burden of the tax relating to the item which he uses for the purposes of his economic activity and the taxation of his business activities would lead to double taxation contrary to the principle of fiscal neutrality inherent in the common system of VAT, of which the Sixth Directive forms part (see, to that effect, Case C-415/98 Bakcsi [2001] ECR I-1831, paragraph 46, and HE, paragraph 71).

47In addition, even supposing that, after actual use for business purposes of the part of the building initially used for private purposes, a refund of the input tax due on the building costs was provided for, a financial charge would encumber the property during the period, which may sometimes be considerable, between the initial investment expenditure and the commencement of actual business use. The principle of the neutrality of VAT with regard to the taxation of the business requires that the investment expenditure incurred for the needs and objectives of a business be regarded as economic activities giving rise to an immediate deduction of input VAT due. The deduction system is meant to relieve the taxable person entirely of the burden of the VAT payable or paid in the course of all his taxable economic activities (see, to that effect, Case 268/83 Rompelman [1985] ECR 655, paragraphs 19 and 23).

48Finally, contrary to what is contended by the Unabhängiger Finanzsenat and the Austrian Government, the interpretation of Article 17(2) of the Sixth Directive deriving from the case-law does not give rise either to circular reasoning, as pointed out by the Advocate General in point 46 of her Opinion, nor to systemic inconsistencies.

49Taxable persons who carry out only exempt transactions cannot deduct, under that provision, any input tax and also, therefore, cannot claim deductions concerning the use for private purposes of mixed-use goods.

50Equally, with regard to taxable persons carrying out both exempt transactions and taxable transactions, there is no conflict between the proportions of private and business use and the proportionate deduction provided for in Article 17(5) of the Sixth Directive.

51It follows from the scheme of Article 17 of that directive that if the taxable person chooses, when acquiring capital goods, to treat them, in their entirety, as forming part of the assets of his business, the immediate deduction of input VAT payable is permitted in relation to the part of the VAT which is proportionate to the amount relating to his taxable transactions. In so far as that proportion may subsequently vary over time, Article 20 of the Sixth Directive provides for an adjustment mechanism. However, if the application of Articles 17 and 20 of that directive results in the right to a partial deduction of VAT, the taxable person, like any person carrying out only taxable transactions, cannot avoid the staggered imposition of VAT on his private use of those goods.

52Second, it should be borne in mind that, according to settled case-law, infringement of the general principle of equal treatment under Community law can arise through the application of different rules to comparable situations or the application of the same rule to different situations (see Case C-390/96 Lease Plan [1998] ECR I-2553, paragraph 34, and Case C-156/98 Germany v Commission [2000] ECR I-6857, paragraph 84).

53It should also be borne in mind that the principle of fiscal neutrality is the reflection, in matters relating to VAT, of the principle of equal treatment (Case C-106/05 L.u.P. [2006] ECR I-5123, paragraph 48 and case-law cited, and Case C-309/06 Marks & Spencer [2008] ECR I-2283, paragraph 49).

54Moreover, the Court has already held that, by treating the private use of goods treated by the taxable person as forming part of the assets of his business as a supply of services for consideration, Article 6(2)(a) of the Sixth Directive aims, first, to ensure equal treatment as between a taxable person, who was able to deduct the VAT on the acquisition or construction of those goods, and a final consumer, by preventing the former from enjoying an advantage to which he is not entitled by comparison with the latter who buys the goods and pays VAT on them, and, second, to ensure fiscal neutrality by ensuring a correspondence between deduction of input VATand charging of output VAT (see, to that effect, Wollny, paragraphs 30 to 33).

55However, with regard to the private use of mixed-use capital goods, it is possible, as the national court has pointed out, that that provision does not ensure, on its own, the same treatment of taxable persons and non-taxable persons or of other taxable persons who acquire goods of the same kind on a private basis and are, as a result of that fact, bound to pay immediately and in full the VAT imposed. It cannot be ruled out that the objective stated in paragraph 47 of this judgment of relieving the taxable person entirely, by the mechanism laid down in Article 17(1) and (2) and Article 6(2)(a) of the Sixth Directive, of the burden of VAT payable or paid in the course of all their economic activities, including any financial charge encumbering the property during the period between the initial investment expenditure and the commencement of actual business use, can give rise to a financial advantage with regard to the private use of those goods by those taxable persons (see, by analogy, Wollny, paragraph 38).

56Thus, the possible difference of treatment of taxable and non-taxable persons results from the application of the principle of fiscal neutrality, the primary purpose of which is to ensure the equal treatment of taxable persons. That potential difference results, also, from the pursuit by those persons of their economic activities as defined in Article 4(2) of the Sixth Directive. Finally, it is linked to the specific status of taxable persons provided for in the Sixth Directive, which results inter alia in the fact that, in accordance with Article 21 of that directive, they are liable to VAT and must collect it.

57Since those characteristics distinguish the position of taxable persons from that of nontaxable persons who do not exercise such economic activities, a possible difference in treatment results from the application of different rules to different situations, thus not giving rise to any infringement of the right to equal treatment.

58The same applies to a taxable person who has allocated the capital goods, in their entirety, to his private assets, since he does not intend to use those goods to pursue his economic activities, but to use them for private purposes.

59Nor can a different view be reached as regards a taxable person who carries out only exempt operations, since such a taxable person is subject to the same VAT burden as a non-taxable person and his status thus largely similar to the latter.

60Finally, with regard to taxable persons carrying out both exempt and taxable transactions, the conclusions reached in paragraph 50 of the present judgment show that they are treated, in respect of each category of their economic activities and in relation to the private use of their mixed-use goods, in exactly the same way as persons who exclusively pursue activities connected with one of those categories of activities or use.

61It follows from the above that Article 17(2)(a) and Article 6(2)(a) of the Sixth Directive do not infringe the general principle of equal treatment under Community law.

62In the light of the foregoing, the answer to the first question is that Article 17(2)(a) and Article 6(2)(a) of the Sixth Directive do not infringe the general principle of equal treatment under Community law by conferring on taxable persons, by means of a full and immediate right to deduct input VAT on the construction of a mixed-use building and the subsequent staggered imposition of that tax on the private use of the building, a financial advantage compared with non-taxable persons and with taxable persons who use their building only as a private residence.

The second question, concerning the classification as State aid of a financial advantage resulting from national measures transposing Article 17(2)(a) of the Sixth Directive

63By its second question, the national court asks, essentially, whether Article 87 EC precludes a national measure transposing Article 17(2)(a) of the Sixth Directive and which provides that the right to deduct input VAT payable is confined to taxable persons carrying out taxable transactions, to the exclusion of those carrying out only exempt transactions, in so far as that national measure may confer a financial advantage, such as that noted in the context of the first question, only on taxable persons carrying out taxable transactions.

Observations submitted to the Court

64Ms Puffer considers that taxable persons carrying out only taxable transactions, those carrying out both exempt transactions and taxable transactions and those carrying out only exempt transactions are, in reality, in the same situation. They may all opt for their mixed-use goods to be treated, in their entirety, as forming part of the assets of the business and for the subsequent staggered payment of VAT for the private use of the goods. Therefore, according to her, there is no infringement of Article 87 EC.

65The Unabhängiger Finanzsenat submits that, since the Sixth Directive does not confer a right to deduct the input VAT payable on mixed-use goods to the extent that it is used for private purposes, there has been no infringement of Article 87 EC.

‘ ’

66The Commission observes that classification as State aid within the meaning of Article 87(1) EC requires that there be inter alia State intervention which favours certain undertakings over others. In the present case, those two conditions are not met, since the right to deduct input VAT payable derives directly from the Sixth Directive and the advantage granted to the beneficiaries of that deduction results from the general scheme of the VAT system.

Answer of the Court

‘

67Under Article 87(1) EC, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade ’

between Member States, be incompatible with the common market .

‘ ’

68According to settled case-law, classification as State aid for the purposes of Article 87(1) of the Treaty requires that all the conditions set out in that provision are fulfilled. Thus, first there must be intervention by the State or through State resources; second, the intervention must be liable to affect trade between the Member States; third, it must confer an advantage on the recipient; and fourth, it must distort or threaten to distort competition (Joined Cases C-341/06 P and C-342/06 P Chronopost and La Poste v Ufex and Others [2008] ECR I-4777, paragraphs 121 and 122, and case-law cited).

69The right to deduct VAT input tax payable, and the possible related financial advantage for taxable persons carrying out taxable transactions, derives directly from Article 17(2)(a) of the Sixth Directive, which the Member States are bound to transpose in their national law.

70As pointed out by the Advocate General in point 70 of her Opinion, the restriction of the right to deduct input VAT payable to only taxable transactions is an integral part of the VAT system set up by Community legislation which must be implemented in the same way by all Member States. Consequently, the condition of intervention by the State is not met, meaning that Article 87(1) EC cannot apply.

71In those circumstances, and without it being necessary to examine the other three conditions, the answer to the second question is that Article 87(1) EC must be interpreted as not precluding a national measure transposing Article 17(2)(a) of the Sixth Directive and which provides that the right to deduct input VAT payable is confined to taxable persons carrying out taxable transactions, to the exclusion of those carrying out only exempt transactions, in so far as that national measure may confer a financial advantage only on taxable persons carrying out taxable transactions.

The third and fourth questions, concerning the conditions for the application of Article 17(6) of the Sixth Directive

72By its third and fourth questions, which should be examined together, the national court asks, essentially, whether the derogation provided for under Article 17(6) of the Sixth Directive applies where the national legislature amends one of the two national overlapping provisions excluding deductions of VAT input tax payable, by legislation which, according to the express intention of the national legislature, was intended to retain that exclusion in force, but which, viewed in isolation, would allow deductions, owing to an error in the interpretation of Community law made by the national legislature.

Observations submitted to the Court

73Ms Puffer considers that, since the former provisions concerned the exclusion of deductions, whereas the new provisions concern the allocation or non-allocation of goods to a business, the AbgÄG 1997 introduced a completely different legislative approach from the previous one, in form, functioning and effects. Therefore, the conditions of Article 17(6) of the Sixth Directive are not fulfilled.

74In that regard, the fact that Paragraph 12(2)(2)(a) of the UStG 1994 was not formally amended by the AbgÄG 1997 is irrelevant, since the interpretation recommended by the referring court differs substantially from the meaning previously given to that provision.

75The Unabhängiger Finanzsenat considers that, since the Sixth Directive does not confer a right to deduct input VAT payable on mixed-use goods in respect of the proportion of private use, Austrian law does not further restrict the right to deduct VAT input tax payable, meaning that Article 17(6) of the Sixth Directive is not relevant in the present case.

76The Austrian Government contended at the hearing that the derogation provided for under Article 17(6) of the Sixth Directive applies both to Paragraph 12(2)(1) and to Paragraph 12( 2)(2)(a) of the UStG 1994.

77First of all, it maintains that those two provisions each independently provide for the exclusion of deductions of VAT input tax payable in respect of the parts of buildings intended for private use.

78Second, the Austrian Government points out that no amendment has been made to Paragraph 12(2)(2)(a) of the UStG 1994 since the entry into force of the Sixth Directive.

79Finally, it is of the view that the amendments made by the AbgÄG 1997 to Paragraph 12(2)(1) of the UStG 1994 have no effect on the applicability of Article 17(6) of the Sixth Directive, because the national legislature intended to retain the pre-existing situation where deductions of the VAT input tax payable were excluded in respect of the parts of buildings intended for private residential use.

80The Commission maintains that the amendments introduced by the AbgÄG 1997 do not extend or restrict the exclusion of the deduction of VAT contained in the earlier legislation, but lead to the same result, that is the exclusion of the deduction of VAT in relation to the construction of mixed-use buildings to the extent that they are used for private purposes.

81However, the old and new legislative approaches which enable the same result to be achieved differ. Since the basis of the new approach is different from that of the old one, ‘ ’

it cannot be maintained that existing legislation within the meaning of Article 17(6) of the Sixth Directive has been retained. In that regard, the possibility of an error by the national legislature regarding the compatibility of the new approach with the Sixth Directive is of no relevance.

Answer of the Court

82It must be borne in mind that Article 17(2) of the Sixth Directive lays down in express and clear terms the principle of deduction of amounts charged as VAT for goods delivered or services provided to a taxable person, in so far as the goods or services are used for the purposes of his taxable transactions.

83The principle of the right to deduct VAT is none the less subject to the derogation set out in Article 17(6) of the Sixth Directive, and in particular the second subparagraph. In that regard, since none of the proposals made by the Commission to the Council under the first paragraph of Article 17(6) have been adopted by the latter, it remains open to the Member States to retain their existing legislation as at the date of entry into force of the Sixth Directive in regard to exclusion from the right of deduction (Case C-345/99 Commission v France [2002] ECR I-4493, paragraph 19, and Case C-409/99 Metropol and Stadler [2002] ECR I-81, paragraph 44).

84While it is, in principle, for the national court to determine the content of the legislation which existed on a date laid down by a Community measure, the Court can provide guidance on interpreting the Community concept which constitutes the basis of a derogation from Community rules for national legislation existing on a particular date (C-157/05 Holböck [2007] ECR I-4051, paragraph 40).

85In that context, the Court has held that any national measure adopted after a date thus fixed is not, by that fact alone, automatically excluded from the derogation laid down in the Community measure in question (Holböck, paragraph 41). Where, after the entry into force of the Sixth Directive, the legislation of a Member State is amended so as to reduce the scope of existing exemptions and thereby brings itself into line with the objective of the Sixth Directive, that legislation must be considered to be covered by the derogation in the second subparagraph of Article 17(6) of the Sixth Directive and is not in breach of Article 17(2) of that directive (see Commission v France, paragraph 22, and Metropol and Stadler, paragraph 45).

86On the other hand, national legislation does not constitute a derogation permitted by the second subparagraph of Article 17(6) of the Sixth Directive, and infringes Article 17(2) of the directive, if its effect is to increase, after the entry into force of the Sixth Directive, the extent of existing exclusions, thus diverging from the objective of that directive (Case C-40/00 Commission v France [2001] ECR I-4539, paragraph 17, and Metropol and Stadler, paragraph 46).

87Consequently, it must be held that a provision which is, in substance, identical to the previous legislation, or limited to reducing or eliminating an obstacle to the exercise of Community rights and freedoms in the earlier legislation, will be covered by the derogation provided for in Article 17(6) of the Sixth Directive. By contrast, legislation based on an approach which differs from that of the previous law and establishes new procedures cannot be treated as legislation existing at the date fixed in the Community measure in question (see, to that effect, Case C-155/01 Cookies World [2003] ECR I-8785, paragraph 63, and, by analogy, Holböck, paragraph 41).

88The Sixth Directive entered into force for the Republic of Austria on the date of accession of that State to the European Union, that is 1 January 1995. It is therefore that date which is relevant for the purposes of the application of the second subparagraph of Article 17(6) of that directive to that Member State.

89The referring court has explained that, on the date of entry into force of the Sixth Directive for the Republic of Austria, the effect of Paragraph 12(2)(1) and 12(2)(2)(a) of the UStG 1994 was that the deduction of VAT was granted only in respect of the part of a building used for business purposes and not in respect of that used as a private residence.

90In particular, according to that court, under Paragraph 12(2)(1) of the UStG 1994, when that legislation entered into force, services connected with the construction of the buildings were considered as being carried out for business purposes only in so far as the consideration given for them constituted operating costs or business expenses.

91Consequently, it appears that, when the Sixth Directive entered into force, Austrian law restricted, in essence, the possibility of allocating a mixed-use building to the assets of the business to those parts of the building used for business purposes alone.

92The national court has also stated that the AbgÄG 1997, first, amended Paragraph 12 ( 2)(1) of the UStG 1994 so that mixed-use buildings can be treated in their entirety as forming part of the assets of the business and, second, laid down in Paragraph 6(1)(16), in conjunction with Paragraphs 6(2) and 12(3), of the UStG 1994 that the use of parts of ‘ ’ the building for private residential purposes constitutes an exempt transaction within the meaning of the first subparagraph of Article 13B(b) of the Sixth Directive, excluding deductions.

93Therefore, it must be held that, even if it cannot be ruled out that they achieve results which, in essence, are identical, the approach of the old and new legislation differs and that they have laid down different procedures, meaning that the new legislation cannot be treated as if it was legislation existing when the Sixth Directive entered into force.

94In that regard, it is irrelevant, as stated by the Advocate General in point 77 of her Opinion, whether the national legislature amended the previous national legislation on the basis of a correct or incorrect interpretation of Community law.

95Finally, with regard to the question whether the amendment of Paragraph 12(2)(1) of the UStG 1994 by the AbgÄG 1997 also affects the applicability of the second subparagraph of Article 17(6) of the Sixth Directive to Paragraph 12(2)(2)(a) of the UStG 1994, which has not been subject to legislative amendment, it must be held that the answer depends on whether those provisions of national law are interdependent or autonomous.

96If Paragraph 12(2)(2)(a) of the UStG 1994 cannot be applied independently from Paragraph 12(2)(1) of that law, the effect would be that if Paragraph 12(2)(1) were to be incompatible, that incompatibility would consequently also affect Paragraph 12(2)(2)(a). If the provision concerned can, however, be applied autonomously, existed when the Sixth Directive entered into force and was not subsequently amended, then the derogation contained in the second subparagraph of Article 17(6) of the Sixth Directive applies to that provision.

97It is for the national court to determine the scope of the national provisions in question.

98In the light of the foregoing, the answer to the third and fourth questions is that Article 17(6) of the Sixth Directive must be interpreted as meaning that the derogation it contains does not apply to a provision of national law which amends legislation existing when that directive entered into force, which is based on an approach which differs from that of the previous legislation and which laid down new procedures. In that regard, it is irrelevant whether the national legislature amended the previous national legislation on the basis of a correct or incorrect interpretation of Community law. The question whether such an amendment of a provision of national law also affects, with regard to the applicability of the second subparagraph of Article 17(6) of the Sixth Directive, another provision of national law depends on whether those provisions of national law are interdependent or autonomous, which is a matter for the national court to determine.

Costs

99Since 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:

1. Article 17(2)(a) and Article 6(2)(a) 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 do not infringe the general principle of equal treatment under Community law by conferring on taxable persons, by means of a full and immediate right to deduct input value added tax on the construction of a mixed-use building and the subsequent staggered imposition of that tax on the private use of the building, a financial advantage compared to non-taxable persons and to taxable persons who use their property only as a private residence.

2. Article 87(1) EC must be interpreted as not precluding a national measure which transposes Article 17(2)(a) of Sixth Directive 77/388 and which provides that the right to deduct input value added tax payable is confined to taxable persons carrying out taxable transactions, to the exclusion of those carrying out only exempt transactions, in so far as that national measure may confer a financial advantage only on taxable persons carrying out taxable transactions.

3. Article 17(6) of Sixth Directive 77/388 must be interpreted as meaning that the derogation it contains does not apply to a provision of national law which amends legislation existing when that directive entered into force, which is based on an approach which differs from that of the previous legislation and which laid down new procedures. In that regard, it is irrelevant whether the national legislature amended the previous national legislation on the basis of a correct or incorrect interpretation of Community law. The question whether such an amendment of a provision of national law also affects, with regard to the applicability of the second subparagraph of Article 17(6) of the Sixth Directive, another provision of national law depends on whether those provisions of national law are interdependent or autonomous, which is a matter for the national court to determine.

[Signatures]

Opinion of the Advocate-General

1In accordance with Community VAT legislation as interpreted by the Court, a person who builds a house for use in part for the purposes of a taxable business and in part for private purposes is entitled to assign the whole house to his business, thus obtaining an immediate right to deduct full input VAT on the building costs. He must then treat his private use of part of the house as a supply for consideration, subject to output VAT. Even so, that arrangement may give him a financial advantage over a person building a similar house for which no taxable business use is envisaged and for which, therefore, no right to deduct input tax arises.

2In this reference for a preliminary ruling, the Austrian Verwaltungsgerichtshof (Higher Administrative Court) queries whether that advantage is compatible with the principle of equal treatment or the Community rules on State aid. It also raises questions as to the validity of a national exclusion from the right to deduct predating the entry into force of the Community VAT legislation but subsequently amended on the basis of a mistaken understanding of the Court’s case-law.

Relevant Community law

The basic provisions

3The case before the national court concerns a house built between 2002 and 2004, so that the relevant Community legislation is the Sixth VAT Directive. (2)

4Under Article 2(1) of that directive, (3) any ‘supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such’ is subject to VAT. Pursuant to Article 11A(1)(a), (4) the taxable amount is, as a general rule, essentially the whole amount of the consideration received.

5However, pursuant to Article 17(2), (5) a taxable person is entitled to deduct from the tax which he is liable to pay (‘output tax’) any VAT due or paid in respect of goods or services supplied or to be supplied to him by another taxable person (‘input tax’), in so far as those goods or services are used for the purposes of his taxable (output) transactions. Under Article 17(1), (6) the right to deduct input tax arises at the time when the deductible tax becomes chargeable (that is to say, essentially, when the inputs are acquired rather than when the outputs are supplied).

6Because the right to deduct arises only in respect of supplies used for the purpose of taxed transactions, there is no such right if they are used for the purpose of exempt transactions, that is to say those listed in particular in Article 13 of the Sixth Directive, (7) or for the purpose of transactions which fall entirely outside the scope of VAT, such as those which are not effected for consideration, or not carried out by a taxable person acting as such.

The problems of mixed use

7A number of provisions deal with aspects of the difficulties which could arise from the fact that, for whatever reason, taxed supplies of goods or services made to a taxable person may be used partly for taxed output transactions and partly for other purposes. Clearly, in such situations, it is important to maintain the distinction between taxed and other transactions and the correspondence between deductions of input tax and charging of output tax.

8Two types of mixed use are dealt with. On the one hand, there are situations in which a taxable person acquires supplies in the course of his business and uses them partly for business and partly for non-business purposes. On the other, there are those in which a business makes both outputs which are taxed and outputs which are not taxed.

9First, therefore, with regard to private use of business goods and comparable situations, Article 5(6) of the Sixth Directive (8) provides: ‘The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration.’

10Similarly, as regards services, Article 6(2) (9) provides:

‘The following shall be treated as supplies of services for consideration:

(a) the use of goods forming part of the assets of a business for the private use of the taxable person or of his staff or more generally for purposes other than those of his business where the value added tax on such goods is wholly or partly deductible;

(b) supplies of services carried out free of charge by the taxable person for his own private use or that of his staff or more generally for purposes other than those of his business.

Member States may derogate from the provisions of this paragraph provided that such derogation does not lead to distortion of competition.’

11Thus, subject to that possibility of a derogation in the case of Article 6(2), those two provisions mean that where a taxable person supplies goods or services to himself from his business but for his non-business use, having deducted the input tax on the supplies he acquired for that purpose, he must in effect charge himself VAT on the transaction.

12The taxable amount in such cases is determined according to Article 11(A)(1)(b) and (c), (10) in accordance with which it is to be:

‘…

(b) in respect of supplies referred to in Article 5(6) …, the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined [at] the time of supply;

(c) in respect of supplies referred to in Article 6(2), the full cost to the taxable person of providing the services;

…’

13Second, Article 17(5) of the Sixth Directive (11) deals with situations where goods or services are used by a taxable person both for transactions in respect of which VAT is deductible and for those in respect of which it is not. In such cases, according to the first subparagraph, ‘only such proportion of the value added tax shall be deductible as is attributable to the former transactions’.

14Under the second subparagraph, that proportion is in principle to be determined in accordance with Article 19 (12) – which defines it essentially as a fraction equivalent to turnover in VAT-deductible transactions divided by total turnover. (13)

15In addition, Article 20(1) and (2) of the Sixth Directive (14) provides for the amount of deductions of input tax to be adjusted where appropriate:

‘1. The initial deduction shall be adjusted according to the procedures laid down by the Member States, in particular:

(a) where that deduction was higher or lower than that to which the taxable person was entitled;

(b) where after the return is made some change occurs in the factors used to determine the amount to be deducted …

2. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured. The annual adjustment shall be made only in respect of one fifth of the tax imposed on the goods. The adjustment shall be made on the basis of the variations in the deduction entitlement in subsequent years in relation to that for the year in which the goods were acquired or manufactured.

By way of derogation from the preceding subparagraph, Member States may base the adjustment on a period of five full years starting from the time at which the goods are first used.

In the case of immovable property acquired as capital goods, the adjustment period may be extended up to 20 years.’

The Court’s case-law on mixed use of capital goods

16The Court has had several occasions to consider the interpretation of the above provisions of the Sixth Directive with regard to mixed use of capital goods, in particular buildings, most recently in Wollny . Other significant judgments are those in Lennartz , Armbrecht , Bakcsi , Seeling and Charles . (15)

17In Lennartz , the Court established the principle that a taxable person who uses goods for the purposes of an economic activity has a right, on the acquisition of those goods, to deduct input tax in accordance with Article 17 of the Sixth Directive, however small the proportion of business use. (16)

18In Seeling , the Court decided that private use by a taxable person of part of a building which is treated as forming, in its entirety, part of the assets of his business must be treated as a taxable supply of services (in accordance with Article 6(2) of the Sixth Directive) and cannot be regarded as a leasing or letting of property (which would have been exempt pursuant to Article 13B(b)). (17)

19In Charles , the Grand Chamber confirmed that case-law, in particular stating clearly that, where capital goods are used both for business and for private purposes the taxpayer has the choice, for the purposes of VAT, of (i) allocating those goods wholly to the assets of his business, (ii) retaining them wholly within his private assets, thereby excluding them entirely from the system of VAT, or (iii) integrating them into his business only to the extent to which they are actually used for business purposes. It held, in that context, that Articles 6(2) and 17(2) and (6) of the Sixth Directive preclude national legislation which does not allow a taxable person to allocate such goods wholly to his business and, where appropriate, to deduct immediately and in full the VAT due on their acquisition. (18)

20Finally, in Wollny , the Court accepted that, where a building forming part of the taxable person’s business assets is used in part for private purposes, the taxable amount for the deemed supply under Article 6(2) of the Sixth Directive may be calculated as, in effect, a percentage of the total cost of acquisition and construction of the building, representing the portion given over to private use, spread over the period for adjustment of the initial deduction under Article 20. Such a solution, it pointed out, serves the interests of equality between taxable persons and final consumers by avoiding certain cases of untaxed end use. (19)

21It may be noted, however, that the Commission has proposed to the Council the insertion of a new Article 168a in Directive 2 006/112, (20) to read as follows:

‘In the event of acquisition, construction, renovation or substantial transformation of immovable property, the initial exercise of the right of deduction arising when the tax becomes chargeable shall be limited to the proportion of the property’s effective use for transactions giving rise to a right of deduction.

By way of derogation from Article 26, [(21) ] the changes in the proportion of use of immovable property referred to in the first paragraph shall be taken into account under the conditions provided for in Articles 187, 188, 190 and 192 [(22) ] for adjusting the initial exercise of the right of deduction.

The changes referred to in the second paragraph shall be taken into account during the period defined by the Member States under Article 187(1) [(23) ] for immovable property acquired as capital goods.’

22The explanatory memorandum indicates that the proposed new provision aims to clarify the exercise of the right to deduct input VAT on the acquisition or construction of immovable property intended for both business and non-business purposes, or on economically comparable transactions concerning such property. Initial deduction would be limited to the actual use of the property for output transactions that give rise to a right of deduction. In cases of mixed use, full and immediate deduction would no longer be possible, but an adjustment system would take account of both increases and reductions in business use. That system would replace the tax on private use under Article 26 of Directive 2006/112 (equivalent to Article 6(2) of the Sixth Directive) during the adjustment period and would function in a manner similar, and apply in parallel, to the existing system for adjusting deductions when the percentage of taxed and exempted transactions varies.

‘Transitional’ provisions concerning exclusion from deductions

23Article 17(6) of the Sixth Directive (24) provides for the Council, acting unanimously on a proposal from the Commission, to decide what expenditure is not to be eligible for deduction of VAT, but specifies that the tax is never to be deductible on expenditure which is not strictly business expenditure, such as luxuries, amusements or entertainment.

24To cover the situation pending the Council’s decision, the second subparagraph of Article 17(6) provides: ‘Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive comes into force.’

25The rules in question have not in fact been adopted, so that the transitional provision remains applicable.

Relevant Austrian legislation

26The referring court explains that two overlapping provisions of the Umsatzsteuergesetz (Law on Turnover Tax) 1994 (‘the UStG’) preclude deduction of input VAT in relation to immovable property used for private purposes.

27On the one hand, Paragraph 12(2)(2)(a) precludes deductions of VAT in respect of expenditure incurred by the taxable person in respect of his private life, including, inter alia, expenditure on his own home. That provision has remained unchanged at all relevant times.

28On the other hand, Paragraph 12(2)(1) governs deductions in relation to immovable property. When the Sixth Directive entered into force in Austria on its accession to the Communities, (25) that provision disallowed any deduction of input tax in respect of a part of a building used by a taxable person for his private residential purposes. Following amendment in 1997, mixed-use buildings can be wholly treated as forming part of the assets of a business. However, pursuant to Paragraphs 6(1)(16), 6(2) and 12(3) of the UStG, read together, the use of parts of a building for private residential purposes is a VAT-exempt transaction (thus precluding deduction of input tax).

29The preparatory documents relating to the amendment expressly state that, as a result of the case-law of the Court of Justice, buildings used for a taxable person’s private residential purposes could benefit from a tax advantage, and that the exemption was intended to prevent such unwanted tax relief in respect of the private sphere.

30It appears that the tax authorities consider that the ruling in Seeling (that private use of immovable property forming part of business assets cannot be treated as exempt leasing or letting) does not affect the situation in Austria, because the exclusion from deduction is covered by the second subparagraph of Article 17(6) of the Sixth Directive.

31It may be mentioned that, since the material time in the present case, the national exemption for private residential use of premises assigned to business use, which precludes deduction of input tax, has been twice amended, (26) and the Council has authorised Austria, by way of derogation from Article 17(2) of the Sixth Directive, to exclude expenditure from the right to deduct VAT when over 90% of the goods and services are used for the private purposes of a taxable person, or of his employees, or, more generally, for non-business purposes. (27)

Facts, procedure and reference for a preliminary ruling

32Between November 2002 and June 2004, Ms Sandra Puffer had a house with swimming pool built, and informed the tax authority that she would be renting out part of it for office use, subject to VAT. Approximately 11% of the building was used for business purposes. Ms Puffer allocated the whole house to her business assets and, citing Seeling , claimed deduction of the full input VAT charged to her in connection with the construction of the building. The tax authority refused to allow any deduction in respect of the swimming pool. For the remainder it allowed deduction only to the extent of the 11% of the property being used for business purposes.

33Ms Puffer’s appeal has now reached the Verwaltungsgerichtshof.

34She argues, first, that, in accordance with the case-law of the Court of Justice, she is entitled to allocate the whole house to her business assets, with full deduction of input tax.

35The referring court points out that, according to Seeling , a taxable person can deduct input VAT in respect of parts of a building used for private purposes if the rest of the building is used for taxable purposes. If he builds a house for private use, he may thus deduct full input VAT if at least one room is used for his business. VAT is charged on private use under Article 6(2) of the Sixth Directive, but is spread over 10 years. Treatment thus differs depending on whether the person concerned is a taxable person or not. Both cases involve end use, but the Sixth Directive gives taxable persons an advantage amounting to some 5% of the cost of the house and around 25% of total input VAT, whereas no such advantage is available to other citizens in respect of identical end use. (28) The referring court therefore queries whether the provisions of the Sixth Directive are contrary to the Community principle of equal treatment. If such a provision had been adopted by the Austrian legislature, it would probably have contravened the principle of equal treatment in Article 7(1) of the Federal Constitution. Moreover, even as between taxable persons, the domestic legislation transposing the Sixth Directive differentiates between private residential properties of those whose turnover is taxed and of those (such as doctors) whose turnover is exempt, thus distorting competition, since a taxable person whose turnover is entirely exempt cannot deduct input tax on private home on account of the business use of a single room. That could be contrary to Article 87 EC, which prohibits State aid.

36Ms Puffer argues, second, that this is not a case in which Austria is entitled to retain an existing exclusion from deduction under Article 17(6) of the Sixth Directive.

37The referring court notes that Paragraph 12(2)(2)(a) of the UStG has remained unchanged since the Sixth Directive entered into force in Austria (and is thus in its view covered by the standstill clause in Article 17(6) of the Sixth Directive). Paragraph 12(2)(1) has been amended, but with the intention of retaining the same exclusion from deduction for parts of buildings in private use. Only subsequently did it emerge, from Seeling , that the private use of buildings cannot be treated as an exempt transaction. According to Holböck , (29) an amended provision may be covered by a standstill clause if it is identical in substance to earlier legislation. The amended version of Paragraph 12(2)(1) of the UStG, read in conjunction with Paragraph 6(1)(16), is identical in substance to the original version and is based on identical intentions on the part of the legislature. But if the amended version is not covered by the standstill clause, the question arises whether the amendment could also affect the validity of the overlapping rules in Paragraph 12(2)(2)(a).

38In that context, the Verwaltungsgerichtshof asks:

‘(1) Does [the Sixth Directive], in particular Article 17 thereof, infringe fundamental rights under Community law (the Community-law principle of equal treatment) because it has the effect of enabling taxable persons to acquire ownership of residential properties for their own private residential purposes (consumption) for approximately 5% less than other EU citizens, with the final value of that advantage rising indefinitely in line with the level of acquisition and construction costs of the residential property in question? Does such an infringement arise also as a result of the fact that taxable persons can acquire ownership of residential properties used for their own private residential purposes – where such properties are used, even minimally, in connection with their business – for approximately 5% less than other taxable persons who do not use their private dwellings, even minimally, in connection with their business?

(2) Does national legislation implementing the Sixth Directive, in particular Article 17 thereof, infringe Article 87 EC because, while the legislation does allow taxable persons who carry out taxable transactions the advantage referred to in Question 1 in respect of properties which they use for private residential purposes, that advantage is not available to taxable persons whose transactions are exempt?

(3) Does Article 17(6) of the Sixth Directive continue to have effect if the national legislature amends a national provision for the exclusion from the right to deduct (in this case, Paragraph 12(2)(1) of the [UStG]), which is based on Article 17(6) of the Sixth Directive, with the express intention of retaining that exclusion from the right to deduct, and national law would indeed result in the retention of an exclusion from the right to deduct, but – owing to an error in the interpretation of Community law (in this case Article 13B(b) of the Sixth Directive) which was only subsequently identified – the national legislature introduced a provision which, viewed in isolation, would, according to Community law (Article 13B(b) of the Sixth Directive as interpreted in [ Seeling ]), allow a deduction to be made?

(4) If the answer to Question 3 is in the negative, could the effect of an exclusion from the right to deduct (Paragraph 12(2)(2)(a) of the UStG 1994) which is based on the “standstill clause” (Article 17(6) of the Sixth Directive) be restricted if the national legislature amends one of two overlapping national provisions excluding deductions (Paragraph 12(2)(2)(a) of the [UStG] and Paragraph 12(2)(1) of the [UStG]) and subsequently does not proceed further because it finds that it has erred in law?’

Assessment

39Ms Puffer, the Unabhängiger Finanzsenat (respondent in the main appeal proceedings) and the Commission have submitted both written and oral observations to the Court. At the hearing, the Austrian Government supported the submissions of the Unabhängiger Finanzsenat.

40Quite apart from the answers which they propose to the questions, those parties differ significantly in their basic approach. Ms Puffer and the Commission accept that the Sixth Directive allows taxable persons to choose to allocate capital goods entirely to business assets, with full and immediate deduction of input tax. By contrast, the Unabhängiger Finanzsenat and the Austrian Government (‘the Austrian authorities’) submit that the Community legislation does not require such a choice to be available, but allows deduction only in respect of the proportion of the cost corresponding to business use.

41I shall therefore examine the Austrian authorities’ position before addressing the questions as raised.

The Austrian authorities’ position

42The Unabhängiger Finanzsenat claims that the wording of the Sixth Directive requires no elucidation, and does not bear the interpretation which the Court has given it.

43Under Article 17(2)(a), input tax is deductible in so far as the goods and services to which it relates are used for the purposes of taxable output transactions . Under Article 6(2)(a), private use of business assets is to be treated as a taxable output transaction where the input tax on the assets is deductible . (30) Consequently, it is necessary first to establish the proportions of business and private use, which will determine the proportion of deductible input tax. Private use will then be a taxable output only to the extent that it concerns goods falling within the proportion acquired for business use, in respect of which a right to deduct could be exercised. (31) Allocation to business assets cannot on its own give rise to a right to deduct, or the proviso ‘where the value added tax on such goods is wholly or partly deductible’ would be meaningless. The Austrian authorities reason, therefore, that capital goods may be allocated entirely to business assets as soon as they are acquired, giving rise to a right to deduct in respect of the proportion given over at that time to taxable business use (which may even be 0%), subject to adjustment of the initial deduction in accordance with Article 20 of the Sixth Directive, to reflect changes in the proportions of business and private use during the deduction period.

44On that basis, the Austrian authorities take issue with the Court’s statements (32) to the effect that a person who uses goods partly for business and partly for private purposes and who deducted all or part of the input VAT on acquisition is deemed to use the goods entirely for the purposes of his taxable transactions within the meaning of Article 17(2), and is therefore entitled to full and immediate deduction of input tax. They consider that the Court has introduced an unwarranted and circular interpretation of the legislation, inferring the right to deduct input tax from the subsequent taxable output in the form of private use.

45In addition, the Austrian authorities seek to refute a number of other arguments which, they consider, might be seen as supporting the right to full deduction in the case of mixed use. The comparative explanation of, on the one hand, Articles 5(6) and 6(2) and, on the other hand, Article 17(5) of the Sixth Directive given by Advocate General Jacobs in Charles (33) is inconsistent and devised simply to get round the difficulties which arise from full deduction. His conclusion in Seeling , (34) from the explanatory memorandum to the Commission’s proposal for the Sixth Directive, that the output tax charge under Article 6(2)(a) was specifically chosen as an alternative to a restriction on the right to deduct input tax, did not support deduction in full for all mixed use goods. And, in the event of mixed use of a building by a taxable person making only exempt outputs, the output tax on private use would vary from year to year depending on the turnover generated by those outputs (in accordance with the pro rata system of Article 17(5)) rather than on the proportion of private use, which would be an absurd result.

46I can understand the Austrian authorities’ reference to an apparent circularity of reasoning in paragraph 26 of Lennartz . There, the Court states that ‘a person who uses goods partly for the purposes of taxable business transactions and partly for private use and who, upon acquiring the goods, recovered all or part of the input VAT, is deemed to use the goods entirely for the purposes of his taxable transactions within the meaning of Article 17(2). Consequently, such a person is in principle entitled to a right of total and immediate deduction of the input tax paid on purchasing the goods.’ However, that wording has never been repeated by the Court. References to it have been paraphrased as ‘if the taxable person chooses to treat capital goods used both for business and private purposes as business goods, the VAT due as input tax on the acquisition of those goods is in principle wholly and immediately deductible’. (35) That, it seems to me, is all the Court has ever meant, despite a possibly unfortunate formulation in Lennartz .

47The main issue, however, is the basic difference in approach as between the Court’s established case-law and the alternative analysis put forward by the Austrian authorities, both of which seek to solve the problem of reconciling the right to full and immediate deduction of input tax on goods to be used for the purposes of taxable outputs with the inevitability that some goods will ultimately be used for purposes other than that originally intended.

48In that regard, I do not consider the provisions of the Sixth Directive to be so clear that the Court’s interpretation of them is superfluous. It seems disingenuous of the Austrian authorities to argue that, while at the same time putting forward their own proposed interpretation over several pages of closely-argued written observations. Had there been such clarity, it would have been enough to cite the provisions themselves.

49It seems to me that the difference in approach is based on a different understanding of the concept of allocating goods to business assets. Although Articles 5(6) and 6(2)(a) of the Sixth Directive both refer to goods forming part of business assets, the legislation in fact does not define the concept of allocation of goods to such assets. The notion has developed in the case-law, starting with Lennartz . To paraphrase that judgment, allocation occurs when a taxable person acting as such (thus, not in a private capacity) acquires goods for the purposes of his economic activity (which may of course comprise both taxable and exempt transactions).

50For the Court, such allocation (provided that it can be established as genuine in the light of all the circumstances, but regardless of the actual proportion of business use (36) ) determines the right to deduct – and requires subsequent private use to be taxed. The capacity in which a person acts when acquiring goods and the purpose for which they are acquired determine whether those goods are placed within the sphere of economic activity, and are thus subject to the rules of VAT, or in the private sphere, where no further VAT rules apply. In the former case, they may still be transferred to the private sphere, subject to payment of output tax (to the extent that input tax was deductible because the economic activity is taxable), thus maintaining tax neutrality for the taxable person. In the latter case, any transfer to the business sphere carries a penalty: the input tax which could not be deducted because the acquisition was for private purposes is definitively irrecoverable, but the value of the goods (including that irrecoverable input tax) will form part of the taxable amount if they are used for taxable output purposes. (37)

51The Austrian authorities consider, however, if I have understood them correctly, that allocation to business assets can be merely a ‘holding’ action. To the extent that goods are intended for private use, they may none the less be allocated to the taxable person’s economic activity but will give rise (via the adjustment mechanism) to a right to deduct only if they are in fact subsequently used for business purposes.

52Such an interpretation is not without points in its favour. It avoids the disadvantages inherent in transfers from the private to the business sphere, and it avoids the financial advantages for taxable persons which are at the heart of this case. Nor does it seem to pose any serious problem of inconsistency with the essence of the VAT system, as may be seen from its similarity to the amendment currently proposed by the Commission. (38)

53However, it denies taxable persons a right to immediate deduction in cases of deferred business use with intermediate private use. And, while capable of fitting into the overall VAT system, it is by no means obviously preferable in that regard to the interpretation contained in the Court’s consistent case-law and is certainly not dictated by the clear wording of the legislation.

54Nor do I consider that the Austrian authorities’ criticisms of the current case-law are justified.

55In the Court’s approach, goods allocated to business assets must be treated as used for business purposes. Any private use thus becomes a taxable business use, with the taxable person supplying himself in the same way as he would any other final consumer. That is true, however, only where there was an initial right to deduct, and the extent of that right depends on the proportions of taxable and exempt transactions which the taxable person makes overall. It is that which explains the proviso ‘where the value added tax on such goods is wholly or partly deductible’ and the explanation set out by Advocate General Jacobs at points 59 and 60 of his Opinion in Charles . Moreover, it seems to me to be a misunderstanding of that point which leads the Austrian authorities to find any absurdity in the fact that, where a taxable person carries out both taxable and exempt transactions, his deduction of input tax in respect of a property he uses for both business and private purposes can be adjusted on the basis of the taxable/exempt ratio and will not be determined solely by the business/private ratio. Finally, as regards Advocate General Jacobs’s references to the explanatory memorandum to the proposal for a Sixth Directive, whilst the passages which he cited may not explicitly state an intention to allow full deduction in the case of mixed-use goods, they are certainly consistent with and suggestive of such an intention.

56In conclusion on this issue, I am not convinced that the Austrian authorities’ arguments provide any reason to reverse the Court’s established case-law in this field. At most, they set out an alternative analysis which is not without attraction but which is by no means, as they seek to present it, the sole and inescapable interpretation of the legislation. If the Court were none the less to consider a reversal possible, that would require the case to be referred to a larger formation, with a reopening of the oral procedure. In such an event, it would be preferable to invite the other Member States to submit observations, since it is a matter which concerns the whole VAT system. However, I note that no Member State other than Austria has found it necessary to react to the Unabhängiger Finanzsenat’s written observations in this case.

57I shall therefore examine the referring court’s four questions on the basis that the Court’s interpretation of the Sixth Directive with regard to mixed-use goods is not in question.

The first question: equal treatment

58It cannot be disputed that a taxable person entitled to full and immediate deduction of input tax on goods which he acquires and allocates to his business, then paying output tax progressively on his private use of those goods, may enjoy an identifiable financial advantage over another person acquiring similar goods in a private capacity and thus unable to deduct any input tax. (39) That advantage will always be present, though its precise extent will depend on several variables. (40) It is therefore unnecessary to take any view on the referring court’s calculation that it can attain 25% of total VAT or 5% of total cost in the case of immovable property in Austria. Suffice it to acknowledge that there is a non-negligible difference in treatment.

59The principle of equal treatment requires that similar situations must not be treated differently unless differentiation is objectively justified. (41) In the circumstances in issue, are the taxable person and the private individual in similar situations, or is the differentiation between them objectively justified?

60The system of taxation of private use of business assets is designed specifically to obviate the – much more substantial – inequality of treatment which would arise if taxable persons were able to put assets, in respect of which they had enjoyed full deduction of input tax, to private use without having to account any further for VAT. However, the existence of a lesser inequality of treatment cannot be justified simply by the absence of a greater inequality. It must still be shown to derive from an objective difference in situation which is relevant to the difference in treatment.

61In the present case, I would agree with the Commission that the taxable person and the private owner are in different situations. For the private owner, the property is given over entirely and definitively to private use. For the taxable person, it is used in part for business purposes, with the possibility of changing the proportion of that use. Where VAT is a component element in the cost of acquiring and maintaining goods, including capital goods and immovable property, it must be borne definitively by the final ‘consumer’ – the person using the goods for private purposes – but must remain completely neutral as regards the taxable person. A taxable person acquiring goods in a private capacity must bear, definitively, the same VAT burden as a non-taxable person. If he subsequently wishes to use the goods for business purposes, he cannot free himself of that tax, which therefore burdens his business activity in turn, in a manner which is incompatible with the requirement of VAT neutrality for taxable persons and which places him at a disadvantage vis-à-vis other competing taxable persons. (42) It is precisely for that reason – and, as Ms Puffer points out, in full awareness of the consequences – that the Court has made it clear that a taxable person must have the option of allocating mixed-use goods to business assets with subsequent taxation of private use.

62The Commission draws attention also to the fact that taxable persons are not only economic operators who contribute to the European Community’s aim of promoting the development of economic activities and in that context take certain risks with their assets but also, specifically, collectors of VAT responsible for ensuring its payment to the tax authorities. Those simply using or consuming goods for their private purposes cannot insist on identical treatment with them in all matters of VAT.

63I would therefore answer the referring court’s first question in the negative.

The second question: State aid

64The referring court also wishes to know whether the same advantage, in so far as it is enjoyed by taxable persons whose output transactions are subject to VAT but not by those whose output transactions are exempt, can constitute State aid prohibited by Article 87 EC. More precisely, it asks whether national legislation implementing the Sixth Directive so as to provide such a relative advantage infringes Article 87 EC.

65The formulation of the question calls for two preliminary remarks.

66First, the information presented to the Court suggests that the Austrian legislation as it stands does not allow such a result. Indeed, it is only if the legislation precludes immediate and full deduction of input tax in the circumstances in issue that the national court’s third and fourth questions appear relevant. If that is so, the second question, as formulated, would appear to be purely hypothetical. However, it is for the national court to interpret national law, and I shall therefore address this question on the assumption that its basic premiss is correct.

67Second, Article 4(1) and (2) of the Sixth Directive defines a taxable person as ‘any person who independently carries out in any place any economic activity’, namely, all activities of producers, traders and persons supplying services including mining and agricultural activities, activities of the professions and the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis, ‘whatever the purpose or results of that activity’. Consequently, a person carrying out only exempt transactions remains a ‘taxable person’ within the meaning of the legislation. However, he has none of the rights or duties of one who carries out taxed transactions and is subject to none of the effects which VAT has for the latter. In short, as far as VAT is concerned, he is in practically the same position as he is in his private life.

68The question itself, I consider, can only be answered in the negative.

69Article 87(1) EC provides that ‘any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market’. It is settled case-law that classification as State aid for the purposes of that provision requires that all the conditions set out are fulfilled. First, there must be intervention by the State or through State resources. Second, the intervention must be liable to affect trade between Member States. Third, it must confer an advantage on the recipient. Fourth, it must distort or threaten to distort competition. (43)

70Here, the difference in treatment between economic operators making only taxable supplies and those making only exempt supplies (with, it may be added, a range of intermediate treatments for those making both taxable and exempt supplies) cannot be ascribed to one State rather than another. It is an integral part of the VAT system set up by Community harmonising legislation which must be implemented in the same way by all Member States. Consequently, there is no ‘intervention by the State’ or effect on trade between Member States. The Commission adds that the advantage conferred on the recipient must, in the Court’s case-law, be selective, which is not the case of a measure which, although conferring an advantage on its recipient, is justified by the nature or general scheme of the system of which it is part. (44) Since the first three conditions are thus not fulfilled, the difference in treatment cannot infringe Article 87 EC.

71I also note that the system of exemptions is designed in such a way as to minimise competition between taxed supplies and exempt supplies, so that any difference in treatment as between operators making the two types of supply will not, in most cases, (45) distort competition.

The third question: amendment of Paragraph 12(2)(1) of the UStG

72As it stood on and before 1 January 1995, Paragraph 12(2)(1) of the UStG provided: ‘Supplies or other services connected with the acquisition, construction or maintenance of buildings are regarded as being for business purposes in so far as the consideration given for them constitutes operating costs or professional expenses under the rules governing income tax.’

73To the extent that such a provision constituted an exclusion from the right to deduct input VAT at that time, it could be maintained, in compliance with Article 17(6) of the Sixth Directive, until such time – as yet unknowable – as the Council may decide what expenditure is not to be eligible for deduction.

74The Court has stated that where, after the entry into force of the Sixth Directive, a Member State amends its legislation so as to reduce the scope of existing exclusions, thereby bringing it more closely into line with the general regime of deduction set out in Article 17(2) of the Sixth Directive, that legislation must be considered to be covered by the derogation in the second subparagraph of Article 17(6). (46) By contrast, if an amendment has the effect of increasing the extent of existing exclusions, thus diverging from the objective of the directive, it is not covered by the second subparagraph of Article 17(6) and thus breaches Article 17(2). (47)

75What appears to have happened in the present case, however, according to the order for reference, is that an exclusion from the right to deduct input tax in cases where output tax was in principle chargeable (namely, private use of goods allocated to business assets) was subsequently transformed into an exemption from output tax entailing the impossibility of deducting input tax.

76The Verwaltungsgerichtshof refers to paragraph 41 of Holböck , (48) in which the Court confirmed its case-law to the effect that a national measure adopted after a date fixed in a standstill clause is not automatically excluded from the derogation laid down in the Community measure in question. If it is, in substance, identical to the previous legislation, or limited to reducing or eliminating an obstacle to the exercise of Community rights and freedoms in the earlier legislation, it will be covered by the derogation. ‘By contrast, legislation based on an approach which differs from that of the previous law and establishes new procedures cannot be treated as legislation existing at the date fixed in the Community measure in question.’

77I can only agree with the Commission that the change to the Austrian legislation described in the order for reference appears to fall within the category envisaged in the last sentence of the paragraph cited above. In that regard, it seems irrelevant whether the national legislature made the change on the basis of a correct or incorrect interpretation of Community law. However, the ruling in Seeling , to the effect that private use of immovable business assets on which input tax was deducted cannot be regarded as exempt leasing or letting but must be treated as a taxable self-supply, does preclude the change which appears to have been made.

The fourth question: implications for Paragraph 12(2)(2)(a) of the UStG

78The national court wishes to know, if the amendment to Paragraph 12(2)(1) of the UStG means that it is not covered by the standstill clause in Article 17(6) of the Sixth Directive, whether that implies that the ‘overlapping’ exclusion from deduction in Paragraph 12(2)(2)(a) also loses the protection of that clause.

79Ms Puffer asserts that Paragraph 12(2)(2)(a) – which provides in effect, by reference to the legislation on income tax, that expenditure on subsistence, including that on private accommodation, cannot give rise to a right to deduct – does not in fact apply to expenditure on the construction of a house or, in any event, was not originally interpreted in that way.

80It is of course for the national court to determine the import of the provision in question. In its order for reference, it describes Paragraph 12(2)(1) and (2)(2)(a) as ‘overlapping’ provisions, but does not explain to what extent they may be interdependent or self-standing. It seems to me clear that, if the exclusion from the right to deduct in subparagraph (2)(2)(a) is dependent, for its interpretation and/or application, on the existence of the exclusion in subparagraph (2)(1), and if the latter is incompatible with the provisions of the Sixth Directive and not covered by the standstill clause, then subparagraph (2)(2)(a) will be affected correspondingly. If, however, it is a self-standing exclusion from the right to deduct, which was in existence before 1995 and has not since been modified, then it is covered by the standstill clause.

81Finally, I would point out again that the referring court’s third and fourth questions appear to be based on a premiss different from that which underpins its second question. The second question assumes that the Austrian legislation allows taxable persons to allocate immovable property to business assets, and enjoy full and immediate deduction to the extent that the business makes taxable supplies, whereas the third and fourth questions assume that the Austrian legislation precludes such deduction. It is for the national court to resolve such matters.

Conclusion

Conclusion

82In the light of the foregoing considerations, I suggest that the Court should answer the questions referred to the following effect:

(1) There is no infringement of the principle of equal treatment in the fact that the Community VAT directives entitle a taxable person to full and immediate deduction of input tax on property which he acquires and allocates to his business, then paying output tax progressively on his private use of that property, even if he thus enjoys an identifiable financial advantage over another person acquiring similar property in a private capacity and thus unable to deduct any input tax.

(2) National legislation implementing the Community VAT directives so as to allow taxable persons such an advantage does not infringe Article 87 EC.

(3) The standstill clause in Article 17(6) of the Sixth VAT Directive does not cover cases in which a previous exclusion from the right to deduct input tax where output tax was in principle chargeable is subsequently transformed into an exemption from output tax, entailing the impossibility of deducting input tax.

(4) If a previous exclusion from the right to deduct is thus transformed into an exemption and is therefore not covered by the standstill clause in Article 17(6) of the Sixth Directive, any other exclusion which is dependent for its interpretation and/or application on the existence of the previous exclusion will also not be covered by the standstill clause. However, a self-standing exclusion which was in existence when that directive came into force in the Member State concerned and has not since been modified remains covered by the clause.

(1) .

(2) – 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, amended on numerous occasions; ‘the Sixth Directive’). It has been replaced, with effect from 1 January 2007, by Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1), the aim of which is to present the applicable provisions clearly and rationally in a recast structure and wording without, in principle, bringing about material changes in the existing legislation. Cross-references below to provisions of Directive 2006/112 do not therefore imply identity of wording with the equivalent provisions of the Sixth Directive.

(3) – See Article 2(1)(a) and (c) of Directive 2006/112.

(4) – See Article 73 of Directive 2006/112.

(5) – See Article 168(a) of Directive 2006/112.

(6) – See Article 167 of Directive 2006/112.

(7) – See Articles 131 to 137 of Directive 2006/112. In particular, Article 13B(b) of the Sixth Directive exempts the leasing and letting of immovable property; however, Article 13C(a) authorises Member States to allow taxable persons a right of option for taxation for such leasing and letting (Articles 135(1)(l) and 137(1)(d) of Directive 2006/112).

(8) – See Article 16 of Directive 2006/112.

(9) – See Article 26 of Directive 2006/112.

(10) – See Articles 74 and 75 of Directive 2006/112.

(11) – See Article 173 of Directive 2006/112.

(12) – See Articles 174 and 175 of Directive 2006/112.

(13) – However, Article 17(5) also allows Member States to vary that rule within certain limits. In particular, there is an option of separate accounting for the taxable and non-taxable parts of the business, and an option of determining the deductible proportion of the input tax according to the use to which the supplies are put – for example, half of the input tax would be deductible in respect of goods half of which were used for taxable outputs and half for non-taxable outputs, regardless of the relative value of the two sets of outputs.

(14) – See Articles 184 to 192 of Directive 2006/112.

(15) – Case C‑97/90 Lennartz [1991] ECR I‑3795; Case C‑291/92 Armbrecht [1995] ECR I‑2775; Case C‑415/98 Bakcsi [2001] ECR I-1831; Case C‑269/00 Seeling [2003] ECR I‑4101; Case C‑434/03 Charles and Charles-Tijmens [2005] ECR I‑7037; Case C‑72/05 Wollny [2006] ECR I‑8297.

(16) – In particular at paragraphs 26 to 28 and 35 of the judgment.

(17) – Paragraphs 40 to 56 of the judgment.

(18) – Paragraphs 23 and 36 of the judgment.

(19) – Paragraphs 20 to 53 of the judgment, in particular paragraphs 48 and 53.

(20) – COM(2007) 677 final of 7 November 2007, proposal for a Council Directive amending VAT Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, Article 1(11).

(21) – Equivalent to Article 6(2) of the Sixth Directive.

(22) – Equivalent to Article 20(2), (3), (4) and (6) of the Sixth Directive.

(23) – Equivalent to the second and third subparagraphs of Article 20(2) of the Sixth Directive.

(24) – See Article 176 of Directive 2006/112.

(25) – Namely, 1 January 1995. It is common ground that, although the UStG 1994 formally entered into force on the same day, the provisions in issue were simply re-enactments of previous provisions which had remained unchanged since 1977. There is consequently no question of their not having been in force (for some considerable time) before the Sixth Directive entered into force in Austria.

(26) – BGBl I No 134/2003 and BGBl I No 27/2004.

(27) – Council Decision 2004/866/EC of 13 December 2004 authorising the Republic of Austria to apply a measure derogating from Article 17 of the Sixth Directive (77/388/EEC) on the harmonisation of the laws of the Member States relating to turnover taxes (OJ 2004 L 371, p. 47), applicable until 31 December 2009. France and Germany also appear to enjoy similar derogations.

(28) – At the hearing, the Austrian Government explained how the referring court may have arrived at its figures (of 5% of the cost and 25% of the input tax) on the basis of Austria’s VAT rate of 20% and adjustment period of 10 years, coupled with a 10% annual financing cost which would have allowed the person concerned to borrow and repay over the 10-year period a sum equal to the amount of VAT immediately deducted. Clearly, each of the basic factors – and thus the precise result – may vary as between Member States and over time.

(29) – Case C‑157/05 [2007] ECR I-4051, paragraph 41.

(30) – The Austrian authorities point out that, of the six languages in which the Sixth Directive was adopted, only the English uses the present tense (‘is deductible’). All the others use a formulation which would translate into English as ‘has given rise to the right to deduct’, indicating a chronological order. Moreover, in English, Article 26(1)(a) of Directive 2006/112 now refers to input tax which ‘was’ deductible.

(31) – The Austrian authorities refer to Joined Cases C‑322/99 and C‑323/99 Fischer and Brandenstein [2001] ECR I‑4049, concerning Article 5(6) of the Sixth Directive, in which the Court considered essentially that, when a car had been acquired without deduction of input tax but allocated to a taxable business, when VAT-deductible work was performed on the car, and when the car was subsequently allocated to the taxable person’s private assets, the taxable amount for the ‘self-supply’ could be only the value in respect of which a right to deduct had arisen.

(32) – They refer to Lennartz , paragraph 26, and Seeling , paragraph 43, both cited in footnote 15 above.

(33) – At points 59 and 60 of his Opinion.

(34) – At point 41 of his Opinion; see also point 59 of his Opinion in Lennartz .

(35) – Seeling , cited in footnote 15, paragraph 41; Case C‑17/01 Sudholz [2004] ECR I‑4243, paragraph 37; Charles , cited in footnote 15, paragraph 24.

(36) – Lennartz , cited in footnote 15, paragraphs 21 and 35.

(37) – See also points 79 and 80 of the Opinion of Advocate General Jacobs in Charles .

(38) – See points 21 and 22 above.

(39) – See, for example, point 39 et seq. of the Opinion of Advocate General Jacobs in Seeling , and point 74 et seq. of his Opinion in Charles , both cited in footnote 15 above.

(40) – See point 35 and footnote 28 above.

(41) – See, for a recent example, Case C-309/06 Marks & Spencer [2008] ECR I-0000, paragraph 51.

(42) – See the Opinion of Advocate General Jacobs in Charles , point 75 et seq.

(43) – See, most recently, Joined Cases C‑341/06 P and C‑342/06 P Chronopost and La Poste [2008] ECR I‑0000, paragraphs 121 and 122.

(44) – See, for example, Case C‑308/01 GIL Insurance [2004] ECR I-4777, paragraph 66 et seq.

(45) – It is true that some cases of competition between the two categories exist, as the referring court points out (see, for example, Case C-401/05 VDP Dental Laboratory [2006] ECR I-12121), but they are rare and the present case is not among them.

(46) – Case C‑345/99 Commission v France [2001] ECR I‑4493, paragraphs 22 to 24; Case C-409/99 Metropol and Stadler [2002] ECR I-81, paragraph 45.

(47) – Case C-40/00 Commission v France [2001] ECR I-4539, paragraphs 17 to 20; Metropol and Stadler , paragraph 46.

(48) – Cited in footnote 29 above.