C-480/10 Commission v Sweden

JUDGMENT OF THE COURT (Fourth Chamber)

25 April 2013 ( *1 )

‛Failure of a Member State to fulfil obligations — Taxation — Directive 2006/112/EC — Article 11 — National legislation restricting the possibility of forming a group of persons which can be regarded as a single taxable person for VAT purposes to undertakings in the financial and insurance sector’

In Case C-480/10,

ACTION for failure to fulfil obligations under Article 258 TFEU, brought on 5 October 2010,

European Commission, represented by R. Lyal and K. Simonsson, acting as Agents, with an address for service in Luxembourg,

v

Kingdom of Sweden, represented by A. Falk and S. Johannesson, acting as Agents, with an address for service in Luxembourg,

supported by:

Ireland, represented by D. O’Hagan, acting as Agent, assisted by G. Clohessy, SC, and N. Travers, BL,

Republic of Finland, represented by H. Leppo, acting as Agent,

THE COURT (Fourth Chamber),

composed of L. Bay Larsen, acting as President of the Fourth Chamber, J.-C. Bonichot, C. Toader, A. Prechal and E. Jarašiūnas (Rapporteur), Judges,

Advocate General: N. Jääskinen,

Registrar: C. Strömholm, Administrator,

having regard to the written procedure and further to the hearing on 6 September 2012,

after hearing the Opinion of the Advocate General at the sitting on 27 November 2012,

gives the following

Judgment

Legal context and the dispute

1By its application, the European Commission asks the Court to rule that, by restricting, in practice, the possibility of forming a group of persons which can be regarded as a single taxable person for value added tax purposes to suppliers of financial and insurance services (‘a VAT group’ and ‘VAT’ respectively), the Kingdom of Sweden has failed to fulfil its obligations under Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1; ‘the VAT Directive’).

Legal context

European Union law

2Article 11 of the VAT Directive provides:

‘After consulting the advisory committee [on VAT] …, each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links.

A Member State exercising the option provided for in the first paragraph, may adopt any measures needed to prevent tax evasion or avoidance through the use of this provision.’

Swedish law

3Chapter 6, Paragraph 1, of the Law on value added tax (1994:200) (mervärdeskattelagen (1994:200); ‘the ML’) provides:

‘For the purposes of the application of the provisions of this Law, two or more economic entities may, in the circumstances stated in this chapter, be regarded as a single economic entity (VAT group), and the activity exercised by the VAT group may be regarded as a single activity.’

4Chapter 6, Paragraph 2, of the ML states:

‘Only the following may be part of a VAT group:

1economic entities, placed under the surveillance of the finance inspectorate which exercise an activity which is exempt because the turnover from that activity is exempt under Paragraph 9 or Paragraph 10 of Chapter 3,

2economic entities whose main purpose is to deliver goods or provide services to the economic entities referred to in subparagraph 1 above, or

3economic entities which are commission agents and principals, and which have a commission link such as that referred to in Chapter 36 of the law on income tax (1999:1229).’

5Chapter 3, Paragraph 9, of the ML exempts the provision of banking and financial services and operations consisting in trading in stocks and shares or similar transactions.

6Chapter 3, Paragraph 10, of that law also exempts the provision of insurance and reinsurance services. It follows from all those provisions that, in the main, only undertakings in the financial and insurance sector may form a VAT group.

The pre-litigation procedure and the proceedings before the Court

7Taking the view that the provisions of the ML run counter to Article 11 of the VAT Directive in so far as they restrict the application of the VAT group scheme to suppliers of financial services and insurance services, on 23 September 2008 the Commission sent a letter of formal notice to the Kingdom of Sweden, requesting it to submit its observations.

8In their reply of 19 November 2008 to that letter of formal notice, the Swedish authorities argued that the provisions of the ML do not breach the VAT Directive.

9Not being satisfied with that reply, the Commission, on 20 November 2009, issued a reasoned opinion, to which the Kingdom of Sweden replied on 20 January 2010 stating that it maintained the position expressed in its reply to the letter of formal notice.

10In those circumstances the Commission decided to bring the present action.

11By orders of the President of the Court of 15 February and 6 July 2011, the Republic of Finland and Ireland were granted leave to intervene in support of form of order sought by the Kingdom of Sweden.

The action

Admissibility

Arguments of the parties

12The Kingdom of Sweden notes that the Commission relies, in support of its action, on the principle of equal treatment while, in the reasoned opinion, it stated that its interpretation of Article 11 of the VAT Directive is based upon the principle of fiscal neutrality. It argues, in its rejoinder, that the subject-matter of the dispute has thus been extended and, accordingly, altered.

13The Republic of Finland is of the opinion that the pre-litigation procedure and the present action do not enable a clear determination of whether the Commission is complaining of an infringement of the principle of fiscal neutrality or an infringement of the principle of equal treatment by the Kingdom of Sweden. It points out that, in accordance with the case-law of the Court, firstly, the elements of fact and of law on which a case is based are to be indicated coherently and intelligibly in the application itself and, secondly, the issue of the dispute is confined by the pre-litigation procedure and must therefore be based on the same grounds and pleas in law as the reasoned opinion.

14In response to that argument, the Commission submits that the elements of fact and of law on which its case is based are indicated coherently and intelligibly in its application. Not disputing that Swedish undertakings carrying on their activities in the financial and insurance sector are not in competition with other Swedish undertakings active in other sectors, it accepts that the principle of fiscal neutrality which it raised in the pre-litigation procedure is not applicable to the present case. However, it is of the opinion that it has not extended or altered the subject-matter of the dispute as compared with the reasoned opinion by putting forward, in support of its action, an argument alleging infringement of the principle of equal treatment.

Findings of the Court

15It must be borne in mind that the essential points of law and of fact on which a case is based must be indicated coherently and intelligibly in the application itself (see, inter alia, Case C-400/08 Commission v Spain [2011] ECR I-1915, paragraph 36 and the case-law cited). In the present case, the Commission’s application, from which it is clear that the Commission relies, in support of its action, not on an infringement of the principle of fiscal neutrality, but on an infringement of the principle of equal treatment, meets that requirement.

16It must also be borne in mind that, in accordance with settled case-law, the subject-matter of proceedings under Article 258 TFEU is delimited by the pre-litigation procedure governed by that provision. Accordingly, the action must be based on the same grounds and pleas in law as those raised in the reasoned opinion. However, that requirement cannot be stretched so far as to mean that in every case the statement of the objections expressly set out in the reasoned opinion and the form of order sought in the application must be exactly the same, provided that the subject-matter of the proceedings as defined in the reasoned opinion has not been extended or altered (see Case C-139/00 Commission v Spain [2002] ECR I-6407, paragraphs 18 and 19, and Case C-458/08 Commission v Portugal [2010] ECR I-11599, paragraphs 43 and 44).

17Furthermore, it is settled case-law that the principle of fiscal neutrality was intended to reflect, in matters relating to VAT, the general principle of equal treatment, which requires that comparable situations must not be treated differently unless such treatment is objectively justified. However, although infringement of the principle of fiscal neutrality may be envisaged only as between competing traders, infringement of the general principle of equal treatment may be established, in matters relating to tax, by other kinds of discrimination which affect traders who are not necessarily in competition with each other but who are nevertheless in a similar situation in other respects (see, to that effect, Case C-309/06 Marks & Spencer [2008] ECR I-2283, paragraphs 49 and 51).

18It follows that the principle of equal treatment, in matters relating to tax, does not coincide with the principle of fiscal neutrality. Accordingly, by submitting in its application, in particular, that the ML, by restricting the possibility of forming a VAT group to undertakings in the financial and insurance sectors, is incompatible with the principle of equal treatment, when it relied in that regard on the principle of fiscal neutrality in the reasoned opinion, the Commission has extended the subject-matter of the dispute.

19Consequently, the Commission’s action is inadmissible in so far as it is based on an infringement of the principle of equal treatment. The remainder of it is admissible.

Substance

Arguments of the parties

20The Commission is of the opinion that the provisions of the ML are contrary to Article 11 of the VAT Directive, in so far as their scope is restricted to the financial and insurance sector.

21It submits out that a national VAT grouping scheme must apply to all the undertakings established in the Member State concerned, whatever their type of activity. It maintains that, since the common VAT system is a uniform system, the introduction of a special scheme within that system must, as a rule, be of general application.

22That interpretation of Article 11 of the VAT Directive is supported by the very wording of that provision, in which there is nothing to suggest that a Member State may restrict application of the scheme provided for to certain undertakings in a given sector. It is also consistent with the objective of that provision, as stated in the Commission’s Explanatory Memorandum which resulted in the adoption of the 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), which is to enable Member States, for the purpose of simplifying administration or combating abuse, not to consider separately taxable persons whose independence is merely a legal technicality.

23Furthermore, although the Commission accepts that the principle of fiscal neutrality does not appear to apply in the present case, it argues that the Swedish VAT group scheme none the less runs counter to the principle of equal treatment. That scheme favours undertakings in the financial and insurance sector over those active in other sectors. The Kingdom of Sweden fails to show that the undertakings in the financial and insurance sector are not in a situation comparable to that of undertakings in other sectors, or that the restriction of the scope of that scheme to those undertakings is objectively justified.

24The Kingdom of Sweden contests the allegation that it has failed to fulfil its obligations. It maintains that the provisions of the ML do not infringe Article 11 of the VAT Directive.

25As a preliminary point, it states that, on the basis of Article 11 of the VAT Directive, during 1998 it made it possible for undertakings in the financial and insurance sector to form VAT groups. Since it considered that that was a derogation from the principle that all taxable transactions are taxed, it restricted that option to areas which it regarded as most important. Thus, it was decided that credit institutions, investment undertakings, insurance undertakings, undertakings carrying on an exempted financial activity and undertakings which primarily supply goods or services to financial undertakings could be part of a VAT group.

26In the view of the Kingdom of Sweden, offering that possibility to the financial and insurance sector was considered particularly appropriate since the activity of that sector is often split between a number of separate legal persons. Since transactions carried out between undertakings in the same group are common and financial undertakings carry out, in the main, exempted activities, VAT operations internal to the group are particularly onerous in that sector. Those undertakings are particularly exposed to competition from undertakings established in other Member States. Moreover, in order to prevent tax evasion and avoidance, in accordance with the second paragraph of Article 11 of the VAT Directive, the possibility of forming a VAT group was restricted to those undertakings which are placed, directly or indirectly, under the supervision of the Finance Inspectorate and which are therefore covered by a public monitoring system.

27Unlike the Commission, the Kingdom of Sweden considers that Article 11 of the VAT Directive is to be interpreted as permitting a national VAT group scheme to apply only to undertakings belonging to certain specified sectors.

28As the common system of VAT is a uniform system, based on the fundamental principle of a general and universal VAT, Article 11 of the VAT Directive is a derogating provision, since it provides that transactions carried out within a group of undertakings can be exempted. That article must therefore be interpreted strictly.

29It does not follow, in the submission of the Kingdom of Sweden, either from the wording or the objectives of Article 11 of the VAT Directive that the application of that provision by a Member State implies that the possibility of being a member of a VAT group is available to all undertakings established in its territory. On the one hand, the lack of precision in that provision confirms, in that regard, the discretion which the Member States have to decide more precisely to which persons established in their territory this possibility should be available. On the other, the objectives of administrative simplification and combating abuse are not relevant to all undertakings and making the possibility of forming a VAT group generally available would increase the risks of abuse, which would run counter to one of the objectives pursued.

30Furthermore, the ML is not in conflict with either the principle of fiscal neutrality or the principle of equal treatment. Firstly, that Law does not distort competition, since the undertakings in the financial and insurance sector are in competition only between themselves. Secondly, those undertakings are not in a situation comparable to that of undertakings in other sectors. Moreover, the restriction of the possibility of forming a VAT group is based on objective grounds.

31Like the Kingdom of Sweden, the Republic of Finland is of the view that there is nothing in the wording of Article 11 of the VAT Directive to allow that provision to be interpreted as meaning that the VAT group scheme must be of general application. It takes the view that the ML is more compatible with the objective of uniformity of the common system of VAT than the Commission’s interpretation of Article 11, since that objective requires that the scope of individual schemes permitted by the VAT Directive which derogate from its general principles must be as restricted as possible. The restriction of the scope of the VAT group scheme cannot, in its view, be made subject to any condition other than that of complying with the principle of fiscal neutrality. The restriction of that scheme to undertakings in the financial and insurance sector does not contradict that principle or, in any event, the principle of equal treatment.

32Ireland, admitted to submit oral observations, argued at the hearing that Article 11 of the VAT Directive does not establish an exception and that it does not impose obligations on the Member States.

Findings of the Court

33Since the existence of the Kingdom of Sweden’s failure, alleged by the Commission, to fulfil its obligations depends on the interpretation to be made of Article 11 of the VAT Directive, on which the parties have stated divergent views, it must be borne in mind at the outset that, in determining the scope of a provision of European Union law, its wording, context and objectives must all be taken into account. Furthermore, it follows from the need for uniform application of European Union law and from the principle of equality that the terms of a provision of European Union law which makes no express reference to the law of the Member States for the purpose of determining its meaning and scope must normally be given an autonomous and uniform interpretation throughout the European Union (Case C-174/08 NCC Construction Danmark [2009] ECR I-10567, paragraphs 23 and 24).

34It is especially important for the uniform application of the VAT Directive that the notion of ‘taxable person’, defined in Title III thereof, is given an autonomous and uniform interpretation. In that context, such an interpretation is necessary for Article 11 of the VAT Directive, despite the optional nature, as regards the Member States, of the scheme for which it provides, in order to avoid differences in application of that scheme between one Member State and another when it is implemented.

35In that regard, it is apparent from the wording of the first paragraph of Article 11 of the VAT Directive that that directive permits each Member State to regard a number of persons as a single taxable person if they are established in the territory of that Member State and if, although they are legally independent, they are closely bound to one another by financial, economic and organisational links. The application of that article is not, according to its wording, made subject to other conditions (Case C-85/11 Commission v Ireland [2013] ECR, paragraph 36). Nor does it provide that the Member States are able to impose other conditions on economic operators in order to form a VAT group, such as carrying out a certain type of activity or being part of a particular sector of activity.

36It is not apparent from either the wording of Article 11 of the VAT Directive or the context of that article, namely Title III of that directive, that the article is a derogating or special provision which must be interpreted narrowly, as suggested by the Kingdom of Sweden and the Republic of Finland.

37As regards the objectives pursued by Article 11 of the VAT Directive, it is apparent from the Commission Proposal which resulted in the adoption of Directive 77/388 that, by adopting the second subparagraph of Article 4(4) of the Sixth Directive, which was replaced by Article 11 of the VAT Directive, the European Union legislature intended, either in the interests of simplifying administration or with a view to combating abuses such as, for example, the splitting-up of one undertaking among several taxable persons so that each might benefit from a special scheme, to ensure that Member States would not be obliged to treat as taxable persons those whose ‘independence’ is purely a legal technicality (Commission v Ireland, paragraph 47).

38The second paragraph of Article 11 of the VAT Directive also permits Member States to adopt any measures needed to prevent tax evasion or avoidance through the use of the first paragraph of the article. Such measures may, however, be taken only in compliance with European Union law. Thus, with that reservation, it is permissible for Member States to restrict the application of the scheme provided for under Article 11 to combat tax evasion or avoidance.

39In the present case, as has been stated in paragraph 26 of this judgment, the Kingdom of Sweden submits that, in order to prevent tax evasion and avoidance, in accordance with the second paragraph of Article 11 of the VAT Directive, it decided to restrict the possibility of forming a VAT group to those undertakings which are placed, directly or indirectly, under the supervision of the Finance Inspectorate and which are therefore covered by a public monitoring system. The Commission has failed to show convincingly that, in the light of the need to combat tax evasion and avoidance, that measure is not well founded.

40It is therefore clear that the Commission has failed to show that the restriction of the application of the scheme provided for in Article 11 of the VAT Directive to undertakings in the financial and insurance sector was contrary to European Union law.

41In consequence and since the action is inadmissible in so far as it is based on an infringement of the principle of equal treatment, the Commission’s action must be dismissed.

Costs

42Under Article 138(1) of the Rules of Procedure of the Court of Justice, the unsuccessful party must be ordered to pay the costs if they have been applied for in the other party’s pleadings. Since the Kingdom of Sweden has applied for costs and the Commission has been unsuccessful, the latter must be ordered to pay the costs. In accordance with Article 140(1) of those Rules of Procedure, under which Member States which have intervened in the proceedings are to bear their own costs, it must be held that the Ireland and the Republic of Finland are to bear their own respective costs.

Operative part

On those grounds, the Court (Fourth Chamber) hereby

Dismisses the action;

Orders the European Commission to pay the costs;

Orders Ireland and the Republic of Finland to bear their own costs.

[Signatures]

( *1 ) Language of the case: Swedish.

OPINION OF ADVOCATE GENERAL

JÄÄSKINEN

delivered on 27 November 2012 ¹

‛VAT — Article 11 of Directive 2006/112/EC — National legislation restricting VAT group registration to providers of financial and insurance services — Compatibility with European Union VAT law’

I – Introduction

1In these proceedings the Commission seeks a declaration that by restricting the availability of value added tax (VAT) grouping to the financial and insurance sectors, Sweden has failed to comply with its obligations under Article 11 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’). ²

2Article 11 of the VAT Directive lays down rules concerning the treatment of more than one person as a single entity for the purpose of administration of tax (often referred to as ‘VAT grouping’). A similar infringement action has also been raised against the Republic of Finland. ³

II – Legal framework

A – European Union law

3Article 11 of the VAT Directive lays down the rules concerning VAT groups as follows:

‘After consulting the advisory committee on value added tax (hereafter, the “VAT Committee”), each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links.

A Member State exercising the option provided for in the first paragraph, may adopt any measures needed to prevent tax evasion or avoidance through the use of this provision.’

B – National law

4Article I of Chapter 6a of the law on VAT 1994:200 (mervärdesskattelagen) 1994:200 (‘the Swedish VAT law’) provides:

‘For the purposes of the application of the provisions of this law, two or more economic entities may, in the circumstances stated in this chapter, be regarded as a single economic entity (VAT group), and the activity exercised by the VAT group may be regarded as a single activity.’

5Article 2 of Chapter 6a of the Swedish VAT law states as follows:

‘Only the following may be part of a VAT group:

1economic entities, placed under the surveillance of the finance inspectorate, which exercise an activity which is exempt because the turnover from that activity is exempt under Article 9 or Article 10 of Chapter 3, and

2economic entities whose main purpose is to deliver goods or provide services to the economic entities referred to in paragraph 1 above, or

3economic entities which are commission agents and principals, and which have a commission link such as that referred to in Chapter 36 of the law on income tax (1999:1229).’

6Article 9 of Chapter 3 of the Swedish VAT law exempts the provision of banking and financial services and operations consisting in trading in stocks and shares or similar transactions.

7Article 10 of Chapter 3 of the same law also exempts the provision of insurance and reinsurance services. It follows from all of those provisions that, in the main, only economic operators in the financial and insurance sector may form a VAT group.

III – Pre-litigation procedure and proceedings before the Court

8On 23 September 2008 the Commission sent a letter of formal notice to the Kingdom of Sweden in which it argued that the provisions of Swedish law restricting the availability of VAT grouping to providers of financial and insurance services were incompatible with Article 11 of the VAT Directive.

9The Kingdom of Sweden responded by letter of 19 November 2008 stating that, in their opinion, the Swedish legislation concerning VAT groups was in line with the VAT Directive.

10On 20 November 2009 the Commission addressed a reasoned opinion to the Kingdom of Sweden in which it restated its position. The Kingdom of Sweden replied by letter of 20 January 2010 in which it maintained that its interpretation of the VAT Directive was correct.

11Not being satisfied with this reply, the Commission instituted the present action which was lodged at the Court on 1 October 2010. The Commission asks the Court to declare that the Kingdom of Sweden has failed to fulfil its obligations under Article 11 of the VAT Directive by restricting the availability of VAT grouping to providers of financial and insurance services.

12The Kingdom of Sweden asks the Court to dismiss the action as inadmissible because the subject-matter of the application goes beyond the complaint formulated by the Commission in the administrative procedure. In the alternative, the Kingdom of Sweden seeks dismissal of the action as unfounded.

13The Republic of Finland and Ireland have intervened in support of the Kingdom of Sweden. These Member States and the Commission participated in the hearing that was held on 6 September 2012.

IV – Admissibility

14In its rejoinder the Kingdom of Sweden argues that the Commission did not mention breach of the principle of equal treatment at any stage during the administrative procedure. Rather, its complaint was confined to breach of the principle of fiscal neutrality. Equal treatment was raised for the first time in the infringement action before the Court, thereby unlawfully extending and modifying the litigation.

15According to the established case-law of the Court, an application must be based on the same reasons and grounds as the reasoned opinion. ⁴ To the extent that a claim has not been mentioned in the reasoned opinion, it cannot be declared admissible in the proceedings before the Court.

16However, as the Court observed in Commission v Portugal, the requirement cannot be stretched so far as to mean that in every case the formal statement of objections set out in the reasoned opinion and the form of order sought in the application must be exactly the same, provided that the subject-matter of the proceedings as defined in the reasoned opinion has not been extended or altered. ⁵

17Article 38(1)(c) of the Rules of Procedure of the Court of Justice, read in conjunction with Article 21 of the Statute of the Court of Justice, stipulates, under the conditions of admissibility, that an application bringing an action for failure to fulfil obligations must state the subject-matter of the proceedings and summary of the pleas in law on which the application is based. ⁶ What is required, at the very least, is a summary of the legal and factual particulars on which those complaints are based. ⁷ The proper conduct of the procedure constitutes an essential guarantee required by the Treaty not only in order to protect the rights of the Member States concerned, but also to ensure that any contentious procedure will have a clearly defined dispute as its subject-matter. ⁸

18In my opinion, when a plea in law that is raised for the first time in proceedings before the Court materially differs from a plea in law that has been raised in the pre-litigation procedure, the inevitable result is that the Commission has extended or altered the subject-matter of the proceedings. In such circumstances, it cannot be argued that the Commission is merely adding detail to arguments that have been raised in general terms at an earlier stage of the proceedings. ⁹ Rather, the architecture of the litigation becomes fundamentally different.

19That is not, however, the case with regard to the principle of equal treatment in the context of the present infringement action. The complaint of the Commission has remained the same during the administrative procedure and the Court proceedings. That is, by limiting the availability of Article 11 VAT grouping to certain sectors, to the exclusion of all other economic operators in Sweden, while comparable situations are being treated differently.

20The difference between fiscal neutrality and the more general equal treatment principle boils down to the question of whether economic operators that do not directly compete with each other are in a comparable situation. This is so because fiscal neutrality is only applicable in this context of competition. Breach of the equal treatment principle can nonetheless arise if comparable situations are treated differently. ¹⁰ However, in my opinion, any distinction between fiscal neutrality and equal treatment can only be of secondary or even tertiary importance to resolving the dispute to hand.

21I have reached this conclusion because of the primary role played by interpretation of Article 11 of the VAT Directive in deciding whether Sweden is acting compatibly with EU law by restricting the availability of VAT grouping to the financial and insurance sectors. Under the established case-law of the Court, the first step is to consider the literal meaning of Article 11. Only when the relevant words in Article 11 are open to different interpretations can recourse be made to its context and purpose. ¹¹ At this stage the principles of fiscal neutrality and equal treatment become relevant as arguments elucidating the interpretation of Article 11 of the VAT Directive. ¹² They do not as such play a role that is independent of Article 11 as elements of the Kingdom of Sweden’s obligations that would affect the admissibility of the present infringement action.

22Thus, the fact that the Commission’s reasoned opinion made no explicit reference to the principle of equal treatment in a sense wider than that of fiscal neutrality does not mean that the Commission has introduced a new claim which the Court cannot address.

V – Arguments of the parties

23The Commission argues that restricting the availability of VAT grouping to providers of financial and insurance services is contrary to Article 11 of the VAT Directive because any national grouping system provided by a Member State must be available to all economic operators established in that Member State, regardless of their line of business. This, according to the Commission, is evident from the wording of Article 11, which states that ‘each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links’.

24This interpretation, the Commission argues, is further supported by the purpose of Article 11 of the VAT Directive which is to enable Member States to regard as one taxable person economic operators that are separate entities only as a matter of technicality. Article 11 simplifies administration and combats abuse. These objectives, the Commission says, are relevant to all economic operators, and not just to those in a certain sector.

25The Commission further argues that the relevant Swedish laws are inconsistent with the principle of equal treatment because similar situations are being treated differently with no objective justification. ¹³ The Commission also contends that, in the area of taxation, infringement of the principle of equal treatment may be established by discrimination that affects traders who are not necessarily in competition with each other but who are nevertheless in a similar situation.

26The Commission claims that in relation to the application of Article 11 of the VAT Directive, all economic operators established in Sweden are in a similar position, but restricting the availability of VAT grouping to providers of financial and insurance services means that these economic operators are treated more favourably than economic operators in other areas. The Commission is of the opinion that there exists no objective reason for this difference in treatment.

27The Kingdom of Sweden claims that the Swedish provision is in line with the wording of Article 11 of the VAT Directive. In the absence of more precise wording in Article 11, the Member States are free to decide which persons established in their territory can have recourse to VAT grouping.

28The Kingdom of Sweden argues that it is especially appropriate to introduce VAT grouping within the financial sector because it is a sector in which activities are often divided between different legal persons. This is caused by regulatory requirements. Furthermore, the financial sector is strongly exposed to competition from economic operators established in other Member States, and because these economic operators have access to a VAT grouping system, Swedish economic operators providing financial services would be at a disadvantage in relation to them if VAT grouping was not available.

29In addition, the Kingdom of Sweden argues that restricting the availability of VAT grouping to economic operators in the financial and insurance sector serves to prohibit the tax avoidance that occurs, for example, when a group of companies includes as internal transactions in their accounts transactions that occurred between the members of the group and companies outside the group.

30The Kingdom of Sweden is of the opinion that Swedish VAT grouping law conforms to both the principle of equal treatment and the principle of fiscal neutrality. The Court’s case-law concerning the principle of equal treatment sets requirements for the neutrality of competition and Swedish VAT grouping law complies with these because economic operators within the financial sector essentially only compete with each other. Nor is Swedish law incompatible with the principle of equal treatment in its broader meaning because economic operators in the financial sector are not in a comparable situation with economic operators in other sectors. This is so because economic operators in the financial sector are often divided between different legal persons for regulatory reasons.

31Finally, the Kingdom of Sweden argues that in interpreting Article 11 of the VAT Directive, inspiration can be drawn from provisions of the VAT Directive concerning exemptions and reduced rates of tax. ¹⁴ As Article 11 enables transactions within a VAT group to take place without being subject to VAT, and the provision thus derogates from the general VAT regime, its scope must be interpreted strictly.

VI – Analysis

A – Preliminary remarks

32In my opinion the decisive question is as follows: Is a Member State which has opted to introduce a VAT grouping system entitled to limit its operation to certain economic operators that fulfil the requirements laid down in Article 11 of the VAT Directive, without extending the availability of Article 11 VAT grouping to all economic operators that meet these requirements?

33Much depends on the scope of Article 11 of the VAT Directive. Are the Member States when exercising their right to consider as ‘a single taxable person’ persons established in their territory who are legally independent, but closely bound to one another by financial, economic and organisational links, allowed to make a distinction by reference to the nature of the business in which economic operators are engaged, so that some transactions or certain categories of taxable persons are excluded? ¹⁵ Has Sweden respected the limits of Article 11? ¹⁶

34At the outset, it is useful to recall that, according to the settled case-law of the Court, in determining the meaning of a provision of European Union law, its objectives, context and wording must all be taken into account. ¹⁷ As I have already mentioned, I will first consider the wording of Article 11 and, if necessary, its context and objectives.

B – Interpretation of the wording of Article 11 of the VAT Directive

35According to the established case-law of the Court, Member States are entitled to rely on the wording of a directive. ¹⁸ On this basis, it is clear from the wording of Article 11 of the VAT Directive that it is an optional provision. However, if a Member State decides to opt for VAT grouping, the conditions thereof must be in conformity with the VAT Directive.

36Article 11 of the VAT Directive provides that VAT grouping is available to any persons established within the territory of the Member States, provided that these persons have close financial, economic and organisational links. There are no other limitations in the provision. On the contrary, one can argue that the use of the expression ‘any persons’ curbs the Member States’ discretion to apply further limitations in their national implementation of the article. In my opinion, ‘any persons’ covers persons independently of the sector of economic activity in which they are involved. Therefore, the literal interpretation of Article 11 of the VAT Directive excludes any restriction of its scope to defined economic sectors.

37If the Court were to accept the above analysis based on the wording of Article 11, it is not strictly necessary for the Court to go on to consider its context and objectives. ¹⁹ However, I will discuss this issue in case my conclusion with respect to the wording of Article 11 is not accepted.

C – The VAT grouping option in the broader context of the VAT regime

38The forming of a VAT group results in the creation of a single taxable person for VAT purposes which is in all respects comparable to a taxable person consisting of only one entity. ²⁰ Regardless of its nature as a special scheme, VAT grouping neither introduces limitations nor broadens the rights of a taxable person as defined in Article 9 of the VAT Directive.

39The VAT system achieves the highest degree of simplicity and neutrality under two conditions: when the tax is levied in as general a manner as possible and when its scope covers all stages of production, distribution, and the supply of services. ²¹ The VAT regime should result in neutrality in competition, so that within the territory of a Member State similar goods and services bear the same tax burden, regardless of the length of the production and distribution chains. ²² When functioning optimally, this so-called neutral taxation should not affect either competition or the decisions economic operators make when organising their activities, such as legal form or organisational structure. ²³

40The establishment of a VAT group initiates the tax liability of the VAT group, and terminates the separate tax liability of those of its members who were taxable persons for VAT purposes before joining the group. ²⁴ The VAT treatment of the group’s transactions, both to and from entities outside the group, is comparable to VAT treatment of a single taxable person operating individually. Transactions between the individual members of the group, and which remain therefore within the group, are considered as having been carried out by the group for itself. Consequently, a VAT group’s internal transactions do not exist for VAT purposes.

41When a VAT group acts in accordance with the rules of the VAT regime, the right of the persons belonging to the VAT group to deduct VAT for purchases is not expanded. ²⁵ This right continues to be applicable only to those supplies that are made for the activities subject to VAT by the VAT group. Nor are the members of a VAT group entitled to deduct VAT on supplies made for VAT exempted activities.

D – The purpose of the VAT grouping provisions

42In the light of the purpose and content of VAT grouping, which I have outlined above, I cannot agree with the Kingdom of Sweden’s argument that Member States have a discretion with respect to the economic sectors to which VAT grouping is available. I have reached this conclusion for the following reasons.

43VAT grouping does not create economic benefits when a purchase is made for activities subject to VAT, since the purchaser is entitled to deduct input VAT. In such a situation it is in principle irrelevant whether the purchase is made within the VAT group without input VAT or with input VAT from outside of the VAT group.

44In certain situations members of a VAT group may gain economic benefits from belonging to the group. ²⁶ For example, membership of a VAT group can be beneficial in a situation in which the member making a purchase subject to VAT had, because of the VAT exempt nature of its activities, no right to deduct VAT at all, or no full VAT deduction right. If such a member purchases from a supplier outside the VAT group, VAT would be incurred. If, however, it makes the purchase from another member of the group, no VAT is incurred.

45Where an economic operator is not entitled to deduct input VAT incurred in a purchase, it might be economically advantageous for it to produce the goods or services itself. For example, a bank that is not entitled to deduct VAT might benefit economically if it produces IT services needed for its banking activities internally rather than buying them from a third party. However, if the VAT grouping option is available, it may outsource its IT service provision to a subsidiary belonging to the group and gain the same advantage.

46The above described economic motivation may make it reasonable for a Member State, where the VAT grouping option is not generally available to all economic operators, to nonetheless open that option to providers of financial and insurance services, which are taxable persons engaged mainly in VAT exempt activities. This does not mean, however, that it would be legal as a matter of European Union VAT law.

E – Can VAT grouping be restricted to certain economic sectors?

47It goes without saying that a Member State’s laws on VAT grouping must comply with the purposes of VAT grouping as provided in the VAT Directive. In this respect the Member States do not have any discretion.

48It should also be borne in mind that it follows from the need for uniform application of European Union law, and from the general principle of equality, that the terms of a provision of European Union law which makes no express reference to the law of the Member States for the purpose of determining its meaning and scope must normally be given an autonomous and uniform interpretation throughout the Union. ²⁷

49As noted above, the Kingdom of Sweden argues that restricting the availability of VAT grouping to the financial and insurance sectors is justified because of the need to create equal conditions of competition for economic operators in these sectors vis-à-vis international operators. In addition, it is argued that such a limitation is justified because of stricter regulation and supervision within the finance and insurance sectors than that which occurs in other sectors. VAT grouping is essential for these sectors as individual economic operators in them have to be organised as separate legal persons for regulatory reasons.

50Without denying the importance of these considerations, I recall that the purposes of VAT grouping are administrative simplification and avoidance of abuse. These goals are not limited to certain sectors but are applicable to all economic operators regardless of the sector in which they operate.

51As for the tendency for the financial and insurance services sectors to divide their activities between different legal persons, it should also be noted that multistage group structures are currently typical in many other sectors as well. In areas such as social and health care services and real estate, VAT grouping could be similarly advantageous. ²⁸ Under Swedish legislation, taxable persons providing exempted supplies, and for which VAT grouping is permitted, are in a more favourable position than groups of other economic operators providing exempted supplies which are denied this option.

52It should be emphasised that a VAT group, after its registration, is a normal single taxable person. No other limitations apply, even if VAT grouping is indeed a special regime. ²⁹

53To my mind, in the light of the requirement for coherent and equal interpretation of European Union VAT law, limiting taxable status of a person by reference to sectors is not justifiable. Different kinds of practical, social, economic and other goals within a sector should be taken into account in the context of specific provisions of VAT law regulating that sector. However, these factors should not be relied on in the definition of taxable persons for the purposes of Article 11 of the VAT Directive. ³⁰

54For this reason the analogy between Article 11 of the VAT Directive and its provisions on exemptions and reduced VAT rates, ³¹ which the Member State wishes to draw from the optional nature of VAT grouping, cannot be upheld. In fact, the provisions on exemptions and reduced rates of tax of the VAT Directive are based on sector specific policy aims which are recognised, or at least tolerated, by the European Union legislator. As the Court has stated in its established case-law, the Member States are free to implement the alleviation of the VAT burden of certain groups of consumers. ³²

55The provisions on VAT grouping, on the other hand, regulate the status of a group of persons as a single taxable person under specific conditions. The VAT Directive does not provide for any non-fiscal specific policy aims that could be fostered by recourse to this regime. Therefore, a more useful analogy to Article 11 of the VAT Directive might be found in the case-law relating to the application of optional measures in the internal market context. ³³ There the Court has concluded that the optional nature of a measure does not mean that the Member States could limit its scope in a way that is not provided in the European Union provision in question.

F – Final observations

56The complaint of the Commission is expressly limited to restricting the availability of VAT grouping to providers of financial and insurance services. Therefore the observation I am about to make cannot serve to confirm the outcome of the infringement action against Sweden. Nevertheless, it provides a useful illustration of the problems that restricting availability of VAT grouping may entail, and indeed it was discussed between the parties at the hearing.

57In fact Swedish VAT law does not exclude from VAT groups all legally independent persons acting within sectors other than the financial and insurance sectors. Under paragraphs 2 and 3 of Article 2 of Chapter 6a of the Swedish VAT law, the following may also be part of a VAT group; (i) economic entities whose main purpose is to deliver goods or provide services to economic entities providing financial services and insurance services and (ii) economic entities which are commission agents and principals, and which have a commission link of the kind referred to in Chapter 36 of the law on income tax.

58As was made clear at the hearing, the two types of entities I have mentioned in points (i) and (ii) above may direct a part of their business activities to customers outside the group. It should be added that, according to the information provided by the representative of the Government of Sweden, in practice the proportion of outward directed activities has been limited to 20%. ³⁴ This is of relevance because it shows that the Swedish VAT grouping regime may cause problems in terms of competition neutrality, which is one aspect of fiscal neutrality, and that such problems have been recognised, and to a certain extent, addressed, by the Member state.

59Given that the restriction on the availability of VAT grouping to financial services and insurance sectors is not absolute in Swedish legislation, the members of a VAT group may gain economic benefits from VAT grouping also in relation to their activities outside financial and insurance sectors.

60On these grounds, I am of the opinion that, if a Member State chooses to provide the option of VAT grouping, it needs to be open to economic operators active in all sectors in the Member State concerned, provided they fulfil the conditions set out in Article 11 of the VAT Directive. ³⁵ Limitations to that principle could be justified only if there is need to take action against potential abuse for clearly identified transactions. In the absence of this, restricting the availability of VAT grouping to the financial and insurance sectors is not acceptable.

VII – Conclusion

Conclusion

61In light of these considerations, I propose that the Court should declare that, (i) by restricting the availability of VAT grouping to the financial and insurance sectors, the Kingdom of Sweden has failed to fulfil its obligations under Article 11 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax and; (ii) order the Kingdom of Sweden to pay the costs and; (iii) order the Republic of Finland to support its own costs.

¹ Original language: English.

² OJ 2006 L 347, p. 1.

³ Case C-74/11 Commission v Finland. I will also deliver today my conclusions in Case C-85/11 Commission v Ireland which concerns the issue of whether Member States are entitled to include non-taxable persons in VAT grouping, and indeed this issue is also pertinent in Case C-74/11 Commission v Finland. The Commission has also challenged the inclusion of non-taxable persons in VAT grouping in a series of other cases, namely Case C-109/11 Commission v Czech Republic; Case C-95/11 Commission v Denmark; Case C-65/11 Commission v Netherlands; Case C-86/11 Commission v United Kingdom. However, the Court has limited its request for an Opinion of an Advocate General to the present case and Case C-85/11 Commission v Ireland.

⁴ See Case C-139/00 Commission v Spain [2002] ECR I-6407, paragraph 18 and case-law cited.

⁵ Case C-458/08 [2010] ECR I-11599, paragraph 44 and case-law cited. See also Case C-39/10, Commission v Estonia [2012] ECR, paragraphs 24 to 26.

⁶ The corresponding provision in the recast Rules of Procedure that entered in force on 1 November 2012 is Article 120, point (c), OJ 2012 L 265 p. 1.

⁷ Case C-456/03 Commission v Italy [2005] ECR I-5335, paragraph 23 and case-law cited.

⁸ Commission v Italy, paragraph 37.

⁹ Commission v Portugal, paragraph 47.

¹⁰ See e.g. Case C-36/99 Idéal Tourisme [2000] ECR I-6049. Indeed, the validity of provisions of the VAT Directive themselves can be challenged for infringement of the principle of equal treatment. See Case C-460/07 Puffer [2009] ECR I-3251. For a recent example of a case in which the Court considered whether a Member State had breached the principle of fiscal neutrality in implementing the VAT Directive see Case C-117/11 Purple Parking and Airparks Services [2012] ECR.

¹¹ Case C-582/08 Commission v United Kingdom [2010] ECR I-7195, paragraph 51. See also my Opinion in that case at point 52.

¹² See e.g. Case C-246/04 Turn- und Sportunion Waldburg [2006] ECR I-589, paragraph 31; Joined Cases C-443/04 and C-444/04 Solleveld [2006] ECR I-3617, paragraph 36.

¹³ The Commission refers here to Case C-309/06 Marks & Spencer [2008] ECR I-2283, paragraphs 49 and 51.

¹⁴ See Title IX and Article 98 of the VAT Directive, respectively.

¹⁵ See on analogous problematics, Turn- und Sportunion Waldburg, paragraph 30.

¹⁶ See, by analogy, Case C-363/05 JP Morgan Fleming [2007] ECR I-5517, paragraph 44.

¹⁷ Case C-174/08 NCC Construction Danmark [2009] ECR I-10567, paragraph 23 and case-law cited; see also Case C-33/11 A Oy [2012] ECR, paragraph 27.

¹⁸ See Commission v United Kingdom, paragraphs 49 to 51.

¹⁹ Commission v United Kingdom, especially at paragraph 51. See also my Opinion in that case at point 52.

²⁰ The practical implementation of the VAT group option varies. In some Member States that have introduced VAT grouping, it is obligatory for persons fulfilling the requirements, and in others it is voluntary.

²¹ See recital 5 of the VAT Directive.

²² See recital 7 of the VAT Directive.

²³ Terra, B., and Kajus, J., A Guide to the European VAT Directives, IBFD, 2012, Chapter 7.3.

²⁴ See Case C-162/07 Ampliscientifica [2008] ECR I-4019, paragraph 19 and 20.

²⁵ For a summary of the deduction system, see Case C-324/11 Tóth [2012] ECR, paragraph 25 and case-law cited.

²⁶ See Communication from the Commission to the Council and the European Parliament on the VAT group option provided for in Article 11 of Council Directive 2006/112/EC on the common system of value added tax (COM(2009) 325 final), pages 11 and 12.

²⁷ See NCC Construction Danmark, paragraph 24, and case-law cited.

²⁸ For a discussion of VAT grouping within the Swedish VAT system, see Håkan Magnusson: Gruppregistrering till mervärdesskatt, Skattenytt 1998/11.

²⁹ The parties have discussed the question whether Article 11 of the VAT Directive provides for an exception or derogation that should be interpreted restrictively. I am of the opinion that this is not a useful approach, especially as the Commission seems to claim, in the present case, that VAT grouping is not a derogation from the general VAT regime, but a special regime. However, the Commission appears to have taken the opposite position in the Commission v Ireland.

³⁰ I observe that in point 2 of Annex A to the Second VAT Directive it was stated that ‘[i]f a Member State intends not to tax certain activities, it should achieve its purpose by means of exemptions rather than by excluding from the scope of the tax persons pursuing such activities’. Hence, within the European Union VAT regime, the provisions defining status as a taxable person should not be applied for the purpose of obtaining specific policy objectives.

³¹ Cited above.

³² See for example Case C-94/09 Commission v France [2010] ECR I-4261, paragraph 28: ‘… where a Member State decides to make use of the possibility given by Article 98(1) and (2) of Directive 2006/112 to apply a reduced rate of VAT to a category of supply in Annex III to that directive, it has, subject to the requirement to observe the principle of fiscal neutrality inherent in the common system of VAT, the possibility of limiting the application of that reduced rate of VAT to concrete and specific aspects of that category’. See also Case C-169/00 Commission v Finland [2002] ECR I-2433, paragraph 30; Case C-384/01 Commission v France [2003] ECR I-4395, paragraph 24; and Case C-442/05 Zweckverband zur Trinkwasserversorgung und Abwasserbeseitigung Torgau-Westelbien [2008] ECR I-1817, paragraph 43.

³³ As to the interpretation of a comparable situation in the European Union in the context of a legislative option, see case C-408/01 Adidas-Salomon and Adidas Benelux [2003] ECR I-12537, where the Court held in paragraph 20 that ‘… The Member State’s option [in transposition of Article 5(2) of Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States relating to trade marks (OJ 1989 L 40, p. 1)] thus relates to the principle itself of granting greater protection to marks with a reputation, but not to the situations covered by that protection when the Member State grants it.’

³⁴ According to the legislative proposal for the VAT grouping provision in Sweden, a maximum of 20 to 30% of the activity can be directed outside of the VAT group. In the case of enterprises providing support services for financial services, the requirement that this should be their main purpose was justified in the relevant government bill with reference to the need to diminish the negative competition effects of VAT grouping in relation to outside providers. See Regeringens proposition 1997/98:148, page 37.

³⁵ A national VAT grouping introduced only for some sectors might also be open to criticism from a State aid viewpoint as it entails a selective advantage to economic operators active in such sectors.