C-487/01 Gemeente Leusden and Holin Groep

GEMEENTE LEUSDEN AND HOLEN GROEP

JUDGMENT OF THE COURT (Fifth Chamber)

29 April 2004 *

In Joined Cases C-487/01 and C-7/02,

REFERENCES to the Court under Article 234 EC by the Hoge Raad der Nederlanden (Netherlands) for a preliminary ruling in the proceedings pending before that court between

Gemeente Leusden (C-487/01),

Holin Groep BV cs (C-7/02)

and

Staatssecretaris van Financiën,

on the interpretation of Articles 5(7)(a), 17 and 20(2) 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:

* Language of the case: Dutch.

uniform basis of assessment (OJ 1977 L 145, p. 1) and the principles of the protection of legitimate expectations and legal certainty,

THE COURT (Fifth Chamber),

composed of: P. Jann, acting for the President of the Fifth Chamber, A. Rosas (Rapporteur) and S. von Bahr, Judges,

Advocate General: A. Tizzano,

Registrar: M.-F. Contet, Principal Administrator,

after considering the written observations submitted on behalf of:

— Gemeente Leusden, by R. Brouwer and H.P. Bodt, Belastingadviseurs,

— the Netherlands Government, by H.G. Sevenster, acting as Agent,

— the French Government, by G. de Bergues and P. Boussaroque, acting as Agents, — the United Kingdom Government, by P. Ormond, acting as Agent, and P. Whipple, Barrister (C-7/02),

— the Commission of the European Communities, by H.M.H. Speyart, acting as Agent,

having regard to the Report for the Hearing,

after hearing the oral observations of Gemeente Leusden, represented by R. Brouwer and H.P. Bodt, of Holin Groep BV cs, represented by R. Vermeulen, advocaat, of the Netherlands Government, represented by S. Terstal, acting as Agent, and the Commission, represented by H.M.H. Speyart and R. Lyal, acting as Agents, at the hearing on 9 January 2003,

after hearing the Opinion of the Advocate General at the sitting of 3 June 2003,

gives the following

Judgment

Legal context and the dispute

1By judgments of 14 December 2001 (Case C-487/01) and 21 December 2001 (Case C-7/02), received at the Court on 17 December 2001 and 11 January 2002, the Hoge Raad der Nederlanden (Supreme Court of the Netherlands) referred to the Court for a preliminary ruling under Article 234 EC, two questions in each case on the interpretation of Articles 17 and 20(2) 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, 'the Sixth Directive') and the principles of the protection of legitimate expectations and legal certainty (Case C-487/01) and of Articles 5(7)(a) and 17 of the Sixth Directive and the principles of the protection of legitimate expectations and legal certainty (Case C-7/02).

2Those questions were raised in proceedings between, in Case C-487/01, the Gemeente Leusden (municipality of Leusden) and the Staatssecretaris van Financiën (Secretary of State for Finance) and, in Case C-7/02, Holin Groep BV cs ('Holin Groep') and the Staatssecretaris van Financiën, regarding payments corresponding to the amounts deducted in respect of value added tax ('VAT') paid on goods or services supplied for the purposes of refurbishing property to be let, required following a legislative amendment abolishing the right to opt for taxation of lettings of immovable property.

Legal framework

Community legislation

3Under Article 2 of the Sixth Directive, the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such is to be subject to VAT.

GLMEENTE LEUSDEN AND HOLIN GROEP

4Under Article 5¹ of that directive 'supply of goods' is to mean the transfer of the right to dispose of tangible property as owner.

5Article 5(7)(a) of the Sixth Directive provides:

'Member States may treat as supplies made for consideration:

(a) the application by a taxable person for the purposes of his business of goods produced, constructed, extracted, processed, purchased or imported in the course of such business, where the value added tax on such goods, had they been acquired from another taxable person, would not be wholly deductible;'

6Article 11(A)(1)(b) of the Sixth Directive provides:

'The taxable amount shall be:

(b) in respect of supplies referred to in Article 5(6) and (7), the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined as the time of supply.'

7Article 13(B) and (C) of the Sixth Directive provides:

'B. Other exemptions

Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

(b) the leasing or letting of immovable property ...

Member States may apply further exclusions to the scope of this exemption;

C. Options

Member States may allow taxpayers a right of option for taxation in cases of:

(a) letting and leasing of immovable property;

Member States may restrict the scope of this right of details of its use.'

8Article 17 of the Sixth Directive provides:

Origin and scope of the right to deduct

1. The right to deduct shall arise at the time when the chargeable.

2. In so far as the goods and services are used for the option and shall fix the

deductible tax becomes

purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

...'

9Article 20 of the Sixth Directive provides:

'Adjustments of deductions

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, in particular where purchases are cancelled or price reductions are obtained; however, adjustment shall not be made in cases of transactions remaining totally or partially unpaid and of destruction, loss or theft of property duly proved or confirmed, nor in the case of applications for the purpose of making gifts of small value and giving samples specified in Article 5(6). However, Member States may require adjustment in cases of transactions remaining totally or partially unpaid and of theft.

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 10 years.

3. In the case of supply during the period of adjustment capital goods shall be regarded as if they had still been applied for business use by the taxable person until expiry of the period of adjustment. Such business activities are presumed to be fully taxed in cases where the delivery of the said goods is; they are presumed to be fully exempt where the delivery is exempt. The adjustment shall be made only once for the whole period of adjustment still to be covered.

4. For the purposes of applying the provisions of paragraphs 2 and 3, Member States may:

— define the concept of capital goods,

— indicate the amount of the tax which is to be taken into consideration for adjustment, — adopt any suitable measures with a view to ensuring that adjustment does not involve any unjustified advantage,

— permit administrative simplifications.

6. Where the taxable person transfers from being taxed in the normal way to a special scheme or vice versa, Member States may take all necessary measures to ensure that the taxable person neither benefits nor is prejudiced unjustifiably.'

10Under Article 1(4) of Council Directive 95/7/EC of 10 April 1995 amending Directive 77/388/EEC and introducing new simplification measures with regard to value added tax — scope of certain exemptions and practical arrangements for implementing them (OJ 1995 L 102, p. 18), the last paragraph of Article 20(2) of the Sixth Directive was replaced by the following wording:

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

11Under Article 2(1) of Directive 95/7, that provision was to be transposed by 1 January 1996 at the latest.

Dutch legislation

12Article 11(1)(b)(5) of the Wet op de Omzetbelasting 1968 (the Law of 1968 on turnover tax) laid down the principle of exemption for lettings of immovable property and the possibility, for the parties to a tenancy, to opt for taxation of lettings.

13That provision was amended by the Wet houdende wijziging van de Wet op de Omzetbelasting 1968, de Wet op belastingen van rechtsverkeer en enkele andere belastingswetten in verband met de bestrijding van constructies met betrekking tot onroerende zaken (Law amending the Law on turnover tax 1968, the Law on the taxation of legal transactions and a number of other tax laws in connection with the combating of [tax avoidance] arrangements with regard to immovable property (of 18 December 1995 (Stadsblad 1995, p. 659), 'the amending law'). That law reserved the right of option for 'persons using the immovable property for purposes in respect of which a full or virtually full right to deduct tax charged exists.'

14The amending law came into force on 29 December 1995. However, it provided that the right of option was to be withdrawn as of 18.00 hours on 31 March 1995, the date and time of a press release announcing the content of the future law.

15For contracts concluded before 31 March 1995, the amending law retained the exception to exemption until 29 December 1995 (in practice until 1 January 1996).

16For subsequent years, Article V(9) of the amending law, which made provision for transitional rules, provided:

'By way of derogation on this point from paragraphs 1 and 5, Article 11(1)(b)(5) of the [amending law] in the version applicable immediately before the entry into force of this law, remains applicable until the 10th financial year following the financial year in which the lessor began to use the immovable property, subject to the condition that:

a. the lease is by contract concluded in writing before 18.00 hours on 31 March [1995];

b. the tenant occupied the property before April 1996;

c. the annual consideration amounts to at least a percentage to be established by ministerial order of the all-in construction costs of the immovable property; and

d. the written contract is notified to the inspector in the four weeks following the entry into force of this law.'

17By ministerial order of 22 December 1995 (WV 95/891, Staatscourant 1995, p. 250), the percentage of the all-in construction costs of the immovable property, referred to in Article V(9)(c) of the amending law, is set at 7% plus 0.15% for each year which has elapsed since the date of first occupation or use of that property.

Facts, the main proceedings and questions referred

Case C-487/01

18The Gemeente Leudsen lets playing fields to various sports clubs.

19During 1990 and 1991, it had a field converted from a natural grass pitch into an artificial grass pitch at a cost of NLG 433 000, plus NLG 79 800 VAT. That pitch was then, as from 1 January 1992, let to the Mixed Hockey Club Leusden.

20The hockey club does not have a right to deduct VAT. However, the parties opted for taxation of the letting, which, because of the correlation between taxation and the right to deduct, enabled the Gemeente Leusden to deduct the input VAT paid on the cost of converting the pitch.

21It is not disputed that the Gemeente Leusden could not rely on the transitional provisions of the amending law, inter alia because the rent paid by the hockey club was less than the minimum percentage laid down by those provisions.

22Following the entry into force of the amending law, an additional assessment to VAT amounting to NLG 15 960 was served on the Gemeente Leusden for the period from 1 January 1997 to 31 December 1998. Following an objection, the additional assessment was upheld by decision of the tax inspector.

23The Gemeente Leusden brought an action before the Gerechtshof te Amsterdam (Amsterdam Court of Appeal) (Netherlands), but that action was dismissed by judgment of 5 June 2000. The Gemeente Leusden appealed to the Hoge Raad der Nederlanden.

24Considering a plea of breach of European law, the Hoge Raad observed that, in its judgment in Case C-381/97 Belgocodex [1998] ECR I-8153, the Court held that a Member State which has availed itself of the possibility provided for by Article 13 (C) of the Sixth Directive and which has thus granted its taxpayers the right to opt for taxation of certain lettings of immovable property, may abolish, by means of a subsequent law, that right of option and thus reintroduce the exemption. The Court left it to the national court referring the question to determine whether the general Community law principles of protection of legitimate expectations and of legal certainty had been respected by the national legislature.

25The Hoge Raad also observed that, in its judgment in Case C-396/98 Schlossstraße [2000] ECR I-4279, the Court interpreted Article 17 of the Sixth Directive as meaning that 'a taxable person's right to deduct VAT paid in respect of goods or services supplied to him with a view to his carrying out certain letting operations is retained where a legislative amendment post-dating the supply of those goods or services but pre-dating the commencement of such operations deprives the taxable person concerned of the right to waive exemption thereof, ...'. However, according to paragraph 51 of the judgment, that rule is not applicable where adjustment is made under the conditions laid down in Article 20 of the Sixth Directive.

26The Hoge Raad held that this case-law does not enable it to assess the merits of the argument relied on by the Gemeente Leusden, namely that adjustment as referred to in Article 20 of the Sixth Directive, is out of the question where a use which is subject to VAT is changed, merely by a legislative amendment, into a use which is exempt without any right to deduct.

27Accordingly, by judgment of 14 December 2001, the Hoge Raad found it necessary to refer the following questions to the Court for a preliminary ruling:

'1. Do Articles 20(2) and 17 of the Sixth Directive or the principles, in European law, of the protection of legitimate expectations and legal certainty preclude adjustment — in a case involving no fraud or abuse or change of planned use as referred to in paragraphs 50 and 51 of the judgment of the Court of Justice in the Schlossstrasse case — of the VAT deducted by a taxable person, which he has paid on an item of (immovable) property supplied to him with a view to the letting (subject to VAT) of that property, for the years of the period of adjustment under Article 20(2) which have not yet elapsed at the time of the cessation of that right of option (in this case, in fact, 1 January 1996) for the sole reason that, as a result of a legislative amendment, the taxable person is no longer entitled to waive exemption for that letting?

2. If the answer to the first question is in the affirmative, is the legislative amendment inapplicable only in respect of the deducted tax mentioned in Question 1, or is it also inapplicable — until the period of adjustment has expired — in respect of the taxed status (subject to the provisions of Article 13(C) of the Sixth Directive) of the letting referred to in Question 1?'

Case C-7/02

28In the course of 1994 and 1995, G&S Properties BV ('G&S'), one of the companies in Holin Groep, had a new office complex constructed on a plot of land it owned in Amsterdam. Holin Groep deducted the VAT charged in that connection.

29In the middle of 1994, G&S entered into negotiations with ING Bank NV ('the Bank') with regard to the leasing of part of the office complex or sale of those offices to the Bank. In these negotiations both G&S and the Bank assumed that in the event of leasing they would opt for taxation of the lettings.

30In December 1995, a lease was signed with effect from 1 January 1996. After this date the Bank finished the conversion work and fitted out the leased properly. On 1 October 1996, the Bank commenced using the leased property for its banking activities which were exempt from VAT. Holin Groep, as lessor, and the Bank, as lessee, requested the tax inspector to make an exception and not apply the exemption from VAT with regard to the lease.

31In the light of the entry into force of the new law, that request was rejected and a VAT assessment amounting to NLG 33 051 was served on Holin Groep, on the basis of the provision of the Dutch law corresponding to Article 5(7)(a) of the Sixth Directive. In response to an objection, the tax inspector upheld the original assessment as regards the principal amount due.

32Holin Groep brought an action before the Gerechtshof te Amsterdam but that action was dismissed by judgment of 20 January 2000. The Gerechtshof held that at 18.00 hours on 31 March 1995 there was still no lease between Holin Groep and the Bank and that the transitional provisions of the amending law were not applicable, regardless of the fact that on that date there were already pre-contractual obligations between Holin Groep and the Bank with regard to the lease of the premises. Holin Groep appealed to the Hoge Raad der Nederlanden against that decision.

33On grounds similar to those in Case C-487/01, Gemeente Leusden, the Hoge Raad, by decision of 21 December 2001, referred the following questions to the Court for a preliminary ruling:

'1. Do Articles 5(7)(a) and 17 of the Sixth Directive or the European law principles of the protection of legitimate expectations and of legal certainty preclude — in a case not involving fraud or abuse or any question of a change in planned use, as mentioned in paragraphs 50 and 51 of the judgment of the Court of Justice in Schlossstrasse — the charging of tax on the basis of the abovementioned Article 5(7)(a) when a taxable person has deducted VAT which he has paid for goods delivered, or services provided, to him with a view to the planned leasing, subject to VAT, of a particular immovable property, on the simple ground that, as a result of a legislative amendment, the taxable person no longer has the right to waive the exemption for that lease?

2. Would an affirmative response to the first question also apply to a right to deduct arising in the period between notification of the legislative amendment mentioned in Question 1 and its entry into force? In other words, in the event of an affirmative response to Question 1, can tax still be charged, on the basis of Article 5(7)(a), on the elements of the cost price referred to in Article 11 (A) (1)(b) of the Sixth Directive which were incurred after that notification date?'

34By order of the President of the Fifth Chamber of the Court of 6 November 2002, Cases C-487/01 and C-7/02 were joined for the purposes of the oral procedure and judgment.

The questions referred

Case C-487/01

The first question

35By its first question, the referring court is essentially asking whether Articles 20(2) and 17 of the Sixth Directive, or the principles of legitimate expectations and legal certainty preclude adjustment under Article 20(2) of the VAT deducted by a taxable person, which he has paid on an item of immovable property supplied to him with a view to the letting subject to VAT of that property, where such adjustment is required on the ground that, as a result of a legislative amendment, the taxable person is no longer entitled to waive exemption for that letting for the years of the period of adjustment which have not yet elapsed at the time of the cessation of that right of option.

— Observations submitted to the Court

36The Gemeente Leusden takes the view that it is not liable to any VAT by way of adjustment because the legislative amendment constitutes a factor outside its control, within the meaning of paragraph 43 of the judgment in Schlossstrasse. It submits that it always assumed it would be able to deduct the VAT on the investment and operating costs. It took that factor into account when it set the rent and when drawing up a budget to balance the costs.

37It argues that it does not meet the conditions laid down by the transitional provisions, inter alia the condition relating to the minimum amount of the rent. It observes that that amount, that is to say 7% of cost, was determined on the basis of the rates of long-term mortgage loans, in other words, taking account of letting income. According to the Gemeente Leusden, such a scheme is contrary to the spirit of the Sixth Directive since there is no requirement that any profit should be sought from the letting of immovable property. In the present case, the amount of the rent was fixed on the basis of objective criteria but in such a way that the transaction was neutral in terms of the municipality's budget, which explains why the rent was below the minimum amount required by the transitional provisions.

38The Gemeente Leusden states that, according to the case-law of the Hoge Raad, the decision to impose VAT on a letting cannot be revoked in mid-contract. As it involves a change in the amount of the rent, there is no provision for it in the contract to let. A civil procedure would have been required to change it, of uncertain outcome. In any event, if such a procedure were successful, it would have meant that the lessee would have had to pay a much higher rent, which would have left it in financial difficulty.

39The French Government, the Netherlands Government and the Commission take the view, on the other hand, that the Gemeente Leusden is liable to VAT under the Netherlands legislation, as it makes provision for adjustment as authorised by Article 20(2) of the Sixth Directive.

40The Netherlands Government explains that, before its amendment, the Netherlands law gave rise to practices intended to circumvent the fact that an exempt trader could not deduct the VAT invoiced on his goods and services. It gives the example of a sports club which, as it is exempt, cannot deduct VAT invoiced on a sports ground it buys. To get round that, the ground is purchased by a third party — usually linked to the club — which lets it to the sports club, it being understood that the third party and the club will opt for taxation of the letting. The VAT on the sports ground can thus be deducted in full by the third party whereas the sports club is only liable to VAT on the rent which is often set artificially low, given the links with the purchaser. Ownership of the ground may be transferred on expiry of the adjustment period of 10 years. It was precisely in order to make such schemes less attractive that the Member States decided to extend the adjustment period to 20 years by Directive 95/7.

41The French and Netherlands Governments and the Commission submit that Article 20 of the Sixth Directive also concerns legislative amendments. The wording of that article in general and the use of the expression 'in particular' in the first paragraph in particular show that cases of adjustment are not listed exhaustively. Moreover, provision for adjustment in such a case would be in keeping with the objective of that article. In that connection the Netherlands Government points out that the Member States must be able to react rapidly to facts of economic life such as abuses. If adjustment were not possible a legislative amendment would not take effect until after the end of the adjustment period. The Netherlands Government also observes that Article 20(6) of the Sixth Directive which provides for transitional measures where the entry into force of a new law is likely to create difficulties would make no sense if the Member States were not entitled to make legislative amendments. Finally, that government submits that if the Community legislature had wanted to preclude from adjustment anything which was outside the control of the taxable person, it would have done so expressly.

42According to the French Government, the adjustment of deductions referred to in Article 20(2) of the Sixth Directive and the treatment, pursuant to Article 5(6) and (7) of that directive, of certain transactions as supplies for consideration are two provisions with the same objective, namely to prevent a taxable person who has enjoyed a right to deduct from gaining economically unjustified advantages.

43According to that government, if there were no adjustment, different treatment would result for taxable persons carrying out the same economic activities which would be contrary to the principle of tax neutrality. A taxable person who ceased to carry out transactions subject to VAT and continued to use for such transactions capital goods in respect of which he had had a full right to deduct and the value of which was not fully exhausted would be in a better position than a person who carries out the same type of transactions after the entry into force of the new rules applicable to them and cannot exercise any right to deduct.

44That government explains that adjustment is the counterpart of the arrangement implemented when an event entails the imposition of VAT on transactions which were previously exempt. In such a case the taxable persons concerned are authorised to adjust the right to deduct which arose under Article 17(1) of the Sixth Directive in respect of capital goods acquired while their activity was exempt but which could not be exercised under Article 17(2) because of the absence of a direct and immediate link with the taxed transactions. That adjustment was effected by means of a supplementary deduction equivalent to a proportion of the VAT imposed on those capital goods and which could not be deducted when those goods were acquired.

45The French and Netherlands Governments and the Commission point out the difference between the Netherlands law and the situation at issue in Schlossstrasse. In that case, a deduction which had already been allowed was disallowed, with reotroactive effect. In the case in the main proceedings, a deduction is to be adjusted pursuant to Article 20 of the Sixth Directive. They all stress that, in the present case, it is not a matter of the retroactive effect of the Netherlands law but of a situation in which a legislative amendment has effects on the future consequences of situations arising while the previous rules were in force.

46The French and Netherlands Governments and the Commission take the view that the Netherlands legislation complies with Article 20 of the Sixth Directive and does not prejudice the general principles of Community law of legal certainty and legitimate expectations.

47The Netherlands Government recalls that although as a general rule the principle of legal certainty precludes a Community measure from having retroactive effect, it may exceptionally be otherwise when the purpose to be achieved so demands and when the legitimate expectations of those concerned are duly respected (Case 98/78 Racke [1979] ECR 69, paragraph 20; Case 99/78 Decker [1979] ECR 101, paragraph 8; and Joined Cases C-143/88 and C-92/89 Zuckerfabrik Süderdith-marschen and Zuckerfabrik Soest [1991] ECR I-415, paragraph 49). It points out in that connection that the measure was justified by the abuses recorded and that the legitimate expectations of the traders were protected. First, the legislative amendment was announced beforehand and was therefore not a surprise. Second, the Netherlands legislature made provision for transitional arrangements applicable to many situations. The only situations not covered were those in which the rent for property was low compared with the investment cost, that is to say, those situations which had features characteristic of abuses such as those the law sought to prevent. Finally, the Netherlands Government pointed out that, as is clear from the debates prior to adoption of the legislation, parties to leases for immovable property were given a period of time to allow them to make arrangements to deal with the consequences entailed by the future law.

— Reply of the Court

48As the referring court observed, a Member State which has availed itself of the possibility provided for by Article 13(C) of the Sixth Directive and which has thus granted its taxpayers the right to opt for taxation of certain lettings of immovable property may abolish, by means of a subsequent law, that right of option and thus reintroduce the exemption (see Belgocodex, cited above, paragraph 27).

49The question at issue in this case is whether the curtailment or withdrawal of the right to opt for taxation of certain lettings of immovable property may have a related effect on the amount of the deductions made in respect of the immovable property which is let and give rise, in that regard, to adjustments of those deductions made pursuant to Article 20 of the Sixth Directive.

50The third subparagraph of Article 20(2) of the Sixth Directive provides that deductions in respect of immovable property acquired as capital goods may be adjusted for 10 years. Under Directive 95/7, that period was extended to 20 years.

51It must be observed that Article 20 of the Sixth Directive, which describes a number of situations in which adjustments may be made, does not specifically cover the case of a legislative amendment. On the other hand, it does not exclude it either.

52Article 20(1) of the Sixth Directive which prefaces the list of situations covered by the paragraph uses the term 'in particular' which indicates that the situations described under (a) and (b) of that provision do not constitute an exhaustive list.

53Moreover, Article 20(1)(b) of the Sixth Directive deals with changes 'in the factors used to determine the amount to be deducted', whereas Article 20(2) of the Sixth Directive, which specifically concerns capital goods for which the period of adjustment is longer, specifies that the adjustment is 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', thus providing for a situation in which there is a change in the right to deduct correlating to a change in the right to opt for taxation of an output transaction which is generally exempt.

54In its observations, the Gemeente Leusden submits, first, that the legislative amendment is a circumstance outside its control and, second, that it took account of the possibility of making a deduction when it set the amount of the rent charged to the sports club.

55The first argument is refuted by Article 20 of the Sixth Directive. According to Article 20(1 )(b), Member States may require adjustment in cases of transactions remaining totally or partially unpaid and of theft. It therefore follows from that provision that a taxable person may be obliged to adjust deductions in circumstances outside his control.

56The second argument put forward by the Gemeente Leusden relates to the principles of protection of legitimate expectations and legal certainty. It points out that it took account of the possibility of deducting VAT on immovable property acquired as capital goods when it set the amount of the rent charged to the sports club.

57The principles of the protection of legitimate expectations and legal certainty form part of the Community legal order. They must accordingly be observed by the Community institutions (Case 74/74 CNTA v Commission [1975] ECR 533), but also by the Member States when they exercise the powers conferred on them by Community directives (Belgocodex, paragraph 26; Schlossstrasse, paragraph 44; and Case C-62/00 Marks & Spencer [2002] ECR I-6325, paragraph 44).

58In the present case, it must therefore be ascertained whether the Sixth Directive, interpreted in the light of those principles, precludes the withdrawal by a Member State of the right to opt for taxation of lettings of immovable property which results in adjustment of deductions made on the immovable property acquired as capital goods which is let.

59The Court has consistently held that, although in general the principle of legal certainty precludes a Community measure from taking effect from a point in time before its publication, it may exceptionally be otherwise where the purpose to be achieved so demands and where the legitimate expectations of those concerned are duly respected. That case-law also applies where the retroactivity is not expressly laid down by the measure itself but is the result of its content (Case C-368/89 Crispoltoni [1991] ECR I-3695, paragraph 17).

60As regards the national rules adopted by the Member States in the area of VAT, the Court has held inter alia that the status of taxable person, once recognised, cannot, save in situations of fraud or abuse, be withdrawn from the taxpayer with retrospective effect, without infringing the principles of the protection of legitimate expectations and legal certainty, as that would retrospectively deprive the taxable person of the right to deduct VAT on the investment expenditure he had incurred (see, to that effect, Case C-400/98 Breitsohl [2000] ECR I-4321, paragraphs 34 to 38).

61The Court has also held that a Member State may not, by means of a legislative amendment made between the date of supply of the goods or services with a view to the performance of certain economic activities and the date of commencement of such activities, with retroactive effect, deprive a taxable person of the right to waive the VAT exemption for such activities (see, to that effect, Schlossstraße, paragraph 43).

62Unlike the legislation at issue in the above two cases decided by the Court, the amending law in the main proceedings does not have retroactive effect and takes effect only for the future, since it retains the exception to exemption until 29 December 1995 and even, in practice, until 1 January 1996, according to the referring court. It is as a result of adjustments made pursuant to Article 20 of the Sixth Directive that the entry into force of the law might prejudice the economic interests of certain taxable persons bound by leases current at the time of entry into force of the law.

63In that regard, although, in its judgments in Breitsohl and Schlossstrasse, the Court stressed the principle that entitlement to deduct, once it has arisen, is retained, that principle only applies in the absence of fraud or abuse and subject to any adjustments to be made under the conditions laid down in Article 20 of the Sixth Directive (Schlossstrasse, paragraph 42, and Breitsohl, paragraph 41). In Schlossstrasse and Breitsohl the questions referred to the Court did not concern the possibility of adjustment under Article 20 of the Sixth Directive.

64It is clear from this initial examination that neither the wording of the Sixth Directive nor the case-law of the Court precludes an interpretation of Article 20 of the Sixth Directive as meaning that a legislative amendment withdrawing the right to opt for taxation of lettings of property entails, as a corollary, the obligation to adjust deductions made on immovable property acquired as capital goods.

65It must therefore be determined whether the principles of protection of legitimate expectation and legal certainty preclude such an interpretation.

66As regards the expectation which a taxable person might have as regards the opportunities for deduction which might act as an incentive for him to accept a rent of an amount which reflects those opportunities, it must be observed that it is not based on any provision of the Sixth Directive. Rather, Article 13(C) of the Sixth Directive allows the Member States to grant their taxable persons the right to opt for taxation of lettings of immovable property but also allows them to restrict the scope of that right or withdraw it. As we are dealing with a directive on fiscal matters, of which certain provisions, such as Article 13(C), give wide powers to the Member States, a legislative amendment adopted under the directive cannot be considered to be unforeseeable.

67Moreover, the adverse effect of withdrawing the right to opt for taxation is not confined to cases of adjustment of deductions. An owner of an immovable property which is let, who is bound, as lessor, to carry out essential work on the let property, would suffer a comparable disadvantage if the legislature were to amend, before the work was carried out, the right to opt for taxation of the letting of the property, thereby preventing that owner from deducting the VAT paid on that work, whereas he would be bound by a lease under which the amount of the rent might take account only of the work to be done but not of the VAT relating to it.

68Thus, any legislative amendment withdrawing the right to opt for taxation of certain lettings of immovable property is liable to disadvantage a taxable person where that person has not made provision for adjustment of the amount of rent charged, whether the expenses relating to the capital goods were incurred in the past or have yet to be incurred. The disadvantage is therefore not specifically caused by the requirement for adjustment within the meaning of Article 20 of the Sixth Directive.

69It follows that the Sixth Directive, interpreted in accordance with the principles of protection of legitimate expectations and legal certainty, does not preclude the withdrawal by a Member State of the right to opt for taxation of lettings of immovable property which results in adjustment of deductions made in respect of immovable property acquired as capital goods which is let pursuant to Article 20 of the Sixth Directive.

70Although Article 20 of the Sixth Directive does not, as such, breach the above principles, it cannot none the less be ruled out that the national legislature has breached them in that, without taking account of a legitimate expectation of taxable persons which had to be protected, it suddenly and unexpectedly withdrew the right to opt for taxation of lettings of immovable property, when the objective to be attained did not require it, without allowing taxable persons bound by leases current at the time of entry into force of the law the time to adjust to the new legislative situation.

71The Netherlands Government submits that the amending law was adopted to prevent schemes to avoid tax, that the transitional provisions were adopted so that the amendment would not affect contracts which could not be considered to be schemes to avoid tax, that the amending law was announced many months before its entry into force, inter alia in a press release in March 1995, thus allowing the parties to a lease time to renegotiate its terms, and that it was still possible for the parties to a contract to let immovable property, where amendment of the amount of rent was not authorised by the contract or could not be negotiated, to seek authorisation for such amendment in the national courts.

72The Gemeente Leusden argues that it is impossible for it to alter the rent, first because of the uncertain outcome of the court procedure required and, second, because of the financial difficulty in which the sports club would be placed if it had to pay a higher rent.

73To begin with, it must be observed that the argument that the sports club would find it difficult to finance a higher rent is not based on a legitimate expectation of the taxable person itself, that is to say the Gemeente Leusden, but on an expectation of its lessee, the sports club. That argument is thus not relevant and cannot be taken into consideration.

74According to the transitional provisions of the law, the debates in preparation for the amending law and the explanations of the Netherlands Government, the legislature was at pains to affect leases current on entry into force of that law as little as possible.

75As to whether a taxable person such as the Gemeente Leusden had a legitimate expectation, it must be observed that the lease at issue in the main proceedings was not covered by the transitional provisions of the law because the amount of the rent was not high enough compared with the cost of the investment. Such a contract to let is thus covered by the amending law as the Netherlands Government presumes it to be a legal arrangement intended to avoid taxation which the parties consider to be too high.

76In that connection, it must be borne in mind that, under Article 13(B) of the Sixth Directive, Member States are to exempt the leasing or letting of immovable property under conditions which they are to lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse. That wording demonstrates that preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive.

77It would be contrary to that objective to prohibit a Member State to require immediate application of its law withdrawing the right to opt for taxation of certain lettings of immovable property entailing an obligation to adjust deductions made, where that State has become aware that the right of option was being used as part of tax avoidance schemes. A taxable person cannot thus justify a legitimate expectation of maintenance of a legislative framework allowing tax evasion, avoidance and abuse.

78As regards abuses, the Court has held that a finding of an abuse requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved and, second, a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it (Case C-110/99 Emsland-Stärke [2000] ECR I-11569, paragraphs 52 and 53). The Court has held that the obligation to repay an advantage unduly obtained in the event that an abuse is thus established does not breach the principle of lawfulness, but is simply the consequence of a finding that there was an abuse (Emsland-Stärke, cited above, paragraph 56).

79As regards tax avoidance, although, under the law of a Member State, a taxpayer cannot be censured for taking advantage of a provision or a lacuna in the legislation which, without constituting an abuse, has allowed him to pay less tax, the repeal of legislation from which a person liable to VAT has derived an advantage cannot, as such, breach a legitimate expectation based on Community law.

80In the light of those considerations, it does not appear that a measure such as the amending law must be considered to have gone further than its objective required or to have breached a legitimate expectation of taxable persons.

81In any event, a taxable person cannot rely on there being no legislative amendment, but can only call into question the arrangements for the implementation of such an amendment. In the present case, it appears that the Netherlands legislature took steps to prevent taxable persons from being taken unawares by implementation of the law in relation to adjustments of the right to deduct. A press release reported the planned legislative amendment on 31 March 1995 and the legislature made provision for transition from taxed letting to exempt letting only from the entry into force of the law, in order to allow the parties to a lease time to confer before that date on the implications of the legislative amendment.

82In the light of the foregoing considerations, the following answer must be given to the question referred:

Articles 17 and 20(2) of the Sixth Directive interpreted in accordance with the principles of the protection of legitimate expectations and legal certainty do not preclude the withdrawal by a Member State of the right to opt for taxation of lettings of immovable property which results in the adjustment of deductions made in respect of the immovable property acquired as capital goods which is let pursuant to Article 20 of the Sixth Directive.

Where a Member State withdraws the right to opt for taxation of lettings of immovable property, it must take account of the legitimate expectation of its taxable persons when determining the arrangements for implementing the legislative amendment. The repeal of legislation from which a taxable person has derived an advantage in paying less tax, without there being any abuse, cannot however, as such, breach a legitimate expectation based on Community law.

The second question

83In the light of the answer given to the first question, there is no need to reply to the second question.

Case C-7/02

The first question

84By its first question the Hoge Raad essentially seeks to know whether Articles 5(7) (a) and 17 of the Sixth Directive or the principles of the protection of legitimate expectations and of legal certainty preclude — in a case not involving fraud or abuse or any question of a change in planned use, as mentioned in paragraphs 50 and 51 of the judgment of the Court of Justice in Schlossstrasse — the charging of tax on the basis of Article 5(7)(a) when a taxable person has deducted VAT which he has paid for goods delivered, or services provided, to him with a view to the planned leasing, subject to VAT, of a particular immovable property, on the simple ground that, as a result of a legislative amendment, the taxable person no longer has the right to waive the exemption for that lease.

— Observations submitted to the Court

85Whilst they accept that the adjustment of deductions referred to in Article 20(2) of the Sixth Directive and the treatment, under Article 5(6) and (7) of that directive, of certain transactions as supplies of goods made for consideration are two provisions intended to achieve a similar objective, namely to prevent a taxable person w ho has had a right to deduct from enjoying economically unjustifiable advantages, the French and United Kingdom Governments and the Commission take the view that the adjustment of the right to deduct must be made on the basis of Article 20 of the Sixth Directive rather than on that of Article 5(7) of that directive.

86They point out that the provisions of Article 5(7) more specifically concern the case where a taxable person intentionally alters the original use of his capital goods, in particular, by making withdrawals of goods or transferring from a taxable activity to exempt activity, or terminates his professional activity.

87The Netherlands Government takes the view that Holin Groep may be liable to VAT under the provision of Netherlands law transposing Article 5(7)(a) of the Sixth Directive.

88According to that government, the adjustment payment must be made after the entry into force of the amending law, without retrospective effect. It arises from the time the office block is disposed of in the course of a business, in the event, on 1 January 1996. If, in a comparable case, the office block had been supplied on that date and the purchaser had then leased the property on an exempt lease, the purchaser/lessor would not be entitled to deduct the input tax paid.

89For the same reasons as those set out in connection with Case C-487/01, the Netherlands Government takes the view that the principles of the protection of legitimate expectations and of legal certainty have not been breached.

— Reply of the Court

90As the governments submitting observations and the Commission have observed, treatment as supplies made for consideration under Article 5(7)(a) of the Sixth Directive and the adjustment referred to in Article 20(2) of that directive are two mechanisms with the same economic effect, that is to say, they oblige a taxable person to pay amounts equivalent to the deductions to which he was not entitled.

91However, the arrangements for payment are different. Whereas Article 5(7)(a) of the Sixth Directive entails a single payment, Article 20(2) of that directive provides for adjustments, in respect of capital goods, spread out over several years.

92As regards the payment of amounts equivalent to deductions claimed by reason of a legislative amendment by which a Member State withdrew the right to opt for taxation of lettings of immovable property, it must be held that such a situation does not fall within the terms of Article 5(7)(a) of the Sixth Directive. That provision is intended to cover the application of goods, by a taxable person, for the purposes of his business, and not a legislative amendment withdrawing the right to opt for taxation of a financial transaction which is generally exempt.

93It follows that Article 20(2) of the Sixth Directive, providing for adjustment in the event of changes to the right to deduct, may serve as the basis for requiring a taxable person to pay sums originally deducted in respect of immovable property acquired as capital goods which has been let under an exempt lease.

94As regards respect for the principles of protection of legitimate expectations and of legal certainty in the application of Article 20(2) of the Sixth Directive, reference should be made to paragraphs 57 to 82 of this judgment.

95The answer to the question referred must therefore be that Article 5(7)(a) of the Sixth Directive concerns the application of goods by a taxable person for the purposes of his business and not a legislative amendment withdrawing the right to opt for taxation of a financial transaction which is generally exempt.

The second question

96In the light of the answer given to the first question, there is no need to reply to the second question.

Costs

Costs

97The costs incurred by the French, Netherlands and United Kingdom Governments and by the Commission, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main proceedings, a step in the action before the national court, the decision on costs is a matter for that court.

Operative part

On those grounds,

THE COURT (Fifth Chamber),

in answer to the questions referred to it by the Hoge Raad der Nederlanden by judgments of 14 and 21 December 2001, hereby rules:

1. Articles 17 and 20(2) 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, interpreted in accordance with the principles of the protection of legitimate expectations and legal certainty do not preclude the withdrawal by a Member State of the right to opt for taxation of lettings of immovable property which results in the adjustment of deductions made in respect of the immovable property acquired as capital goods which is let pursuant to Article 20 of the Sixth Directive 77/388.

Where a Member State withdraws the right to opt for taxation of lettings of immovable property, it must take account of the legitimate expectation of its taxable persons when determining the arrangements for implementing the legislative amendment. The repeal of legislation from which a taxable person has derived an advantage in paying less tax, without there being any abuse, cannot however, as such, breach a legitimate expectation based on Community law.

2. Article 5(7)(a) of the Sixth Directive 77/388 concerns the application of goods by a taxable person for the purposes of his business and not a legislative amendment withdrawing the right to opt for taxation of a financial transaction which is generally exempt.

Jann Rosas von Bahr

Delivered in open court in Luxembourg on 29 April 2004.

R. Grass

V. Skouris

Registrar President

OPINION OF ADVOCATE GENERAL

TIZZANO delivered on 3 June 2003

Introduction

1By judgments of 14 and 21 December 2001, the Hoge Raad der Nederlanden (Supreme Court of the Netherlands) referred to the Court of Justice, pursuant to Article 234 EC, a number of questions for a preliminary ruling concerning the interpretation of the Sixth VAT Directive (hereinafter: the 'directive'). The national court is seeking, in particular, to establish whether the principles of the protection of legitimate expectations and legal certainty mean that, following a legislative amendment, a Member State may not require a taxable person, under Article 20 or, in the alternative, Article 5(7)(a) of the directive, to repay, in full or in part, the VAT it has deducted in accordance with the directive. The national court is also asking the Court of Justice to define the scope of the abovementioned legislative amendment in relation to leases in existence at the time the amendment entered into force. Finally, the national court is seeking to establish whether the answer to the first question would be different if account were taken solely of the period following the notification of the draft legislation containing the abovementioned legislative amendment.

I — Legal framework

A — The relevant provisions of the directive

2Article 2 of the directive provides that:

'The following shall be subject to value added tax:

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

3Article 4(1) of the directive provides:

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

4Under Article 5(7)(a) of the directive:

'The Member States may treat as supplies made for consideration:

(a) the application by a taxable person for the purposes of his business of goods produced, constructed, extracted, processed, purchased or imported in the course of such business, where the value added tax on such goods, had they been acquired from another taxable person, would not be wholly deductible;.'

5Under Article 10(2) of the directive:

the tax shall become chargeable when the goods are delivered or the services are performed ...'.

6Article 11(A)(1)(b) of the directive provides:

'1. The taxable amount shall be:

(b) in respect of supplies referred to in Article 5(6) and (7), 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;'

7Article 13(B) of the directive provides:

'Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse;

(b) the leasing or letting of immovable property ?'

8However, under Article 13(C) of the directive:

'Member States may allow taxpayers a right of option for taxation in cases of:

(a) letting and leasing of immovable property;

Member States may restrict the scope of this right of option and shall fix the details of its use.'

9Article 17 of the directive provides that:

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

2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

(c) value added tax due under Article[s] 5 (7)(a) ...'

10Finally, under Article 20 of the directive:

'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, in particular where purchases are cancelled or price reductions are obtained; however, adjustment shall not be made in cases of transactions remaining totally or partially unpaid and of destruction, loss or theft of property duly proved or confirmed, nor in the case of applications for the purpose of making gifts of small value and giving samples specified in Article 5(6). However, Member States may require adjustment in cases of transactions remaining totally or partially unpaid and of theft.

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 10 years. 3

3. In the case of supply during the period of adjustment, capital goods shall be regarded as if they had still been applied for business use by the taxable person until expiry of the period of adjustment. Such business activities are presumed to be fully taxed in cases where the delivery of the said goods is taxed; they are presumed to be exempt where the delivery is exempt. The adjustment shall be made only once for the whole period of adjustment still to be covered.

...'

B — The relevant provisions of Netherlands legislation

11The Netherlands transposed the directive into national law by a Law of 28 December 1978 amending the 'Wet op de omzetbelasting 1968' (Law of 1968 on Turnover Tax; hereinafter: 'the Law of 1968'). 5 The Law of 1968 was subsequently amended by the 'Wet van 18 december 1995 houdende wijziging van de Wet op de Omzetbelasting 1968 enz.' (Law of 18 December 1995 amending the Law on Turnover Tax 1968 etc.; (hereinafter: 'the Law of December 1995'). 6

12In implementation of Article 13(B) and (C) of the directive, Article 11(1)(b), point 5, of the Law of 1968 provided, before its amendment by the Law of December 1995, for VAT exemption for the leasing of immovable property, although it gave the lessor and lessee the possibility of opting for taxation of the leasing of immovable property not for habitation, by submitting a joint application to that effect to the tax authorities.

13As a result of the amendments made to that provision by the Law of December 1995, however, the possibility of taking up that option became limited solely to those cases in which the lessee uses the leased immovable property for purposes in respect of which he has a full or virtually full right to deduct VAT.

14In accordance with Article V(1) of the Law of December 1995, that Law entered into force on 29 December 1995 but applies retroactively, as of 18.00 hours on 31 March 1995, the date on which the Netherlands Secretary of State for Finance issued a press release indicating the intention of the Netherlands Council of Ministers to amend the 1968 Law with retroactive force as of the date of the press release itself. Article V (9), however, provides that the new rules do not apply, for a period comprising the first financial year in which the lessor began using the property and the beginning of the tenth financial year, to leases for property concluded in writing by 18.00 hours on 31 March 1995 and fulfilling certain conditions.

15The procedures for adjusting the VAT deducted in relation to immovable property are governed by Article 13(2) of the regulation implementing the Law of December 1968 (hereinafter: the 1968 implementing regulation). In accordance with the provisions of Article 20 of the directive, that article provides that the deduction in relation to immovable property is to be adjusted over a period of nine financial years beginning with the financial year in which the economic operator first used the property and that the adjustment is to be made annually in respect of one tenth of the amount of VAT deducted.

II — Facts, main proceedings and questions referred

Case C-487/01

16During the period 1990-1991, the Municipality of Leusden converted a natural grass pitch into an artificial grass pitch in a sports ground that it owned. On 1 January 1992, that sports ground was let to the Mixed Hockey Club (hereinafter: the 'Hockey Club').

17Even though it was not entitled to deduct VAT, the Hockey Club together, with the Municipality of Leusden, opted for taxation of the letting in accordance with Article 11 of the Law of 1968. Under Article 17 of the directive, according to which VAT on goods or services is deductible only in so far as those goods or services are used for purposes which are also subject to VAT, that would have enabled the Municipality of Leusden to deduct the full amount of VAT relating to the work it had carried out on the sports ground.

18However, as a result of the amendment to Article 11 of the Law of 1968 introduced by the Law of 1995, the Municipality of Leusden and the Hockey Club lost the option for taxation the letting of the sports ground. For that reason, and on the basis of Article 13 of the 1968 implementing regulation, the tax authority decided to ask the Municipality of Leusden to adjust the VAT deducted on the work that had been carried out. That adjustment, in particular, had been applied to only a portion of the VAT initially deducted, that is to say the portion covering the years remaining, after the entry into force of the Law of December 1995, of the ten-year adjustment period commencing with the first use of the sports ground.

19The Municipality of Leusden brought an action against that decision before the Gerechtshof te Amsterdam (Amsterdam Court of Appeal) which, however, ruled against it. The Municipality of Leusden therefore appealed against that Court's ruling before the Hoge Raad, claiming, among other things, that the adjustment to the deduction of VAT consequent on the legislative amendment was incompatible with the principles of legitimate expectation and legal certainty cited in the Court's judgments of 3 December 1998 in Case C-381/97 Belgocodex and 8 June 2000 in Case C-396/98 Schloßstraße.

20The Hoge Raad had doubts concerning the interpretation to be given to the relevant provisions of the directive since the facts of this case in some respects differed from those of the cases cited above, it therefore stayed proceedings and referred the following questions to the Court for a preliminary ruling:

'Do Articles 20(2) and 17 of the Sixth Directive or the principles, in European law, of the protection of legitimate expectations and legal certainty preclude adjustment — in a case involving no fraud or abuse or change of planned use as referred to in paragraphs 50 and 51 of the judgment of the Court of Justice in the Schloßstraße case — of the VAT deducted by a taxable person, which he has paid on an item of (immovable) property supplied to him with a view to the letting (subject to VAT) of that property, for the years of the period of adjustment under Article 20(2) which have not yet elapsed at the time of the cessation of that right of option (in this case, in fact, 1 January 1996) for the sole reason that, as a result of a legislative amendment, the taxable person is no longer entitled to waive exemption for that letting?

2. If the answer to the first question is in the affirmative, is the legislative amendment inapplicable only in respect of the deducted tax mentioned in Question 1, or is it also inapplicable — until the period of adjustment has expired — in respect of the taxed status (subject to the provisions of Article 13(C) of the Directive) of the letting referred to in Question 1 ?'

Case C-7/02

21In the course of 1994 and 1995, G&S Properties BV (hereinafter: 'G&S'), a member of the Holin Groep BV cs. (hereinafter: the 'Holin Group') had built on land it owned a building complex made up of premises for use as offices, and it deducted the VAT charged in this respect.

22Towards the middle of 1994, G&S entered into negotiations with ING Bank NV (hereinafter: the 'ING Bank') with regard to the leasing of part of the office building or sale of the building to the Bank. In these negotiations both G&S and the Bank agreed that, in the event of leasing, they would opt to make the lease subject to tax in accordance with Article 11 of the Law of 1968. The Bank intended to use the leased property for its own banking activities which are exempted from turnover tax by statute.

23Although G&S claims to have entered into a commitment to lease the office building to the ING Bank before 31 March 1995, the lease was not drawn up in writing until December 1995 and took effect as of 1 January 1996.

24Subsequently, ING Bank and the Holin Group applied to the Tax Inspector for the VAT exemption to be waived in accordance with Article 11 of the Law of 1968. But their application was rejected because, following the entry into force of the Law of December 1995, Article 11 of the Law of 1968 had been amended and, since the lease had not been drawn up in writing by 18.00 hours on 31 March 1995, it could not be covered by the transitional arrangements under Article V(9) of the Law of December 1995.

25The Tax Inspector further established that the Holin Group had constructed the building in question as part of its own business, that it was using it to meet its own business requirements; and that, had the immovable property been acquired by third parties, the Holin Group would not have been able to deduct VAT. Therefore, on the basis of Article 3(1 )(h) of the Law of 1968, which is based on Article 5(7)(a) of the Sixth Directive, the Inspector demanded that the Holin Group pay the VAT previously deducted in respect of the construction work on the property in question.

26The Holin Group brought an action against that decision before the Gerechtshof Amsterdam, which dismissed the action. On appeal to the Hoge Raad, the Holin Group claimed that, by charging VAT in accordance with the national provision based on Article 5(7)(a) of the directive as a result of the legislative amendment, the fraud or abuse or any question of a change in planned use, as mentioned in paragraphs 50 and 51 of the judgment of the Court of Justice in Schloßstraße — the charging of tax on the basis of the abovementioned Article 5(7)(a) when a taxable person has deducted VAT which he has paid for goods delivered, or services provided, to him with a view to the planned leasing, subject to VAT, of a particular immovable property, on the simple ground that, as a result of a legislative amendment, the taxable person no longer has the right to waive the exemption for that lease?

2. Would an affirmative response to the

decision at issue was incompatible with the principles of the protection of legitimate expectations and legal certainty cited in the Court's Belgocodex and Schloßstraße judgments.

27As the Hoge Raad had doubts concerning the interpretation to be given to the relevant provisions of the directive since the facts of this case in some respects differed from those of the cases cited above, it stayed proceedings and referred the following questions to the Court for a preliminary ruling:

first question also apply to a right to deduct arising in the period between notification of the legislative amendment mentioned in Question 1 and its entry into force? In other words, in the event of an affirmative response to Question 1, can tax still be charged, on the basis of Article 5(7)(a), on the elements of the cost price referred to in Article 11(A)(1)(b) of the Sixth Directive which were incurred after that notification date?'

III— Procedure before the Court of Justice

'1. Do Articles 5(7)(a) and 17 of the Sixth Directive, or the European law principles of the protection of legitimate expectations and of legal certainty 28. During the written procedure, the preclude — in a case not involving following submitted observations to the Court in relation to Case C-487/01: the Municipality of Leusden, the Netherlands and French Governments and the Commission. The French, Netherlands and United Kingdom Governments and the Commission submitted observations in relation to Case C-7/02. The two cases were joined by order of 6 November 2002, in accordance with Rule 43 of the Rules of Procedure of the Court of Justice. The Municipality of Leusden, the Holin Group, the Netherlands Government and the Commission took part in the hearing of 9 January 2003.

IV — Legal analysis

A — The first questions referred in Cases C-487/01 and C-7/02

29By its first question in Case C-487/01, the national court is essentially asking the Court of Justice to clarify whether, following a legislative amendment, the principles of the protection of legitimate expectations and legal certainty prevent a Member State from requiring a taxable person to repay the tax that person has deducted, in accordance with Article 20 of the directive.

30The first question in Case C-7/02 is fundamentally the same as that in Case C-487/01, the only difference being that it is raised in relation to Article 5(7)(a) rather than Article 20 of the directive.

31Since the questions are very similar, I shall consider them jointly below.

Summary of the observations submitted to the Court of Justice

32The Municipality of Leusden points out that it drew up its own investment plans and fixed the rent for letting the sports ground to the Hockey Club, relying, at the time the sports ground was converted, on the legislation then in force, under which it was entitled to deduct all of the VAT applicable to expenditure on that conversion work. The lease contained no clause allowing it, in the event of legislative amendments of the kind at issue, to adjust the rent so that the lessee had to bear the financial burden consequent on the amendment; therefore, to avoid having to meet that cost, the Municipality of Leusden would now have to bring an action before the courts — obviously with no guarantee as to the outcome — to secure adjustment of the rent under Article 258 of Book VI of the Netherlands Civil Code.

33In support of its arguments, the Municipality of Leusden cites the Schloßtraße judgment and the Opinion of Advocate General Geelhoed in Case C-17/01, Sudholz. 9 It contends that it is apparent from that case-law that the principles of legal certainty and legitimate expectation generally preclude the subsequent withdrawal by legislative amendment of the right to deduct VAT, once established. In the light of those principles, the Municipality of Leusden therefore concludes that it cannot be required to make any adjustment under Article 20 of the directive, and the first question must, consequently, be answered in the affirmative.

34The Holin Group, too, claims to have relied, from the start of construction work on the building subsequently leased to the ING Bank, on the possibility of opting for taxation of that lease on the basis of the version of Article 11 of the Law of 1968 which was in force at the time. The building had been constructed specifically in order to be leased to the ING Bank, as is clear from the fact that it included safes. Moreover, as early as 31 March 1995, it had a pre-contractual undertaking with the ING Bank concerning the future leasing of the building and stipulating that the rent would be subject to VAT.

35The Holin Group therefore considers that, in the light of the principles of the protection of legitimate expectations and legal certainty and, more particularly, the way in which the Court applied them in the abovementioned judgment in Schloßtraße, the Netherlands tax authorities could not, as a result of the amendment to Article 11 of the Law of 1968, claim repayment of the VAT it had deducted, by way of either an adjustment under Article 20 of the directive or the imposition of a tax within the meaning of Article 5(7)(a) of the directive. It therefore concludes that the first question referred in Case C-7/02 should be answered in the affirmative.

36The Netherlands and French Governments and the Commission take a different view, as does the United Kingdom Government, but solely in relation to Case C-7/02, the only case in which it has submitted observations.

37In relation, first of all, to Case C-487/01, the Netherlands Government points out that, according to Article 20 of the directive, the VAT deducted is to be adjusted whenever, in the context of activities subject to VAT, the use of the goods or services in relation to which the deduction was made, does not subsequently take place or takes place in a different way from that initially declared by the taxable person. That rule applies not only in cases in which the actual use of the goods or services differs from that initially intended by the taxable person but also in instances in which that use is no longer feasible because of a legislative amendment. In point of fact, again, according to the Netherlands Government, had the legislature wished to preclude factors outside the control of the taxable person, such as a legislative amendment, from resulting in adjustment, it ought to have made specific provision for this. However, Article 20(1 )(b) of the directive provides that even in cases of theft, that is to say, in a situation over which the taxable person clearly has no control, the Member States may require adjustment of the deduction.

38It is true, the Netherlands Government continues — and on this point it has the backing of the French Government and the Commission — that Article 20 of the directive does not aspire to list all cases in which adjustment is required, but only certain examples, as demonstrated by the use of the expression 'in particular' in the first sentence of Article 20(1). Therefore, the directive does not rule out the possibility of adjustment as a consequence of a legislative amendment.

39Furthermore, the Netherlands Government and the Commission both point out that the circumstances of this case differ from those in Schloßtraße, on which the Court was asked to give a ruling. Schloßtraße concerned a legislative amendment which jeopardised, with retroactive effect, a deduction which had already been made, thus totally depriving the taxable person of his previously acquired right to deduct VAT, whereas this case involves the legal adjustment of a deduction, on the basis of Article 20 of the directive, not with retroactive effect but solely in relation to the years of the ten-year adjustment period that had yet to elapse at the time the legislative amendment entered into force.

40The Netherlands Government also claims that the Municipality of Leusden could have avoided the financial loss resulting from the adjustment by agreeing with the Hockey Club to review the rent or referring the matter to the courts under Article 258 of Book VI of the Netherlands Civil Code.

41Finally, the Netherlands Government adds that if the Court were to rule that the adjustment in accordance with Article 20 of the directive was not applicable, the Municipality of Leusden would have the right to deduct in relation to goods whose use is VAT-exempt. That would be contrary to the principle — which emerges from paragraph 44 of the judgment in Becker, paragraphs 14 to 16 of the judgment in Weissgerber and paragraph 23 of the judgment in Monte dei Paschi di Siena — that a taxable person who intends pursuing a tax-exempt activity may not claim any right to deduct.

42As regards Case C-7/02, the Netherlands Government points out that the charging of VAT to the Holin Group in accordance with Article 5(7)(a) of the directive is merely an indirect consequence of the legislative amendment in question. According to that article, in fact, VAT becomes chargeable once the taxable person has the goods for the purposes of his own business. In this case, that happened on 1 January 1996, on commencement of the lease, that is to say at a point in time after the legislative amendment had entered into force. This case is therefore significantly different from Schloßtraße in which the taxable person was deprived of a right to deduct which had already arisen, as a result of a legislative amendment with retroactive effect.

43According to the Netherlands Government, the liability to VAT of the Holin Group under Article 5(7)(a) of the directive is based on the consideration that, if on the same date that Group had purchased the immovable property in question from a third party to lease it to the ING Bank, it would not have been entitled to deduct VAT on the purchase price, since the property was intended for an activity — leasing to a bank — which was no longer subject to VAT by virtue of the legislation that had just entered into force. In this case, therefore, the charging of VAT in accordance with Article 5(7)(a) is not in breach of the principles of the protection of legitimate expectations and legal certainty.

44The Commission also endorsed that view at the hearing, modifying the stance it had previously taken in its written observations.

45The United Kingdom Government, for its part, argues that the purpose of Article 5 (7)(a) of the directive is not to adjust the deduction of VAT but to ensure respect for the principle of fiscal neutrality. Moreover, it is the responsibility of taxable persons, when entering into contracts with third parties, to insert into those contracts clauses designed to avert the possible negative impact of future legislative amendments. But the Holin Group omitted to take that precaution when negotiating the contract of lease with the ING Bank. The United Kingdom Government finally points out that the circumstances of Schloßtraße are not comparable to those of the present case, since the latter does not relate to the obligation to repay the VAT which the taxable person had previously deducted because of a legislative amendment, but the possibility of requiring the payment of VAT in accordance with Article 5(7)(a) of the directive.

46The Netherlands Government then cites the Court's case-law, in relation to both cases, and in particular the Racke, 14 Decker and Zuckerfabrik judgments, according to which the temporal effects of a Community act may exceptionally be permitted to run from a date subsequent to its publication, if the objective to be attained so requires, and without prejudice to the full protection of the legitimate expectations of those concerned. The Netherlands Government considers that those conditions are met in both cases at issue. First, the Law of December 1995 was designed to put a stop to certain abuses which had resulted from Article 11 of the Law of 1968 before it was amended. Secondly, that law had provided for transitional arrangements applicable to many leases that were up and running. Those transitional arrangements did not, however, extend to leases — such as that concluded between the Municipality of Leusden and the Hockey Club — which provided for an excessively low rent compared to the extent of the lessor's investment in the property or — like that concluded between the Holin Group and the ING Bank — were not drawn up in writing by 31 March 1995, the object being to prevent those leases that had presumably been drawn up specifically to commit the abuses which that Law was designed to curb from benefiting from the legislation that had been repealed. Finally, the principle of the protection of legitimate expectations had been respected since, as early as 21 December 1994, the Netherlands Secretary of State for Finance had announced the intention of amending the provisions in question and then confirmed that intention in both a reply to a parliamentary question of 21 March 1995 and a press release of 31 March 1995.

47The French and Netherlands Governments finally claim that it would be incompatible with the principle of VAT neutrality if the Municipality of Leusden and the Holin Group were not subject to adjustment under Article 20 of the directive and to VAT in accordance with Article 5(7) (a) of the directive respectively. In the view of these Governments, the result would constitute unwarranted discrimination against all taxable persons wishing, after the Law of December 1995 had entered into force, to have work carried out on immovable property they intended to rent out. They would not in fact be entitled to deduct VAT in relation to such work, even though they were in the same circumstances as the Municipality of Leusden and the Holin group prior to the entry into force of that law.

Assessment

48Before replying to the questions referred, I consider it appropriate to draw attention to a number of principles the Court has established in relation to the right to deduct VAT under Article 17 of the directive.

49It is first of all clear from the case-law that this right arises at the time the VAT becomes chargeable in accordance with Article 10 of the directive and that 'consequently, only the capacity in which a person is acting at that time can determine the existence of the right to deduct'.

50The Court then explained that any person acquiring goods or services with the intention, confirmed by objective evidence, to use those goods or services in the exercise of an economic activity, is acting in the capacity of a taxable person in accordance with Article 4 of the directive and therefore acquires the right to deduct the VAT payable on such expenditure. In the absence of any provision empowering the Member States to limit the right to deduct, that right must be exercised immediately in respect of all the taxes charged on transactions relating to inputs, without prejudice to any subsequent adjustments in accordance with Article 20 of the directive.

51But above all, it is apparent from the Court's many judgments that the principles of legal certainty and the protection of legitimate expectations generally prevent the right to deduct VAT, once established, from subsequently being limited as a result of facts, circumstances or events outside the control of the taxable person.

52More particularly, for the purposes of this case, the Court ruled in Schloßstraße that 'provided that the national court finds that the intention to commence economic activities giving rise to taxable transactions was declared in good faith and that that intention is supported by objective evidence, the taxable person is entitled immediately to deduct the VAT due or paid on the goods or services supplied with a view to the performance of the economic activities which it envisages carrying out, and the principles of the protection of legitimate expectations and of legal certainty preclude its being deprived retroactively of that right by a legislative amendment post-dating the supply of those goods or services'. 1

53That said, in order to answer the two questions referred, it will first be necessary to determine whether, in the light of the case-law set out above, the Municipality of Leusden and the Holin Group actually acquired the right to deduct VAT pursuant to Article 17 of the directive before 29 December 1995, that is to say before the entry into force of the amendment to Article 11 of the Law of 1968. It will then be necessary to consider, in the light of that same case-law, whether, in the circumstances of the cases at issue, the Netherlands tax authority was entitled to ask the Municipality of Leusden for VAT adjustment in accordance with Article 20 of the directive and/or to tax the Holin Group in accordance with Article 5(7)(a) of the directive.

The acquisition by the Municipality of Leusden and the Holin Group of the right to deduct VAT within the meaning of the directive

54On the first point, I would observe to begin with that determining 'whether, in a particular case, a taxable person has acquired goods for the purposes of his economic activity' and therefore — in so far as such activities are subject to VAT — determining whether that person has acquired a right to deduct in accordance with Article 17 of the directive 'is a question of fact which must be determined in the light of all the circumstances of the case, including the nature of the goods concerned and the period between the acquisition of the goods and their use for the purposes of the taxable person's activity'.

55Applying those principles to Case 487/01, I would first point out that, according to the submissions of the Municipality of Leusden, at the time it undertook the conversion work on the sports ground, its intention was not only to let it out but also to exercise, together with the future lessee, the option for taxation of the lease, on the basis of the version of Article 11 of the Law of 1968 that was in force at the time. That this continued to be its intention, including at the time the VAT relating to that work became chargeable within the meaning of Article 10 of the directive, and that this point in time predated the entry into force of the Law of December 1995, is not only common ground, but seems to me to be fully borne out by the facts, given that the work was completed in 1991, the sports ground was leased to the Hockey Club as of 1 January 1992 and the right to opt for taxation of that lease was actually exercised.

56It must therefore be recognised, on the basis of the principles cited above, that the Municipality of Leusden acquired the right to deduct the VAT applicable to the said works, pursuant to Article 17 of the directive, and, consequently, lawfully exercised that right in full during the period 1990-1991.

57The same applies as regards the Holin Group which, as is apparent from the order for reference, acquired the right to deduct VAT, pursuant to Article 17 of the directive, on the construction work on the immovable property leased to the ING Bank, and also exercised that right in full.

58In that light, I shall therefore now move on to consider whether, in the two cases at issue, the Netherlands tax authority was entitled to seek adjustment of the VAT deducted by the Municipality of Leusden pursuant to Article 20 of the directive and/ or to tax the Holin group pursuant to Article 5(7)(a) of the directive.

Applicability to the Municipality of Leusden of Article 20 of the directive

59There seems to me to be no doubt that the Municipality of Leusden was asked to make the VAT adjustment pursuant to Article 20 of the directive solely because, as a result of the entry into force of the Law of December 1995, the lease of the sports ground to the Hockey Club, for which purpose the Municipality had acquired and exercised the right to deduct in accordance with Article 17 of the directive, could no longer be subject to VAT.

60In other words, it seems to me that it cannot be disputed that, in this case, there is causal link between the entry into force of that Law and the request to the Municipality of Leusden that, by means of an adjustment pursuant to Article 20 of the directive, it should refund the VAT it had previously deducted under the abovementioned Law.

61In those circumstances, I consider the application of an adjustment, pursuant to Article 20 of the directive, to be tantamount to revoking the right to deduct a taxable person had acquired under the directive, solely because a legislative amendment has transformed an activity formerly subject to VAT into an activity which is no longer subject to VAT.

62That, in my view, is patently incompatible with the Court's ruling in Schloßstraße, namely that a national legislative amendment cannot deprive the taxable person of a right to deduct VAT which he acquired in good faith within the meaning of the directive (see point 52 above).

63That case-law notwithstanding, the Netherlands Government argues that Article 20 of the directive is applicable even in circumstances in which the actual use of the goods or services differs from the use originally intended for reasons beyond the control of the taxable person, as in the case of theft, and that there is, consequently, no reason not to apply the provision to instances of legislative amendment also.

64But I fail to see how all of that can corroborate the argument of the Netherlands Government. Article 20(1 )(b) of the directive actually provides, as a general rule, that adjustment may not be sought in cases of 'destruction, loss or theft of property duly proved or confirmed', that is to say in circumstances clearly beyond the control of the taxable person; and it allows the Member States to derogate from that rule only in cases of theft. It therefore seems to me that the provision tends rather to support the opposite view to that of the Netherlands Government, confirming, as it does, that, save for the exceptions specifically listed in that article, adjustment cannot be made in instances in which, for reasons beyond the taxable person's control, goods cannot be used for the taxable activity originally intended.

65But the Netherlands Government and the Commission further contend — and this seems to me central to their arguments — that Article 20 of the directive does not provide a comprehensive list of cases of adjustment. The first sentence of Article 20 (1), and especially the expression 'in particular', clearly indicate that the cases listed immediately thereafter do not constitute an exhaustive list. The directive does not therefore exclude the situation in which adjustment is the result of a legislative amendment.

66I must, however, point out that, even though there is no doubt that Article 20 contains a non-exhaustive list of possible cases of adjustment, it seems to me difficult, to say the least, to maintain that the cases not specifically listed can include legislative amendments, since that would call in question fundamental principles of Community law. In fact, it seems to me clear that, given the implications of adjustment in a situation of that nature, the legislature ought to have made specific provision for it, had it intended to include it under Article 20. The fact that the legislature made no mention of that situation has therefore, of necessity, to be interpreted as meaning that it is excluded; that, moreover, is consistent with the general rule I mentioned a little earlier.

67If that is so, then, in my view, the claim by the Netherlands Government and the Commission that the circumstances of this case are in any event different from those which gave rise to the judgment in Schloßstraße because the issue in that case was a legislative amendment which prejudiced, with retroactive effect, a deduction that had already been granted, whereas the present case concerns the lawful adjustment of a deduction, on the basis of Article 20 of the directive, solely in relation to the years of the ten-year adjustment period still to run at the time the legislative amendment entered into force, cannot be upheld.

68That claim cannot be upheld because it is based on the extensive interpretation of Article 20 which I challenged a little earlier. But it also fails because, despite all the finely honed arguments to the contrary, it is hard to see how it can be denied that a legislative amendment has retroactive character simply because it does not go as far as to revoke legal situations that have now ceased to exist but 'is limited' to precluding the future enjoyment of a right legitimately acquired under the earlier legislation.

69Finally, that claim cannot be upheld because, in my view, it is caught up in a vicious circle. According to the Commission, in fact, in Schloßstraße, the Court mentioned the possible application of Article 20 of the directive as one of the cases in which a right to deduct may be revoked. That leads the Commission to conclude that any revocation of this right founded on Article 20 is legitimate, including, therefore, revocation as a result of the legislative amendment at issue here. But I must point out that, in this way, the Commission's argument begs the question since the issue in this case is not whether Article 20 permits the withdrawal of the right to deduct (something nobody disputes) but whether it permits withdrawal in all circumstances and especially in the case of a legislative amendment which, with retroactive effect, transforms an activity previously subject to VAT into an activity which is no longer subject to VAT. As I explained earlier, Article 20 does not permit this; nor can this be inferred from the fact that the judgment in Schloßstraße mentions Article 20, for other purposes and in a different sense.

70Moreover, as we have seen, the Netherlands Government also seeks to justify in more general and convincing terms the legitimacy of the retroactive nature of the legislative amendment at issue. But I shall return to that later, since the argument is pertinent primarily in relation to Case C-7/02 (see points 85 - 101 below).

71I shall now consider other arguments advanced by the Netherlands Government in support of its own case. In the first place, it contends that there has been no violation of the principle of protection of legitimate expectations because as early as December 1994, the Netherlands Secretary of State for Finance had stated his intention of amending Article 11 of the Law of 1968; that intention was later confirmed on 21 March 1995 in response to a parliamentary question and on 31 March 1995 in a press release.

72That argument cannot, in my view, be upheld either. According to the court files in fact, the Municipality of Leusden acquired the right to deduct at issue well before those announcements were made. Consequently, none of those announcements can have affected the formation of a legitimate expectation on the part of the Municipality regarding the inviolability of that right.

73In support of its own argument, the Netherlands Government then cites the judgments in Becker, Weisseerber and Monte dei Paschi di Siena, 27 which give rise to the principle that a taxable person who intends pursuing an activity exempt from tax may not claim any right to deduct.

74I must, however, object that in this case, as I explained above, the Municipality of Leusden acquired that right before the letting of the sports ground became VAT-exempt.

75Nor, finally, am I convinced by the argument of the French and Netherlands Governments that if the Municipality of Leusden were not subject to any obligation to adjust, the result would be unwarranted discrimination against all those taxable persons who, despite finding themselves, after the Law of December 1995 had entered into force, in the same position as the Municipality of Leusden prior to that Law, could not, unlike the Municipality, benefit from the right to deduct VAT.

76It actually seems clear to me that such 'difference in treatment' is the natural consequence of any new provision which, by amending legislation already in force, provides for the future only, in accordance with the principle of non-retroactivity, and thus inevitably differentiates between the legal situations already obtaining under the amended legislation and the legal situations arising subsequently.

77In the light of the above considerations, I therefore consider that the principles of the protection of legitimate expectations and legal certainty preclude, in the circumstances of this case, the application of an adjustment, in accordance with Article 20 of the directive, to the Municipality of Leusden.

Applicability of Article 5(7)(a) of the directive to the Holin Group

78I now come to consider whether, in this case, Article 5(7)(a) of the directive is applicable to the Holin Group. I would point out that the Holin Group too acquired, prior to the entry into force of the Law of December 1995, a right to deduct VAT in relation to the construction work on the immovable property leased to the ING Bank (see point 57 above).

79None the less, the Netherlands Government, the United Kingdom Government and the Commission maintain that the VAT relating to that work is chargeable to the Holin Group in accordance with the directive because the event giving rise to the tax — that is to say the Holin Group's 'use' of the building in question 'for the purposes of [its] business' in accordance with Article 5(7)(a) of the directive — in this case the commencement of the leasing of the immovable property by the ING Bank, occurred on 1 January 1996, that is to say at a date when the Law of December 1995 had already entered into force. Those governments and the Commission are, therefore, denying that the Law has retroactive effect.

80But that argument does not seem to me to be well founded. Even if we accept the argument that, in the circumstances of this case, the event that gave rise to the tax in accordance with Article 5(7)(a) of the directive occurred after the entry into force of the Law of December 1995, that does not alter the fact that another event giving rise to taxation in accordance with the directive had occurred before that Law entered into force — namely the carrying out (and invoicing for) construction work on the abovementioned immovable property on behalf of the Holin Group. And it was as a result of that event, as I have explained, that the Group acquired a right to deduct VAT.

81In those circumstances, and as correctly 28 pointed out by the national court and the Commission in its written observations, the practical effect of accepting that Article 5(7) (a) of the directive is applicable to the Holin Group as regards those same construction works would be to compel the Holin Group to repay the VAT previously deducted and thereby revoke the right to deduct VAT it had acquired prior to the entry into force of the Law of December 1995.

82Nor, in my view, can there be any doubt that it was specifically as a result of the entry into force of that Law that the conditions for Article 5(7)(a) of the directive to apply to the Holin Group were met. That provision actually applies only in cases in which any acquisition from third parties of the goods used by a taxable person for the purposes of his business do not confer on him the right wholly to deduct VAT.

83Consequently, it is only because the Law of December 1995 precluded the possibility of opting for taxation of the lease of the immovable property to the ING Bank that the Holin Group ceased to be able to claim any right to deduct VAT on acquiring that property from third parties.

84I therefore consider that there is a specific causal link between the entry into force of the Law of December 1995 and the revocation of the right to deduct VAT previously acquired by the Holin Group as a result of the charging of VAT to that Group in accordance with Article 5(7)(a) of the directive. That, in my view, confirms that in this case the Law was applied retroactively.

85However the Netherlands Government further claims that, in any event, the conditions which justify the adoption of a Community act with retroactive effect, in the light of the abovementioned case-law of the Court of Justice (see point 40 above), are present in this case. According to that case-law, that possibility may in fact exceptionally be permitted 'when the purpose to be achieved so demands and the legitimate expectations of those concerned are duly respected'.

86In the view of the Netherlands Government, both those conditions are met in this case. The new elements introduced by the Law of December 1995 are designed to bring to an end certain abuses resulting from the application of Article 11 of the Law of 1968; and, in addition, the taxable persons were alerted to the possible future amendment of that article by a number of announcements from the Netherlands Secretary of State for Finance and a press release he issued on 31 March 1995.

87As far as the statements by the Secretary of State for Finance are concerned, I would immediately point out that, were it to be proven, as in the case of the Municipality of Leusden, that the Holin Group's acquisition of the right to deduct VAT predated those announcements, logic dictates that they could not have prevented the formation of a legitimate expectation on the part of that Group as regards the inviolability of the right in question.

88However, the second question 30 referred appears to suggest that the Holin Group had acquired the right in question at a point subsequent to the announcements.

89Even in those circumstances, I should, however, be inclined to rule out, as does the Commission in its written observations, that a press release concerning only a legislative proposal — of still uncertain outcome, therefore — can affect the formation of a legitimate expectation concerning the inviolability of a right acquired on the basis of the legislation in force.

90But even assuming that, being now in a position to anticipate the future amendment to the Law, the Holin Group could not fully rely on the inviolability of the right to deduct VAT, it would also be necessary to ascertain whether, in this case, the other condition the Court requires to allow an act to be retroactive is fulfilled, namely that it must be essential for the act to be retroactive if it is to achieve its declared purpose. 1

91In that connection, the Netherlands Government simply claims, as we have seen, that the purpose of the Law of December 1995 was to combat abuses resulting from the inadequacy of the legislation previously in force.

92Aside from the fact that, in the question referred, the national court expressly ruled out that the Holin Group had committed fraud or an abuse in this connection, it seems to me that the argument of the Netherlands Government fails to properly to take account of the actual scope of the case-law that has been cited.

93It seems to me in fact that it would be a distortion of the case-law to infer that the mere need to pursue the declared purpose of an act could of itself be sufficient to justify that act violating rights already acquired, for the obvious reason that it is precisely the violation and not just the adoption of the act that has to be justified here. In other words, what needs to be demonstrated is that conferring retroactive effect on the act is a necessary consequence of pursuing its objective and, moreover, a consequence which cannot be otherwise avoided and is proportionate to the objective pursued.

94In this case, as the Commission also has pointed out in its written observations, it does not seem to me that the Netherlands Government has demonstrated the existence of such conditions; nor do they emerge clearly from an objective assessment of the case. In fact, I consider the reverse to be true, in the light of my comments on the fact that the Holin Group conducted itself properly in relation to the matters at issue here.

95However, the United Kingdom Government maintains that the retroactive effect of the Law of December 1995 as of 31 March 1995, that is to say the date on which the Netherlands Secretary of State for Finance issued the press release announ cing the intention of adopting the Law, was necessary in order to prevent a form of abuse known in the United Kingdom as a 'prepayment scheme' — which some taxable persons might otherwise engage in during the period between the notification and the entry into force of the law.

96That form of abuse takes place, in particular, where a company collaborates, with one or more associated companies, artificially to fix the point at which the tax becomes chargeable under the directive at a date prior to the entry into force of the law.

97That argument also fails to convince me. In fact, even though it seems to me perfectly reasonable and appropriate to penalise an abuse of that nature, I do not believe that it was necessary to confer retroactive effect on the Law of December 1995 for that purpose.

98As the Court has held on several occasions, we can infer from the directive the principle according to which 'in cases of fraud or abuse ? the tax authority may claim repayment of the sums retroactively

...'.32

99In my view, if a company artificially fixes the date of the event giving rise to the tax, that is a clear example of the kind of fraud or abuse which justifies, under the directive, the full repayment of any VAT that company has deducted.

100However, in this case, as I mentioned above, the national court has ruled out any fraud or abuse on the part of the Holin Group. Therefore, were the Law of December 1995 applicable to that Group, it would be unjustifiably deprived, retroactively, of a right to deduct VAT which it had acquired in good faith.

101In the light of the above considerations, I therefore consider that the retroactive application of the Law of December 1995 is not justified in this case.

102Nor, finally, for the reasons I set out above (see points 75 and 76) does the argument of the French and Netherlands Governments seem to me to be acceptable, according to which if the Holin Group were not subject to the tax in question, the result would be unwarranted discrimination against all those taxable persons who, despite finding themselves, after the Law of December 1995 had entered into force, in the same position as the Municipality of Leusden prior to that Law, could not, unlike the Municipality, benefit from the right to deduct VAT.

103For the abovementioned reasons, I therefore consider that even in this case the principles of legal certainty and the protection of legitimate expectations preclude the charging of the tax to the Holin Group under Article 5(7)(a) of the directive.

Conclusions on the two questions analysed

104On the basis of the above considerations, I therefore consider that the answer to the first question referred in both cases should be that the principles of the protection of legitimate expectations and legal certainty preclude adjustment, within the meaning of Article 20 of the directive, or the tax, within the meaning of Article 5(7) (a) of the directive, being chargeable to a taxable person solely because, as a result of a legislative amendment, that person may no longer levy VAT on the activity in relation to which it had acquired a right to deduct VAT under the directive.

B — The second question referred in Case C-487/01

105By its second question, the national court is basically asking the Court of Justice to clarify whether, if the first question in this case is answered in the affirmative, the Law of December 1995 is inapplicable, until the period of adjustment has expired, to lessees who opted for taxation of the lease, on the basis of the legislation in force, with the effect that, during this period, the Hockey Club would still be required to pay VAT on the lease for the sports ground.

106The Netherlands Government maintains that since the first question referred in this case ought to be answered in the negative, there is no need to answer the second.

107The French Government shares that view. However, were the Court to answer the first question in the affirmative, the French Government submits that the second question should be answered in the affirmative also, in accordance with the principle of fiscal neutrality and in order to secure the proper operation of the VAT regime.

108Neither the Municipality of Leusden nor the Commission has submitted observations on this question.

109For my part, I would first point out that even though it is generally 'solely for the national court ? to determine in the light of the particular circumstances of the case both the need for the preliminary ruling ? and the relevance of the questions which it submits to the Court', 3 the latter has, on several occasions, held that 'it has no jurisdiction to give a preliminary ruling on a question submitted by a national court where it is quite obvious that the interpretation or assessment of the validity of a provision of Community law sought by that court bears no relation to the actual facts of the main action or its purpose, or where the problem is hypothetical'. 4

110According to that case-law, 'if it should appear that the question raised is manifestly irrelevant for the purposes of deciding the case, the Court must declare that there is no need to proceed to judgment'. 35 In that connection, it has also been made clear that 'in order that the Court of Justice may perform its task in accordance with the Treaty, it is essential for national courts to explain, when the reasons do not emerge beyond any doubt from the file, why they consider that a reply to their questions is necessary to enable them to give judgment'. 6

111That said, I would point out that it is not clear from either the order for reference or the other documents in the file that an answer to the question at issue would assist the national court in deciding the case before it.

112It is in fact apparent from the file that this dispute has arisen solely between the Municipality of Leusden and the Netherlands tax authority as a result of the latter's decision to ask the Municipality for an adjustment in accordance with Article 20 of the directive. But it is not clear that the national court is also concerned with the question whether, despite the entry into force of the Law of 1995, the Hockey Club is still required to pay VAT on the lease.

113The fact that neither the Netherlands Government nor the Municipality of Leusden felt the need to submit to the Court any observations on this question and that, although it would patently be the party most affected by any answer to the question, the Hockey Club has not only been absent from the whole procedure before the Court, it has not even been involved, so far as I can determine, in the proceedings before the national court, seems to me to indicate that this question does not form part of the dispute pending before the Hoge Raad.

114In the light of the above considerations, I therefore consider that the second question referred by the Hoge Raad in Case C-487/01 is hypothetical and has therefore to be declared inadmissible.

115I will, however, make the following points, in the event that the Court does not share my view.

116Were this question answered in the affirmative, the practical effect would merely be to suspend, during the remainder of the period of adjustment, the applicability of the Law of December 1995 to leases operational at the time it entered into force, thereby guaranteeing that the coffers of the Netherlands exchequer would be in receipt of revenue from a tax that could not otherwise have continued to be levied. In other words, a response of that nature would enable the Netherlands exchequer to compensate for the failure of the Law of December 1995 to provide for transitional rules requiring lessees, who, as a result of that Law, would no longer be required to pay VAT, to continue to pay the tax until the period of adjustment ended.

117In the light of those considerations, it seems to me that this question raises an issue of the interpretation of national rather than Community law. If in fact it is the case — as I explained when answering the first question — that, when amending national legislation on charging VAT on the letting of immovable property, a Member State is required to respect, in accordance with the principles of legal certainty and the protection of legitimate expectations, the right to deduct VAT acquired by the lessors of immovable property under that legislation, no principle of Community law, in my view, prevents that State, when making the amendment, from depriving its own exchequer — albeit unintentionally — of the right to continue levying the tax on the lessee of such immovable property.

118But the French Government claims that if the Netherlands exchequer were not allowed to continue to levy VAT on lessees of immovable property who opted to pay that tax under legislation that has now been repealed, VAT neutrality and the proper operation of the VAT regime would be jeopardised.

119That seems to me to be a questionable argument. If I have properly understood, it is actually based on the alleged violation of two principles arising from the directive: the principle according to which 'all traders should be treated neutrally as regards their tax burden, regardless whether they are engaged in only preparatory acts or whether they are carrying out taxable transactions', and the principle that a taxable person may deduct VAT charged on a transaction relating to inputs only in so far as the outcome serves the purposes of a taxable transaction relating to outputs.

120Neither of those principles seems to me to have been violated in this case. At the time when the Municipality of Leusden deducted the VAT chargeable on the conversion work on the sports ground, it actually did so for the purpose of an activity — letting the sports ground to the Hockey Club — which was at that time taxable under the national legislation then in force. Therefore, the Municipality of Leusden acquired and exercised the right to deduct VAT in full compliance with the abovementioned principles.

121Since, therefore, I find that the answer to this question does not depend on the interpretation of the provisions of the directive or the application of principles of Community law, I consider that, if this question is held to be admissible, the answer should be that it is for the national court to assess whether, on the basis of the principles of its own legal order, those lessees who opted for taxation of the lease on the basis of the legislation in force at the time the lease was drawn up should continue to be required to pay that tax even after the entry into force of a legislative amendment which removes the possibility of opting for taxation of that lease.

C — The second question referred in Case C-7/02

122If I have properly understood, by its second question in Case C-7/02, the national Court is actually asking the Court for elucidation on two points. Firstly, it is asking whether an affirmative answer to the first question, namely the inviolability of the right to deduct VAT acquired by the Holin Group prior to the entry into force of the Law of December 1995, also applies to the period subsequent to the press release of 31 March 1995 in which the Netherlands Secretary of Finance announced the proposed amendment to Article 11 of the Law of 1968. If the answer to that question is in the negative, the Hoge Raad is asking whether the Holin Group is required to pay a tax in accordance with Article 5(7)(a) of the directive, to be calculated, in accordance with Article 11(A)(1)(b)of the directive, on the basis of the construction costs of the buildings leased to the ING Bank and incurred after the date of that press release.

123The Holin Group maintains that the press release post-dated the commitments it had entered into with the ING Bank in relation to the future lease of the immovable property and the option for taxation of that lease and that, consequently, any taxation of the work commissioned on that immovable property after the press release was issued is incompatible with the principles of legitimate expectation and legal certainty.

124The French Government for its part contends that if, in answer to the first question in this case, the Court holds that the tax under Article 5(7)(a) of the directive is not applicable to adjust a VAT deduction made for the purposes of a taxable activity which subsequently ceased to be taxable as a result of a legislative amendment, that tax is inapplicable to the Holin Group as regards the whole of the period prior to the legislative amendment. Furthermore, it would not be possible, in accordance with Article 11(A)(1)(b) of the directive, to calculate that tax exclusively on the basis of the expenditure on construction work on the immovable property incurred after the press release was issued.

125But the Netherlands and United Kingdom Governments take a different view. They in fact consider that the Holin Group knew, at least after 31 March 1995, that it would be liable to tax in accordance with Article 5(7)(a) of the directive, if it decided to lease to the ING Bank the immovable property on which it was having work done. Consequently, the Holin Group could not rely on the principles of the protection of legitimate expectations and legal certainty in relation to the period after 31 March 1995 and the Group can, therefore, be charged that tax, calculated on the basis of the expenditure incurred during that period.

126The Commission, finally, points out in its written observations that the press release could not have affected the formation on the part of the Holin Group of a legitimate expectation concerning the chargeability of VAT on the future lease of the immovable property in question. The Commission comments that the press release actually related only to proposed legislation by the Netherlands Government, and that it was not certain whether it would be passed, or passed unamended, by the Netherlands parliament. Consequently, even during the period between the press release and the final adoption of the new rules, the legislation in force was likely to foster a legitimate expectation on the part of taxable persons.

127For myself, I consider that by this question, the national court is in fact merely reformulating the first question submitted in this case, highlighting the fact that the legislative amendment at issue was announced in advance in a press release.

128I shall therefore confine myself to referring to my comments on the first question, namely that if, on the one hand, it is at least questionable, as the Commission rightly points out, whether, after the press release was issued, the Holin Group could have remained absolutely confident of the right to deduct VAT it had acquired (see point 89 above), on the other, there seems, in this case, to be no valid justification for that right to have been revoked by the Law of December 1995, (see points 90- 101 above).

129On those grounds, therefore, I consider that the reply here must be that the answer to the first question also applies to the period following the announcement, by the Netherlands Secretary of State for Finance in a press release, that the Netherlands Government intended to introduce amendments to the VAT legislation in force.

V — Conclusions

130In the light of the above considerations, I therefore propose that the Court give the following answers to the questions submitted:

(1) As regards the first question raised in Cases C-487/01 and C-7/02, the principles of the protection of legitimate expectations and legal certainty preclude the application to a taxable person of an adjustment, pursuant to Article 20 of the directive, or a charge to tax, pursuant to Article 5(7)(a) of the directive, on the sole ground that, as a result of a legislative amendment, that person may no longer charge VAT on the activity in relation to which it had acquired a right to deduct VAT under the directive.

(2) The second question submitted in Case C-487/01 is inadmissible. In any event, it is for the national court to assess whether, on the basis of the principles of its own legal order, those lessees who opted for taxation of the lease on the basis of the legislation in force at the time when the lease was drawn up should continue to be required to pay that tax even after the entry into force of a legislative amendment which removes the possibility of opting for taxation of that lease.

(3) As regards the second question raised in Case C-7/02, the answer to the first question also applies to the period following the announcement, in the press release issued by the Netherlands Secretary of State for Finance, that the Netherlands Government intended to introduce amendments to the VAT legislation in force.

Notes

(1) Original language: Italian.

(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).

(3) In accordance with Article 1 (4) of Council Directive 95/7/EC of 10 April 1995 amending Directive 77/388/EEC and introducing new simplification measures with regard to value added tax — scope of certain exemptions and practical arrangements for implementing them (OJ 1995 L 102, p.

(18) , that article has been replaced by the following: 'In the case of immovable property acquired as capital goods, the adjustment period may be extended up to 20 years'.

(4) Staatsblad 1978, p. 677.

(5) Staatsblad 1968, p. 329.

(6) Staatsblad 1995, p. 659.

(7) [1998] ECR I-8153.

(8) [2000] ECR I-4279.

(9) Opinion of Advocate General Geelhoed in Case C-17/01 Sudholz [2004] ECR I-4245. GEMEENTE LEUSDEN AND HOLLN GROEP

(10) Case 8/81 [1982] ECR 53, paragraph 44.

(11) Case 207/87 [1988] ECR 4433, paragraphs 14 ro 16.

(12) Case C-136/99 [2000] ECR I-6109, paragraph 23.

(13) In its observations, in fact, the Commission started from the premiss that in order to determine whether the tax under Article 5(7)(a) of the directive was chargeable to the Holin Group, it was necessary to establish the date when the lease was concluded rather than the date when it took effect. Assuming, therefore, that the contract was concluded before 29 December 1995, it bad maintained that, since the lease was not yet subject to VAT in accordance with the legislation in force on that date, by charging the tax in question to the Holin Group, the Netherlands tax authority had violated the principles of the protection of legitimate expectations and legal certainty.

(14) Case 98/78 [1979] ECR 69, paragraph 20.

(15) Case 99/78 [1979] ECR 101, paragraph 8.

(16) Joined Cases C-143/88 and C-92/89 [1991] ECR I-415, paragraph 49.

(17) Case 97/90 Lennarlz [1991] ECR I-3795, paragraph 8.

(18) See Case 268/83 Rompelman [1985] ECR 655, paragraphs

(22) to 24; Case C-110/94 Inzo [1996] ECR I-857, paragraphs 15 to 19; Case C-37/95 Ghent Coal Terminal [1998] ECR I-1, paragraph 17; Joined Cases C-110/98 and C-147/98 Gabalfrisa [2000] ECR I-1577, paragraph 47; Case C-396/98, cited in footnote 8 above, paragraph 36; and Case C-400/98 Breitsohl [2000] ECR I-4321, paragraph 34).

(19) See Case 50/87 Commission v France [1988] ECR 4797, paragraphs 16 and 21, and Case C-97/90, cited in footnote

(17) above, paragraph 27.

(20) See Case C-110/94, cited in footnote 18 above, paragraphs

(21) , 24 and 25; Case C-37/95, cited in footnote 18 above, paragraphs 20 and 22; Case C-381/97, cited in footnote 7 above, paragraph 26; Case C-396/98, cited in footnote 8 above, paragraph 42; and Case C-400/98, cited in footnote

(18) above, paragraph 41. See, to the same effect, the Opinion of Advocate General Geelhoed in Case C-17/01, cited in footnote 9 above, point 48.

(21) Case C-396/98, cited in footnote 8 above, paragraph 47; see also Case C-62/00 Marks and Spencer [2002] ECR I-6325, paragraph 45.

(22) Case 97/90, cited in footnote 17 above, paragraph 21.

(23) See paragraph 3.4.5 of the order for reference, in which the Hoge Raad states that: 'the present case ? involve[s] the charging of a tax on the basis of Article 5(7)(a) of the Sixth Directive, which in practice has the result that the right to deduct which arose pursuant to Article 17 of the Sixth Directive will be adjusted' (emphasis added).

(24) See paragraph 3.1.1 of the order for reference in which the Hoge Raad states that: The party concerned deducted the turnover tax charged in this respect'.

(25) Case 8/81, cited in footnote 11 above.

(26) Case 207/87, cited m footnote 12 above.

(27) Case C-136/99, cited in footnote 13 above.

(28) See paragraph 3.4.5 of the order for reference, cited in footnote 23 above.

(29) See, inter alia, Case C-143/88, Zuckerfabrik, cited in footnote 16 above, which contains further references.

(30) I am thinking in particular of the passage which refers to a '... right to deduct arising in the period between notification of the legislative amendment mentioned in Question 1 and its entry into force?'.

(31) See, among many, Case 108/81 Amylum [1982] ECR

(310) 7, paragraphs 5-6 and Case C-143/88, cited in footnote

(16) above, paragraphs 50 to 54.

(32) Case C-110/94, cited in footnote 18 above, paragraph 24; Joined Cases C-110/98 and C-147/98, cited in footnote 18 above, paragraph 46; Case C-396/98, cited in footnote 8 above, paragraph 40.

(33) Case C-318/00 Bacardi-Martin [2003] ECR I-905, paragraph 41. To the same effect, sec, among others, Case C-415/93 Bosman and Others [19951 ECR I-4921, paragraph 59; Case C-421/97 Taranlik [1999) ECR I-3633, paragraph 33; and Case C-36/99 Idéal Tourisme [2000] ECR I-6049, paragraph 20.

(34) Case C-318/00, cited in footnote 33 above, paragraph 43. See also Case C-343/90 Lourenço Dias [1992] ECR I-4673, paragraphs 17 and 18; Case C-83/91 Meilicke [1992] ECR I-4871, paragraph 25; Case C-415/93, cited in footnote 33 above, paragraph 61; Case C-437/97 EKW and Wein & Co [2000] ECR I-1157, paragraph 52; and Case C-36/99, cited in footnote 33 above, paragraph 20.

(35) Case C-343/90, cited in footnote 34 above, paragraph 20.

(36) Case 244/80 Foglia v Novello [1981] ECR 3045, paragraph 17.

(37) Sec the Opinion of Advocate General Lenz in Case C-11O/94, cited in footnote 18 above, point 27; sec also Case 268/83, cited in footnote 18 above, paragraph 23.

(38) Article 11(A)(1)(b) provides that, for the supplies referred to in Article 5(6) and (7) of the directive, the taxable base is to be the purchase price of the goods or of similar goods or, in the absence of the purchase price, the cost price, determined at the time of supply.

(39) Although, at the hearing, the Commission changed its stance, as compared with its written observations, in relation to the first question submitted in this case (see point 43 above), it made no further comment on the second question at the hearing.