C-50/87 Commission v France

Judgment of the Court of 21 September 1988. - Commission of the European Communities v French Republic. - Failure by a Member State to fulfil its obligations - Articles 17 to 20 of Council Directive 77/388/EEC of 17 May 1977 - Limitation of the right to deduct VAT on let immovable property. - Case 50/87. European Court reports 1988 Page 04797 Swedish special edition Page 00599 Finnish special edition Page 00615

Summary Parties Grounds Decision on costs Operative part

++++

Tax provisions - Harmonization of legislation - Turnover taxes - Common system of value-added tax - Deduction of tax paid on inputs - Right conferred on taxable persons - Limitations - Need for an express Community provision - Legislation limiting the right of deduction in relation to let immovable property

( Council Directive 77/388, Arts 17 to 20 )

The system for deduction of value-added tax paid on inputs provided for in Articles 17 to 20 of the Sixth Directive is meant to relieve the trader entirely of the tax payable or paid in the course of his economic activities . Any limitation of the right of deduction granted to taxable persons must, in view of its impact on the level of the tax burden, be applied in a similar manner in all the Member States and presupposes the existence of a Community provision expressly authorizing it . In the absence of such a provision, the right of deduction must be exercised immediately in respect of all the taxes charged on transactions relating to inputs .

Legislation which, for undertakings that let immovable property which they have acquired or had built, limits the right of deduction to a fraction of the tax paid on inputs where the amount of the proceeds of the letting of the property is less than a specified percentage of its value is not permitted by, and is therefore incompatible with, the directive .

In Case 50/87

Commission of the European Communities, represented by Johannes F . Buhl, a Legal Adviser to the Commission, acting as Agent, and Alain Van Solinge, a member of its Legal Department, acting as Joint Agent, with an address for service in Luxembourg at the office of Georgios Kremlis, a member of its Legal Department, Jean Monnet Building, Kirchberg,

applicant,

v

French Republic, represented by Régis de Gouttes and Bernard Botte of the Directorate for Legal Affairs of the Ministry of Foreign Affairs, acting as Agents, with an address for service in Luxembourg at the French Embassy, 9 boulevard Prince Henri,

defendant,

APPLICATION for a declaration that by introducing and maintaining in force fiscal rules restricting certain taxable persons' right to deduct the VAT paid on inputs at the time when the tax becomes chargeable, the French Republic has failed to fulfil its obligations under the EEC Treaty,

THE COURT

composed of : A . J . Mackenzie Stuart, President, G.Bosco, J . C . Moitinho de Almeida and G . C . Rodríguez Iglesias ( Presidents of Chambers ), T . Koopmans, U . Everling, Y . Galmot, C . N . Kakouris and F . A . Schockweiler, Judges,

Advocate General : Sir Gordon Slynn

Registrar : H . A . Ruehl, Principal Administrator

having regard to the Report for the Hearing and further to the hearing on 3 March 1988,

after hearing the Opinion of the Advocate General delivered at the sitting on 25 May 1988,

gives the following

Judgment

Legal context and the dispute

1By an application lodged at the Court Registry on 18 February 1987, the Commission of the European Communities brought an action under Article 169 of the EEC Treaty for a declaration that by introducing and maintaining in force fiscal rules restricting certain persons' right to deduct the VAT paid on inputs at the time when the tax becomes chargeable and by failing to comply with the Sixth Council Directive ( 77/388/EEC ) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value-added tax : uniform basis of assessment ( Official Journal 1977, L 145, p . 1 ) ( hereinafter referred to as "the Sixth Directive ") and in particular Articles 17 to 20 thereof, the French Republic had failed to fulfil its obligations under the Treaty .

2By Decree No 79-310 of 9 April 1979 laying down special rules regarding the deduction of value-added tax charged on let immovable property, the French Republic introduced a tax system under which undertakings letting immovable property which they had purchased or had built could deduct only a fraction of the value-added tax (" VAT ") charged on the purchase or construction of such property where the annual income from the letting thereof was less than one-fifteenth of the property' s value . The provisions of that decree were incorporated in the Code général des impots ( General Tax Code ) as Articles 233 A to 233 E .

3The Commission, considering the French legislation incompatible with the Sixth Directive, addressed a letter to the Government of the French Republic on 27 March 1985 calling upon it to submit its observations, in accordance with the first paragraph of Article 169 of the EEC Treaty .

4The French Government did not respond to that letter and therefore the Commission delivered a reasoned opinion to it on 14 May 1986 . The French Republic refused to comply with the opinion and the Commission then brought the present action on 18 February 1987 .

5Reference is made to the Report for the Hearing for a fuller account of the national legislation at issue, the course of the procedure, and the conclusions, submissions and arguments of the parties, which are referred to or discussed hereinafter only in so far as is necessary for the reasoning of the Court .

Admissibility

6The French Republic pleads that the application is inadmissible on the ground that the only complaint made by the Commission in the letter calling for its observations related to the incompatibility of the decree in question with the Sixth Directive whereas, in the reasoned opinion and in the application, it is accused of infringing Articles 99 and 100 of the EEC Treaty by adopting that decree and by failing to comply with the said directive . Owing to that change in the subject-matter of the dispute the French Republic was not able properly to prepare its defence in the procedure prior to the commencement of legal proceedings .

7The Commission maintains that the complaint made in the letter calling for observations is reiterated in its entirety in the reasoned opinion and in the application . The Sixth Directive was adopted under Articles 99 and 100 of the Treaty; in its reasoned opinion and in the application, the Commission confined itself to defining the scope of the complaint made in the letter calling for observations, criticizing the French Republic for adopting legislation incompatible with the directive and thus failing to fulfil its obligations under the abovementioned provisions of the Treaty .

8It must be observed that it is apparent both from the letter calling for observations and from the reasoned opinion and the application that the issue in this dispute is whether the French legislation is contrary to the Sixth Directive . Since there has been no change in the subject-matter of the dispute during the various stages of the proceedings, the rights of the defence have not been disregarded .

9The objection of inadmissibility raised by the French Republic must therefore be dismissed .

Grounds

Substance

10The Commission claims that Articles 17 to 20 of the Sixth Directive impose upon Member States that allow taxable persons, pursuant to Article 13 C ( a ), the right of option for taxation in the case of the letting of immovable property the obligation to grant those persons the right to a total and immediate deduction of the VAT paid on inputs and that that right may not be limited according to the amount of the rent charged .

11The French Republic contends that the legislation in question relates to leases at rents lower than those usually charged on the market, which are granted either by certain undertakings to their subsidiaries or by certain local authorities, for social reasons, to sports or cultural associations or to undertakings in order to help the latter to establish themselves . Such activities essentially appear to involve the grant of a benefit, but to allow the landlord no right of deduction in such cases would be excessively severe . The legislation in question is, it claims, in conformity with Article 2 of Directive 67/227 of the Council of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes ( Official Journal, English Special Edition 1967, p . 14, hereinafter referred to as "the First Directive "); that article lays down the principle that the price of property purchased must be passed on in the cost price of the property let by the taxable person .

12The relevant aspects and features of the VAT system should first be described .

13Article 4 ¹ of the Sixth Directive defines a taxable person as "any person who independently carries out in any place any economic activity specified in paragraph ², whatever the purpose or results of that activity ". Paragraph ² of that article adds that "the economic activities referred to in paragraph ¹ shall comprise all activities of producers, traders and persons supplying services ". Also considered to be an economic activity is "the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis ".

14Article 17 ¹ of the same directive provides that "the right to deduct shall arise at the time when the deductible tax becomes chargeable" and Article 17 ² authorizes the taxable person, to the extent to which the goods and services are used for the purposes of his taxable transactions, "to deduct from the tax which he is liable to pay ... value-added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person ".

15From the features of VAT described above it may be inferred, as the Court pointed out in its judgment of 14 February 1985 in Case 268/83 Rompelman (( 1985 )) ECR 655, that the deduction system is meant to relieve the trader entirely of the burden of VAT payable or paid in the course of all his economic activities . The common system of VAT consequently ensures that all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT, are taxed in a wholly neutral way .

16The combined effect of the rules referred to above is that, in the absence of any provision empowering the Member States to limit the right of deduction granted to taxable persons, that right must be exercised immediately in respect of all the taxes charged on transactions relating to inputs .

17Such limitations on the right of deduction have an impact on the level of the tax burden and must be applied in a similar manner in all the Member States . Consequently, derogations are permitted only in the cases expressly provided for in the directive .

18With regard more particularly to the taxation of lettings of immovable property, it should be noted that the Sixth Directive allows the Member States either to exempt them ( Article 13 B ( b ) ) or to grant taxable persons the right to opt for taxation ( Article 13 C ( a ) ). In the latter case, which is the relevant case here, where the right to opt for taxation is exercised, undertakings which let immovable property and which are taxable persons within the meaning of Article 4 of the Sixth Directive are covered by the deduction system mentioned above .

19The French legislation on the deduction of VAT charged on let immovable property does not allow total and immediate deduction where the aggregate amount of the proceeds from the letting of the property is less than one-fifteenth of the property' s value . Such legislation is therefore incompatible with the abovementioned provisions of the Sixth Directive .

20It is true that, as pointed out by the French Republic, such legislation is necessary particularly in order to deal with lettings at low rents granted by local authorities to associations with social objects or to undertakings which have come to their areas in order to establish themselves . The result of such practices would be to allow local authorities to make subsidies which would in part be borne by the State if the principle of total and immediate deduction were upheld in such cases .

21In that connection, however, it must be stated that in order to deal with situations such as those referred to by the French Republic, Article 20 of the Sixth Directive provides for a system of adjustment . Where, because of the amount of the rent, the lease must necessarily be regarded as involving a concession and not as constituting an economic activity within the meaning of the directive, the deduction initially made is adjusted and the time-limit for that adjustment may be extended up to 10 years .

22As regards the need to prevent tax evasion, mentioned by the French Republic, that need cannot justify measures derogating from the directive otherwise than under the procedure which is provided for in Article 27 thereof and to which the French Republic has not had recourse .

23Finally, it must be observed that Article 2 of the First Directive, according to which "on each transaction, value-added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the value-added tax borne directly by the various cost components", cannot serve as a basis for the French legislation at issue . That provision merely lays down the principle of the right to deduction, and the conditions applicable thereto are laid down in the abovementioned provisions of the Sixth Directive .

24It follows from the foregoing that by introducing and maintaining in force, in breach of the Sixth Council Directive of 17 May 1977, fiscal rules which, for undertakings that let immovable property which they have acquired or had built, limit the right to deduct value-added tax paid on inputs where the amount of the proceeds of the letting of such immovable property is less than one-fifteenth of its value, the French Republic has failed to fulfil its obligations under the Treaty .

Costs

Costs

25Pursuant to Article 69 ² of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs . Since the French Republic has failed in its submissions, it must be ordered to pay the costs .

Operative part

On those grounds,

THE COURT

hereby :

¹ Declares that by introducing and maintaining in force, in breach of the Sixth Council Directive of 17 May 1977, fiscal rules which, for undertakings that let immovable property which they have acquired or had built, limit the right to deduct value-added tax paid on inputs where the amount of the proceeds of the letting of such immovable property is less than one-fifteenth of its value, the French Republic has failed to fulfil its obligations under the Treaty;

Signatures

² Orders the French Republic to pay the costs .

OPINION OF ADVOCATE GENERAL SIR GORDON SLYNN delivered on 25 May 1988 My Lords,

By Articles 233 A to 233 E of the French General Tax Code which incorporated French Decree No 79-310 of 9 April 1979 (JORF, 19.4.1979, p. 902) undertakings which lease buildings for an annual return of less than one-fifteenth of the value of the property, in respect of which value-added tax is chargeable, may only deduct a fraction of the value-added tax charged on the purchase or construction of the property by those undertakings. The value of the property is defined as the taxable amount of the property for the purposes of value-added tax less the value of the land and financing costs. The legislative provisions lay down a formula for the calculation of the fraction, and for adjustments which have to be made in certain eventualities, which are summarized in the report for the hearing and which I do not repeat here.

The Commission considered that these provisions were incompatible with Council Directive 77/388/EEC of 17 May 1977 (Official Journal 1977, L 145, p. 1) governing the uniform basis of assessment for value-added tax ('the Sixth Directive'). After its initiating letter of 27 March 1985 pursuant to Article 169 of the EEC Treaty

4808 and after issuing a reasoned opinion dated 14 May 1986, the Commission made the present application to the Court on 18 February 1987 for a declaration that France had failed to fulfil its obligations under Articles 99 and 100 of the EEC Treaty by adopting and maintaining in force fiscal rules restricting certain taxable persons' right to deduct VAT paid ('input tax') at the time when the deductible tax becomes chargeable and failing to comply with the Sixth Directive, in particular Articles 17 to 20 thereof.

France objects first that these proceedings are inadmissible. It contends that the initiating letter alleged incompatibility with the Sixth Directive, whereas the reasoned opinion and this application allege a breach of Articles 99 and 100 of the Treaty by the adoption of the decree and a failure to comply with the Sixth Directive.

In my view, France is right to stress the importance of the initiating letter which is intended to give the Member State to which it is addressed adequate notice of the substance of the claim against it. It is for the Commission to formulate clearly and precisely at the first stage the legal basis for its contention that a Member State has failed to fulfil its Treaty obligations (Opinions in Case 254/83 Commission v Italy [1984] ECR 3395, at pp. 3401 and 3402 and Case 193/80 Commission v Italy [1981] ECR 3019, at pp. 3039 and 3040).

In this case, however, it is plain that in the letter as well as in the reasoned opinion and in this application, the essential claim made is that the French legislation contravenes the Sixth Directive. France had ample opportunity at all stages to answer that contention and I do not consider that it has been deprived of its rights under the procedure laid down by Article 169 (see Case 211/81 Denmark v Commission [1982] ECR 4547). The reference in the reasoned opinion and the application to Articles 99 and 100 of the EEC Treaty, on which the Sixth Directive was based, seem to me to be a formality, perhaps misconceived, and in any event not pursued in oral argument. For my part I accept that these proceedings are admissible.

Both in writing and orally, France has put forward arguments to explain the basis of the limitation on the deduction of VAT and to justify on an accountancy basis the formula adopted which it has variously said is to prevent fraud, or more fundamentally, to prevent deduction of the VAT where premises are let at unrealistically low rents by certain undertakings to associated undertakings and by local authorities for what are really social ends. It is said that if a full deduction of input tax paid on the construction or purchase of a building is allowed in respect of a letting at a very low rent the undertaking can deduct far more than it is liable to pay and thereby gains an advantage at the expense of public funds.

If the right to adopt this sort of provision exists, as France contends, then prima facie the actual figures put forward are persuasive. The question, however, is whether under the Sixth Directive this kind of provision may be adopted.

The Commission's case is that there is no provision in the Sixth Directive which permits this kind of arrangement.

As I see it the starting point is Article 4 (1) of the Sixth Directive which defines a 'taxable' person as 'any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity'. Those activities 'comprise all activities of producers, traders and persons supplying services'. 'The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.' In addition, by paragraph 3 of Article 4 'Member States may also treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in paragraph 2'. It seems to follow that if the undertaking in question only carries out the lettings occasionally, France could have opted not to treat them as taxable persons. If the activities are carried out regularly and other than occasionally then the undertaking is a taxable person.

The directive, however, gives a Member State the right to exempt the leasing or letting of immovable property (subject to certain exceptions) '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' (Article 13 (B) (b)). A Member State may also grant taxpayers the right of option for taxation in cases of letting and leasing of immovable property (Article 13 (C) (a)).

Once VAT is chargeable the basic rule is to be found in Article 17: '(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;'. Rules for the application of this basic provision are set out in Articles 17 to 20 of the Sixth Directive.

The directive allows two modifications to this basic provision. In the first place Article 20 provides detailed mechanisms for the adjustment, in certain circumstances, of deductions allowed earlier. In particular, Article 20 (1) (a) permits an adjustment to

4810

be made where the deduction was in reality higher or lower than that to which the taxable person was entitled. In the second place, Article 27 enables the Council to authorize a Member State to derogate from the provisions of the directive 'in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance'.

Subject to these possible modifications it seems to me that Article 17 is to be read, and indeed can only be read, as meaning that the right to deduct arises in full at the time when the deductible tax becomes chargeable. It seems to me impossible to construe that article, or any other provision of the directive, in the absence of the special authorization under Article 27, as enabling a Member State to permit the deduction of a fraction only of input tax over a prescribed number of years.

This is not undermined by the provision in Article 13 (B) that Member States shall exempt the leasing or letting of immovable property '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'. It seems to me that that provision goes to the conditions which must be present before the right to deduct arises and cannot operate to limit the right to deduct once it has arisen.

I find nothing in the wording or purpose of the system for the deduction of tax found in Articles 17 to 20 to provide for the deduction of a fraction only of input VAT by taxable persons. An interpretation to the latter effect would it seems to me, in any event, run counter to the judgments of the Court in Case 15/81 (Gaston Schul Douane Expediteur BVv Inspecteur der Invoerrechten en Accijnzen [1982] ECR 1409, at p. 1426, paragraph 10) and Case 268/83 (Rompelman v Minister van Financiën [1985] ECR 655, at pp. 663 and 664, paragraph 16). In the latter case the Court said that 'a basic element of the VAT system is that VAT is chargeable on each transaction only after deduction of the amount of the VAT borne directly by the cost of the various components of the price of the goods and services and that the deduction procedure is so designed that only taxable persons may deduct the VAT already charged on the goods and services from the VAT for which they are liable'. The deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of his economic activities, so that all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT, are taxed in a wholly neutral way (Rompelman, paragraph 19 of the judgment). That does not accord with the concept — central to the position adopted by the French Republic — that part of the right to deduct input VAT may, in appropriate circumstances, be deferred.

The French Republic contends that in so far as Article 2 (2) of Directive 67/227/EEC (Official Journal, English Special Edition 1967, p. 14) ('the First Directive') states that: 'On each transaction, value-added tax, calculated on the price of the goods or services at the rate applicable to such goods and services, shall be chargeable after deduction of the amount of value-added tax borne directly by the various cost components', the Member State is entitled to limit the right to deduct if it can prove that the deduction relates to goods and services the cost of which will not be passed on in the price of the taxed transaction.

I do not accept that argument. That article of the First Directive must be read in the light of the greater elaboration of the harmonized system of VAT contained in the Sixth Directive. In my view, the passages in the judgments of the Court in Gaston Schul and Rompelman, cited earlier, make it clear that VAT only becomes chargeable on a transaction after deduction of input VAT and that the trader is to be relieved entirely of the burden of the VAT payable or paid in the course of all his economic activities. It follows that the Member State is not entitled to limit the right to deduct if it can prove that the deduction relates to goods and services the cost of which will not be passed on in the price of the taxed transaction. If it were permitted to do so, the burden of the input VAT paid would still fall on the taxable person and that is plainly contrary to the interpretation already given by the Court as to the purpose and operation of the deduction system.

Thus, the directive provides certain options to deal with particular economic circumstances — in Article 4, in Article 13 (A), (B) and (C), in Article 20 and in Article 27. There is no power to create a further option however convenient or defensible economically that may appear. Member States must choose between the options laid down in the directive to achieve so far as possible the result they desire.

It follows that the provisions contained in Decree No 79-310 are not compatible with the uniform basis of assessment established by the Sixth Directive.

Accordingly, in my opinion, the Commission is entitled to a declaration to that effect and the French Government should pay the costs of this application.