C-58/04 Köhler

JUDGMENT OF THE COURT (First Chamber)

15 September 2005 *

In Case C-58/04,

Reference for a preliminary ruling under Article 234 EC from the Bundesfinanzhof (Germany), made by decision of 23 October 2003, received at the Court on 11 February 2004, in the proceedings

Antje Köhler

v

Finanzamt Düsseldorf-Nord,

THE COURT (First Chamber),

composed of P. Jann, President of the Chamber, N. Colneric, K. Schiemann (Rapporteur), E. Juhász and E. Levits, Judges,

* Language of the cast·: German.

Advocate General: M. Poiares Maduro, Registrar: M. Ferreira, Principal Administrator,

having regard to the written procedure and further to the hearing on 17 February 2005,

after considering the observations submitted on behalf of:

— Ms Köhler, by G. Sinfield, Solicitor, H.-W. Schneiders, Steuerberater, and C. Küppers, Rechtsanwalt,

— the German Government, by C.-D. Quassowski, L. Lumma and W.-D. Plessing, acting as Agents,

— the Greek Government, by V. Kyriazopoulos, S. Chala and I. Bakopoulos, acting as Agents,

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

after hearing the Opinion of the Advocate General at the sitting on 7 April 2005, KOHLER

gives the following

Judgment

Legal context and the dispute

1This reference for a preliminary ruling concerns the interpretation of 'stop in a third territory' within the meaning of Article 8(1 )(c) of Sixth Council Directive 77/388/ EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1), as amended by Council Directive 92/111/EEC of 14 December 1992 amending Directive 77/388 and introducing simplification measures with regard to value added tax (OJ 1992 L 384, p. 47) ('the Sixth Directive').

2The reference was made in the course of proceedings between Ms Kohler and the Finanzamt (Tax Office) as to whether sales made by the person concerned in her boutique on a cruise ship were taxable.

Legal background

Community legislation

3Article 8 of the Sixth Directive provides that:

'1. The place of supply of goods shall be deemed to be:

(b) in the case of goods not dispatched or transported: the place where the goods are when the supply takes place.

(c) in the case of goods supplied on board ships, aircraft or trains during the part of a transport of passengers effected in the Community: at the point of the departure of the transport of passengers.

For the purposes of applying this provision:

— "part of a transport of passengers effected in the Community" shall mean the part of the transport effected, without a stop in a third territory, between the point of departure and the point of arrival of the transport of passengers,

— "the point of departure of the transport of passengers" shall mean the first point of passenger embarkation foreseen within the Community, where relevant after a leg outside the Community,

— "the point of arrival of the transport of passengers" shall mean the last point of disembarkation of passengers foreseen within the Community of passengers who embarked in the Community, where relevant before a leg outside the Community.

...'.

National legislation

4Pursuant to the first sentence of Paragraph 1(1) of the Umsatzsteuergesetz (German Law on value added tax) ('UStG'), supplies made by a trader within German territory for consideration in the course of his business are subject to turnover tax.

5Paragraph 3(6) of the UStG states:

'A supply is deemed to be made at the place where the goods were situated at the time the right to dispose of them arose.'

6Paragraph 3e(1) of the UStG provides:

'If goods, not intended for immediate consumption, are supplied on board a ship, an aircraft or a train during a transport of passengers within the Community, the point of departure in the Community of the relevant transport shall be treated as the place of supply.'

7Paragraph 3e(2) of the UStG provides:

'A transport of passengers within the Community, within the meaning of subparagraph (1), shall be deemed to include a transport or part of a transport between the point of departure and point of arrival of the means of transport in the Community without any stop outside the Community. For the purposes of the first sentence, the point of departure shall mean the first point of passenger embarkation foreseen within the Community. For the purposes of the first sentence, the point of arrival shall mean the last point of passenger disembarkation foreseen within the Community. In the case of a return trip, the return leg shall be considered to be a separate transport.'

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

8During 1994, Ms Kohler operated a boutique on a cruise ship which made voyages departing from Kiel, Bremerhaven or Travemunde (towns in Germany), travelling to ports outside the Community (Norway, Estonia, Russia and Morocco) and ending in Kiel, Bremerhaven or Genoa (Italy). Those trips could only be booked for the entire cruise; it was not possible to embark for the first time or disembark finally during the cruise. However, it was possible to disembark for short periods for stops of several hours or one day in order to make sightseeing trips.

KOHLER

9The Finanzamt decided to treat sales made in Ms Köhlers shop as taxable transactions on the ground that the points of arrival and departure were situated within Community territory. Ms Köhler brought an appeal against that decision before the Finanzgericht, claiming that on account of stops made in a third territory the sales in question were not to be taxable in Germany.

10The Finanzgericht dismissed her appeal. It held that the fact that the transport of passengers was interrupted between the points of departure and arrival by stops in a third territory did not imply that the transactions were made outside national territory. Furthermore, only those stops intended for the embarkation of new passengers or for final disembarkation should be regarded as 'stops' within the meaning of Paragraph 3 of the UStG.

11Ms Kohler brought an appeal before the Bundesfinanzhof contesting that interpretation.

12Taking the view that the interpretation of 'stop in a third territory' is determinative of the outcome of the dispute, the Bundesfinanzhof decided to stay its proceedings and to refer the following question to the Court for a preliminary ruling:

'Are stops made by a ship in ports of non-member countries, at which passengers may disembark from the vessel only for a short period, for example for sightseeing purposes, but at which they may not begin or end their journey, "stops in a third territory" within the meaning of Article 8(1)(c) of [the Sixth Directive]'

The question referred for a preliminary ruling

Observations submitted to the Court

13The German Government suggests that the answer to the question should be in the negative. It argues that 'stop' should not be interpreted in a literal and restrictive fashion as applying to an individual traveller who makes a short stop somewhere before continuing his journey.

14A 'stop' implies that passengers may get on or off a means of transport in order to begin or end their journey. Classifying a halt, during which passengers may only leave the means of transport briefly, as a 'stop' would run counter to the meaning and purpose of the provision in question. If the definition of 'stop' put forward by the applicant were to be accepted, the attachment rule laid down in Article 8(l)(c) of the Sixth Directive and consequently the fiscal aim of that provision (taxation of on board supplies during intra-Community transport on Community territory) could easily be evaded. It would be enough to choose the means of transport and the itinerary so as to allow stops on the territory of third countries during which the passengers could briefly leave the means of transport, without being able to end their journey definitively.

15The applicant, the Commission of the European Communities and the Greek Government take the view that the question referred for a preliminary ruling should be answered in the affirmative.

16The applicant asserts that a stop does not necessarily involve embarkation or disembarkation from the means of transport. If that were the intention of the Community legislature it would have explicitly used the words 'embarkation' or 'disembarkation' as it did in order to define the 'point of departure' and the 'point of arrival'. 'Stop'should be interpreted as meaning a pause, an interruption of a journey or a halt.

17The Commission submits that the rule laid down in Article 8(1)(c) of the Sixth Directive cannot be applied if it conflicts with the law of a third country. The Commission takes the view that the effect of short stops in the territory of third countries is to break the continuity of the intra-Community character of the transport. Each time that the passengers are able to purchase goods which are normally taxed the jurisdiction of the Member State which is the point of departure of the transport of passengers should therefore be suspended, so as not to conflict with the right of a third country to impose tax within its territory.

18The Greek Government argues that by making an intermediate stop in a third country or in a territory which, from a tax point of view, is not part of the Community, the ship travels to and returns from a third country. Accordingly, goods sold in shops on those vessels should enjoy the tax exemption applied to passengers from third countries. Such an approach presupposes that passengers are able to disembark, during the stop, in a third territory and purchase tax-free goods there on the ground that they export them, regardless of the length of their stay in that country and without any obligation to end the journey.

Reply of the Court

19In the absence of a specific definition of 'stop' in the Sixth Directive, it is appropriate to find its interpretation in the scheme and purpose of Article 8(1)(c).

20That article is among the provisions of the Sixth Directive devoted to the determination of the place of taxable transactions and lays down in Article 8(1)(b), in relation to supplies of goods, a general rule according to which, in the case of goods not dispatched or transported, the place of supply is deemed to be the place where the goods are when the supply takes place.

21Article 8(l)(c) contains a derogation from this principle of territoriality. It provides that the place where the goods are supplied is deemed to be situated at the point of the departure of the transport of passengers in the case of goods supplied on board ships, aircraft or trains during the part of a transport of passengers effected in the Community.

22Therefore, Article 8(1)(c) of the Sixth Directive seeks to determine in a uniform manner the place of taxation of supplies of goods made on board ships, aircraft or trains in the course of a journey starting and ending on Community territory and limits taxation, during the part of the transport of passengers effected within the Community, to the point of departure of the means of transport. The result is a simplified scheme of taxation which avoids, throughout the intra-Community journey, the successive application of the national VAT systems of the Member States through which the journey is made and, therefore, conflicts concerning tax jurisdiction between Member States.

23Furthermore, it must be observed that Article 8(1)(c) of the Sixth Directive states explicitly that 'part of a transport of passengers effected in the Community' is to be regarded as the part of the transport effected, without a stop in a third territory, between the point of departure and the point of arrival of the transport of passengers.

24By excluding in that manner the existence of 'part of a transport of passengers effected within the Community', in the case of a stop in a third territory, Article 8(1) (c) of the Sixth Directive thus aims to avoid the risks of conflicts of jurisdiction with the tax systems of third countries which would arise in the event of goods being supplied whilst an intra-Community journey was interrupted by a stop in a third territory.

25In that connection, it must be recalled that, as regards the taxation of services on board ships, the Court has already acknowledged that the Sixth Directive does not prohibit Member States from extending the scope of their tax legislation beyond their territorial limits, so long as they do not encroach on the jurisdiction of other States (Case 283/84 Trans Tirreno Express [1986] ECR 231, and Case C-30/89 Commission v France [1990] ECR I-691, paragraph 18). Such considerations also apply in relation to taxation of supplies of goods.

26In the light of the scheme and the purpose of Article 8(1)(c) of the Sixth Directive, it should therefore be held that any supply of goods effected on a ship during a stop in a third territory is deemed to be made outside the scope of the Sixth Directive, the tax treatment of the supply of goods falling, in that case, within the tax jurisdiction of the State in which the stop is made.

27Having regard to all of the foregoing considerations, the answer to the question referred for a preliminary ruling must be that stops made by a ship in ports of a third country during which passengers may leave the ship, even for a short period, are 'stops in a third territory' within the meaning of Article 8(1 )(c) of the Sixth Directive.

Costs

28Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

On those grounds, the Court (First Chamber) hereby rules:

Stops made by a ship in the ports of a third country during which passengers may leave the ship, even for a short period, are 'stops in a third territory' within the meaning of Article 8(1)(c) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 92/111/EEC of 14 December 1992 amending Directive 77/388/EEC and introducing simplification measures with regard to value added tax.

[Signatures]

KÖHLER

OPINION OF ADVOCATE GENERAL

POIARES MADURO delivered on 7 April 2005 1

Introduction

1In this reference for a preliminary ruling the Bundesfinanzhof (Federal Finance Court, Germany) seeks guidance from the Court of Justice concerning the interpretation of the concept of 'stop in a third territory' within the meaning of the Article 8(1)(c) of Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of Member States relating to turnover taxes — common system 2 for value added tax (the 'Sixth Directive').

I — The relevant Community provisions

2Article 2 of the Sixth Directive provides that 'the supply of goods ... effected for consideration within the territory of the

1 — Original language: Portuguese.

2 - OJ 1977 1. 145. p 1. as amended by Council Directive 91/680/ EEC of 16 December 1991 supplementing the common system of value added tax and amending Directive 77/388/EEC with a view to the abolition of fiscal frontiers (Ol 1991 L 376. p.1) and by Council Directive 92/111/EEC of 14 December 1992 amending Directive 77/388/EEC and introducing simplification measures with regard to value added tax (OJ 1992 L 384, p. 47).

country by a taxable person acting as such' is to be subject to value added tax.

3According to Article 3(2) 'the "territory of the country" shall be the area of application of the Treaty establishing the European Economic Community as stipulated in respect of each Member State in Article 227' (now Article 299 EC).

4Article 8(1 )(b) provides that 'the place of supply of goods ... not despatched or transported ... shall be deemed to be ... the place where the goods are when the supply takes place'.

5Article 8(1)(c) was introduced by Directive 91/680. The version substituted by Directive 92/111, in force in the year in which the dispute arose, provides that the place of supply of goods shall be deemed to be 'in the case of goods supplied on board ships, aircraft or trains during the part of a transport of passengers effected in the Community: at the point of departure of the transport of passengers.

For the purposes of applying this provision:

— "part of a transport of passengers effected in the Community" shall mean the part of the transport effected, without a stop in a third territory, between the point of departure and the point of arrival of the transport of passengers,

— "the point of departure of the transport of passengers" shall mean the first point of passenger embarkation foreseen within the Community, where relevant after a leg outside the Community,

— "the point of arrival of the transport of passengers" shall mean the last point of disembarkation of passengers foreseen within the Community of passengers who embarked in the Community, where relevant before a leg outside the Community.

In the case of a return trip, the return leg shall be considered to be a separate transport.

II — Facts, national provisions and the reference for a preliminary ruling

6In 1994 A. Köhler (the 'claimant') operated a shop on board a cruise ship. The claimant effected supplies in the course of running the shop and a dispute has arisen as to whether or not those supplies are taxable. The cruises in question departed from Kiel, from Bremerhaven and from Travemünde, passing through ports situated outside the territory of the Community, for example in Norway, Estonia, Russia or Morocco, and terminated in Kiel, Bremerhaven or Geneva. Bookings were available only for the entire cruise; it was not possible to book sections of the trip, or to embark for the first time or to disembark finally at ports en route.

7The Finanzamt (Tax Office) treated the sales made in the claimant's shop during those cruises as being taxable and liable to value added tax in Germany in accordance KOHLER with Paragraph 3e of the Umsatzsteuergesetz (Law on turnover tax) 1993 ('UStG') transposing Article 8(1)(c) of the Sixth Directive. Paragraph 3e(1) of the UStG provides that '... if goods, not intended for consumption on board, are supplied on board a ship ... during a transport of passengers within the Community, the point of departure in the Community of the relevant transport shall be treated as the place of supply'.

8Paragraph 3e(2) of the UStG provides:

'A transport of passengers within the Community, within the meaning of subparagraph (1), shall be deemed to include a transport or part of a transport between the point of departure and point of arrival of the means of transport in the Community without any stop outside the Community. For the purposes of the first sentence, the point of departure shall mean the first point of passenger embarkation foreseen within the Community. For the purposes of the first sentence, the point of arrival shall mean the last point of passenger disembarkation foreseen within the Community. In the case of a return trip, the return leg shall be considered to be a separate transport.'

9In her action against the decision of the Finanzamt (Tax Office) the claimant argued that, by reason of the stops made in a third territory, the sales at issue were not taxable in Germany; under Paragraph 3e of the UStG the supplies should not be regarded as having been effected during a transport within Community territory.

10The Finanzgericht (Finance Court) dismissed the action and held that the fact that the ship had made stops in a third territory between the ports of departure and of arrival did not imply that supplies of goods should be regarded as having been effected outside national territory. Only those stops in a third territory where passengers were able to disembark finally or where new passengers were able to embark for the first time should be regarded as 'stops' within the meaning of Paragraph 3e(2) of the UStG.

11The claimant appealed against that decision to the Bundesfinanzhof (Federal Finance Court), which decided to refer the following question to the Court of Justice for a preliminary ruling:

'Are stops made by a ship in ports of nonmember countries, at which passengers may disembark from the vessel only for a short period, for example for sightseeing purposes, but at which they may not begin or end their journey, "stops in a third territory" within the meaning of Article 8(1)(c) of Directive 77/388/EEC?'

III — Analysis

12It is more difficult to define the word 'stop' for the purposes of Article 8(1)(c) of the Sixth Directive than might appear from a cursory reading of the provision at issue. The term 'stop' does not in fact have one unambiguous meaning which may be deduced from the text. Several interpretations come to mind, ranging from stops for technical reasons, in particular for refuelling of the vessel or stops simply to allow passengers to enjoy panoramic views, to stops to allow new passengers to embark or to allow others to disembark finally; it also covers stops during which passengers are able to leave the ship to go sightseeing and shopping in the country they are visiting on the understanding that they will subsequently return to the vessel. There might at first appear to be some grounds for considering, as the claimant does to some extent in her written observations, that when the legislature has not drawn a distinction then none should be drawn when the legislation is interpreted. It would, however, be an over simplification to interpret the term 'stop' within the meaning of Article 8 of the Sixth Directive in its broadest sense without attempting to understand why the question whether or not a stop is made in a third territory should be relevant for the application of the specific system set out in Article 8 (1)(c) of the Sixth Directive.

A — The nature of Article 8 as a conflict rule for the delimitation of tax jurisdiction as between States

13The answer to the question raised by the Bundesfinanzhof first requires an analysis of Article 8 of the Sixth Directive, which incorporates the concept of a stop in a third territory. That article contains various conflict rules designed to delimit rationally, as between the Member States, the respective scope their national law is to have in the matter of VAT as regards the supply of goods. 3 Each of those rules determines which Member State is to have exclusive jurisdiction to impose VAT on a supply of goods, when the relevant connecting factors set out in Article 8 show that the goods were supplied in the territory of that State. In this respect Article 8 must necessarily be considered in parallel with Article 9, which contains conflict rules concerning the provision of services. Those two articles are, moreover, the only two articles in Title VI to the Sixth Directive — 'Place of taxable transactions' 4 — and the seventh recital, to which I have just referred, applies to them both equally.

14Although it is true that the Court of Justice has not yet had an opportunity to state categorically that Article 8 of the Sixth

3 — See the seventh recital in the preamble to the Sixth Directive. 4 — See in that connection the Opinion of Advocate General Sir Gordon Slynn in Case 283/84 Trans Tirreno Express [1986] ECR 231 and 232, especially p. 235 et seq.

KÖHLER Directive is intended to avoid conflicts concerning tax jurisdiction between States, tliat view has been expressed unequivocally as regards Article 9. In the Berkholz judgment of 4 July 1985 the Court stated that Article 9 is 'designed to secure the rational delimitation of the respective areas covered by national value added tax rules by determining in a uniform manner the place where services are deemed to be provided for tax purposes' and thus to establish definitively the exclusive jurisdiction of a Member State to charge VAT on services provided. 5 Those are thus essential rules for avoiding 'conflicts concerning jurisdiction'. 6 The Court also pointed out that a further criterion for the interpretation of Article 9(1) was determination of the most appropriate point of reference in order to avoid creating conflicts concerning tax jurisdiction between the Member States. 7

15The parallel nature of the framework of rules for the delimitation of tax jurisdiction provided for in Article 9 of the Sixth Directive and of the framework set out in Article 8 is well known. It therefore seems to me advisable to approach Article 8 in the light of the intention to avoid conflict by avoiding encroachment upon the tax juris

5 — Case 168/84 (1985] ECR I-2251. paragraph 14, and Case C-155/01 Cookies World [2003] ECR I-8785, paragraph 46. See also the judgments in Case C-68/92 Commission v France 9 [19 3] ECR I-5881. paragraph 14, Case C-69/92 Commission v Luxembourg [1993] ECR I-5907, paragraph 15. and Case C-73/92 Commission v Spam [1993] ECR I-5997, paragraph 12 6 — Case C-30/89 Commission v France [1990] ECR I-691, paragraph 10. Berkholz, paragraph 14, and Trans Tirreno Express, paragraph 15.

7 — Berkholz. paragraph 17, and, more recently. Case C-260/95 DFDS [1997] ECR I-1005, paragraph 19, and Case C-231/94 Faarborg-Gelting Limen [1996] ECR I-2395, paragraph 16. diction of other States, which the Court considered germane in interpreting the rules laid down in Article 9 on the provision of services.

16It is therefore within this general framework of the meaning and purpose of Article 8 of the Sixth Directive that we must understand the specific rule contained in Article 8(1)(c) and in particular the significance of the use of the term 'stop in a third territory' in that provision.

B — The origin and aims of Article 8(1)(c) of the Sixth Directive, in particular the concept of a 'stop in a third territory'

17An examination of the origin of Article 8 (1)(c), which was introduced by Council Directives 91/680 and 92/111, does not detract from, but tends rather to strengthen, the general meaning of Article 8 as a provision containing a set of rules designed to avoid conflict between States concerning tax jurisdiction.

18Council Directive 91/680 on the abolition of fiscal frontiers between the Member States introduced subparagraph (c), which sets out the simplified system of value added tax for goods supplied on board during intra-Community transport in accordance with the principle that tax should be levied in the Member State of origin. That subparagraph was designed to introduce simplified VAT measures applicable to journeys beginning and ending within the Community in accordance with the principle of point of origin. Such a solution was of course required as a result of the abolition of fiscal frontiers between the Member States; it was clearly undesirable to apply the general rule set out in subparagraph (b) — basing taxation on the place where the goods were situated when the supply was effected — since that would entail preparing a breakdown of supplies according to the territories of the various Member States which the means of transport had passed through.

19The wording of the abovementioned subparagraph (c), introduced by Council Directive 91/680, was amended by Council Directive 92/111 since, in the Commission's view, subparagraph (c) was liable to lead to confusion in the terms in which it was drafted. 8 In that respect the preparatory documents for Directive 92/111 show that the expression 'without a stop in a third territory' did not appear in the Commission's proposal for an amendment to subparagraph (c). That was added by the Council without any specific explanation of the underlying reasons. In line with that amendment, the Council also considered that the simplified system for taxation in the State of origin set out in subparagraph (c) should be applicable

8 — See p. 4 of the explanatory memorandum to the Proposal for a Council Directive amending Directive 77/388 and introducing simplification measures (presented by the Commission to the Council) Brussels, 4 November 1992, COM(92) 448 final. not to supplies of goods effected during 'transport of passengers within the Community', as proposed by the Commission but, in less broad terms, only to 'the part of a transport [of passengers] within the territory of the Community'. 9

20Those final two amendments to the Commission's proposal clearly show, in my view, a concern to ensure that the adoption of the simplified VAT system based on the Member State of origin of the intra-Community transport should not encroach upon the tax jurisdiction of non-member countries within their respective territories. Such an intention explains the inclusion of the concept of 'stop in a third territory' in the wording of the subparagraph in question in terms which are, moreover, fully supported 10 by international law.

21According to an established principle of international law, an essential feature of a State's sovereignty is that, first, lit has absolute and exclusive power to determine taxes within its territory and, secbnd, that

9 — Emphasis added.

10 — Although the sixth recital in the preamble to Directive 92/111 does not make specific reference to the need to safeguard relations with 'third territories' in the clarification incorporated by the Community legislature regarding determination of tax jurisdiction for certain operations conducted on board ships, aircraft or trains when passengers are carried within the Community, the second, third and fourth recitals clearly show how Directive 92/111 took account of relations with 'third territories' in the drafting of the provisions contained therein for the abolition of fiscal frontiers within the Community.

KÖHLER any exceptions to that principle, in particular where foreign tax laws might be applicable within the territory of a State in place of its own laws, must be made with the sovereign 11 consent of that State. That principle is moreover clearly evident in the case of merchant ships anchored in foreign ports. Inasmuch as they are within the internal 12 waters of the port State they remain totally 13 subject to the fiscal laws of that State. The situation is not affected by the fact that the

11 — See G. Gest and G. Tixier, Droit Fiscal international, 2nd edition, PUF, Paris 1990, p. 17, where reference is made to 'pouvoir fiscal absolu à l'intérieur de son territoire, qui constitue une sorte de chasse gardée'. In the same vein, A.H. Qureshi, The Freedom of a State to Legislate in Fiscal Matters under General International Law in The Public International Law of Taxation — Text, Cases and Materials, Graham & Trotman, London 1994, p. 29 to 31, and B. Terra, The Place of Supply in European VAT, Kluwer Law, Dordrecht 1998, p.

3. See also M. Rutsel Silvestre, The Jurisdiction to tax in International Law — Theory and Practice of Legislative Fiscal Jurisdiction, Kluwer, Deventer, 1989, pp. 7, 15, 16 and 23, and especially p. 37, where the tax jurisdiction of a State is described as stemming from its sovereignty and the limits of that jurisdiction are also defined. Referring specifically to the 'territorial sovereignty' of the State, the author quotes the words of Judge Moore in the case of The S. S. Lotus in the judgment of the Permanent Court of International Justice of 7 September 1927, France v Turkey, Series A, No. 10, p. 69 according to which: '... the principle of absolute and exclusive jurisdiction within national territory applies to foreigners as well as to citizens or inhabitants, and the foreigner can claim no exemption from the exercise of such jurisdiction, except in so far as he may be able to show either: (1) that he is, by reason of some special immunity, not subject to the operation of the local law, or (2) that the local law is not in conformity with international law'.

12 — See R.R. Churchill and A.V. Lowe, The Law of the Sea, Juris Publishing, Manchester University Press, 3rd Edition, 1999, p. 61 which states that: '... the coastal State enjoys full territorial sovereignty over its internal waters ... By entering foreign ports and other internal waters, ships put themselves within the territorial jurisdiction of the coastal State. Accordingly, that State is entitled to enforce its laws against the ship and those on board' (ibid., p. 65). On the subject of ports as an integral part of the internal waters of the State, not to be confused with its territorial waters, see D.P. O'Connell, The International Law of the Sea, Vol. I, Clarendon Press, Oxford, 1982, p. 385. D. Vignes points out in 'La juridiction de l'État du port et le navire en Droit international' in Le navire en Droit International, Colloque de Toulon, Éditions A. Pedone, Paris, 1993, pp. 127 to 150, especially p. 127, that port States have tended towards expanding jurisdiction (or 'creeping jurisdiction') in recent times.

13 — See, in greater detail, G. Gidel, Le Droit International Public de la mer - Le temps de paix, Tome II, Les eaux intérieurs, Topos Verlag and Librairie Edouard Duchemin, Lichtenstein/ Paris, 1981, p. 79 et seq., especially as regards the total subjection of the ship to the fiscal laws of the port State, pp. 119 to 125.

State may refrain from effectively exercising its tax jurisdiction within the ship, either because it regards that as a matter involving 14 purely 'internal arrangements', or merely because it does not want to take steps which would discourage foreign shipping from seeking to use its ports. 15

22The case-law of the Court of Justice also clearly reflects a concern to prevent the implementation of the Sixth Directive from giving rise to encroachment upon the fiscal sovereignty of States within their territory. Thus in Trans Tirreno Express, the Court expressly recognised the freedom of a Member State to apply 'its value added tax legislation to a transport operation effected between two points within its national territory, even where a part of that journey is completed outside its national territory, provided that it does not encroach on the tax 16 jurisdiction of other States'. The Trans Tirreno Express judgment therefore makes

14 — See R.R. Churchill and A.V. Lowe, The Law of the Sea, op.cit., p. 68, which states that the port States 'as a matter of strict law' are in any case entitled, as regards internal matters concerning the ship, to exercise jurisdiction simply because such ships enter their internal waters voluntarily.

15 — It is well known in particular that there is commercial competition between ports to attract visiting cruise liners. See J. Combacau and S. Sur, Droit international public, 5th edition, Montchrestien, Paris, 2001, p. 461, on the right to refuse entry to a port.

16 — Paragraph 21 of the judgment and more recently the judgment in Case C-30/89 Commission v France, paragraph 18 (emphasis added). The Court refers in non-specific terms in Trans Tirreno Express to 'other States', which of course include non-member countries and not merely other Member States. Although the concern in that case was to safeguard the tax jurisdiction of the other Member States, that same concern to respect the principle of territoriality will logically extend to dealings with non-member countries. That would therefore arise also, as the Greek Government pointed out at the hearing, from the need to respect the scope of the territorial application of the joint VAT system set out in Articles 2 and 3(2) of the Sixth Directive. See also B. Terra, The Place of Supply in European VAT, op. cit., pp. 3 and 4.

the application of the common system of value added tax subject to the condition 'that it does not encroach on the tax jurisdiction 1 of other States'. 7 Although it is considered acceptable for a State to extend the field of application of its tax legislation in international waters, that is not the case when the ship passes 'through any area falling under 18 the national sovereignty of another State'. Therefore, according to the principle of territoriality, the Member States cease to have jurisdiction to apply the common system of value added tax at the point where non-member countries' jurisdiction to tax supplies effected within their respective territories begins.

C — Consequences of a stop in a third territory for the taxation of supplies of goods effected on board

23In order to answer the question submitted by the Bundesfinanzhof it is essential to consider the consequences of a stop in a third territory regarding the taxation of supplies of goods effected on board.

24As I have already mentioned, Article 8 lays down a simplified VAT system for supplies of goods effected on board during

17 — Trans Tirreno Express, paragraph 21.

18 — Trans Tirreno Express, paragraph 18.

the part of a transport operation carried out within Community territory. Such supplies of goods are thus subject to only one VAT regime: that of the State in which the intra-Community transport operation originates. This avoids a return to the strict general rule on territoriality laid down in Article 8(1)(b), which would entail applying in the course of the voyage the same number of national VAT systems as Member States whose territory 1 was visited. 9

25For the reasons mentioned above, stops in a third territory do constitute grounds for suspending, for the duration of those stops in territories where non-member countries have tax jurisdiction, the common VAT system for supplies of goods effected there. There are, however, no grounds for suspend ing the simplified system for the rest of the journey, whether within Community territory itself or in international waters, or even when the vessel is merely in transit within the territorial waters of non-member countries where there is no actual encroachment upon the fiscal sovereignty of other States.

19 — The opinion expressed in legal literature is also that the rule set out in subparagraph (b) constitutes 'the general rule in the Sixth Directive with regard to the supply of goods' (B. Terra and J. Kajus, A Guide to the European VAT Directives, Vol. 1, IBFD Publications, 2005, p. 557, and especially pp. 559 and 560). This is, of course, provided that the goods in question are not goods for despatch or transportation, which are eventualities mentioned in Article 8(1)(a).

KOHLER

26It would in fact run completely counter to the intention to simplify inherent in subparagraph (c) to divide what is a single intra-Community voyage (inasmuch as it effectively runs between the two most distant points within the Community territory chosen as points of initial embarkation and final disembarkation) into various intra-Community parts — which would be the result of suspending the simplified system because of a stop in a third territory. At the same time the aim of avoiding any encroachment upon the fiscal sovereignty of nonmember countries within their ports does not justify sacrificing the application of that simplified system any more than is necessary to achieve that aim. It is sufficient, in order to achieve that end, to suspend application of the VAT system of the State of origin for the duration of the stop in a third territory.

27Article 8(1)(c) should therefore be interpreted as meaning that the whole of an intra-Community voyage, namely a voyage between the first point at which passengers embark situated within the Community territory and the final point within Community territory where the passengers may end their journey, is subject to the simplified system set out in that article. Any stops in a third territory between those two points would have the effect of suspending the application of that simplified system only for 20 the duration of each stop.

28There can be no justification — quite the contrary — for applying a succession of different VAT systems each time the vessel returns to its intra-Community route. That would be the result if we were to revert to the application of the territorial system set out in Article 8(1)(b) or were constantly to re-apply the system described in Article 8(1)(c). 21

29The interpretation proposed here for Article 8(1)(c), to the effect that a stop in a third territory simply constitutes grounds for suspending the application of the simplified system laid down in that article for the duration of the stop, does not imply that the intra-Community journey cannot form part of a longer voyage which may originate and/ or end outside the Community. That is exactly the meaning of the reference to a

20 — Accordingly, during a call at a port of a non-member country, the supplies of goods effected on board will not be subject to the VAT system of the first Member State where the intra-Communily voyage began. The means of transport in question is. throughout this period, entirely subject to the tax lunsdiction of a non-member country and. consequently, any supplies of goods effected on board during such stops clearly fall outside the territorial scope of the Sixth Directive. 21 — 1 do not therefore concur with the interpretation of Article 8 ( 1 He) which B. Terra and I. Kaius appear to be following in A Guide to the European VAT Directives, op. cit.. p. 560. note 552. and the example given therein.

possible 'stop in a third territory' 2 in the last part of the definitions of the point of departure and the point of arrival. During those parts of the voyage, which are not of an intra-Community nature, the simplified rules provided for in Article 8(1)(c) will clearly not apply.

30In the same way, if the point of departure of a journey is for example in Germany and no point of arrival is envisaged for those passengers within the territory of the Community, such a journey is not of an intra-Community nature and therefore the supplies effected on board will be subject to the strict territorial regime set out in subparagraph (b). In that case VAT will be payable in Germany on supplies of goods that are situated on German territory when the supply is effected.

32The available interpretative factors, in particular the teleologicai approach, merely make it possible first to discard certain interpretations because they are particularly incompatible with the aims pursued and, second, to ascertain that several equally tenable interpretations of that concept are possible.

33It seems to me that the interpretation suggested by the German Government certainly falls into the first category. In fact such an interpretation would make the common system for VAT applicable to supplies of goods effected during a vessel's stay in the territory of a non-member country when passengers were able to leave the vessel and make purchases in that country. I think that an interpretation of the concept of a stop which produced such a result would be wholly inadvisable since the aim in view is to avoid encroaching upon the tax jurisdiction of non-member countries 2 within their territory. 3 D — Interpretation proposed for the concept of 'stop in a third territory'

31. It would seem that no specific guidance can be gleaned either from the wording used or from the intention underlying the inclusion of the term 'stop in a third territory' in the text of subparagraph (c) as to how that concept should best be interpreted.

22 — It is relevant to point out in this respect that in Germany for example the provision transposing the directive, Paragraph 3e(2) of the UStG, does not even include the finalp arts of the definitions given in the Sixth Directive: 'point of departure of the transport of passengers' and 'point of arrival of the transport of passengers'.

34With regard to the possible interpretations that appear to me to be compatible with the purpose of the provision, the Court will finally need to decide between the

23 — I would add that, from a literal standpoint, as the Commission pointed out at the hearing, although the legislature made several specific references in subparagraph (c) to the embarkation of new passengers or the final disembarkation of passengers when defining the points of departure and of arrival of the transport operation, they did not do so as regards the concept of a stop.

KOHLER various equally tenable solutions which differ essentially as to how strictly they achieve the twofold aim pursued by the legislature: simplification of the tax system applicable and avoidance of conflicts concerning the fiscal sovereignty of non-member countries within third territories.

35Of those teleologically tenable interpretations, the one which most scrupulously avoids encroachment upon the tax jurisdiction of a non-member country where a stop is made is the one which interprets the concept of stop simply as any stop at a place appropriate to that purpose (a port, airport or station), depending on the means of 2 transport in question. 4 Thus, irrespective of whether the passengers are able to disembark, for example, from the ship during a stop at a port in a non-member country, in so far as the ship is entirely subject to the fiscal sovereignty of the port State, the common system of VAT would not apply to supplies of goods effected on board during such a stop. That is, however, an interpretation which, because it so strictly respects the objective of avoiding encroachment upon the territorial jurisdiction of nonmember countries, could be open to abuse inasmuch as it makes it legal to suspend application of the regime provided for in Article 8(1 )(c) to supplies of goods effected

24 — There is moreover some support for this in the Engkish version of the text which refers simply to a stop' in a third territory.

on board during a stop merely because of a decision to stop the vessel in a third territory in the course of an intra-Community voyage.

36Another ideologically tenable interpretation of the concept of a stop has been proposed by the Commission and, in almost identical terms, by the Greek Government, as well as by the claimant. That is that a stop within the meaning of Article 8(1 )(c) must imply that the passengers are able to leave the means of transport in question, even if only for a short period, and to make purchases in the non-member country in question. Only in such circumstances might the application of the common VAT system to supplies effected on board give rise to a conflict, which it is important to avoid, concerning the tax jurisdiction of the nonmember country. It should finally be mentioned that only when there is an opportunity to choose between acquiring goods on board the vessel or otherwise would there be any actual conflict of jurisdiction that would be unacceptable in the light of the objectives underlying the inclusion by the legislature of the concept of a stop in Article 8(1 )(c). In other words, the undesirable conflict of tax jurisdiction would arise only when in any given place, such as a port that was legally subject to the fiscal sovereignty of the port State, establishments on board ships stop ping there, although in fact situated in the same market as establishments outside the vessel, were subject, by virtue of Community law, to an indirect system of taxation in whose territory it is located and of different from the one applicable to those avoiding conflicts of tax jurisdiction with establishments outside the vessel but situ non-member countries. I therefore think it is ated also in that State.

to be preferred since, in cases where passengers have no opportunity to go ashore and make purchases, the question of a conflict arising because supplies of goods effected on board might be subject to a tax

37The interpretation just described does regime different from the one applicable in not conform so strictly to the principle of the non-member country would tend to be a making the means of transport entirely purely hypothetical one.

subject to the fiscal sovereignty of the State

IV — Conclusion

38In the light of the foregoing considerations, I propose that the Court of Justice give the following answer to the question referred to it by the Bundesfinanzhof:

Stops made by ships in ports of non-member countries during which passengers may disembark from the vessel only for a short period, for example for sightseeing purposes, but at which they may not begin or end their journey, constitute 'stops in a third territory' within the meaning of Article 8(1)(c) of Sixth Council Directive 77/388/EEC of 17 May 1977, provided that the passengers have an opportunity to make purchases in that third territory, the application of the regime provided for in that subparagraph thereby being suspended for the duration of the stop.