C-85/11 Commission v Ireland

JUDGMENT OF THE COURT (Grand Chamber)

9 April 2013 ( *1 )

‛Failure of a Member State to fulfil obligations — Taxation — Directive 2006/112/EC — Articles 9 and 11 — National legislation permitting the inclusion of non-taxable persons in a group of persons who may be regarded as a single taxable person for VAT purposes’

In Case C-85/11,

ACTION for failure to fulfil obligations under Article 258 TFEU brought on 24 February 2011,

European Commission, represented by R. Lyal, acting as Agent, with an address for service in Luxembourg,

v

Ireland, represented by D. O’Hagan, acting as Agent, assisted by G. Clohessy, SC, and N. Travers, BL, with an address for service in Luxembourg,

supported by:

Czech Republic, represented by M. Smolek and T. Müller, acting as Agents,

Kingdom of Denmark, represented initially by C. Vang, and subsequently by V. Pasternak Jørgensen, acting as Agents, with an address for service in Luxembourg,

Republic of Finland, represented by H. Leppo and S. Hartikainen, acting as Agents,

United Kingdom of Great Britain and Northern Ireland, represented by H. Walker, acting as Agent, and by M. Hall, Barrister,

THE COURT (Grand Chamber),

composed of V. Skouris, President, K. Lenaerts, Vice-President, A. Tizzano, J. Malenovský, M. Berger and E. Jarašiūnas (Rapporteur), Presidents of Chambers, E. Juhász, J.-C. Bonichot, M. Safjan, D. Šváby and A. Prechal, Judges,

Advocate General: N. Jääskinen,

Registrar: L. Hewlett, Principal Administrator,

having regard to the written procedure and further to the hearing on 5 September 2012,

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

gives the following

Judgment

Legal context and the dispute

1By its application, the European Commission requests the Court to declare that, by permitting non-taxable persons to be members of a group of persons regarded as a single taxable person for purposes of value added tax (a ‘VAT group’ and ‘VAT’, respectively), Ireland has failed to fulfil its obligations under Articles 9 and 11 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1) (‘the VAT Directive’).

Legal context

European Union Law

2Articles 9 to 13 of the VAT Directive are included in Title III (entitled ‘Taxable persons’) of that directive.

3Article 9 of that directive provides:

‘1. “Taxable person” shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.

Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as “economic activity”. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.

2. In addition to the persons referred to in paragraph 1, any person who, on an occasional basis, supplies a new means of transport, which is dispatched or transported to the customer by the vendor or the customer, or on behalf of the vendor or the customer, to a destination outside the territory of a Member State but within the territory of the Community, shall be regarded as a taxable person.’

4Article 10 of the VAT Directive states that the condition that the economic activity be conducted ‘independently’ is to exclude employed and other persons from VAT in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability.

5Article 11 of the VAT Directive provides:

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

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

6Article 12 of the VAT Directive provides that Member States may regard as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in the second subparagraph of Article 9(1) of that directive, and in particular the supply of a building or of land for construction.

7Under Article 13 of the VAT Directive, regional and local government authorities and other bodies governed by public law are not, as a general rule, to be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities.

Irish law

8Section 15 of the Value Added Tax Consolidation Act 2010, which in essence reproduced the provisions of section 8(8) of the Value Added Tax Act 1972, as amended, provides:

Subject to subsection (2), where the Revenue Commissioners are satisfied that 2 or more persons established in the State, at least one of whom is a taxable person, are closely bound by financial, economic and organisational links and it seems necessary or appropriate to them for the purpose of efficient and effective administration (including collection) of the tax to do so, then, for the purpose of this Act, the Commissioners may, whether following an application on behalf of those persons or otherwise:

by notice in writing ... to each of those persons deem them to be a single taxable person … and the persons so notified shall then be regarded as being in [a VAT group] for as long as this subsection applies to them, but section 65 shall apply in respect of each of the members of the [VAT] group, and

one of those persons, who shall be notified accordingly by the Commissioners, shall be responsible for complying with the provisions of this Act in respect of the [VAT] group, and

all rights and obligations arising under this Act in respect of the transactions of the [VAT] group shall be determined accordingly,

and

make each person in the [VAT] group jointly and severally liable to comply with this Act and regulations (including the provisions requiring the payment of tax) that apply to each of those persons and subject to the penalties under this Act to which they would be subject if each such person was liable to pay to the Commissioners the whole of the tax chargeable, apart from regulations under this section, in respect of each such person.’

The pre-litigation procedure and the proceedings before the Court

9On 23 September 2008, the Commission sent a letter of formal notice to Ireland drawing the attention of that Member State to the possible incompatibility with Articles 9 and 11 of the VAT Directive of section 8(8) of the Value Added Tax Act 1972, as amended, which was then in force, under which non-taxable persons were able, as section 15 of the Value Added Tax Consolidation Act 2010 now provides, to be part of a VAT group. In accordance with Article 226 EC, the Commission invited Ireland to submit its observations.

10In their replying letter of 23 January 2009, the Irish authorities maintained that the national provisions at issue were compatible with the VAT Directive.

11As the Commission was not satisfied with that reply, on 23 November 2009 it issued a reasoned opinion, to which Ireland replied on 27 January 2010, stating that it maintained the position expressed in its reply to the letter of formal notice.

12In those circumstances the Commission decided to bring the present action.

13By orders of the President of the Court of 4 July 2011 and of 27 September 2011, the Czech Republic, the Kingdom of Denmark and the Republic of Finland, on the one hand, and the United Kingdom of Great Britain and Northern Ireland, on the other, were granted leave to intervene in support of the form of order sought by Ireland.

14By letter of 27 January 2012, Ireland requested, on the basis of the third paragraph of Article 16 of the Statute of the Court of Justice of the European Union, that the case be decided by the Grand Chamber.

The action

Admissibility

Arguments of the parties

15Ireland requests, principally, that the Court dismiss the action as inadmissible. It claims, in that regard, that the subject-matter of the application goes beyond the complaint formulated by the Commission in the administrative procedure. Whereas, in its letter of formal notice and in the reasoned opinion, the Commission alleged that Ireland permitted non-taxable persons to join a VAT group, it now complains that Ireland permits such persons to be members of such a group, which implies that it would be necessary not only to regulate and police the constitution of the existing approved VAT groups but also to police those groups on an ongoing basis in order to ensure that their members could, if their activities were to be assessed independently, continue to qualify as taxable persons in their own right.

16The Commission, in its reply, contests that plea of inadmissibility, pointing out that it has always stated that the reference to ‘persons’ in Article 11 of the VAT Directive concerns only taxable persons, from which it follows that a non-taxable person may not be a member of a VAT group. Moreover, the Commission submits that, if the Court were to consider that it had widened the subject-matter of the proceedings, there could be only partial inadmissibility.

Findings of the Court

17According to settled case-law, the subject-matter of the proceedings under Article 258 TFEU is delimited by the pre-litigation procedure provided for in that provision. Accordingly, the application must be based on the same grounds and pleas as the reasoned opinion. However, that requirement cannot go so far as to mean that in every case the formal statement of objections set out in the reasoned opinion and the form of order sought in the application must be exactly the same, provided that the subject-matter of the proceedings as defined in the reasoned opinion has not been extended or altered (see, inter alia, Case C-139/00 Commission v Spain [2002] ECR I-6407, paragraphs 18 and 19, and Case C-458/08 Commission v Portugal [2010] ECR I-11599, paragraphs 43 and 44).

18In the present case, although the Commission used the words ‘to be members of a VAT group’ in the form of order sought in its application, whereas it had used the words ‘to join a VAT group’ in the statement of complaint set out in the reasoned opinion, that in no way altered the subject-matter of the proceedings as defined in the reasoned opinion. The difference between those formulations has no effect on the content of the alleged failure to fulfil obligations, which, as is stated in both the application and the reasoned opinion, lies in the fact that the Irish legislation transposing the VAT Directive permits the inclusion of non-taxable persons in a VAT group in infringement, according to the applicant, of Articles 9 and 11 of that directive.

19Consequently, the objection of inadmissibility raised by Ireland must be rejected.

Substance

Arguments of the parties

20In support of its action, the Commission submits that Article 11 of the VAT Directive must be interpreted as meaning that non-taxable persons for VAT purposes cannot be included in a VAT group.

21It maintains that Article 11 of the VAT Directive allows several persons, taken together, to be regarded as a single taxable person provided that each of those persons is a taxable person for VAT purposes in its own right. That article, it argues, represents an exception to the general rule that each taxable person is to be treated as a separate entity for the application of the VAT rules. It should therefore be interpreted restrictively. Although it is true that that article refers to ‘persons’, the fact that the persons included in a VAT group are to be treated as ‘a single’ taxable person implies that each member of that group must itself be a taxable person. Likewise, the concept of ‘grouping’ implies that the persons concerned belong to the same category for the purposes of the common system of VAT.

22Furthermore, according to the Commission, if the word ‘persons’ were to be understood as referring to all persons without restriction, then a VAT group could be composed solely of non-taxable persons, something which would be contrary to the common system of VAT.

23The Commission submits that its interpretation of Article 11 of the VAT Directive is, moreover, consistent with the objective of that article, which is, as is apparent from the Explanatory Memorandum to the proposal which led to the adoption of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1) (‘the Sixth Directive’), to simplify administration for the taxpayer and tax authorities and to combat abuse by preventing persons which are not truly independent business units from being treated as separate taxable persons. The inclusion of non-taxable persons in a VAT group would neither simplify administration nor prevent abuse.

24Neither the wording of Article 11 of the VAT Directive nor the preparatory documents relating to that directive state that that provision was intended to alter the concept of a ‘taxable person’ or to extend the rights and obligations of taxable persons to others. That would, however, be the result, according to the Commission, if non-taxable persons were able to join a VAT group, since, as acquisitions that take place within such a group are regarded as non-existent for VAT purposes, that would permit, first, the supply of goods and the provision of services to non-taxable persons without any charge to VAT, and, secondly, would allow the group in question to recover input VAT in respect of supplies made to such persons, which would result in a net loss of VAT and would be contrary to the common system of VAT.

25It is therefore necessary, according to the Commission, not to adhere to a literal interpretation of Article 11 of the VAT Directive, but to read it in the light, first, of its immediate context, namely Title III of the VAT Directive and, in particular, Article 9 thereof, which defines a ‘taxable person’ as any person who carries out any economic activity, and, secondly and more generally, of the scheme of that directive.

26Although the Court has not hitherto had occasion to rule on the issue raised by the present case, indirect support for the Commission’s position is, in its view, to be found in paragraph 19 of the judgment in Case C-162/07 Ampliscientifica and Amplifin [2008] ECR I-4019, and in the Opinion of Advocate General Van Gerven in the case which gave rise to the judgment in Case C-60/90 Polysar Investments Netherlands [1991] ECR I-3111.

27Disputing all of those arguments, Ireland maintains that the Commission’s interpretation of Article 11 of the VAT Directive is not consistent with its literal sense. It argues that the use of the word ‘persons’ in the English-language version, and not ‘taxable persons’, is a deliberate choice on the part of the European Union legislature. The argument set out in the reasoned opinion that the word ‘taxable’ was omitted to eschew repetition is, Ireland argues, implausible in view of the fact that, when that directive was adopted, the word ‘any’ was added in the English-language version thereof between the term ‘single taxable person’ and the word ‘persons’.

28The purpose of Article 11 of the VAT Directive, Ireland submits, is to permit Member States to regard several persons as a single taxable person provided that certain minimum conditions are satisfied, which involves an assessment on the part of the Member States. A single taxable person exists, for the purposes of the application of the VAT rules, only if it carries out an economic activity, in accordance with Article 9 of that directive, which provides a general definition of a taxable person. Contrary to what the Commission claims, Article 11 of the VAT Directive, which features in Title III thereof, in no way appears to be a derogation from that definition. Moreover, the concept of ‘grouping’ cannot form the basis for the interpretation of the aforementioned Article 11, since it is not part of the wording of that article and the persons referred to in that provision do not form a group, but cease to exist individually for the purposes of administering VAT and become a single taxable person.

29Whilst a VAT group may include one or more non-taxable persons, that does not, according to Ireland, mean that a Member State would be entitled to regard a group comprising only such persons as a single taxable person, which would be meaningless and precluded by the Irish legislation.

30Ireland takes issue with the Commission’s claim that the latter’s interpretation of Article 11 of the VAT Directive is consistent with the objectives of that article. Ireland states that, although administrative simplification and the combatting of abuse are among those objectives, they are not the only objectives of that article, as is apparent from the second paragraph of Article 11. In any event, the objectives pursued do not make it possible to determine how the term ‘persons’ is to be interpreted. Contrary to the Commission’s assertion, the inclusion of non-taxable persons in a VAT group may, in particular circumstances, be not only consistent with the promotion of administrative simplification and the prevention of abuse, but also necessary for such purposes.

31Ireland submits that the Commission’s argument that the concept of a ‘taxable person’ may not be extended is unfounded because permitting a non-taxable person to be part of a VAT group, like permitting a taxable person who does not engage in taxable supplies to be part of such a group, does not alter the scope of that concept. Although Article 11 of the VAT Directive may, in certain circumstances, operate to extend the rights and obligations of a member of a VAT group, that is, in fact, the very purpose of that provision, namely the single tax treatment of all persons who are part of a duly recognised VAT group. Furthermore, the second paragraph of Article 11 of the VAT Directive permits Member States to adopt measures against tax evasion and avoidance which may be carried out by a VAT group.

32Ireland adds that, once the VAT group is recognised, the entity which was a non-taxable person is included in that group for VAT purposes, while remaining a separate legal person for other purposes. It states that, while it is true that no VAT will be charged if that group receives goods or services from another group member, its non-economic activities will be taken into account in determining the entitlement of that group to deduct, in the same way as if the undertaking had been organised as a single legal person. Precluding a non-taxable person, such as a holding company, from being a member of a VAT group, would, Ireland submits, be to deny deductibility on the basis of how the entity is structured in relation to corporate law.

33Lastly, Ireland points out that, contrary to what the Commission claims, the case-law of the Court provides no support for the Commission’s interpretation of Article 11 of the VAT Directive.

34Like Ireland, the Czech Republic, the Kingdom of Denmark, the Republic of Finland and the United Kingdom take the view that the Commission’s position is not supported by the wording and objectives of Article 11 of the VAT Directive, the common system of VAT or the case-law of the Court.

Findings of the Court

35It should be borne in mind at the outset that, in determining the scope of a provision of European Union law, its wording, context and objectives must all be taken into account (Case C-174/08 NCC Construction Danmark [2009] ECR I-10567, paragraph 23 and the case-law cited).

36In the present case, it is apparent from the wording of the first paragraph of Article 11 of the VAT Directive that that directive permits each Member State to regard a number of persons as a single taxable person if they are established in the territory of that Member State and if, although they are legally independent, they are closely bound to one another by financial, economic and organisational links. The application of that article is not, according to its wording, made subject to other conditions, in particular to the condition that those persons could themselves, individually, have had the status of a taxable person within the meaning of Article 9(1) of the VAT Directive. As it uses the word ‘persons’ and not the words ‘taxable persons’, the first paragraph of Article 11 of the VAT Directive does not make a distinction between taxable persons and non-taxable persons.

37It must be pointed out that Article 11 of the VAT Directive derives from the second subparagraph of Article 4(4) of the Sixth Directive. Whereas point 2 of Annex A to Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes – Structure and procedures for application of the common system of value added tax (OJ, English Special Edition 1967, p. 16), which introduced the concept of a VAT group into European Union law, permitted Member States ‘not to consider as separate taxable persons, but as one single taxable person’, persons who are organically linked to one another by economic, financial or organisational relationships, the words ‘as separate taxable persons’ were abandoned in the drafting of the second subparagraph of Article 4(4) of the Sixth Directive.

38Furthermore, although the wording of the second subparagraph of Article 4(4) of the Sixth Directive was repeated in similar terms in the majority of the language versions of Article 11 of the VAT Directive, in the English-language version of that article the word ‘any’ was added, with the result that the relevant passage of that provision reads as follows: ‘each Member State may regard as a single taxable person any persons established in the territory of that Member State’.

39It is not apparent from those successive drafting amendments that the European Union legislature intended, when adopting the Sixth Directive and, subsequently, the VAT Directive, to preclude non-taxable persons from being included in a VAT group and that the word ‘persons’ was used instead of the words ‘taxable persons’ in order to avoid repetition. The fact that other provisions of the VAT Directive, which do not come under Title III thereof dealing with the concept of a ‘taxable person’, use the term ‘persons’ to designate taxable persons cannot result in any different finding, as that term is used in a different context to that of Article 11 of the VAT Directive.

40Furthermore, it must be pointed out that, contrary to what the Commission argues, it cannot be inferred from the words ‘as a single taxable person’ that Article 11 of the VAT Directive seeks solely to permit a number of taxable persons to be dealt with as a single entity, as those words relate, not to a condition for the application of that article, but to its outcome, which is that a number of persons are regarded as a single taxable person. In addition, there is no basis in the wording of that article for the Commission’s argument that it represents an exception to the general rule that each taxable person must be treated as a separate entity, with the result that that article is to be interpreted restrictively, or for the argument that the concept of grouping implies that all of the persons concerned belong to the same category, as the word ‘grouping’ does not appear in that article.

41Consequently, it is not apparent from the wording of Article 11 of the VAT Directive that non-taxable persons cannot be included in a VAT group.

42The Commission, however, submits that, going beyond the wording of Article 11 of the VAT Directive, its interpretation of that article must prevail in view of its context, its objectives and the case-law of the Court. It is for that reason necessary to examine whether the arguments put forward by the Commission in support of this position show that Article 11 of the VAT Directive must be interpreted as meaning that non-taxable persons cannot be included in a VAT group.

43It must be pointed out, firstly, that the case-law of the Court to which the Commission refers as regards that issue cannot usefully be relied on in the present case since that issue is not the subject-matter of the abovementioned judgments in Polysar Investments Netherlands and Ampliscientifica and Amplifin.

44As regards, secondly, the context of Article 11 of the VAT Directive, it is necessary to point out that Article 9(1) of that directive contains a general definition of the concept of a ‘taxable person’. Article 9(2) and Articles 10, 12 and 13 of that directive provide details in respect of that concept, either by including in it, or by permitting Member States to include in it, persons who do not satisfy that general definition, such as persons who carry out certain transactions on an occasional basis, or by excluding other persons from it, such as employed persons or public authorities. Consequently, it cannot be inferred from the scheme of Title III of the VAT Directive that a person who does not satisfy that general definition is necessarily excluded from being one of the persons referred to in Article 11 thereof.

45As regards the relationship, within Title III of the VAT Directive, between Articles 9(1) and 11 of that directive, it must be stated that a combined reading of those articles does not support the conclusion, drawn by the Commission, that the persons referred to in Article 11 must individually satisfy the general definition of a taxable person set out in Article 9(1) of that directive. A comparison of those two provisions does not preclude the interpretation that, as submitted by Ireland and the interveners, it is those persons, taken together and closely bound to one another by financial, economic and organisational links, who must collectively satisfy that definition.

46Consequently, it is not possible to uphold the Commission’s arguments that, having regard to the context of Article 11 of the VAT Directive, that article must be interpreted as meaning that non-taxable persons cannot be included in a VAT group.

47As regards, thirdly, the objectives pursued by Article 11 of the VAT Directive, it is apparent from the Explanatory Memorandum to the proposal which resulted in the adoption of the Sixth Directive (COM(73) 950) that, by adopting the second subparagraph of Article 4(4) of the Sixth Directive, which was replaced by Article 11 of the VAT Directive, the European Union legislature intended, either in the interests of simplifying administration or with a view to combating abuses such as, for example, the splitting-up of one undertaking among several taxable persons so that each might benefit from a special scheme, to ensure that Member States would not be obliged to treat as taxable persons those whose ‘independence’ is purely a legal technicality.

48It is not evident that the possibility for Member States to regard as a single taxable person a group of persons including one or more persons who may not individually have the status of a taxable person runs counter to those objectives. It is, on the contrary, conceivable that, as Ireland and the interveners have submitted, the presence, within a VAT group, of such persons contributes to administrative simplification both for the group and for the tax authorities and makes it possible to avoid certain abuses, and that that presence may even be indispensable to that end if it alone establishes the close financial, economic and organisational links which must exist between the persons constituting that group in order for it to be regarded as a single taxable person.

49In addition, it must be pointed out that, if such a possibility might itself give rise to abuse, the second paragraph of Article 11 of the VAT Directive permits Member States to adopt any measures needed to prevent tax evasion or avoidance through the use of the first paragraph of Article 11.

50Consequently, the Commission has not established that the objectives of Article 11 of the VAT Directive militate in favour of an interpretation according to which non-taxable persons cannot be included in a tax group.

51In view of all of the foregoing considerations, the Commission’s action must be dismissed.

Costs

52Under Article 138(1) of the Rules of Procedure of the Court of Justice, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Since Ireland has applied for costs and the Commission has been unsuccessful, the Commission must be ordered to pay the costs. In accordance with Article 140(1) of those Rules of Procedure, under which Member States which have intervened in the proceedings are to bear their own costs, it must be held that the Czech Republic, the Kingdom of Denmark, the Republic of Finland and the United Kingdom are to bear their own respective costs.

Operative part

On those grounds, the Court (Grand Chamber) hereby:

Dismisses the action;

Orders the European Commission to pay the costs;

Orders the Czech Republic, the Kingdom of Denmark, the Republic of Finland and the United Kingdom of Great Britain and Northern Ireland to bear their own respective costs.

Signatures

[Signatures]

( *1 ) Language of the case: English.

OPINION OF ADVOCATE GENERAL

JÄÄSKINEN

delivered on 27 November 2012 ¹

‛VAT — Articles 9 and 11 of Directive 2006/112/EC — National rules allowing non-taxable persons to be members of VAT groups — Compatibility with European Union VAT law’

I – Introduction

1In these proceedings, the Commission seeks a declaration that by permitting non-taxable persons to be members of a value added tax (VAT) group (a single taxable person for VAT purposes) Ireland has failed to comply with its obligations under Articles 9 and 11 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’). ²

2Concurrently with these proceedings, the Commission instituted an infringement action against the Kingdom of Sweden for breach of Article 11 of the VAT Directive, but for different reasons. I will address this complaint in a separate opinion.

II – Legal framework

A – European Union law

3Article 9(1) of the VAT Directive defines the concept of a taxable person for VAT purposes as follows:

‘1. “Taxable person” shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.

Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as “economic activity”. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.’

4Article 11 of the VAT Directive lays down rules concerning the treatment of more than one person as a single entity for the purpose of administration of the tax (‘VAT grouping’) as follows:

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

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

B – National law

5Section 15 of the Value Added Tax Consolidation Act 2010, which came into force for taxable periods commencing on or after 1 November 2010, provides that: ³

‘(1) Subject to subsection (2), where the Revenue Commissioners are satisfied that 2 or more persons established in the State, at least one of whom is a taxable person, are closely bound by financial, economic and organisational links and it seems necessary or appropriate to them for the purpose of efficient and effective administration (including collection) of the tax to do so, then, for the purpose of this Act, the said Commissioners may, whether following an application on behalf of those persons or otherwise -

by notice in writing (in this section referred to as a “group notification”) to each of those persons deem them to be a single taxable person (in this section referred to as a “group”) and the persons so notified shall then be regarded as being in the group for as long as this subsection applies to them, but section 65 shall apply in respect of each of the members of the group, and

one of those persons, who shall be notified accordingly by the Commissioners, shall be responsible for complying with the provisions of this Act in respect of the group, and

all rights and obligations arising under this Act in respect of the transactions of the group shall be determined accordingly,

and

make each person in the group jointly and severally liable to comply with this Act and regulations (including the provisions requiring the payment of tax) that apply to each of those persons and subject to the penalties under this Act to which they would be subject if each such person was liable to pay to the Commissioners the whole of the tax chargeable, apart from regulations under this section, in respect of each such person:

…’

III – Pre-litigation procedure and proceedings before the Court

6On 18 September 2008 the Commission sent a letter of formal notice to Ireland, in which it argued that various provisions of Irish law were incompatible with Articles 9 and 11 of the VAT Directive, because they allowed non-taxable persons to join a VAT group.

7The Irish authorities responded by letter of 27 January 2009 stating that, in their opinion, the Irish legislation was in line with the VAT Directive.

8On 20 November 2009 the Commission addressed a reasoned opinion to Ireland in which it restated its position. Ireland replied by letter of 19 January 2010 in which it maintained that its interpretation of the VAT Directive was correct.

9Not being satisfied with Ireland’s reply, the Commission instituted the present infringement action which was lodged at the Court on 24 February 2011. The Kingdom of Denmark, the Czech Republic, the Republic of Finland and the United Kingdom have all intervened in support of Ireland. These Member States and the Commission participated in the hearing that was held on 5 September 2012.

10Ireland asks the Court to dismiss the action as inadmissible because the subject-matter of the application goes beyond the complaint formulated by the Commission in the administrative procedure. In the alternative, Ireland seeks dismissal of the action as unfounded.

IV – Admissibility of the action

11Ireland argues that the formal declaration sought from the Court by the Commission differs significantly from the original complaint made against Ireland in the letter of formal notice. Ireland alleges that the Commission’s original complaint was confined to the argument that, on a proper interpretation of Articles 9 and 11 of the VAT Directive, a non-taxable person cannot ‘join’ a VAT group. Ireland further alleges that this was the complaint to which it responded in its reply to the letter of formal notice, and that the complaint of the Commission continued to be so limited in its reasoned opinion. Yet, in the proceedings before the Court, the Commission contends that Ireland is breaching Articles 9 and 11 of the VAT Directive ‘by permitting non-taxable persons to be members of a VAT group’.

12Ireland objects that, if the Commission were correct in its assertions, Ireland would be required not only to regulate and police the formation of VAT groups so as to completely exclude non-taxable persons, but also to continue policing existing approved groups. For Ireland, this means that the allegations made by the Commission are broader in scope than those that were put in the administrative phase, and Ireland was given no opportunity during that phase to comment on the implications of the broader complaint which, for Ireland, are not insignificant.

13According to the established case-law of the Court, an application must be based on the same reasons and grounds as the reasoned opinion. ⁴ To the extent that a claim has not been mentioned in the reasoned opinion, it cannot be declared admissible in the proceedings before the Court.

14However, as the Court observed in Commission v Portugal, that requirement cannot be stretched so far as to mean that in every case the formal statement of objections set out in the reasoned opinion and the form of order sought in the application must be exactly the same, provided that the subject-matter of the proceedings as defined in the reasoned opinion has not been extended or altered. ⁵

15These infringement proceedings are primarily concerned with the interpretation of Article 11 of the VAT Directive. In the first paragraph of Article 11 Member States are given the option of regarding separate persons as a single taxable person. According to the second paragraph of Article 11, a Member State exercising the discretion provided for in the first paragraph may adopt any measures needed to prevent tax evasion or avoidance.

16Thus, the applicability of Article 11 of the VAT Directive is not dependent on whether it is a question of joining the group or belonging to it. The second paragraph of Article 11 simply gives Member States the right to adopt any measures needed to prevent tax evasion or avoidance. In other words, Article 11 of the VAT Directive contains exhaustive prerequisites for separate persons to be regarded as a single taxable person, and it is this question that lies at the heart of the infringement action.

17In the present case, the rewording in the application of the complaint did not extend, alter or even limit the subject-matter of the proceedings as defined in the reasoned opinion. It has had no effect on Ireland’s rights of defence because the action brought by the Commission is directed at who may be a member of a VAT group, and not the control of such groups by Member State authorities.

18Thus, the fact that the Commission’s reasoned opinion made no distinction between non-taxable persons joining VAT groups, and non-taxable persons maintaining membership thereof, does not mean that the Commission has introduced a new claim which the Court cannot address.

19The claim of inadmissibility should therefore be rejected.

V – Arguments of the parties

20The disagreement between the Commission and Ireland can be summarised as follows.

21The Commission takes the view that, even though the word ‘taxable’ does not appear in Article 11 of the VAT Directive in between the words ‘any persons’, it is implicit in Article 11 of the VAT Directive that this provision encompasses only ‘taxable persons’ as defined in Article 9 of the VAT Directive. Otherwise, a VAT group could consist solely of non-taxable persons. For the Commission, the concept of ‘grouping’ implies that all of the persons in the Article 11 group must belong to the same category for VAT purposes. Further, given that Article 11 derogates from the general rule that each taxable person is to be treated as a separate unit, Article 11 is to be interpreted narrowly.

22The Commission argues that its interpretation of Article 11 of the VAT Directive is consistent with the primary purposes of the VAT grouping provisions, which are to simplify administration and combat abuse. Simplification lies primarily in relief from the administrative and accounting burdens associated with filing individual accounts and VAT returns. Since only taxable persons must file such accounts and returns, the goal of simplification cannot justify the inclusion of non-taxable persons in a VAT group. In relation to abuse, the explanatory memorandum to the proposal for the Sixth VAT Directive mentions only the aim of preventing economic operators from exploiting the taxation thresholds by splitting a single business into several separate persons. The Commission seems to suggest that this excludes any role for non-taxable persons. The Commission further argues, however, that Article 11 cannot be used as an instrument to prevent tax evasion or avoidance ⁶ by, for example, allowing holding companies which are not taxable persons under Article 9 to be included in a VAT group under Article 11.

23Additionally, the Commission argues that its complaint is supported, although indirectly, by case-law of the Court, and mainly by the judgment in Ampliscientifica. In that case the Court held that the effect of implementing a VAT group regime was to allow ‘persons, in particular companies, which are bound to one another by financial, economic and organisational links no longer to be treated as separate taxable persons for the purposes of VAT but to be treated as a single taxable person’. ⁷ In the Commission’s opinion, this passage, along with the Opinion of Advocate General Van Gerven in Polysar, ⁸ reflects the idea that only taxable persons may be members of a ‘single taxable person’.

24Ireland, on the other hand, takes the position that Article 11 of the VAT Directive must be interpreted literally, and the use of the term ‘persons’ by the legislator without the attribute ‘taxable’ was deliberate. If the legislature had intended to refer to taxable persons in Article 11, it would have inserted this word into the recast VAT Directive.

25Ireland argues that the concept of ‘grouping’ on which the Commission relies is merely descriptive, and is not used in the VAT Directive itself. It cannot therefore form the basis for the interpretation of Article 11 of the VAT Directive. Further, while it is theoretically possible for a VAT group to consist solely of non-taxable persons, this is both highly improbable and, moreover, expressly precluded by Irish legislation. ⁹

26Ireland claims that the addition of the second paragraph to Article 11 of the VAT Directive has extended the purpose of the provision to enable Member States to adopt measures in relation to VAT groups which are intended to combat abuse, simplify VAT treatment and prevent tax evasion and avoidance. ¹⁰ Ireland argues that permitting non-taxable persons, especially holding companies, ¹¹ to be members of a VAT group may promote the prevention of tax avoidance and/or evasion. Such advantages, according to Ireland, include being able to impose joint and several liability on a holding company where trading members of a group run into difficulties in paying VAT that is due.

27Finally, Ireland contests the relevance of the case-law relied on by the Commission. The question of whether only taxable persons may be members of a VAT group was not before the Court in Ampliscientifica. As for Advocate General Van Gerven’s opinion in Polysar, Ireland notes that the Court decided not to follow the Advocate General’s opinion in either that case, or in its later judgments in Wellcome Trust ¹² or Harnas and Helm. ¹³

VI – Analysis

28At the outset, it is useful to recall that, according to the settled case-law of the Court, in determining the meaning of a provision of European Union law, its objectives, context and wording must all be taken into account. ¹⁴ I will first consider the wording of Article 11 in the light of its legislative history, before examining its context and objectives.

A – Legislative history and wording

29In 1967 VAT grouping was introduced into EU law by the Second VAT Directive. Point 2 of Annex A to the Second VAT Directive ¹⁵ allowed the Member States to regard, as a single taxable person, separate independent persons fulfilling the prerequisites set forth therein. Later, the option was regulated by the Sixth VAT Directive, ¹⁶ and more recently by the current VAT Directive. However, its form altered in the process of amendment.

30In the Second VAT Directive, Point 2 of Annex A, the Member States were allowed ‘not to consider as separate taxable persons, but as one single taxable person, persons who, although independent from the legal point of view, are, however, organically linked to one another by economic, financial or organisational relationships’. Recourse to the word ‘separate’ indicated that the Member States had the choice of treating taxable persons separately, or as one taxable person. The same meaning appeared in the French and German versions of the Second VAT Directive.

31However the Sixth VAT Directive featured a change in the wording of the provision on VAT grouping. The relevant provision of that directive, namely the second subparagraph of Article 4(4), made no reference to members of a VAT group as being ‘separate’ taxable persons, but merely as ‘persons’. ¹⁷

32The change was more apparent in language versions of the Sixth Directive in which there is a different word for ‘taxable person’ and ‘person’. One example is the French language. The former translates as ‘assujetti’ while the latter translates as ‘personne’.

33The wording of Article 11 of the recast VAT Directive appears to be the same in most language versions, with the exception of the English version. ¹⁸ In the English version the word ‘any’ has been added before the word ‘person’, which according to the Irish, Finnish and United Kingdom Governments simply serves to emphasise that the ‘person’ belonging to a VAT group does not have to be a taxable person.

34In the light of this legislative history, I find it difficult to accept the arguments of the Commission. As has been pointed out by Ireland, elsewhere in the VAT Directive, the term ‘taxable person’ has been used, and not ‘person’ when an entity is engaged in economic activities for the purposes of the VAT Directive. While the legislative history is not decisive, it may imply that the legislator wanted to broaden the scope of those who may engage in VAT grouping.

35Further, I note that supplies between non-taxable persons fall outside the scope of the VAT Directive, irrespective of whether they form a VAT group or not. This means that the Commission’s hypothetical concern that a VAT group could consist merely of non-taxable persons is not pertinent.

36Therefore, Article 11 of the VAT Directive allow Member States to regard as ‘a single taxable person’ any legally independent persons established in the territory of that Member State, provided that they are closely bound to one another by financial, economic and organisational links. This conclusion is in conformity with the principle of legal certainty, which is particularly important in taxation matters, where not only taxable persons and tax authorities but also the Member States need to rely on the clear and precise wording of the relevant European Union law. ¹⁹ I therefore propose that the Commission’s action should be dismissed.

B – The objectives and context of the VAT grouping provisions

37If the Court were to accept the above analysis based on the wording of Article 11, it is not strictly necessary for the Court to go on to consider its context and objectives. ²⁰ However, I will discuss this issue in case the Court does not accept my conclusion with respect to the wording of Article 11.

38The Explanatory Memorandum to the proposal for the Sixth VAT Directive states that ‘… in the interests of simplifying administration or of combating abuses (e.g. the splitting up of one economic operator among several taxable persons so that each may benefit from a special scheme) Member States will not be obliged to treat as taxable persons those whose “independence” is purely a legal technicality’. ²¹ The legislative history of the provisions establishing VAT groups reveals no other aims. For the Commission, these goals preclude the inclusion of non-taxable persons in VAT groups.

39In order to understand the purpose of VAT grouping within the context of the broader VAT regime, account needs to be taken of the effect VAT groups have on fiscal neutrality. This entails consideration of the practical effects of registering a VAT group. This is significant, because these effects may well provide the motivation for economic operators to be involved in VAT grouping, provided that they have a choice in this respect under the applicable national legislation. ²²

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

40The forming of a VAT group results in the creation of a single taxable person for VAT purposes which is in all aspects comparable to a taxable person consisting of only one entity. Regardless of its nature as a special scheme, VAT grouping neither introduces limitations nor broadens the rights of a taxable person as defined in Article 9 of the VAT Directive.

41The VAT system achieves the highest degree of simplicity and neutrality under two conditions: when the tax is levied in as general a manner as possible and when its scope covers all stages of production, distribution, and the supply of services. ²³ The VAT regime should result in neutrality in competition, so that within the territory of a Member State similar goods and services bear the same tax burden, regardless of the length of the production and distribution chains. ²⁴ When functioning optimally, this so-called neutral taxation should not affect either competition or the decisions economic operators make when organising their activities, such as legal form or organisational structure. ²⁵

42The establishment of a VAT group initiates the tax liability of the VAT group, and terminates the separate tax liability of those of its members who were taxable persons for VAT purposes before joining the group. ²⁶ The VAT treatment of the group’s transactions, both to and from entities outside the group, is comparable to VAT treatment of a single taxable person operating individually. Transactions between the individual members of the group, and which remain therefore within the group, are considered as having been carried out by the group for itself. Consequently, a VAT group’s internal transactions do not exist for VAT purposes.

43When a VAT group acts in accordance with the rules of the VAT regime, the right of the persons belonging to the VAT group to deduct VAT for purchases is not expanded. ²⁷ This right continues to be applicable only to those supplies that are made for the activities subject to VAT by the VAT group. Nor are the members of a VAT group entitled to deduct VAT on supplies made for VAT exempted activities.

D – The purpose of the VAT grouping provisions

44In the light of the purpose and context of VAT grouping, which I have outlined above, I cannot agree with the Commission’s argument that non-taxable persons must be precluded from it. I have reached these conclusions for the following reasons.

45VAT grouping does not create economic benefits when a purchase is made for activities subject to VAT, since the purchaser is entitled to deduct input VAT. In such a situation it is in principle irrelevant whether the purchase is made within the VAT group without input VAT or with input VAT from outside of the VAT group. However, as a VAT group’s internal transactions are disregarded for VAT purposes, VAT grouping may entail cash flow advantages for economic operators with respect to activities that are subject to VAT.

46In certain situations members of a VAT group may gain economic benefits from belonging to the group. ²⁸ This, in my opinion, is simply an inevitable consequence flowing from the basic fiscal policy choice of a Member State to permit VAT grouping.

47Membership of a VAT group can be beneficial, for example, in a situation in which the member making a purchase subject to VAT had, because of the VAT exempt nature of its activities, no right to deduct VAT at all, or no full VAT deduction right. If such a member purchases from a supplier outside the VAT group, VAT would be incurred. If, however, it makes the purchase from another member of the group, no VAT is incurred.

48Where an economic operator is not entitled to deduct input VAT incurred in a purchase, it might be economically advantageous for it to produce the goods or services itself. For example, a bank that is not entitled to deduct VAT might benefit economically if it produces IT services needed for its banking activities internally rather than buying them from a third party. However, if the VAT grouping option is available, it may outsource its IT service provision to a subsidiary belonging to the group and still gain the same advantage.

49Hence, VAT liability can and does have an impact on the structure and functioning of business activities. But VAT grouping allows the Member States to diminish the influence of VAT on the way economic operators organise themselves. It can do this by reducing the difference in costs between producing a service in-house and buying it from a dependent supplier with separate legal personality. Thus, VAT grouping supports fiscal neutrality by enabling appropriate business structures without negative consequences in terms of VAT liability. Moreover, the possibility of including non-taxable persons as members of a VAT group places corporate structures that include such persons in the same position as other corporate structures. An example is found in such company groups where a holding company possesses majority holdings in all other companies of the group.

50I recall it is the activity and not the legal form that defines status as a taxable person for VAT purposes. The activities of members of VAT groups need to be examined in order to determine the practical effect of VAT grouping in terms of fiscal neutrality.

51For example, in principle the nature of the activities of a legally independent holding company as taxable or non taxable does not depend on whether it belongs to a VAT group or not. ²⁹ Nevertheless, a holding company belonging to a VAT group can purchase taxable goods and services without VAT, whereas a holding company not belonging to a VAT group cannot. Through its membership in a VAT group, a non-taxable person becomes an entity regulated by the European Union VAT regime.

52However, in my opinion it is not an anomaly that non-taxable persons can belong to a VAT group. This is so because any taxable person may be engaged in activities falling within the scope of VAT and activities falling outside of the scope of VAT. ³⁰ In this respect no distinction can be made between an ordinary taxable person and a VAT group.

53Hence, from the perspective of fiscal neutrality, the inclusion of non-taxable persons in a VAT group makes no difference to the pursuit of the goals of the VAT grouping regime. Moreover, in my opinion, a situation in which a non-taxable person benefits economically by making VAT free purchases within a VAT group is not different from the situation in which a taxable person engaged in VAT exempt activities may, by belonging to a VAT group, purchase taxable supplies VAT free from within the VAT group.

54In conclusion, I consider that the purpose of VAT grouping within the VAT regime does not support the position according to which non-taxable persons cannot be included in VAT groups under Article 11 of the VAT Directive.

VII – Conclusion

Conclusion

55For these reasons I propose that the Court should declare that Ireland, by permitting non-taxable persons to be members in a value added tax group, has not infringed its obligations under Articles 9 and 11 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. In consequence the Commission’s action should be dismissed and the Commission be ordered to pay costs and the intervening Member States to support their own costs.

¹ Original language: English.

² OJ 2006 L 347, p. 1. Similar infringement actions have been raised by the Commission against the Czech Republic, the Kingdom of Denmark, the Republic of Finland, the Kingdom of the Netherlands, and the United Kingdom of Great Britain and Northern Ireland. See Case C-109/11 Commission v Czech Republic; Case C-95/11 Commission v Denmark; Case C-74/11 Commission v Finland; Case C-65/11 Commission v Netherlands; Case C-86/11 Commission v United Kingdom. The Court has limited, however, its request for an Opinion of an Advocate General to this case and Case C-480/10 Commission v Sweden, where my opinion will be presented at the same time as the present opinion.

³ Substantially identical provisions were previously contained in section 8(8)(a) of the Value Added Tax Act 1972, as amended most recently by the Finance Act 2008.

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

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

⁶ The Commission contends that, if a Member State wishes to derogate from the normal provisions of the VAT Directive in pursuit of this objective, it must comply with the procedure laid down in Article 395 of the VAT Directive.

⁷ Case C-162/07 [2008] ECR I-4019, paragraph 19.

⁸ Case C-60/90 [1991] ECR I-3111. Advocate General Van Gerven concluded at point 9 of his Opinion that: ‘The question which arises is whether that option enables a Member State to treat two persons who are closely bound to one another as a single taxable person where it is established that one of those persons does not engage in any “economic activities” within the meaning of Article 4 of the directive. In my view, that question must be answered in the negative.’

⁹ Ireland refers to section 15(1) of the Value Added Tax Consolidation Act 2010 that requires at least one the members of a VAT group to be a taxable person for the purposes of Title III of the VAT Directive.

¹⁰ Ireland further refutes the argument that measures based on Article 11 need to be adopted on the basis of Article 395 of the VAT Directive.

¹¹ As to holding companies from the VAT point of view, see for example Polysar, and Case C-29/08 SKF [2009] ECR I-10413.

¹² Case C-155/94 [1996] ECR I-3013. In Wellcome Trust the issue at stake was whether the concept of economic activities, within the meaning of Article 4(2) of the Sixth Directive, is to be interpreted as including an activity consisting in the purchase and sale of shares and other securities by a trustee in the course of the management of the assets of a charitable trust.

¹³ Case C-80/95 [1997] ECR I-745. Harnas and Helm concerned the question whether Article 4(2) of the Sixth Directive is to be interpreted as meaning that the mere acquisition of ownership in and the holding of bonds, activities which are not subservient to any business activity, and the receipt of income thereform are not to be regarded as economic activities conferring on the person concerned the status of a taxable person.

¹⁴ See Case C-174/08 NCC Construction Danmark [2009] ECR I-10567, paragraph 23 and case-law cited; see also Case C-33/11 A Oy [2012] ECR, paragraph 27.

¹⁵ Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes – Structure and procedures for application of the common system of value added tax (OJ, English Special Edition 1967(I), p. 16).

¹⁶ Sixth Council Directive 77/388/EEC 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.

¹⁷ The full text of the second subparagraph of Article 4(4) of the Sixth Directive states ‘… each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links’.

¹⁸ See recital 3 of the VAT Directive: ‘To ensure that the provisions are presented in a clear and rational manner, consistent with the principle of better regulation, it is appropriate to recast the structure and the wording of the Directive although this will not, in principle, bring about material changes in the existing legislation. A small number of substantive amendments are however inherent to the recasting exercise and should nevertheless be made. Where such changes are made, these are listed exhaustively in the provisions governing transposition and entry into force.’

¹⁹ Case C-582/08 Commission v United Kingdom [2010] ECR I-7195, paragraphs 49 to 51.

²⁰ Commission v United Kingdom, especially at paragraph 51. See also my Opinion in that case at point 52.

²¹ See Explanatory Memorandum to the proposal for a Sixth VAT Directive, COM(73) 950, 20 June 1973.

²² The practical implementation of the VAT group option varies. In some Member States that have introduced VAT grouping, it is obligatory for persons fulfilling the requirements, and in others it is voluntary.

²³ See recital 5 of the VAT Directive.

²⁴ See recital 7 of the VAT Directive.

²⁵ Terra, B., and Kajus, J., A Guide to the European VAT Directives, IBFD, 2012, Chapter 7.3.

²⁶ See Ampliscientifica, paragraphs 19 and 20.

²⁷ For a summary of the deduction system, see Case C-324/11 Tóth [2012] ECR, paragraph 25 and case-law cited.

²⁸ See Communication from the Commission to the Council and the European Parliament on the VAT group option provided for in Article 11 of Council Directive 2006/112/EC on common system of value added tax (COM(2009) 325 final), pages 11 and 12.

²⁹ See the judgment in Polysar, paragraphs 15 to 17.

³⁰ See Case C-77/01 EDM [2004] ECR I-4295, paragraph 49, and Case C-437/06 Securenta [2008] ECR I-1597, paragraph 26. ‘It is apparent from the information supplied by the national court that Securenta carries out three types of activity: (i) non-economic activities, which do not fall within the scope of the Sixth Directive; (ii) economic activities, which as such fall within the scope of that directive but are exempt from VAT; and (iii) taxed economic activities. The question therefore arises, in that context, whether – and, if so, to what extent – such a taxable person has the right to deduct input VAT relating to expenditure which is not attributable to specific output transactions.’