C-89/81 Hong-Kong Trade

JUDGMENT OF THE COURT

Legal context and the dispute

1 APRIL 1982

Staatssecretaris van Financiën v Hong Kong Trade Development Council

(reference for a preliminary ruling from the Hoge Raad der Nederlanden)

(Refund of value added tax)

Case 89/81

Tax provisions — Harmonization of legislation — Turnover taxes — Common system

of value added tax — Taxable person — Concept — Person providing services free of charge — Excluded

(Council Directive 67/228, Art. 4)

A person who habitually provides the Second Directive on the harmonservices for traders, free of charge in all ization of legislation of Member States cases, cannot be regarded as a taxable concerning turnover taxes.

person within the meaning of Article 4 of

In Case 89/81

REFERENCE to the Court under Article 177 of the EEC Treaty by the Hoge Raad der Nederlanden [Supreme Court of the Netherlands] for a preliminary ruling in the proceedings pending before that court between

[Secretary of State for Finance] of the STAATSSECRETARIES VAN FINANCIËN Netherlands

and

Amsterdam, HONG KONG TRADE DEVELOPMENT COUNCIL,

1 — Language of ihe Cue: Dutch.

on the interpretation of Article 4 and the first sub-paragraph of Anicie 11 (2) of the Second Council Directive, 67/228/EEC, of 11 April 1967, on the harmonization of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value added tax (Official Journal, English Special Edition 1967, p. 16),

THE COURT

composed of: J. Mertens de Wilmars, President, G. Bosco, A. Touffait and O. Due (Presidents of Chambers), P. Pescatore, Lord Mackenzie Stuart, A. O'Keeffe, T. Koopmans, U. Everling, A. Chloros and F. Grévisse, Judges,

Advocate General: P. VerLoren van Themaat Registrar: P. Heim

gives the following

JUDGMENT

Facts and Issues

I — Facts and procedure The activities carried out by the office in Amsterdam consist in providing information and advice about Hong Kong and the possibilities of trade with Hong Kong for traders in the Netherlands and The Hong Kong Trade Development in Europe in general who request it and Council is an organization founded in also providing similar information 1966 under Hong Kong law with the concerning the Netherlands and Europe object of promoting trade between Hong for undertakings in Hong Kong. All such Kong and other countries. Its legal form information is provided free of charge. appears to be — according to the Hoge Raad — that of "bedrijfschap" [trade organization] or "produktschap" [production board] as provided for by Netherlands law, that is to say an The Director of the Amsterdam office, organization or body governed by public although appointed by the Governor of law. It has opened offices in various Hong Kong by agreement with the important trade centres, including Trade Council, is not in the service of Amsterdam in 1972.

the Hong Kong authorities.

The Amsterdam office has its expenses paid by the Hong Kong organization, whose income is provided partly in the form of a grant from the Hong Kong Government and partly from a charge of 0.5% of the value of products imported into and exported from Hong Kong.

Having applied in 1973 for approval as an undertaking within the meaning of the second directive on value added tax, the respondent in the main proceedings received, until 1978 and in respect of each application submitted by it, a refund from the Inspector of Taxes of the input taxes paid in respect of its activities in Amsterdam, but in all cases "subject to amendment upon subsequent investigation".

After carrying out a check at the beginning of 1978, the Inspector took the view that the respondent in the main proceedings was not an undertaking and made an adjusted assessment requiring repayment of the amounts which the Netherlands Government had paid between 1973 and 1978. In response to an objection, the Inspector reduced the assessment "to the amount in respect of the year 1978", namely HFL 9 987.06.

That decision was the subject of an appeal to the Gerechtshof, [Regional Court of Appeal], Amsterdam which by judgment of 6 May 1980 held that since the respondent was regularly and independently engaged in "business in society by satisfying the needs of the community for such guidance and assistance", it constituted an undertaking and might consequently "deduct the turnover tax charged to it by other undertakings".

That decision was contested by the Staatssecretaris van Financiën who, in his submissions before the Hoge Raad, stated that the Gerechtshof "was not entitled to decide that the Trade Council must be treated as an undertaking within the meaning of the Wet op de Omzetbelasting [Law on turnover tax]" in the first place on the ground that since its activities are carried on free of charge it cannot be regarded under Netherlands law as being an undertaking and, in the second place, that Article 11 of the Second Directive prevents it from obtaining any refund of input tax.

Having regard to the concurring opinion of Mr Advocate General van Soest, the Hoge Raad decided to stay the proceedings and referred two questions to the Court:

" 1 . Can a person who habitually provides services for traders be regarded as a taxable person within the meaning of Article 4 of the Second Directive [of the Council of the European Economic Community of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes] in the event of those services being provided free of charge?

2 If Question 1 is answered in the affirmative :

Does the first sentence of Article 11 (2) of the Second Directive prevent the deduction of turnover tax on goods and services used for the purpose of providing services as aforesaid?"

The order making the reference was received at the Court Registry on 14 April 1981.

In accordance with Article 20 of the Protocol on the Statute of the Court of Justice of the EEC, written observations were submitted by the Netherlands Government, represented by Mr Plug, the Secretary General and acting Minister for Foreign Affairs, acting as Agent, by the respondent in the main proceedings, represented by G. H. Warning, and by the Commission of the European Communities, represented by D. Gilmour, assisted by Th. Van Rijn, members of its Legal Department, acting as Agents.

On hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry.

II — Observations submitted pursuant to Article 20 of the Protocol on the Statute of the Court of Justice

A — First question

The Netherlands Government is of the opinion that to answer the questions raised it is appropriate also to have regard to the aim and scope of the system of value added tax. Accordingly, it considers the wording of Article 2 of the First Directive and that of Article 2 of the Second Directive to be relevant. It follows from those provisions that "in the case of operations carried out free of charge, which are therefore not taxable, the Community system of value added tax no longer operates and the stage of consumption has in fact been reached".

As regards the first question, the Netherlands Government maintains that the respondent in the main proceedings cannot be regarded as a taxable person on the ground that, in its view, there can be no economic activity within the meaning of Annex A, paragraph 2, regarding Article 4 of the Second Directive, where services are provided free of charge in all cases. On the other hand, if a supplier of goods or services occasionally provided services for no consideration, that would not mean that there was no activity involving the provision of services within the meaning of the Second Directive, which was also true in Case 154/80 Coöperatieve Aardappelen bewaarplaats, judgment of 5 February 1981 ([1981] ECR 445).

The Netherlands Government considers that its opinion is confirmed by the provisions of Article 12 (2) of the Second Directive and by Annex A, paragraph 25,

1280 regarding Article 12 (2), which impose on the taxable person the obligation to issue an invoice which must show separately the price exclusive of tax and the corresponding tax. According to the Netherlands Government "it would be somewhat absurd to impose those conditions if a supplier or provider of services who delivers goods or provides services free of charge must also be regarded as a taxable person within the meaning of Article 4 of the Second Directive".

In consequence, "the Netherlands Government is of the opinion that a person who habitually provides services on behalf of undertakings cannot be regarded as a taxable person within the meaning of Article 4 of the Second Directive if such provision of services is carried out free of charge. In that connection, it is of the opinion that the answer to the first question must be negative."

The respondent in the main proceedings, after pointing out that the principle of neutrality must be observed with regard to value added tax, states the view that, as far as that tax is concerned, "maximum neutrality is achieved where the group of those who are defined as taxable persons is as wide as possible". For that reason, Article 4 of the Second Directive makes it clear that "the pursuit of profit is not a precondition for the status of taxable person".

In Annex A, paragraph 2, regarding Article 4, it is stated in the first place in the first subparagraph that the expression "activities of producers, traders or persons providing services" is to be understood in a wide sense, then, in the second subparagraph, that if a Member State intends not to tax certain activities it is to achieve that purpose by means of exemptions rather than by restricting the concept of taxable person, and finally in the third subparagraph, that Member States are entitled to regard as a taxable person anyone who engages, albeit occasionally, in transactions pertaining to economic activities, which — according to the respondent in the main proceedings — was taken up in Article 4 of the Sixth Directive.

Therefore only a wide interpretation of the concept of taxable person is appropriate ''within the framework of the European turnover tax".

Moreover that interpretation is confirmed by the provisions of Articles 2 and 6 of the Second Directive.

In fact, according to Article 2, the provision of services within national territory by a taxable person, against payment, is subject to value added tax. If any of these three conditions is not fulfilled, the provision of services is not taxable, but still constitutes a provision of services — thus, the provision of services effected outside national territory' by a taxable person constitutes a provision of services (see the second subparagraph of Article 11 (2) of the Second Directive).

Therefore, the provision of services free of charge may in principle also be regarded as a provision of services within the meaning of the Second Directive.

According to the respondent in the main proceedings, the question whether the provision of services free of charge may be considered as a provision of services within the meaning of the Second Directive must be examined in the light of Article 6 thereof which regards as the "provision services" "any transaction of which does not constitute a supply of goods within the meaning of Article 5". That definition is so wide that it includes the provision of services free of charge.

Nevertheless, to reach the conclusion on that basis that a supplier of goods or services providing services in that way is a taxable person, a further requirement is, according to Article 4 of the Second Directive, that the transaction in question should pertain to an "economic activity". The latter expression, used in Annex A, paragraph 2, regarding Article 4, must be understood in a wide sense.

In conclusion, the respondent in the main proceedings is of the opinion that in consequence of the nature of value added tax, on the one hand, and of the combined effect of Articles 2, 4 and 6 of the Second Directive on the other hand, "anyone who habitually provides free of charge services representing an economic activity must be regarded as a taxable person within the meaning of Article 4 of the Second Directive".

The Commission emphasizes in the first place that the Hong Kong legislation setting up the Trade Development Council seems to indicate that "that organization may, with regard both to its structure and to its activities, be considered as falling more within the public sector than within the private sector", a question which the Netherlands courts should examine on the basis both of Netherlands law and of Hong Kong law.

It then puts Article 4 of the Second Directive back into its immediate context, before raising the question whether the Hong Kong Trade Development Council is a taxable person within the meaning of that article ¡: takes the view that to interpret m a: provision regard should be had to Article 4 of the Sixth Directive, one of the a;,"vof which was to define the concept of taxable person

According to the Commission, "a; '••'•• sight", the respondent in the :r,.r; proceedings is a taxable person. nen.ti .. person who provides servicer ever though not for gain, thus unequr-o* \ ·• tailing within the terms ot trie pro . i-ui in question

; Moreover, neither Annex A ARTICLe oi the Sixth Directive contra..:.c;·. t' . "clear meaning or Article 4' >' ine Second Directive and the v o iinn-iv. v takes the \iew in particular thai ' there .· hardly any doubt that promotional activities" of type of those carried on

the

by respondent in main

the the

proceedings "are of an economic nature" and that it is of little importance that those activities are not paid for by the direct beneficiaries of them.

The only reason for contesting those conclusions is found in the provisions of Annex A, paragraph 2, of the Second Directive which exclude from the concept of taxable person corporate bodies governed by public law in respect of activities which they pursue as public authorities. But it is for the Netherlands courts to decide whether the respondent in main proceedings falls within that

the

category which is excluded from the concept of taxable person.

In consequence, the Commission proposes that first question should be

the

answered as follows:

"Any person who habitually renders services to undertakings without charge to the beneficiary may be regarded as a taxable person within the meaning of Article 4 of the Second Directive".

B — Second question

Having replied to the first question in the negative, the Netherlands Government considers "that there is no reason to answer the second question".

The respondent in the main proceedings is of the opinion in the first place that this question should be examined not only in relation to the wording of Article 11 of the Second Directive — in which case the answer "is so simple that it must be admitted that it is not the one which the Hoge Raad seeks" — but also "in conjunction" with the Netherlands Law on turnover tax.

In fact, the question for which an answer is actually sought is "whether the

1282 Netherlands tax administration may rely upon the Second Directive where the latter provides, as in the case in point, for a right to deduct which is more restrictive than that provided for by the Netherlands Law or 1968 on turnover tax".

It is a question of determining whether — in the same way as private individuals may in certain cases avail themselves in legal proceedings of the provisions of directives — national authorities also have "that right where a directive confers upon them a right which is more extensive than that provided under their own legislation".

In this case, the relevant provision of the Netherlands Law, Article 15, did not exclude "deduction of the input tax paid in respect of services provided for the carrying out of non-taxable transactions". Thus, it appears from that p rovision that the Netherlands legislature as not complied with the obligation laid down in the first sentence of Article 11 (2) of the Second Directive.

For this type of dispute, a specific procedure is laid down in Articles 169 and 170 of the Treaty Rome; it would therefore "not be correct" to seek to achieve the same object by the indirect means of Article 177.

Moreover, the interests of the Netherlands Government are not harmed since the government itself is the author of its own law. And if it did regard its interests as being harmed, all it would need to do would be to change the law.

Finally, the case-law of the Court shows that it has relied on equitable grounds to support the direct effect of directives. In particular it is clear from the judgment of 6 October 1970 (Case 9/70 Franz [1970] ECR 825), in particular Grad paragraph 5 of the decision, that the Court has expressed "the. idea of protection of the individual". It is recognized, as a matter of legal theory, that directives may not impose obligations on individuals but may only confer rights on them".

In consequence, the respondent in the main proceedings takes the view that "the Netherlands authorities are not entitled to limit the right to deduct the input tax paid in respect of non-taxable transactions in reliance on the Second Directive".

The Commission considers that, in so far as it may be necessary to reply to the second question, the appropriate view is that "Article 11 (2), first sentence, manifestly prevents deduction of the turnover tax on goods and services used for the provision of services by the Hong Kong Trade Development Council", since by virtue of Article 2 only services provided against payment are subject to value added tax (see paragraph 12 of the decision of 5 February 1981, judgment cited above) and that there may therefore be no deduction of value added tax levied on the value of goods and services used for the provision of goods and services free of charge, on the ground that the transaction is not taxable.

The Commission further adds that, as far as the respondent in the main proceedings is concerned, whether or not it is regarded as a taxable person, the result is the same with regard to the deduction of value added tax paid in respect of inputs — no such deduction is possible.

In consequence, the Commission proposes that the following answer should be given to the second question: "The first paragraph of Article 11 (2) of the Second Directive prevents the deduction of turnover tax levied on goods and services used for the provision of services free of charge".

III — Oral procedure

At the sitting on 12 January 1982 oral argument was presented and replies to questions put by the Court were given by the following. Mr Bijl, acting as expert, for the Netherlands Government; and Thomas Van Rijn, acting as Agent, for the Commission of the European Communities.

The Advocate General delivered his opinion at the sitting on 2 March 1982.

Decision

1By a judgment of 8 April 1981, which was received at the Court on 14 April 1981, the Hoge Raad [Supreme Court] of the Netherlands submitted to the Court for a preliminary ruling under Article 177 of the EEC Treaty two questions on the interpretation of Articles 4 and 11 of the Second Council Directive, 67 / 228 / EEC , of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value added tax (Official Journal, English Special Edition 1967, p. 16).

2 The questions were raised in proceedings between the Staatssecretaris van Financiën [Secretary of State for Finance] of the Netherlands and the Hong Kong Trade Developement Council [hereinafter referred to as the "Trade Council"], an organization founded in Hong Kong in 1966 with the object of promoting trade between Hong Kong and other countries, which opened an office in Amsterdam in 1972. Its activities in the Netherlands consist in providing free of charge for traders information and advice about Hong Kong and the opportunities for trade with Hong Kong and also in providing similar information concerning the European market for Hong Kong traders. The income of the Amsterdam office is provided in the form of a fixed annual grant from the Hong Kong Government and from the proceeds of a charge amounting to 0.5% of the value of products imponed into and exported from Hong Kong.

The dispute between the Netherlands tax authorities and the Trade Council arose from the fact that the Netherlands authorities, having until 1978, "subject to amendment upon subsequent investigation", refunded to the Trade Council the amount of value added tax invoiced by undertakings which had provided it with services or supplied it with goods, ceased to regard it as a taxable person and accordingly reclaimed the above-mentioned amount which, according to the tax authorities, had been improperly refunded. The matter was brought before the Hoge Raad, which referred the following two questions to the Court:

" 1 . Can a person who habitually provides services for traders be regarded as a taxable person within the meaning of Article 4 of the Second Directive [of the Council of the European Economic Community of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes] in the event of those services being provided free of charge?

2If question 1 is answered in the affirmative: Does the first sentence of Article 11 (2) of the Second Directive prevent the deduction of turnover tax on goods and services used for the purpose of providing services as aforesaid?"

4Anicie 4, which is referred to in the first question, provides:

" 'Taxable person' means any person who independently and habitually engages in transactions pertaining to the activities of producers, traders or persons providing services, whether or not for gain."

5The national court places emphasis on the fact that, in the case before it, the Trade Council's services are in all cases provided free of charge, because in Article 4, which defines a taxable person, the "transactions" pertaining to the activities of producers, traders or persons providing services are not described, whereas Anicie 2 of the same directive states that only services provided by a taxable person against payment are to be subject to value added tax. Consideration of those two articles, a literal analysis of which is not prima facie an appropriate way to resolve the issue as to whether or not an organization which habitually provides services free of charge may be regarded as a taxable person, indicates that it would be advisable to identify the relevant features of the common system of value added tax in the light of its purpose.

6That purpose, which the Second Directive mentions in its preamble whilst at the same time referring to the First Directive, 67/227, of the same date (Official Journal, English Special Edition 1967, p. 14), is evident from the preamble to the latter directive, which refers to the need to achieve such harmonization of legislation concerning turnover taxes as will eliminate factors which may diston conditions of competition and therefore to secure neutrality in competition, in the sense that within each country similar goods should bear the same tax burden, whatever the length of the production and distribution chain.

7In order to attain that objective, the First Directive provides in the first paragraph of Article 2 that the principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.

8The way in which that principle, which is based on the price of the goods and services, is to be applied is indicated in the second paragraph of the same article, as follows:

"On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components."

In addition, the third paragraph provides that the common system of value added tax is to be applied up to and including the retail trade stage.

9Under that system it is clear that tax is no longer deductible when the chain of transactions has come to an end. It is then charged to the final consumer who cannot pass on the amount of the tax unless there is a further transaction in which a price is paid.

10Where a person's activity consists exclusively in providing services for no direct consideration, there is no basis of assessment and the free services in question are therefore not subject to value added tax. In such circumstances the person providing services must be assimilated to a final consumer because he is at the final stage of the production and distribution chain. In fact, the link between him and the recipient of the goods or service does not fall within any category of contract likely to be the subject of tax harmonization giving rise to neutrality in competition; in those circumstances, services provided free of charge are different in character from taxable transactions which, within the framework of the value added tax system, presuppose the stipulation of a price or consideration.

11That difference is apparent from the context of the provision of which an interpretation is requested. The requirement that taxable transactions must be effected against payment is confirmed by the fact that the economic activities of taxable persons, within the meaning of Annex A, paragraph 2, first subparagraph, are necessarily activities which are carried on with the object of obtaining payment of consideration or which are likely to be rewarded by the payment of consideration, because if they are free of charge in all cases they do not fall within the system of value added tax, since they cannot, according to Article 8, constitute a basis of assessment. The need for payment is also clear from Article 12 of the same directive which imposes on every taxable person the obligation to issue an invoice in respect of goods supplied and services provided by him to another taxable person, to keep accounts to make possible inspection by the tax authorities and to lodge a declaration each month containing all the information required for calculation of the tax.

12The context of Article 4 of the Second Directive, the interpretation of which is involved in this case, and the cohesion of the system clearly prove therefore that a person providing services free of charge in all cases cannot be regarded as a taxable person within the meaning of that article.

13Consequently, the reply which should be given to the first question is that a person who habitually provides services for traders, in all cases free of charge, cannot be regarded as a taxable person within the meaning of Article 4 of the Second Directive.

1 4 Since the first question submitted by the Hoge Raad has been answered in the negative, there is no need to consider the second question.

Costs

Costs

15The costs incurred by the Netherlands Government and the Commission of the European Communities, which have submitted observations to the Court, are not recoverable; as these proceedings are, in so far as the parties to the main proceedings are concerned, in the nature of a step in the action pending before the national court, the decision on costs is a matter for that court.

Operative part

On those grounds,

THE COURT,

in reply to the questions submitted to it by the Hoge Raad by order of 8 April 1981, hereby rules:

A person who habitually provides services for traders, in all cases free of charge, cannot be regarded as a taxable person within the meaning of Article 4 of the Second Directive.

Mertens de Wilmars Bosco Touffait

Due Pescatore Mackenzie Stuart O'Keeffe

Koopmans Everling Chloros Grévisse

Delivered in open court in Luxembourg on 1 April 1982.

J. A. Pompe G. Bosco

Deputy Registrar President of the First Chamber,

acting as President

OPINION OF MR ADVOCATE GENERAL

VERLOREN VAN THEMAAT

DELIVERED ON 2 MARCH 1982 ¹

Mr President,

Members of the Court,

1. The facts and questions

As is often the case, in the present proceedings for a preliminary ruling the facts emerging from the judgment making the reference are useful in throwing light on the questions referred to this Court. I therefore begin with a short summary of the most important facts — including the course of the national proceedings —, to which I shall refer by using letters of the alphabet.

The Hong Kong Trade Development Council (hereinafter referred to as “the Trade Council”) is an organization founded under Hong Kong law in 1966 and also established in Hong Kong for the promotion of trade between Hong Kong and other countries. According to the facts referred to in the judgment of the Gerechtshof [Regional Court of Appeal], Amsterdam, quoted by the Hoge Raad (Supreme Court], its legal form may be compared with that of a Netherlands “bedrijfschap” [trade organization] or “produktschap” [production board]. According to the Gerechtshof, the Trade Council is composed of nominated and ex officio members from the groups representing various interests in industry, trade and credit enumerated in its judgment as well as from the Government of Hong Kong.

The Trade Council has offices in various important trade centres, including — since 1972 — Amsterdam. The activities which were and are carried on from the office in Amsterdam consist mainly in providing information and advice about Hong Kong and opportunities for trade with Hong Kong for undertakings in the Netherlands and in other West European countries as well as in providing information about the opportunities for trade with the Netherlands and other West European countries for undertakings in Hong Kong. As a rule, that information is provided free of charge. The same applies to the other services provided for undertakings by the Trade Council's Amsterdam office. The executive director of the Amsterdam office is appointed by the Governor of Hong Kong in consultation with the Trade Council and he in turn appoints the staff and other employees.

The Trade Council's income consists of an annual fixed contribution from the Hong Kong Government, supplemented by funds obtained by means of a charge amounting to 0.5 % of the value of goods imported into or exported from Hong Kong. The charge is levied by the Government, which remits the proceeds to the Trade Council after deducting the costs of collection. In 1972 the annual fixed contribution amounted to 6 million Hong Kong dollars and the net yield from the charge to approximately 18 million Hong Kong dollars. The expenses of the Amsterdam office are paid by the Trade Council.

In 1973 the Trade Council submitted to the Inspector of Turnover Taxes, Amsterdam, an application containing a statement of its objects. procedure, composition and financing, and the Inspector recorded the Council, as thus represented in Amsterdam, in the register of businesses. Apart from the miscalculation of a few minor sums, the Trade Council, in each of its declarations, declared only the input tax which it had paid. Each application for the refund of input tax was granted with the proviso that “the application is granted subject to amendment upon subsequent investigation”.

After carrying out a check at the beginning of 1978, however, the Inspector took the view that the Trade Council was not an undertaking and made a subsequent assessment. The Trade Council successfully appealed against that assessment to the Gerechtshof, Amsterdam, whereupon the Staatssecretaris van Financiën [Secretary of State for Finance] appealed in cassation against the Gerechtshofs decision on the ground that the Gerechtshof was not entitled to decide that the Trade Council should be regarded as an undertaking within the meaning of the Wet op de Omzetbelasting [Law on turnover tax] with the right to deduct input tax, inter alia because the Gerechtshofs view conflicted with the Second Council Directive of 11 April 1967 (Directive 67/228/EEC) on the harmonization of legislation of Member States concerning turnover taxes (Official Journal, English Special Edition 1967, p. 16). For further details of the legal arguments which played a rôle in the proceedings before the Netherlands courts, I refer to the judgment making the reference.

In connection with the appeal in cassation, the Hoge Raad of the Netherlands referred the following two questions to the Court of Justice for a preliminary ruling:

Can a person who habitually provides services for traders be regarded as a taxable person within the meaning of Article 4 of the Second Directive [of the Council of the European Economic Community of 11 April 1967 on the harmonization of legislation of Member States concerning turnover tax] in the event of those services being provided free of charge?

2If Question 1 is answered in the affirmative :

Does the first sentence of Article 11 (2) of the Second Directive prevent the deduction of turnover tax on goods and services used for the purpose of providing services as aforesaid?”

2. The relevant provisions of the directive

Before giving further consideration to the questions posed, I consider it useful to review the main provisions of the directive which, in view of the facts of the basic dispute, may be important. At the same time, I shall pay attention to the relationship between those provisions of the directive which the Court is asked to interpret and other provisions thereof which are important for a proper understanding of the former.

As has been stated, the basic dispute concerns the right to deduct, or in this case to receive a refund of, the value added tax which the Trade Council's Amsterdam Office itself had to pay on goods and services supplied to it. That matter is governed by Article 11 of the directive. The first subparagraph of Article 11(2) provides that: “Value added tax on goods and services used in nontaxable or exempt transactions shall not be deductible.” The second question referred to the Court relates to that subparagraph.

As appears from the abovementioned subparagraph, the right to deduct input tax is dependent on a number of preconditions. In particular, there is no right of deduction — except as provided for in the second subparagraph of Article 11 (2), which is not wholly unimportant in this case — if the goods or services on which the tax is paid are used in nontaxable or exempt transactions. Moreover, it is clear from Article 11 (1) that the right of deduction applies exclusively to those who are themselves taxable persons. The first question referred to the Court concerns the latter condition, that is to say the Trade Council's subjective liability to tax. As appears from the judgment making the reference, in the view of the Staatssecretaris van Financiën, the Trade Council has no subjective liability to tax under the rules contained in the Netherlands Wet op de Omzetbelasting, 1968 (Article 1 in conjunction with Article 7), which limit such liability to “undertakings”, and it therefore cannot claim the right conferred on undertakings in Articles 2 and 15 of that Law to deduct input tax. The Gerechtshof's wider view of the concept of undertaking is, it is claimed, incompatible with the Second Directive.

For the application of the first subparagraph of Article 11 (2), the following questions must therefore be considered, in so far as is relevant here:

Whether the Trade Council is subjectively a taxable person This is governed by Article 4 of the directive, to which, as has been stated, the first question referred to the Court relates. It is necessary in thai regard to determine when a person “independently and habitually engages in transactions pertaining to the activities of producers, traders or persons providing services, whether or not for gain.”

Whether the Trade Council is objectively a taxable person This question must not be confused with the question relating to subjective liability to tax. From the judgment making the reference and from the provisions of the Netherlands Law, it seems to me to follow that the whole problem in this case arose because in Articles 2 and 15 the Netherlands Law confers on every undertaking (subjectively a taxable person) the right to deduct input tax and does not also make that right subject to the existence of objective liability to tax as defined in Article 2 of the directive.

The question of objective liability to tax is dealt with in Articles 2, 5 and 6 of the directive.

It is apparent merely from a reading of Article 2, on which the second question asks the Court, although only indirectly, to give a ruling, that it is only the provision of services against payment that is to be subject to value added tax. Moreover, it is also important to point out, in connection with the facts previously stated under B, that it is only the provision of services against payment within the territory of the country that is to be subject to value added tax.

The second subparagraph of Article 11 (2) of the directive provides that deduction of input tax is possible if the provision or services takes place abroad against payment. From the judgment making the reference (first paragraph on page 7) it might be inferred that the Gerechtshof in this case perhaps assumed that payments were made from Hong Kong. However, the latter point seems to be important for proper understanding of the tacts, but not for the answer to the questions referred to the Court, since an interpretation of the second subparagraph of Article 11 (2) has not been requested.

Article 6 (2) of the directive is particularly important for the purpose of answering the questions posed. It is clear from that provision that the rules laid down in the directive as regards the taxation of the provision of services are to be compulsorily applicable only to services listed in Annex B. Point 4 of that list of services, “commercial advertising services”, seems to be of particular importance in this case. Although it is not immediately clear that the services provided by the Trade Council may be qualified as such, the Court has nevertheless not been requested to give a ruling on the interpretation of that annex.

Whether there is a basis of assessment and whether to that extent there may be said to be liability to tax within the meaning of the first subparagraph of Article 11(2)

The basis of assessment is determined in Article 8 of the directive. Subparagraph (a) of the first paragraph of that article confirms once again that it is only services provided against payment that are taxable.

Articles 9 and 10 of the directive concerning rates of tax and exemptions are not of direct importance in this case. Although during the proceedings some attention was paid to Article 12 of the directive, in the final analysis it seems to me that no clear arguments can be derived from that aniele for the purpose of answering the questions referred to the Court. The aniele provides that every taxable person is to be required to keep accounts, issue invoices and lodge declarations. Since, as appears from the clear wording of Article 12, those obligations are to be imposed on all taxable persons, they undoubtedly ought to apply also to taxable persons who either have no objective liability to tax or are exempt from tax. In such cases there may, in connection with the provisions of Article 11 (2), be some doubt as to the purpose of imposing those administrative obligations but not as to the duty to impose them. Consequently, it is not possible — contrary to the opinion expressed by the Netherlands Government in its written obsenations — to adduce a teleological or systematic argument based on the practical aims of Article 12 in support of a narrow interpretation of the concept of “taxable person”. As has already been stated, the concept of “taxable person” relates exclusively to the subjective liability to tax. Nevertheless, in order to ensure proper control, subjectively taxable persons who do not engage in taxable transactions should be subject to the administrative duties provided for in Article 12 of the directive. Contrary to the opinion of the Netherlands Government, the draftsmen of the directive clearly considered that requirement important. It will be clear from the remainder of my opinion why it may indeed be important from the point of view of control.

Since the provisions of the directive on objective liability to tax and on exemptions make it possible that taxable persons are nevertheless not liable to tax (but are to be subject to the administrative obligations contained in Article 12), the concept of “taxable person” under the scheme of the directive clearly covers a wider group of persons than those who are actually liable to tax.

3. The first question

As has already been stated, the first question referred to the Court asks whether a person who habitually provides sen-ices for traders may be regarded as a taxable person within the meaning of Article 4 of the Second Directive (on the harmonization of turnover taxes) in the event of those services being provided free of charge.

Since Article 1 of the directive also confers binding force on Annexes A and B, in order to answer that question consideration must be given to the provisions relating to Article 4 contained in Annex A as well as to the wording and purpose of that article. Moreover, regard should also be had to the scheme of the directive as a whole and within that framework particularly to Article 2, previously analysed, which concerns the objective liability to tax.

So far as the wording and scope of Article 4 are concerned, the crux of the matter is in my opinion the concept of engaging in “transactions pertaining to the activities of producers, traders or persons providing services”. As appears from the wording of the questions and the exposition of the facts, it is assumed that the Trade Council operates independently and habuually pursues the activities needing to be defined. In my opinion, moreover, the expression “whether or not for gain” in Article 4 is only explanatory and of secondary importance. That expression is therefore intended merely to clarify that it is not the aim but rather the nature of the activities in question which is relevant

In mv opinion, on a meaningful interpretation of the wording of Article 4, transactions may be regarded as pertaining to the activities of producers, traders or persons providing services, wherever the following two conditions are met:

the services must be provided for undertakings;

the transactions must be of such a nature as might be engaged in by independent suppliers of sen-ices who operate for gain.

In this case the relevance of the second condition lies in the fact that it is quite conceivable that a trade promotion sen-ice such as the present might be set up by Hong Kong trade and industry themselves and also financed by Hong Kong trade and industry in proportion to the results of the trade promotion activities on Hong Kong's imports and expons. The nature of the activities would not change at all as a result of such an arrangement. The method of payment for those activities under such an arrangement would moreover the equivalent in economic terms to the principal source of finance under the present structure of the serice As appears from the facts already set c_-under C. under the present arrangement the Trade Council is in principle financed from sources the size of -a nu. is directly proportionate to the Lite which the trade promotion har, o. imports and exports Finales, it would be conceivable that a resourceful under taking might itself hit upon the ulei engaging in wholly equivalent activities for the promotion ot Hong Kong juc and industry or another group of foreign undertakings. In order to finance those activities, it might then conclude contract with the government or with the organization in the foreign industry concerned, whereby the amount of the payments would again be determined; an equivalent basis to that which decided upon in this case, that on the basis of the volume of trade with the country concerned. Those alternatives emphasize and explain the fact that it is the economic nature of the activities in question which is relevant for the purposes of Article 4 and not the legal form or the method of financing those activities.

The explanatory provisions relating to Article 4 contained in Point 2 of Annex A confirm that the conclusion thus arrived at is correct. In the first paragraph thereof it is stated that the basic concept referred to in that provision must be interpreted widely so as “to cover all economic activities”. In the second paragraph it is added that if a Member State intends not to tax certain activities, it should achieve its purpose by means of exemptions rather than by excluding from the scope of the tax persons pursuing such activities. Admittedly, it follows from the fifth paragraph that public corporate bodies, such as that which, according to the national court's findings of fact, is concerned here, are not as a general rule to be considered as taxable persons. However, that applies exclusively in respect of activities which they pursue in their official capacity as official authorities. The latter reservation seems to me to be a provision of Community law, the interpretation of which cannot simply be left to the national court. I propose that the Court of Justice should interpret that provision as meaning that activities pursued by public corporate bodies in their official capacity as official authorities can in no case be regarded as meaning activities which by their nature might also be pursued by independent traders who operate for gain. Such an interpretation is also supported by the second and third subparagraphs of Article 4 (5) of the Sixth Council Directive on turnover taxes (Official Journal 1977, L 145, p. 1). It does not seem to me to be strictly necessary to amplify the conclusion which I have already reached with regard to the interpretation of Article 4, but it is desirable in order to emphasize it.

As has already been stated, the expression “whether or not for gain” contained in Article 4 is in my opinion intended only to make it clear that it is not the object but rather the nature of the activities in question which is important. The correctness of that interpretation is in my opinion also clearly demonstrated by Article 4 (1) of the Sixth Directive on turnover taxes, to which the Commission refers in its written observations. Unlike the Commission, however, I consider that that expression in Article 4 of the Second Directive is not in itself decisive with regard to the basic question posed by the Hoge Raad, that is to say whether the fact that the Trade Council provides services free of charge is relevant for purposes of the applicability of Article 4 of the Second Directive. Even transactions which are not for gain will as a rule be provided subject to payment of expenses. However, there is in my opinion another compelling reason why the receipt or non-receipt of payment cannot constitute a supplementary criterion for the applicability of Article 4. As the Commission's representative stated in answer to a question put by the Court during the hearing, economic reality displays every conceivable intermediate form between independent organizations which always receive payment for the services which they provide, those which sometimes do and sometimes do not and those which never receive such payment. It would be difficult for rules on subjective liability to tax to take account of such a variety of intermediate forms. The matter of the receipt of payment belongs rather to the rules on objective liability to tax. Consequently, that matter is dealt with in Article 2 of the Second Directive. That article offers a clear rule for services provided both occasionally and habitually against payment, which, however, implies that tax should be imposed on the habitual provision of services even where payment is required only occasionally. That again presupposes that in such a case a taxable person can be identified. As appears from the facts mentioned under D and on account of the ever-present possibility of changes in this regard in the future, that point may also be of practical importance in the present case. In any event, the systematic argument derived from Article 2 of the directive supports the interpretation of Article 4 of the directive which I have put forward.

I therefore conclude that the first question submitted should be answered as follows:

“A person who independently and habitually provides services for undertakings should — regardless of whether that person is constituted under private or public law — be regarded as a taxable person within the meaning of Article 4 of the Second Council Directive on the harmonization of legislation of Member States concerning turnover taxes (Official Journal, English Special Edition 1967, p. 16), if that person's activities by their nature might also be provided by independent suppliers of services who operate for gain. The question whether or not those services are provided against payment is important for the determination of objective liability to tax on the basis of Article 2, but not for the interpretation of Article 4 of the Second Directive.”

4. The second question

If the first question is answered in the affirmative, the second question referred to the Court must also be answered. I would remind the Court that that question reads as follows:

“Does the first sentence of Article 11 (2) of the Second Directive prevent the deduction of turnover tax on goods and services used for the purpose of providing services as aforesaid?”

I agree with the Commission that the content alone of this question raises few problems. It is clear from the wording of the first subparagraph of Article 11 (2) that input tax paid by a taxable person on goods and sen-ices which he uses for the provision of nontaxable services may not be taken into account for the purposes of deduction or refund. As has been stated earlier, it follows from Anieles 2 and 8 of the directive that in the case of services which are provided free of charge within the territory of the country there can be no objective liability to tax or basis of assessment and such services are therefore not taxable. Without prejudice to the second subparagraph of Article 11 (2), deduction of input tax is therefore to that extent not possible.

Both the wording of the question and the facts pertaining to the main issue make it clear, however, that the aim of the question was different and may be clarified by the following, somewhat amplified formulation of the question: “Does the first subparagraph of Article 11 (2) of the Second Directive of itself, that is to say without national implementing provisions pertaining thereto, prevent a national tax authority from allowing deduction of turnover tax on goods and services which are used by a taxable person within the meaning of the directive for the provision of services free of charge.” Seen in this perspective, it is clear that, in putting the question, the Hoge Raad wishes to know whether the tax authority of a Member State can rely upon a provision of the directive to charge taxable persons in a case for which the Member State concerned has made no provision in its implementing provisions. As has been stated earlier, in so far as is important in this case, in the Netherlands Law, in particular in Articles 2 and 15 thereof, the right to deduct input tax is not, or at least not clearly, made dependent upon the existence of objective liability to tax within the meaning of Article 2 of the directive. In particular, subject to the following paragraphs of that article, which are not applicable in this case, Article 15 (1) of the Law seems to confer the right of deduction on any subjectively taxable person (undertaking). That at the same time explains why the concept of undertaking plays such a critical role in the main proceedings in cassation.

The refusal to recognize a taxable person's right to deduct tax paid must in my opinion, in the context of the question as formulated above, be equated with the imposition of liability to taxation. The existing liability to tax is indeed maintained by the refusal of a deduction. In economic terms, that gives rise to a result similar to that of the imposition of liability to tax. The Hoge Raad's question should therefore in my view be answered in the negative. Article 189 of the EEC Treaty clearly provides that a directive is binding (only) upon each Member State to which it is addressed. The unanimous view expressed in the extensive literature which I have consulted on this subject is that it may indeed be inferred from the judgments of the Court that individuals can derive from directives personal rights on which they may rely against the government, but not that directives can directly give rise to obligations for individuals (in this case to repay tax already deducted). From the Court's most recent decisions I can at most infer that an individual may rely on the illegality of a derogation by the national legislature from a directive if it affects him adversely. In that regard, I refer inter alia to paragraph 29 of the judgment of the Court in Case 51/76 Verbond van Nederlandse Ondernemingen v Inspecteur der Invoerrechten en Accijnzen [1977] ECR 113, to paragraphs 9 and 18 of the judgment in Case 38/77 Enka v Inspecteur der Invoerrechten en Accijnzen [1977] ECR 2203, to paragraphs 20 to 22 of the judgment in Case 21/78 Delkvist v Anklagemyndigheden [1978] ECR 2327, to paragraphs 18 to 23 of the judgment in Case 148/78 Pubblico Ministero v Ratti [1979] ECR 1629 and to paragraphs 17 to 25 of the recent judgment of 19 January 1982 in Case 8/81 Ursula Becker v Finanzamt Münster-Innenstadt. In my opinion a similar idea was also by implication the basis of the Court's judgment of 5 February 1981 in Case 154/80 Staatssecretańs van Financiën v Coöperatieve Aardappelenbewaarplaats [1981] ECR 445.

If the Member State itself could, in the event of a deficiency in its legislation, rely on the direct effect of a directive as against an individual, this would in my opinion be equivalent to conferring on the directive in question binding effect as against individuals, in the sense that there could arise directly from directives not only rights as against the Member State bound by the directive but also financial obligations for individuals, in this case obligations to repay tax or the loss by the taxable person of his right of deduction. As I have already stated, neither in Article 189 of the Treaty, nor in the directive in question, nor in the judgments of the Court can I find support for such an interpretation. Judge Pescatore correctly pointed out in his recent and richly-documented article entitled “L'effet des directives communautaires, une tentative de démythification” (Recueil Dalloz, 1980, p. 171) that in determining the legal effects of directives account must always be taken, on the one hand, of the binding effect for Member States and, on the other, of the need for the adoption of implementing measures by the Member States. The directive cannot therefore make good deficiencies in the implementing measures at the expense of individuals (in this case, taxable persons). Judge Pescatore also concludes at page 176, paragraph 2, of the abovementioned article that individuals can be bound only by national provisions implementing directives and that a directive as such may not be relied upon by a Member State as against individuals. In this particular respect there is an essential difference between it and a regulation, which for example might prohibit certain kinds of national aid in the form of tax concessions. Unlike a directive, such a regulation has general application. Like a decision declaring an aid incompatible with Community law, it can therefore in itself, unlike a directive, impose an obligation on Member States to reclaim benefits obtained which are incompatible with Community law. A directive can impose only an obligation on a Member State to adopt the necessary implementing measures. The obligation to repay, however, then results from the implementing measures.

In my opinion, the second question should therefore be answered as follows:

“The first subparagraph of Article 11 (2) of the Second Directive on turnover taxes prevents, without prejudice to the second subparagraph thereof, the deduction of turnover tax on goods and services used by a taxable person, within the meaning of Article 4 of the directive, for the provision of services free of charge in all cases, in so far as provision to that effect is made in the national legislation.”

¹ Translated from the Dutch.