JUDGMENT OF THE COURT (Fifth Chamber)

18 December 1997 (1)

(Sixth Directive (77/388/EEC) — Scope — Right to deduction of VAT —Retention of balance of VAT due — Principle of proportionality)

In Joined Cases C-286/94, C-340/95, C-401/95 and C-47/96,

REFERENCE to the Court under Article 177 of the EC Treaty by the Hof vanBeroep te Antwerpen (Belgium) (C-286/94 and C-340/95), the Rechtbank vanEerste Aanleg te Brussel (C-401/95) and the Rechtbank van Eerste Aanleg teBrugge (Belgium) (C-47/96) for a preliminary ruling in the proceedings pendingbefore that court between

Garage Molenheide BVBA (C-286/94),

Peter Schepens (C-340/95),

Bureau Rik Decan-Business Research & Development NV (BRD) (C-401/95),

Sanders BVBA (C-47/96)

and

Belgian State

on the interpretation of Article 18(4) of the Sixth Council Directive 77/388/EEC of17 May 1977 on the harmonization of the laws of the Member States relating toturnover taxes — Common system of value added tax: uniform basis of assessment(OJ 1977 L 145, p. 1),

THE COURT (Fifth Chamber),

composed of: C. Gulmann, President of the Chamber, M. Wathelet,J.C. Moitinho de Almeida, P. Jann (Rapporteur) and L. Sevón, Judges,

Advocate General: N Fennelly,

Registrar: D. Louterman-Hubeau, Principal Administrator,

after considering the written observations submitted on behalf of:

—    Garage Molenheide BVBA, by V. Dauginet, of the Antwerp Bar,

—    Bureau Rik Decan-Business Research & Development NV (BRD) andSanders BVBA, by L. Vandenberghe and R. Tournicourt, of the BrusselsBar,

—    the Belgian Government, by J. Devadder, Counsellor General, Ministry ofForeign Affairs, External Trade and Development Cooperation, acting asAgent,

—    the Greek Government (C-340/95, C-401/95 and C-47/96), byF. Georgakopoulos, Deputy Legal Adviser, Legal Council of State, andA. Rokophyllou, Special Adviser to the Deputy Minister of Foreign Affairs,acting as Agents,

—    the Italian Government (C-286/94, C-340/95 and C-401/95), by ProfessorUmberto Leanza, Head of the Department of Contentious DiplomaticAffairs, Ministry of Foreign Affairs, acting as Agent, assisted by MaurizioFiorilli, Avvocato dello Stato,

—    the Swedish Government (C-401/95), by E. Brattgård, DepartmentalAdviser, Department of Foreign Trade, Ministry of Foreign Affairs, actingas Agent, and

—    the Commission of the European Communities, by B.J. Drijber, of its LegalService, acting as Agent,

having regard to the Report for the Hearing,

after hearing the oral observations of Garage Molenheide BVBA, represented byM. Vanden Broeck, of the Antwerp Bar, Bureau Rik Decan-Business Research &Development NV (BRD) and Sanders BVBA, represented by L. Vandenberghe,the Belgian Government, represented by B. van de Walle de Ghelcke and G. deWit, of the Brussels Bar, the Greek Government, represented byF. Georgakopoulos, the Italian Government, represented by G. De Bellis, Avvocato

dello Stato, and the Commission, represented by B.J. Drijber, at the hearing on 30January 1997,

after hearing the Opinion of the Advocate General at the sitting on 20 March 1997,

gives the following

Judgment

1.

    By orders of 17 October 1994 (C-286/94), 25 October 1995 (C-340/95), 12December 1995 (C-401/95) and 6 February 1996 (C-47/96), received at the CourtRegistry on 21 October 1994, 30 october 1995, 21 December 1995 and 16 February1996 respectively, the Hof van Beroep te Antwerpen (Court of Appeal, Antwerp),13th and 3rd Chambers (C-286/94 and C-340/95), the Rechtbank van Eerste Aanlegte Brussel (Court of First Instance, Brussels) (C-401/95) and the Rechtbank vanEerste Aanleg te Brugge (Court of First Instance, Bruges) (C-47/96) referred to theCourt for preliminary rulings under Article 177 of the EC Treaty a number ofquestions on the interpretation of Article 18(4) of the Sixth Council Directive77/388/EEC of 17 May 1977 on the harmonization of the laws of the MemberStates relating to turnover taxes — Common system of value added tax: uniformbasis of assessment (OJ 1977 L 145, p. 1, hereinafter 'the Sixth Directive‘).

2.

    Those questions were raised in four actions brought against the Belgian State byGarage Molenheide BVBA (hereinafter 'Molenheide‘), Peter Schepens, BureauRik Decan-Business Research & Development NV (BRD) (hereinafter 'Decan‘)and Sanders BVBA (hereinafter 'Sanders‘).

The Community legislation

3.

    Article 18(2) and (4) of the Sixth Directive, concerning procedures relating to theright of deduction, provide:

'2.    The taxable person shall effect the deduction by subtracting from the totalamount of value added tax due for a given tax period the total amount ofthe tax in respect of which, during the same period, the right to deduct hasarisen and can be exercised under the provisions of paragraph 1.

    ...

4.    Where for a given tax period the amount of authorized deductions exceedsthe amount of tax due, the Member States may either make a refund or

carry the excess forward to the following period according to conditionswhich they shall determine.

    However, Member States may refuse to refund or carry forward if theamount of the excess is insignificant.‘

The Belgian legislation

4.

    In Belgian law, Article 18(4) of the Sixth Directive was implemented in particularby Article 47 of the Value Added Tax Code, which provides that, where theauthorized deductions exceed the tax due for a particular period, the excess is tobe carried forward to the following tax period.

5.

    The first subparagraph of Article 76(1) of that Code, as amended by the Law of28 December 1992, adds that any excess outstanding at the end of the calendaryear is to be refunded in accordance with the conditions to be established by theKing, on application by the taxable person. Pursuant to the second subparagraph,the King may permit the grant of refunds even before the end of the calendar year.Finally, according to the third subparagraph,

'[W]ith respect to the requirements laid down in the first and secondsubparagraphs, provision may be made by Royal Decree for a retention in favourof the VAT, Registration and Property Authority, having the effect of a preventiveattachment within the meaning of Article 1445 of the Judicial Code.‘

6.

    That provision was implemented by Article 7 of the Royal Decree of 29 December1992, which inserted into Royal Decree No 4 of 29 December 1969 on refunds inrespect of VAT (hereinafter 'Royal Decree No 4‘) an Article 8/1(3) which isworded as follows:

'If the tax debt referred to in the first paragraph does not constitute, in favour ofthe administration, a debt which is, in whole or in part, certain, definite and duefor payment, which is inter alia the case where it is disputed or has given rise to anorder for recovery within the meaning of Article 85 of the Code, execution of whichis opposed by an objection within the meaning of Article 89 of the Code, the taxcredit shall be retained by the administration up to the amount of the tax claimed. That retention shall take effect as a preventive attachment until the dispute hasbeen definitively resolved, either in the administrative procedure or by a final courtjudgment. The condition laid down by Article 1413 of the Judicial Code shall bedeemed to have been satisfied as regards the implementation of that retention[fourth subparagraph].

If, with regard to the balance refundable resulting from the return referred to inArticle 55(1)(3) of the Code, and in respect of which the taxable person has or hasnot opted for a refund, either there are serious grounds for presuming or there is

evidence that the aforesaid return or returns concerning previous periods containinaccurate information and if such grounds for presumption or evidence point tothe existence of a tax debt the actual existence of which cannot, however, beestablished before the time for the payment order or for the operation equivalentto payment, no payment order shall be made in respect of the balance nor shall thebalance be carried forward to the following tax period, and the tax credit shall beretained in order to permit the administration to verify the accuracy of theinformation [fifth subparagraph].

...

The serious grounds for presumption or the evidence referred to in the foregoingsubparagraph, proving or indicating the tax debt, must be established by an officialreport drawn up in accordance with Article 59(1) of the Code. The report shall bebrought to the notice of the taxable person by registered letter [sixthsubparagraph].

The retention referred to in subparagraphs (4) and (5) shall have the effect of apreventive attachment until the evidence contained in the report referred to in theforegoing subparagraph is refuted or until the accuracy of the relevant transactionsemerges from information obtained under the cooperation mechanisms establishedby the European Communities on exchange of information between Member Statesof the Community [seventh subparagraph].

...

The taxable person may only contest the attachment referred to in paragraphs 4and 5 in accordance with Article 1420 of the Judicial Code. However, the courthaving jurisdiction in the matter of attachments may not order the attachment tobe lifted for so long as the evidence contained in the report referred to insubparagraph 6 has not been refuted, particulars have not been obtained by wayof exchange of information between Member States of the Community or aninvestigation by either the Office of the Public Prosecutor or an examiningmagistrate is pending. The retention shall cease when the attachment is lifted bythe administration or by judicial decision. If it is lifted by the administration, thetaxable person shall be informed by registered letter indicating the date on whichit was lifted [tenth subparagraph].

Where the tax credit ceases to be retained, the tax debt constituting a debt infavour of the administration which is certain, definite and due for payment shall ifappropriate be discharged in accordance with subparagraph 2, without anyformality having to be completed [eleventh subparagraph].‘

7.

    Pursuant to Article 1413 of the Judicial Code, to which the fourth subparagraph ofArticle 8/1(3) of Royal Decree No 4 refers, a preventive attachment may be carriedout only in cases where prompt action is required.

8.

    According to the national courts, the retention provided for in the fifthsubparagraph of Article 8/1(3) of Royal Decree No 4, which operates as apreventive attachment within the meaning of Article 1445 of the Belgian JudicialCode, is designed to block by way of a precautionary measure the refundable VATbalance until proceedings concerning any sum which may be payable by the taxableperson in respect of VAT are concluded, either by administrative decision or by ajudicial decision which has become final or until the evidence or the seriousgrounds for presumption, referred to in the official report, have been refuted oruntil the veracity of the transactions emerges from the information obtained underthe procedures laid down by the rules adopted by the European Communitiesconcerning the exchange of information between Member States or from aninvestigation by either the Office of the Public Prosecutor or an examiningmagistrate. The mechanism is essentially the same with regard to the otherretention provided for in the fourth subparagraph of that provision.

Case C-286/94

9.

    Molenheide runs a garage in Antwerp (Belgium). That company filed, for theperiod from 1 January 1993 to 31 December 1993, a VAT return in which itclaimed entitlement to a deduction in the sum of BFR 2 598 398.

10.

    However, during a check carried out at its premises, the VAT authority discoveredcircumstances giving rise to serious grounds for presuming that the return inquestion contained incorrect and incomplete particulars.

11.

    An official report was drawn up by the chief inspector of the main Wijnegem VAToffice on the basis of those findings and was notified to Molenheide by registeredletter of 15 June 1993. The official report also indicated that the relevant collectorwould effect a retention on the basis of it.

12.

    On 16 June 1993 a retention notice was served on Molenheide by registered letter. In that notice, the tax authority stated that there were serious grounds forpresuming, and indeed evidence, that the abovementioned return containedincorrect particulars and that those grounds or evidence were indicative of a taxdebt, the amount of which could not be properly determined at that time.

13.

    The retention, which corresponded to the refundable amount arrived at on thebasis of the VAT return filed by Molenheide, was based on the fifth subparagraphof Article 8/1(3) of Royal Decree No 4.

14.

    On 23 July 1993 Molenheide contested the retention decision before the judgehearing attachment proceedings in the Rechtbank van Eerste Aanleg te Antwerpen,maintaining that the fifth subparagraph of Article 8/1(3) of Royal Decree No 4 wasinvalid.

15.

    By order of 4 november 1993, the judge hearing attachment proceedings declaredthe action unfounded.

16.

    On 24 December 1993 Molenheide appealed against that order to the Hof vanBeroep te Antwerpen. In those proceedings Molenheide claimed that the retentionof tax credits, as provided for by the third subparagraph of Article 76(1) of theBelgian VAT Code and by the fifth subparagraph of Article 8/1(3) of Royal DecreeNo 4, was contrary to Articles 18(4) and 27 of the Sixth Directive.

17.

    Uncertain as to how the latter provisions should be interpreted, the Hof vanBeroep te Antwerpen considered it appropriate to seek a preliminary ruling fromthe Court of Justice on the following question:

'On a proper construction of Article 18(4) of the Sixth VAT Directive, may aMember State refrain from refunding substantial VAT credits of its residents orcarrying them forward to a following tax period, and instead attach them as aprotective measure under national rules owing to the existence of serious groundsfor suspecting tax evasion, without creating a definitive legal title in that respectand without the Member State having received any authorization under Article 27of the Sixth VAT Directive?‘

Case C-340/95

18.

    This case too is concerned with a retention under the fifth subparagraph of Article8/1(3) of Royal Decree No 4, prompted by serious grounds for presumption of taxevasion.

19.

    Mr Schepens owns a garage. He filed a VAT return for the period from 1 January1993 to 31 March 1993 in which he claimed the right to refund of the sum of BFR3 311 438.

20.

    Following a check carried out in May 1993 a chief inspector and an auditor fromthe VAT authority drew up an official report on 15 June 1993 to the effect thatthere were serious grounds for presuming that the VAT returns for the first quarterof 1993 contained incorrect particulars and gave grounds for concluding that taxwas payable. On 16 June 1993 the plaintiff was informed of the conclusions of theinspection by registered letter. He also received a copy of the official report andthe tax authority informed him that it intended to retain the amounts that had beenrefundable. The retention notice was sent to him on 18 June 1993.

21.

    The tax authority followed the same procedure for the tax return for the secondquarter of 1993, which showed a credit of BFR 2 419 078. After carrying out acheck on 15 September 1993 it drew up an official report on 20 September 1993,which it notified to the person concerned by registered letter of 22 September 1993,followed on the same date by a retention notice.

22.

    Those serious grounds for presumption related in particular to a type of fraudknown as 'circular sales‘, not involving evasion of VAT but creating fictitious VATexcesses, in particular on intra-Community transactions. Thus, according to theBelgian administrative authorities, Mr Schepens sought to recover amounts of VATwhich he claimed to have paid when purchasing a number of vehicles. However,the findings of the tax authority established that eight of his suppliers had not filedVAT returns for the first quarter of 1993 or paid any VAT. Moreover, MrSchepens had likewise not proved that he had paid them the VAT, all thetransactions having been conducted in cash or by cheque. Most of the vehicles hadbeen delivered outside Belgium but within the Community and at least some ofthem had been purchased more than once in Belgium. For each transaction, theVAT indicated on the Belgian purchase invoice had not been paid by the personswho issued the invoices and Mr Schepens had been unable to establish, by evidenceof the kind prescribed in Article 3 of Royal Decree No 52, that he had in factdelivered the vehicles outside Belgium but within the Community. For Februaryand March 1993, the intra-Community transactions carried out represented anamount of BFR 11 625 000.

23.

    In the case of the intra-Community deliveries, the VAT had not been accountedfor on the outgoing invoices and, under the VAT mechanism, the right to refundof the VAT mentioned on the corresponding purchase invoices came into being. Moreover, there were grounds for presuming that those vehicles had never leftBelgium.

24.

    Mr Schepens then applied for the lifting of the retentions or the preventiveattachments carried out.

25.

    His application was refused by the competent court of first instance, whereupon heappealed to the Hof van Beroep te Antwerpen, claiming, on the basis of legalarguments similar to those advanced by Molenheide, that Article 18(4) of the SixthDirective allowed a choice only between carrying the excess forward to thefollowing period and refunding it. Consequently, if it wished to follow anothercourse, the Belgian State should, pursuant to Article 27 of the Sixth Directive, havesought authorization from the Council. Mr Schepens also invoked the principle ofproportionality.

26.

    The Hof van Beroep te Antwerpen then referred the following questions to theCourt for a preliminary ruling:

'1.    Do Articles 18(4) and 27 of the Sixth Council Directive of 17 May 1977 onthe harmonization of the laws of the Member States relating to turnovertaxes (VAT Directive 77/388/EEC) have direct effect in the national legalsystems of the Member States and thus in Belgian law?

2.    If so, does Article 18(4) of the Directive preclude a Member State fromrefusing to refund to a taxable person a VAT credit in relation to a specificperiod or periods during which that credit arose or to carry it over to asubsequent tax period, and instead withholding it by means of the Belgianwithholding procedure, which has the effect of a preventive attachmentwithin the meaning of Article 1445 of the Belgian Judicial Code, as long asno definitive entitlement has arisen in that regard and only up to theamount of the demand relating to that tax period or earlier periods, wherethe demand is disputed by the taxable person?

3.    Is Article 18(4) of the Directive applicable, given that, according to theBelgian State, such withholding is a debt-recovery procedure?

    —    If so, is Article 27 of the Directive applicable if such withholding wereto form part of the ”conditions” (modalités)?

    —    If not, is Article 27 applicable, on the assumption that suchwithholding is a debt-recovery procedure?

4.    If Article 18(4) of the Directive is applicable to the Belgian withholdingprocedure, does that procedure infringe the principle of proportionality asdefined by the Court of Justice?‘

Case C-401/95

27.

    In this case the retention was made on the basis not of the fifth subparagraph, buton the fourth subparagraph, of Article 8/1(3) of Royal Decree No 4.

28.

    By registered letter of 26 September 1995, the tax authority informed Decan thaton that date it was effecting a retention or preventive attachment of the VATcredit of BFR 705 404 resulting from its VAT return for the period from 1 to 30June 1995. That retention was made because of a VAT debt claimed by theBelgian State for a period covered by an earlier return. Without giving furtherparticulars of the debt claimed, the national court states that it was recorded in anofficial report of 26 May 1994 and that it was the subject of an order for recoveryserved on 10 October 1995 in respect of the sum of BFR 784 305, together withfines of BFR 130 500 and interest of BFR 232 064.

29.

    Before the Rechtbank van Eerste Aanleg te Brussel, the parties put forward thesame arguments as those exchanged in the two other cases described above, andthe national court has merely referred to the orders relating to those cases. Itadds, however, that whilst in the Molenheide case there were serious grounds forpresumption of tax evasion, the position is different in the Decan case.

30.

    The Rechtbank van Eerste Aanleg te Brussel therefore referred the followingquestions to the Court for a preliminary ruling:

'1.    Must Article 18(4) of the Sixth Council Directive of 17 May 1977 on theharmonization of the laws of the Member States relating to turnover taxesbe interpreted as permitting a Member State to refuse to refund a VATcredit from a specific tax period or to carry it forward to a following period,yet to retain it on the ground that, and for so long as, it has a claim againstthe taxpayer in question relating to a previous tax period, if that claim isdisputed by the taxpayer and thus does not yet constitute a definitive title,where the Member State has not received any authorization underArticle 27 of the Sixth VAT Directive?

2.    If Question 1 is to be answered in the affirmative, must Article 18(4) of theSixth VAT Directive, in conjunction with the principle of proportionality, beinterpreted as permitting the Member State to lay down that the necessityor urgency of the retention may not be contested in any way and that theretention may in no way be replaced by a guarantee or annulled so long asthe disputed VAT claim has not been made the subject-matter of a finaljudicial decision?‘

Case C-47/96

31.

    As in the Decan case, the retention was made pursuant to the fourth subparagraphof Article 8/1(3) of Royal Decree No 4.

32.

    According to an official report of 30 January 1992, Sanders owes the Belgian StateVAT in the sum of BFR 370 791 (together with a fine of BFR 741 582 and interestas from 21 January 1988) for the purchase without an invoice of 227 000 kg of flourfrom CERES NV and for involvement in the delivery of 403 710 kg of flour by thelatter company to a third party. Those transactions were carried out in 1987.

33.

    Sanders contested that debt, which is thus not certain, definite and due for paymentwithin the meaning of the fourth subparagraph of Article 8/1(3) of Royal DecreeNo 4, whereupon the Roeselare VAT collector, by registered letter of 23 November1994, gave notice that it was retaining, by way of preventive attachment in respectof the abovementioned debt, the balance of the current account relating to itsperiodical VAT return made up to 31 October 1994, namely BFR 236 215.

34.

    On 5 January 1995 Sanders instituted proceedings against the Belgian State forlifting of the preventive attachment before the judge hearing attachmentproceedings in the Rechtbank van Eerste Aanleg te Brugge, relying on the samearguments as those put forward in the other cases, and on the principle ofproportionality, since in its view the retention was neither necessary nor the onlymeasure available.

35.

    Uncertain as to how to interpret the Community provisions relied on, the judgehearing attachment proceedings also decided to seek a preliminary ruling on thefollowing two questions:

'1.    Must Article 18(4) of the Sixth VAT Directive be interpreted as permittinga Member State, instead of refunding to a taxable person a VAT credit fora given tax period, or carrying it forward to a subsequent tax period, to”withhold” the same by way of protective attachment on the basis of anadditional demand in respect of an earlier tax period, where that additionaldemand is contested in law and is thus not based on any definitiveentitlement, and where the Member State has not obtained authorizationpursuant to Article 27 of the VAT Directive?

2.    In the event that Question 1 is answered in the affirmative:

    Do the principle of proportionality enshrined in Community law andArticle 18(4) of the Sixth VAT Directive permit the Member State toprovide:

    (1)    that the taxable person may contest the attachment (as validated bythe ”withholding” measure) only by adducing evidence rebutting theallegations made by the Treasury in the official report, and not bychallenging the actual need for, and urgency of, that measure;

    (2)    that withholding may not be replaced by another form of security norlifted pending the delivery of final judgment on the contested demandfor payment made by the Treasury?‘

The preliminary questions

36.

    In these four cases the national courts essentially wish to ascertain whether Article18(4) of the Sixth Directive precludes measures such as those at issue in the mainproceedings and, if not, what effect the principle of proportionality might have insuch circumstances.

37.

    With regard, first, to Article 18(4) of the Sixth Directive, the national courts askessentially whether that provision precludes national measures providing for the

preventive attachment of a refundable VAT credit where either there are seriousgrounds for presumption of tax evasion or there is a VAT debt claimed by the taxauthority, that debt being contested by the taxable person.

38.

    The applicants consider that the retentions provided for in the fourth and fifthsubparagraphs of Article 8/1(3) of Royal Decree No 4 are incompatible with Article18(4) of the Sixth Directive since, where the VAT excess is not insignificant, thenational administrative authority may only choose either to make a refund or tocarry the excess forward to the period covered by the next return. Retention of thebalance, which is not covered by that choice, constitutes an outright negation of thetaxable person's right to deduct VAT.

39.

    The applicants also maintain that Article 18(2) and (4) of the Sixth Directive referto periods covered by returns and infer that the Belgian authority may not retaina VAT balance relating to a period other than the period to which the disputerelates, an approach which, moreover, is consistent with the requirement for areasonable time-limit.

40.

    On the other hand, the Belgian, Greek, Italian and Swedish Governments and theCommission maintain that the retentions provided for by the Belgian legislationconstitute 'measures of recovery‘ and, as such, are not governed by the SixthDirective or by the applicable Community legislation but fall within the exclusivecompetence of the Member States.

41.

    Measures such as those at issue in the main proceedings are designed to enable thecompetent fiscal authorities to retain, as a protective measure, refundable amountsof VAT where there are grounds for presumption of tax evasion or where thoseauthorities claim that there is a VAT debt owing to them which is not apparentfrom the taxable person's returns and which the taxable person contests.

42.

    It is clear from the Sixth Directive as a whole that it is intended to establish auniform basis so as to guarantee the neutrality of the system and, as indicated inthe 12th recital in its preamble, to harmonize the rules governing deductions 'tothe extent that they affect the actual amounts collected‘ and to ensure that 'thedeductible proportion [is] calculated in a similar manner in all the Member States‘.

43.

    It follows that Title XI of the Sixth Directive, which deals with deductions, and inparticular Article 18, relates to the normal functioning of the common system ofVAT and does not in principle concern measures such as those described inparagraph 41 above.

44.

    The answer to be given must therefore be that Article 18(4) of the Sixth Directivedoes not in principle preclude measures of the kind at issue in the mainproceedings.

45.

    As regards, next, the effects which the principle of proportionality may have in thiscontext, it must be emphasized that whilst the Member States may, in principle,adopt such measures, it is nevertheless the case that those measures are liable tohave an impact on the national authorities' obligation to make an immediate refundunder Article 18(4) of the Sixth Directive.

46.

    Thus, in accordance with the principle of proportionality, the Member States mustemploy means which, whilst enabling them effectively to attain the objectivepursued by their domestic laws, are the least detrimental to the objectives and theprinciples laid down by the relevant Community legislation.

47.

    Accordingly, whilst it is legitimate for the measures adopted by the Member Statesto seek to preserve the rights of the Treasury as effectively as possible, they mustnot go further than is necessary for that purpose. They may not therefore be usedin such a way that they would have the effect of systematically undermining theright to deduct VAT, which is a fundamental principle of the common system ofVAT established by the relevant Community legislation.

48.

    The answer to be given in that regard must therefore be that the principle ofproportionality is applicable to national measures which, like those at issue in themain proceedings, are adopted by a Member State in the exercise of its powersrelating to VAT, since, if those measures go further than necessary in order toattain their objective, they would undermine the principles of the common systemof VAT and in particular the rules governing deductions which constitute anessential component of that system.

49.

    As regards the specific application of that principle, it is for the national court todetermine whether the national measures are compatible with Community law, thecompetence of the Court of Justice being limited to providing the national courtwith all the criteria for the interpretation of Community law which may enable itto make such a determination (see in particular Case C-55/94 Gebhard v Consigliodell'Ordine degli Avvocati e Procuratori di Milano [1995] ECR I-4165).

50.

    In that connection, the applicants submit, first, that the retention is absolute andis effected automatically as soon as there is a dispute between the administrativeauthority and the taxable person. In their view, the retention provided for by thefourth subparagraph of Article 8/1(3) of Royal Decree No 4 is, by virtue of theactual wording of that provision, compulsory whenever a tax debt is contested, thisbeing a rule to which there are no exceptions, and the court seised of the matteris not required to consider whether such a retention is necessary or whether thematter is urgent, those conditions being irrebuttably presumed to be satisfied. Thesame applies in their view to the retention provided for by the fifth subparagraphof the same provision.

51.

    It must be held that, where a preventive attachment procedure constitutes aderogation from the ordinary law applicable to preventive attachments, in thatnecessity and urgency are irrebuttably presumed, doubts may legitimately beentertained as to whether it is an indispensable instrument for ensuring recoveryof the sums due.

52.

    It must therefore be held that an irrebuttable presumption, as opposed to anordinary presumption, would go further than is necessary in order to ensureeffective recovery and would be contrary to the principle of proportionality in thatit would not enable the taxable person to adduce evidence in rebuttal forconsideration by the judge hearing attachment proceedings.

53.

    Second, the applicants draw attention to the lack of any effective remedies bothbefore the judge hearing attachment proceedings and in the proceedings on thesubstance of the case. Without the consent of the VAT authority, the judgehearing attachment proceedings is, according to the applicants, never permitted,save where a formal requirement has been infringed, to lift in whole or in part theretention of the refundable balance. That situation derives from the combinedeffect of various legal provisions, for the most part derogating from the ordinarylaw relating to preventive attachments, which provide that the judge hearingattachment proceedings may not order such a measure until such time as theevidence contained in the official reports of the tax authority is refuted or thegenuineness of the transactions emerges from the particulars obtained through theCommunity procedures for exchange of information between Member States. Thejudge hearing attachment proceedings is thus concerned only with the formalpropriety of the preventive attachment procedure, not with the substantiveconditions governing the attachment.

54.

    For the same reasons, where there is an appeal by the administrative authorityagainst a decision favourable to the taxable person, it is impossible to have theattachment lifted, even partially (for example, in respect of the fines), since thedecision does not definitively dispose of the substantive issues. The retentionoperates as a preventive attachment until the dispute has been finally determined,either by administrative measure or by a judgment which has become definitive.

55.

    In that connection, it must be observed that, in considering whether the adverseeffect on the right of deduction is proportionate, the availability of effective judicialreview is necessary both in the proceedings on the substance of the case and inthose before the judge hearing attachment proceedings.

56.

    Consequently, provisions of laws or regulations which would prevent the judgehearing attachment proceedings from lifting in whole or in part the retention of therefundable VAT balance, even though there is evidence before him which wouldprima facie justify the conclusion that the findings of the official reports drawn upby the administrative authority were incorrect, should be regarded as going further

than is necessary in order to ensure effective recovery and would adversely affectto a disproportionate extent the right of deduction.

57.

    Similarly, provisions of laws or regulations which would make it impossible for thecourt adjudicating on the substance of the case to lift in whole or in part theretention of the refundable VAT balance before the decision on the substance ofthe case becomes definitive would be disproportionate.

58.

    Third, the applicants observe that it is impossible for the taxable person to requesta court to adopt in place of the retention a different protective measure which issufficient to protect the interests of the Treasury but is less onerous for the taxableperson, such as, for example, provision of a bond or a bank guarantee. Such apossibility is open only to the tax authority and is entirely a matter for its discretion.

59.

    It must be pointed out that such impossibility, if proved, would also exceed thebounds of what is necessary to guarantee recovery of any sums due, in that thesubstitution in question might mitigate the adverse effect on the right of deductionand the grant of such a measure should be amenable to review by a court.

60.

    Fourth, the applicants observe that the retention is not limited to the principalamount due in respect of VAT but also covers interest on it, procedural costs andpenalties which may amount to as much as 200% of the principal amount. Thatmeasure is thus disproportionate to the objective which it pursues, in particularwhere the dispute concerns a question of pure law and not tax evasion in the strictsense.

61.

    In that regard, it must be observed that the exercise of effective judicial review ofthe kind described above, in particular if both the court adjudicating on thesubstance of the case and the judge hearing attachment proceedings were able togrant the taxable person, at his request and at any stage of the procedure, a totalor partial lifting of the retention, would suffice to eliminate any lack ofproportionality in the calculation of the amounts retained, in particular as far aspenalties are concerned.

62.

    Fifth, the applicants state that, under Belgian law, in the event of release of theretained VAT balances, interest is not payable by the Treasury unless the sumsretained have not been duly returned by 31 March of the year following that inwhich the refundable balances came into being and unless the amount refundableis at least BFR 10 000, the last VAT return for the calendar year in which the VATcredit arose was signed at the place on the form indicated for that purpose and allthe VAT returns have been filed within the prescribed time-limits.

63.

    In that regard, it must be observed that it is not necessary, in order to attain theobjective pursued by legislation such as that at issue in the main proceedings,namely to ensure recovery of the amounts due, for interest to be calculated from

a date other than that on which the retained VAT balance would normally havebeen paid under the Sixth Directive, and therefore that the principle ofproportionality precludes the application of such legislation. The same applies tothe other conditions mentioned above: in particular, lateness in filing returns canbe penalized in a manner unconnected with the retention procedure and withoutaffecting the right to refund of the VAT balance.

64.

    The answer to be given must therefore be that it is for the national court toexamine whether or not the measures in question and the manner in which they areapplied by the competent administrative authority are proportionate. In thecontext of that examination, if the national provisions or a particular constructionof them would constitute a bar to effective judicial review, in particular review ofthe urgency and necessity of retaining the refundable VAT balance, and wouldprevent the taxable person from applying to a court for replacement of theretention by another guarantee sufficient to protect the interests of the Treasurybut less onerous for the taxable person, or would prevent an order from beingmade, at any stage of the procedure, for the total or partial lifting of the retention,the national court should disapply those provisions or refrain from placing such aconstruction on them. Moreover, in the event of the retention being lifted,calculation of the interest payable by the Treasury which did not take as its startingpoint the date on which the VAT balance in question would have had to be repaidin the normal course of events would be contrary to the principle ofproportionality.

Costs

65.

    The costs incurred by the Belgian, Greek, Italian and Swedish Governments andby the Commission of the European Communities, which have submittedobservations to the Court, are not recoverable. Since these proceedings are, for theparties to the main proceedings, a step in the proceedings pending before thenational courts, the decision on costs is a matter for those courts.

On those grounds,

THE COURT (Fifth Chamber),

in answer to the questions referred to it by the Hof van Beroep te Antwerpen, theRechtbank van Eerste Aanleg te Brussel and the Rechtbank van Eerste Aanleg teBrugge by orders of 17 October 1994, 25 October 1995, 12 December 1995 and 6February 1996, hereby rules:

1.    Article 18(4) of the Sixth Council Directive 77/388/EEC of 17 May 1977 onthe harmonization of the laws of the Member States relating to turnovertaxes — Common system of value added tax: uniform basis of assessment

does not in principle preclude measures of the kind at issue in the mainproceedings.

2.    However, the principle of proportionality is applicable to national measureswhich, like those at issue in the main proceedings, are adopted by aMember State in the exercise of its powers relating to VAT, in that, if theywent further than was necessary in order to attain their objective, theywould undermine the principles of the common system of VAT, inparticular the conditions governing deductions, which are an essentialcomponent of that system.

    It is for the national court to examine whether or not the measures inquestion and the manner in which they are applied by the competentadministrative authority are proportionate. In the context of thatexamination, if the national provisions or a particular construction of themwould constitute a bar to effective judicial review, in particular review ofthe urgency and necessity of retaining the refundable VAT balance, andwould prevent the taxable person from applying to a court for replacementof the retention by another guarantee sufficient to protect the interests ofthe Treasury but less onerous for the taxable person, or would prevent anorder from being made, at any stage of the procedure, for the total orpartial lifting of the retention, the national court should disapply thoseprovisions or refrain from placing such a construction on them. Moreover,in the event of the retention being lifted, calculation of the interest payableby the Treasury which did not take as its starting point the date on whichthe VAT balance in question would have had to be repaid in the normalcourse of events would be contrary to the principle of proportionality.

GulmannWathelet Moitinho de Almeida Jann Sevón

Delivered in open court in Luxembourg on 18 December 1997.

R. Grass

C. Gulmann

Registrar

President of the Fifth Chamber

1: Language of the case: Dutch.