JUDGMENT OF THE COURT (Sixth Chamber)

18 June 1998 (1)

(Failure to fulfil obligations — Sixth Council Directive 77/388/EEC — Article17(2) and (6) — Right to deduct VAT — Exclusions provided for by national rulespredating the Sixth Directive)

In Case C-43/96,

Commission of the European Communities, represented by H. Michard and E.Traversa, of its Legal Service, acting as Agents, with an address for service inLuxembourg at the office of C. Gómez de la Cruz, also of its Legal Service,Wagner Centre, Kirchberg,

applicant,

v

French Republic, represented by C. de Salins, Deputy Director in the LegalDirectorate, Ministry of Foreign Affairs, assisted by G. Mignot, Foreign AffairsSecretary in the same Ministry, acting as Agents, with an address for service inLuxembourg at the French Embassy, 8B Boulevard Joseph II,

defendant,

supported by

United Kingdom of Great Britain and Northern Ireland, represented by S. Ridley,of the Treasury Solicitor's Department, acting as Agent, with an address for servicein Luxembourg at the British Embassy, 14 Boulevard Roosevelt,

intervener,

APPLICATION for a declaration that, by maintaining in force legislation whichdenies taxable persons the right to deduct value added tax on means of transportwhich constitute the very tool of their trade, the French Republic has failed to fulfilits obligations under the Sixth Council Directive 77/388/EEC of 17 May 1977 on theharmonisation of the laws of the Member States relating to turnover taxes —Common system of value added tax: uniform basis of assessment (OJ 1977 L 145,p. 1), and in particular Article 17(2) thereof,

THE COURT (Sixth Chamber),

composed of: R. Schintgen, President of the Second Chamber, acting for thePresident of the Sixth Chamber, G.F. Mancini, P.J.G. Kapteyn, J.L. Murray andG. Hirsch (Rapporteur), Judges,

Advocate General: F.G. Jacobs,

Registrar: D. Louterman-Hubeau, Principal Administrator,

having regard to the Report for the Hearing,

after hearing oral argument from the parties at the hearing on 25 September 1997,

after hearing the Opinion of the Advocate General at the sitting on 13 November1997,

gives the following

Judgment

1.

    By application lodged at the Court Registry on 14 February 1996, the Commissionof the European Communities brought an action under Article 169 of the ECTreaty for a declaration that, by maintaining in force legislation which deniestaxable persons the right to deduct value added tax (VAT) on means of transportwhich constitute the very tool of their trade, the French Republic has failed to fulfilits obligations under the Sixth Council Directive 77/388/EEC of 17 May 1977 on the

harmonisation of the laws of the Member States relating to turnover taxes —Common system of value added tax: uniform basis of assessment (OJ 1977 L 145,p. 1, hereinafter 'the Sixth Directive‘), and in particular Article 17(2) thereof.

The Sixth Directive

2.

    Article 17(2) of the Sixth Directive provides as follows:

'In so far as the goods and services are used for the purposes of his taxabletransactions, the taxable person shall be entitled to deduct from the tax which heis liable to pay:

(a)    value added tax due or paid in respect of goods or services supplied or tobe supplied to him by another taxable person;

...‘

3.

    Article 17(6) provides:

'Before a period of four years at the latest has elapsed from the date of entry intoforce of this directive, the Council, acting unanimously on a proposal from theCommission, shall decide what expenditure shall not be eligible for a deduction ofvalue added tax. Value added tax shall in no circumstances be deductible onexpenditure which is not strictly business expenditure, such as that on luxuries,amusements or entertainment.

Until the above rules come into force, Member States may retain all the exclusionsprovided for under their national laws when this directive comes into force.‘

4.

    On 25 January 1983 the Commission submitted to the Council a Proposal for aTwelfth Directive on the harmonisation of the laws of the Member States relatingto turnover taxes — Common system of value added tax: expenditure not eligible fordeduction of value added tax (OJ 1983 C 37, p. 8), which was amended by anotherproposal submitted by the Commission to the Council on 20 February 1984 (OJ1984 C 56, p. 7). That proposal was not adopted by the Council.

The national legislation

5.

    The French rule at issue is Article 237 of Annex II to the French Code Général desImpôts (hereinafter 'the CGI‘), which entered into force on 27 July 1967 andwhich provides as follows:

'Value added tax shall not be deductible on vehicles or machines, whatever theirnature, designed for the transport of persons or for mixed use which constitutefixed assets or, if not, are not intended for resale in a new state.‘

6.

    The basic documentation of the French tax authority (Série 3 C A, Division D,feuillets 1532 and 1533, updated on 1 May 1990) states that the vehicles coveredby that provision are bicycles, motorcycles, private motor cars, boats, aeroplanesand helicopters. However, the aforesaid rule does not apply to commercial vehiclessuch as vans, lorries, tractors and other 'highly specialised vehicles‘. Furthermore,helicopters are not eligible for deduction even where they are used for aerialphotography, publicity, pilot training, or topographical or geodesic surveys.

The pre-litigation procedure

7.

    By letter of 6 September 1991 the Commission informed the French Republic thatit regarded Article 237 of Annex II to the CGI as incompatible with the SixthDirective and, in particular, Article 17(2) thereof, in so far as it does not confer theright to deduct VAT on vehicles used for the purposes of driving instruction.

8.

    By letter of 6 September 1991 the French Government informed the Commissionthat the contested provision had been amended, with effect from 1 January 1993,in such a way as to render vehicles or equipment used exclusively for the purposesof driving instruction eligible for deduction.

9.

    By letter of 12 July 1993 the Commission informed the French Government thatboth the condition that a vehicle must be used exclusively for the purposes ofdriving instruction and the exclusion of the right to deduct which continued toaffect taxable persons whose work by its very nature involved the use of certainmeans and forms of transport (such as helicopters used for lifting by anundertaking engaged in aerial work) were in breach of Article 17(2) of the SixthDirective.

10.

    By letter of 4 October 1993 the French Government replied that the condition thata driving-school vehicle must be used exclusively for the purposes of drivinginstruction had been relaxed by administrative order of 4 February 1993. It alsopointed out that the exclusion of the right to deduct VAT on means of transportwhich constitute the very object of a taxable person's trade was authorised byArticle 17(6) of the Sixth Directive.

11.

    In the case of vehicles used for the purposes of driving instruction, the Commissiondecided to discontinue the procedure. However, taking the view that the principleof the right to deduct VAT on a means of transport which constitutes the veryobject of a taxable person's trade was fundamental, the Commission issued areasoned opinion to the French Republic on 8 November 1994, requesting it totake the requisite measures within a period of two months.

12.

    In its reply of 9 January 1995, the French Government expressed its totaldisagreement with the Commission's analysis and set out in more detail theobservations it had formulated in its reply to the letter of formal notice.

The application

13.

    In support of its application, the Commission claims that the exclusion, providedfor by Article 237 of Annex II to the CGI, of the right to deduct VAT on goodswhich constitute the very tool or object of a taxable person's trade is contrary toArticle 17(2) of the Sixth Directive.

14.

    Admittedly, the second subparagraph of Article 17(6) of the directive expresslyauthorises Member States to retain provisions excluding the right to deduct which,like Article 237 of Annex II to the CGI, predate the entry into force of the SixthDirective.

15.

    According to the Commission, however, the exclusion of the right to deductprovided for by Article 17(6) of the Sixth Directive relates only to expenditurewhich is not strictly business expenditure. Thus, the only expenditure liable to beexcluded from the right to deduct is that incurred by a taxable person on goods andservices which are not absolutely essential for the operation of his business. Thatpossibility is designed to prevent a taxable person from being able to obtain for hisown final use goods and services which have not been taxed.

16.

    That interpretation cannot be accepted, as it is not consistent with the wording ofArticle 17(6) of the Sixth Directive.

17.

    The first subparagraph of Article 17(6) of the Sixth Directive provides that theCouncil is to decide what expenditure is not eligible for a deduction of VAT. Thenext sentence states that 'value added tax shall in no circumstances be deductibleon expenditure which is not strictly business expenditure‘. It follows, in particular,from that second sentence that the rules which the Council is called upon to adoptare not automatically limited to expenditure which is not strictly businessexpenditure.

18.

    In those circumstances, the expression 'all the exclusions‘, used in the secondsubparagraph of Article 17(6), clearly comprises expenditure which is strictlybusiness expenditure. That provision accordingly authorises the Member States toretain national rules which deny taxable persons the right to deduct VAT on meansof transport which constitute the very tool of their trade.

19.

    As the Advocate General has pointed out in paragraphs 14 to 16 of his Opinion,that interpretation is confirmed by the origin of Article 17(6) of the Sixth Directive. In the first place, in the explanatory memorandum accompanying its proposal for

the Sixth Directive (Bulletin of the European Communities, Supplement 11/73, p. 1),the Commission stated that certain expenditure, even though incurred in theordinary course of the undertaking's business, would be difficult to apportionbetween business use and private use. Secondly, it is clear from a comparison ofthe wording of Article 17(6) proposed by the Commission and that adopted by theCouncil that, when the Sixth Directive was adopted, the Member States wereunable to agree on the arrangements applicable specifically to expenditure onpassenger transport.

20.

    In the light of those considerations, it is apparent that, by maintaining in forcelegislation which denies taxable persons the right to deduct VAT on means oftransport which constitute the very tool of their trade, the French Republic has notfailed to fulfil its obligations under the Sixth Directive, and in particular Article17(2) thereof. The application for a declaration that it has failed to fulfil itsobligations must therefore be dismissed as unfounded.

Costs

21.

    Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to beordered to pay the costs. Since the Commission has been unsuccessful, it must beordered to pay the costs. Under Article 69(4) of the Rules of Procedure, MemberStates and institutions which intervene in the proceedings are to bear their owncosts.

On those grounds,

THE COURT (Sixth Chamber)

hereby:

1.    Dismisses the application;

2.    Order the Commission of the European Communities to pay the costs;

3.    Orders the United Kingdom of Great Britain and Northern Ireland to bearits own costs.

SchintgenMancini Kapteyn             Murray                        Hirsch

Delivered in open court in Luxembourg on 18 June 1998.

R. Grass

H. Ragnemalm

Registrar

President of the Sixth Chamber

1: Language of the case: French.