JUDGMENT OF THE COURT (Second Chamber)

15 January 1998
(1)

(Value added tax — Sixth VAT Directive — Article 17 — Right to deduct —Adjustment of deductions)

In Case C-37/95,

REFERENCE to the Court under Article 177 of the EC Treaty by the Belgian Hofvan Cassatie for a preliminary ruling in the proceedings pending before that courtbetween

Belgian State

and

Ghent Coal Terminal NV

on the interpretation of Article 17 of the Sixth Council Directive 77/388/EEC of17 May 1977 on the harmonisation 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 (Second Chamber),

composed of: H. Ragnemalm, President of the Sixth Chamber, acting as Presidentof the Second Chamber, G.F. Mancini (Rapporteur) and G. Hirsch, Judges,

Advocate General: D. Ruiz-Jarabo Colomer,

Registrar: H.A. Rühl, Principal Administrator,

after considering the written observations submitted on behalf of:

—    the Belgian State, by Jan Devadder, General Adviser in the Legal Serviceof the Ministry of Foreign Affairs, External Trade and DevelopmentCooperation, acting as Agent, assisted by Ignace Claeys Bouùaert, Advocatewith right of audience before the Belgian Hof van Cassatie, and Bernardvan de Walle de Ghelcke, of the Brussels Bar,

—    Ghent Coal Terminal NV, by Pierre Van Ommeslaghe, Advocate with rightof audience before the Belgian Hof van Cassatie,

—    the German Government, by Ernst Röder, Ministerialrat in the FederalMinistry of Economic Affairs, and Gereon Thiele, Assessor in that Ministry,acting as Agents,

—    the Greek Government, by Michail Apessos, Deputy Legal Adviser in theState Legal Council, Maria Basdeki, Agent for Legal Proceedings in theState Legal Council, and Anna Rokofyllou, Special Adviser to the DeputyMinister for Foreign Affairs, acting as Agents, and

—    the Commission of the European Communities, by Berend Jan Drijber, ofits Legal Service, acting as Agent,

having regard to the Report for the Hearing,

after hearing the oral observations of the Belgian State, represented by Bernardvan de Walle de Ghelcke; Ghent Coal Terminal NV, represented by Martin Lebbe,of the Brussels Bar; the Greek Government, represented by Michail Apessos andAnna Rokofyllou; and the Commission, represented by Berend Jan Drijber, at thehearing on 11 July 1996,

after hearing the Opinion of the Advocate General at the sitting on 11 July 1996,

gives the following

Judgment

1.

    By decision of 10 February 1995, received at the Court on 16 February 1995, theBelgian Hof van Cassatie (Court of Cassation) referred for a preliminary rulingunder Article 177 of the EC Treaty a question concerning the interpretation ofArticle 17 of 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, hereinafter 'the Directive‘).

2.

    That question arose in a dispute between the Belgian State and Ghent CoalTerminal NV ('Ghent Coal‘) concerning payment of an amount of value added tax('VAT‘) which Ghent Coal deducted in respect of certain investment work whichit had carried out.

3.

    Article 17 of the Directive provides as follows:

'1.    The right to deduct shall arise at the time when the deductible tax becomeschargeable.

2.    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;

(b)     value added tax due or paid in respect of imported goods;

...‘

4.

    The adjustment of deductions is governed by Article 20, which provides as follows:

'1.     The initial deduction shall be adjusted according to the procedures laiddown by the Member States, in particular:

(a)    where that deduction was higher or lower than that to which the taxableperson was entitled;

(b)    where after the return is made some change occurs in the factors used todetermine the amount to be deducted, in particular where purchases arecancelled or price reductions are obtained; however, adjustment shall notbe made in cases of transactions remaining totally or partially unpaid andof destruction, loss or theft of property duly proved or confirmed ...

2.     In the case of capital goods, adjustment shall be spread over five yearsincluding that in which the goods were acquired or manufactured. The annual

adjustment shall be made only in respect of one-fifth of the tax imposed on thegoods. The adjustment shall be made on the basis of the variations in thededuction entitlement in subsequent years in relation to that for the year in whichthe goods were acquired or manufactured.

...

3.     In the case of supply during the period of adjustment capital goods shall beregarded as if they had still been applied for business use by the taxable personuntil expiry of the period of adjustment. Such business activities are presumed tobe fully taxed in cases where the delivery of the said goods is taxed; they arepresumed to be fully exempt where the delivery is exempt. The adjustment shall bemade only once for the whole period of adjustment still to be covered.

...‘

5.

    In Belgium, the supply of land is exempt from VAT.

6.

    In 1980, Ghent Coal purchased land in the harbour area of Ghent. It subsequentlycarried out investment work and immediately deducted the VAT paid on the goodsand services relating to that work for the period between 1 January 1981 and31 December 1983.

7.

    On 1 March 1983, on the initiative of the city of Ghent, Ghent Coal exchanged theland in question for other land situated elsewhere in the Ghent harbour area. Consequently, it never used the land in respect of which it had carried out theinvestment work giving rise to the deduction.

8.

    It is not disputed that the investment was in the normal course of events to havebeen used in taxable transactions, or that the exchange had been neither foreseennor planned in advance by Ghent Coal, which was unable to avoid it from aneconomic point of view and for which it even constituted a case of economic forcemajeure.

9.

    Following investigations carried out in 1984, the tax authorities concluded thatGhent Coal had not used the land in question for the purpose of carrying outtaxable transactions and accordingly sought repayment of the VAT deducted inconnection with the investment work carried out on the land in question, along withpayment of a fine and default interest.

10.

    Ghent Coal initially accepted the view taken by the tax authorities. On 27 March1986, however, it brought proceedings against the Belgian State before theRechtbank van eerste Aanleg (Court of First Instance), Ghent, which, by judgmentof 4 April 1990, dismissed its application. However, by judgment of 26 October1992, the Hof van Beroep (Court of Appeal), Ghent, upheld the appeal lodged byGhent Coal. The Belgian State thereupon sought to have that judgment set aside.

11.

    The Belgian State takes the view that, when goods or services supplied have givenrise to a deduction but have never been used for the purpose of carrying outtaxable transactions, the right to deduct must be retroactively withdrawn and thededucted VAT repaid in full.

12.

    Ghent Coal argues that the right to deduct VAT due or paid in respect of goodsor services originally intended to be used for the purpose of carrying out taxabletransactions is an absolute right and cannot therefore be called into question evenif the person concerned has never actually made use of those goods or services.

13.

    Since it took the view that an interpretation of Article 17 of the Directive wasnecessary to resolve the dispute before it, the Belgian Hof van Cassatie decided tostay the proceedings and refer the following question to the Court for a preliminaryruling:

'Does Article 17 of the Sixth Council Directive of 17 May 1977 on theharmonisation of the laws of the Member States relating to turnover taxes meanthat the right to deduct remains in existence for value added tax on investmentswhich were originally intended for use in the undertaking but which, for reasonsbeyond its control, were never in fact put into use by the undertaking?‘

14.

    By its question, the national court is essentially asking whether Article 17 of theDirective must be construed as allowing a taxable person acting as such to deductVAT which he is liable to pay on goods or services supplied to him for thepurposes of investment work intended to be used in taxable transactions and, if so,whether the right to deduct remains acquired where, by reason of circumstancesbeyond his control, the taxable person has never made use of that investment workin order to carry out taxable transactions.

15.

    With regard to the first part of this question, the Court has stated repeatedly thatthe deduction system is meant to relieve the trader entirely of the burden of theVAT payable or paid in the course of all his economic activities. The commonsystem of value added tax consequently ensures that all economic activities,whatever their purpose or results, provided that they are themselves subject toVAT, are taxed in a wholly neutral way (see in particular Case 268/83 Rompelmanv Minister van Financiën [1985] ECR 655, paragraph 19, and Case 50/87Commission v France [1988] ECR 4797, paragraph 15).

16.

    In the absence of any provision empowering the Member States to limit the rightof deduction granted to taxable persons, that right must be exercised immediatelyin respect of all the taxes charged on transactions relating to inputs. Suchlimitations on the right of deduction must be applied in a similar manner in all theMember States and therefore derogations are permitted only in the cases expresslyprovided for in the Directive (see, in particular, Commission v France, cited above,paragraphs 16 and 17, Case C-97/90 Lennartz v Finanzamt München III [1991] ECR

I-3795, paragraph 27, and Case C-62/93 BP Supergas v Greek State [1995]ECR I-1883, paragraph 18).

17.

    It follows that a taxable person acting as such is entitled to deduct the VATpayable or paid for goods or services supplied to him for the purpose of investmentwork intended to be used in connection with taxable transactions.

18.

    With regard, next, to the second part of the question, it follows from paragraph 15of the judgment in Lennartz, cited above, that the use to which the goods andservices are put merely determines the extent of the initial deduction to which thetaxable person is entitled under Article 17 and the extent of any adjustments in thecourse of the following periods.

19.

    Furthermore, in its judgment in Case C-110/94 INZO v Belgian State [1996]ECR I-857, concerning the position of an undertaking which had never effected anytaxable transaction, the Court ruled, at paragraphs 20 and 21, that the right todeduct, once it has arisen, remains acquired even if the planned economic activityhas not given rise to taxable transactions.

20.

    Likewise, the right to deduct remains acquired where the taxable person has beenunable to use the goods or services which gave rise to a deduction in the contextof taxable transactions by reason of circumstances beyond his control.

21.

    It also follows from the judgment in INZO (paragraph 24) that in cases of fraud orabuse, in which the person concerned, on the pretext of intending to pursue aparticular economic activity, in fact sought to acquire as his private assets goods inrespect of which a deduction could be made, the tax authority may claim repaymentof the sums retroactively on the ground that those deductions were made on thebasis of false declarations.

22.

    However, when circumstances beyond the control of the taxable person haveprevented him from using the goods or services giving rise to deduction for theneeds of his taxable transactions, there is no risk of fraud or abuse capable ofjustifying subsequent repayment.

23.

    Finally, it must be pointed out that a supply of investment goods during theadjustment period, such as occurred in the main proceedings in this case, may giverise to an adjustment of the deduction under the conditions set out in Article 20(3)of the Directive.

24.

    The answer to the question submitted must therefore be that Article 17 of theDirective must be construed as allowing a taxable person acting as such to deductthe VAT payable by him on goods or services supplied to him for the purpose ofinvestment work intended to be used in connection with taxable transactions. Theright to deduct remains acquired where, by reason of circumstances beyond hiscontrol, the taxable person has never made use of those goods or services for the

purpose of carrying out taxable transactions. A supply of investment goods duringthe adjustment period, where such occurs, may give rise to an adjustment of thededuction under the conditions set out in Article 20(3) of the Directive.

Costs

25.

    The costs incurred by the German and Greek Governments and by the Commissionof the European Communities, which have submitted observations to the Court, arenot recoverable. Since these proceedings are, for the parties to the mainproceedings, a step in the action pending before the national court, the decision oncosts is a matter for that court.

On those grounds,

THE COURT (Second Chamber),

in answer to the question referred to it by the Belgian Hof van Cassatie by decisionof 10 February 1995, hereby rules:

Article 17 of 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 must beconstrued as allowing a taxable person acting as such to deduct the VAT payableby him on goods or services supplied to him for the purpose of investment workintended to be used in connection with taxable transactions. The right to deductremains acquired where, by reason of circumstances beyond his control, thetaxable person has never made use of those goods or services for the purpose ofcarrying out taxable transactions. A supply of investment goods during theadjustment period, where such occurs, may give rise to an adjustment of thededuction under the conditions set out in Article 20(3) of Directive 77/388.

RagnemalmMancini Hirsch

Delivered in open court in Luxembourg on 15 January 1998.

R. Grass

R. Schintgen

Registrar

President of the Second Chamber

1: Language of the case: Dutch.