OPINION OF ADVOCATE GENERAL

FENNELLY

delivered on 4 April 2000 (1)

Case C-142/99

Floridienne SA and Berginvest SA

v

Belgian State

1.

    The present reference concerns the calculation of VAT deductions from taxcharged on management and technical-advice services provided by mixed holdingcompanies, i.e. companies that hold shares as well as carrying out taxabletransactions, to their subsidiaries. Do dividends paid by the latter have the effectof reducing the deductions proportionately? All those who have submittedobservations to the Court are ad idem in asking for clarification of the problematicproposition enunciated by the Court in Polysar (2) that the maintenance ofshareholdings in companies would be regarded as economic activity 'where theholding is accompanied by direct or indirect involvement in the management‘ ofsuch companies.

I - The background

2.

    Floridienne SA and Berginvest SA (hereinafter 'the applicants‘) areindustrial-holding companies. (3) In addition to holding shares, the applicants areinvolved in the management of the companies in which they hold shares byproviding taxable services to their subsidiaries, such as management, technicalassistance, accounting and advisory services. It would appear from uncontestedinformation provided by the applicants to the Court that such services were alsoprovided during the relevant period to former subsidiaries and to certain othercompanies with which the group did business. Furthermore the applicants haveadvanced certain sums by way of loans to the subsidiaries or to some of them butnot, it seems, to other companies. Consequently, the applicants receive dividendson their shares and interest on their loans. They have claimed the right to deductfrom the (output) VAT which they charge in respect of the services provided totheir subsidiaries the entirety of the (input) VAT paid by them in the price ofgoods and services provided to them.

3.

    The Collectors of VAT for Tournai and Verviers, respectively, issued ordersagainst each of the companies requiring payment of additional VAT in the sumsof BEF 13 812 839 and BEF 17 598 876. The said Collectors assert that deductionscould properly have been made only for the proportion that the receipts fromtaxable services bore to the total turnover of the applicants' taxable services plusdividend and interest income. Following upon actions brought by the applicants forannulment of these orders, as well as for damages, the Tribunal de PremièreInstance (Court of First Instance), Tournai, Belgium (hereinafter 'the nationalcourt‘) has referred the following question to the Court for a preliminary ruling:

'Must share dividends and interest on loans always be excluded from thedenominator of the fraction used to calculate the deductible proportion, evenwhere the company receiving such dividends and interest has involved itself in themanagement of the undertakings paying them, save in the exercise of its rights asshareholder?‘

4.

    The national court has described the applicants' involvement in themanagement of the subsidiaries as follows:

'[T]hey carry out other activities on behalf of their subsidiaries, such asmanagement and technical assistance, financing and advising, and they are directlyinvolved in the management of the companies in which they hold shares, some ofits managers being on the boards of those companies.

In connection with their activities providing services to their subsidiaries, theapplicants carry out taxable transactions, giving rise to the right to make deductionsin respect of taxes imposed on goods and services supplied to them (input taxes).‘

II - Observations and analysis

(i)    Income from dividends

5.

    Although findings of fact are exclusively a matter for the national court, itis important to note, immediately, that the findings contained in the order forreference suggest that the relationships between the applicants and theirsubsidiaries are governed by objective legal measures, such as contracts for theprovision of services and the appointment of managers to serve on the boards ofthe subsidiaries.

6.

    The applicants claim that the receipt of dividends and interest amount tosimple enjoyment of the fruits of investment and do not constitute 'economicactivity‘ within the scope of Community VAT. These receipts should not,therefore, be taken into account when calculating permitted deductions. Belgiumrelies essentially for its contrary view on the participation of the applicants in themanagement of their subsidiaries. Such activity changes the nature of the receiptsinto the fruits of an extended economic activity which in principle is subject to VATbut exempt by virtue of Article 13B(d)(5) of the Sixth Directive. (4) In order toavoid infringing the principle of neutrality, the dividends must be included, at leastpartially, in the relevant denominator. At the hearing, counsel for the applicantsdenied that the national court had made any definite finding that the applicants hadinvolved themselves in the management of their subsidiaries, apart from providingtaxable services or exercising rights of nomination which they enjoyed asshareholders. In the alternative, he contested Belgium's view that the receipt ofdividends could be regarded as the remuneration for an activity which was to beregarded as taxable but exempt pursuant to Article 13B(d)(5). (5)

7.

    It is necessary to consider the principal relevant provisions of the Sixth VATDirective. (6)

8.

    The central crux of the case is the meaning of the term 'economic activity‘. As appears from Article 4 of the Sixth Directive, that term defines the scope of theCommunity VAT system. Article 4(1) of the Sixth Directive provides that a'taxable person‘ is to mean 'any person who independently carries out in anyplace any economic activity specified in paragraph 2, whatever the purpose orresults of that activity‘. Article 4(2) goes on to provide:

'The economic activities referred to in paragraph 1 shall comprise all activities ofproducers, traders and persons supplying services including mining and agriculturalactivities and activities of the professions. The exploitation of tangible or intangibleproperty for the purpose of obtaining income therefrom on a continuing basis shall alsobe considered an economic activity‘ (emphasis added).

In addition, Article 4(3) permits Member States also to 'treat as a taxable personanyone who carries out, on an occasional basis, a transaction relating to theactivities referred to in paragraph 2 ...‘, before mentioning, in particular, certaintransactions relating to buildings or building land.

9.

    The limitation of the scope of VAT to 'economic activity‘ means, to givethe most obvious example, that an individual who carries on a trade or professionin his own name must keep his personal and business affairs separate. He may notmake VAT deductions in respect of his private purchases. Where he divertsbusiness goods or services to his private use, he may have to pay VAT on them. (7)

10.

    Furthermore, as is clear from the case-law of the Court, upon which theapplicants place particular reliance, the notion of 'economic activity‘ does notencompass the enjoyment of the fruits of the simple ownership of investments, suchas shares and bonds or debentures.

11.

    In Polysar, the Court was concerned with a claim by a pure holding companythat dividend income received from its holdings of shares should be regarded forVAT purposes as having been obtained in the pursuit of an economic activity. Recalling its dictum in Van Tiem (8) as to the wide scope of VAT, the Court statedthat 'it does not follow from that judgment ... that the mere acquisition and holdingof shares in a company is to be regarded as an economic activity, within themeaning of the Sixth Directive, conferring on the holder the status of a taxableperson‘. (9) The Court explained this interpretation of the scope of the principleexpressed in Van Tiem in the following terms: (10)

'[T]he mere acquisition of financial holdings in other undertakings does notamount to the exploitation of property for the purpose of obtaining incometherefrom on a continuing basis because any dividend yielded by that holding ismerely the result of ownership of the property.‘

12.

    In Wellcome Trust, the Court was even more explicit. It took the same viewin respect of the extremely substantial investment activities of a charitable trustconsisting 'essentially in the acquisition and sale of shares and other securities witha view to maximising dividends and capital yields ...‘. (11) In Harnas & Helm (12) the'mere acquisition and holding of bonds, activities which are not subservient to anyother business activity, and the receipt of income therefrom‘ were also 'not to beregarded as economic activities conferring on the person concerned the status ofa taxable person‘. (13)

13.

    In none of these three cases did the taxpayer carry out any taxabletransactions. Each had sought treatment as a taxable person by virtue of itsinvestment activities so as to be able to exercise a right to deduct VAT inputs. Consequently no issue arose about the apportionment of VAT deductions as nodeductions were possible.

14.

    The Court had to address the calculation of deductible proportions inSofitam. (14) The system of deductions is, of course, central to the very nature ofthe Community VAT regime. Its objective is to ensure that the economic burdenof VAT is borne only by the consumer. Traders, as taxable persons, are entitledto deduct VAT paid on goods and services they have purchased from the VATpaid by them to the revenue authorities on their taxable transactions and to passthe remaining burden on to their customers in the form of the price charged. Thisis reflected in Articles 17 to 20 of the Sixth Directive which are designed 'to relievethe trader entirely of the burden of the VAT payable or to be paid in the courseof all his economic activities‘. (15)

15.

    Article 17(1) declares the general principle of a 'right to deduct ...‘. Thematerial part of Article 17(2) states that:

'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 and services [that] are usedfor the purposes of his taxable transactions ... .‘

16.

    In order to be deductible, therefore, the input VAT must have been paidon 'goods and services used for the purposes of his taxable transactions ...‘(emphasis added). This important and necessary precondition acts as a primaryfilter against abuse, at least where inputs can readily be related to thecorresponding outputs.

17.

    The present case is, however, directly concerned with the interpretation ofArticles 17(5) and 19(1) of the Sixth Directive. The first two paragraphs ofArticle 17(5) provide:

'As regards goods and services to be used by a taxable person both for transactionscovered by paragraphs 2 and 3, in respect of which value added tax is deductible,and for transactions in respect of which value added tax is not deductible, only suchproportion of the value added tax shall be deductible as is attributable to theformer transactions.

This proportion shall be determined, in accordance with Article 19, for all thetransactions carried out by the taxable person.‘

Article 19(1) provides:

'The proportion deductible under the first subparagraph of Article 17(5) shall bemade up of a fraction having:

-    as numerator, the total amount, exclusive of value added tax, of turnoverper year attributable to transactions in respect of which value added tax isdeductible under Article 17(2) and (3),

-    as denominator, the total amount, exclusive of value added tax, of turnoverper year attributable to transactions included in the numerator and totransactions in respect of which value added tax is not deductible. TheMember States may also include in the denominator the amount ofsubsidies, other than those specified in Article 11A(1)(a).

The proportion shall be determined on an annual basis, fixed as a percentage androunded up to a figure not exceeding the next unit.‘

18.

    Belgium claims that the applicants should be permitted to make deductionspro rata according to the proportion that the turnover of their taxable transactionsbears to their total turnover, including dividends and interest received from theirsubsidiaries. The Commission has argued in its written observations that the SixthDirective contains no rule regarding the method of taking account of incomerelating to private activities outside the scope of the Directive and that MemberStates are, accordingly, free to decide on the deductibility of VAT inputs relatingto such activities.

19.

    I have serious doubts about the correctness of the Commission's suggestion. If Member States chose to permit deduction of VAT in respect of purely privateactivities, which would amount in reality to reimbursement in most cases, therewould potentially be a very serious loss of VAT revenue, a small percentage ofwhich, it must be recalled, is paid to the Community budget. It would amount torelieving the consumer from the burden of VAT, which would be contrary to acentral tenet of the system. (16) In any event it does not arise on the facts of thiscase.

20.

    The first part of the response to the more relevant argument of the BelgianState and to the question posed by the national court is to be found in Sofitam. Sofitam, to use the expression employed by Advocate General Van Gerven in hisOpinion in that case, was a 'mixed holding company‘, like the applicants in thepresent case. (17) It had receipts from share dividends and from taxabletransactions. France took the same view as is now taken by Belgium in this case,to wit that Sofitam should be allowed to deduct 'only up to the percentageresulting from the ratio between the amount of its taxable receipts and the annualamount of its total receipts, including the dividends which it had received‘. (18) Sofitam raised directly, therefore, the issue of the interpretation of Article 19(1) ofthe Sixth Directive. However, unlike in the present case, there was no suggestionthat Sofitam was involved in any way in the management of its subsidiaries. (19) Inthose circumstances, the Court ruled that as 'the receipt of dividends is not theconsideration for any economic activity ... it does not fall within the scope ofVAT ... [and that] dividends resulting from holdings fall outside the deductionentitlement‘. (20) It concluded that: (21)

'Consequently, dividends must be excluded from the calculation of the deductibleproportion referred to in Articles 17 and 19 of the Sixth Directive, if the objectiveof wholly neutral taxation ensured by the common system of VAT is not to bejeopardised.‘

Finally, the Court stated explicitly that the 'share dividends received by anundertaking which is not subject to VAT in respect of the whole of its transactionsare to be excluded from the denominator of the fraction used to calculate thedeductible proportion‘. (22)

21.

    It follows to my mind that the dividends involved in this case should similarlybe excluded, unless the management activities of the applicants in relation to theirsubsidiaries call for a different interpretation of Article 19(1). It is this possibilitythat is central to the present case. In Polysar, the Court, having ruled that theinvestment activities of a pure holding company did not amount to 'economicactivities‘, stated that it would be 'otherwise where the holding is accompanied bydirect or indirect involvement in the management of the companies in which theholding has been acquired, without prejudice to the rights held by the holdingcompany as shareholder‘. (23)

22.

    The situation contemplated by this qualification did not arise on the factsof Polysar or on those of any of the later cases. (24) In Wellcome Trust and Harnas& Helm, the Court mentioned, by reference to Article 13B(d)(5) of the SixthDirective, that 'transactions ... effected as part of a commercial share-dealingactivity or in order to secure a direct or indirect involvement in the managementof the companies in which the holding has been acquired‘ might fall within thescope of VAT. (25) In the latter case the Court added that such transactions would'constitute the direct, permanent and necessary extension of the taxable activity‘. In each case, the Court cited, without comment, its Polysar statement.

23.

    However, this language, i.e. the reference to extensions of taxable activity,suggests rather that the Court had in mind its judgment in RégieDauphinoise-Cabinet A. Forest v Ministre du Budget. (26) Régie was involvedprincipally in the management of property. It managed rented property on behalfof the owners and acted as a manager of condominiums. It received advances fromthe owners, which were paid into a bank account operated by Régie, which theninvested them, by way of diverse treasury placements, with financial institutions onits own account. Régie apparently, however, became the owner of the sumsinvested and was entitled to retain the interest earned on the placements, albeitsubject to a contractual obligation ultimately to repay the relevant principalamounts. In reality, therefore, as the applicants contended at the hearing, Régie'sremuneration from its additional investment activities was limited to the interestreceived.

24.

    The Court accepted that the placements by Régie with financial institutionscould 'be regarded as services supplied to those institutions, consisting in the loanof money for a fixed period, duly remunerated by the payment of interest‘ (27) and,moreover, that 'unlike the receipt of dividends by a holding company ... interestreceived by a property management company on investments made for its ownaccount of sums paid by co-owners and lessees cannot be excluded from the scopeof VAT, since the interest does not arise simply from the ownership of the asset,but is the consideration for placing capital at the disposition of a third party‘. (28) The Court was nevertheless careful to distinguish the activities of an undertakinglike Régie from simple 'placements made with banks by the manager of acondominium‘ who was not 'acting as a taxable person‘. (29) Accordingly, itconcluded that: (30)

'... in the case at issue in the main proceedings, the receipt, by such a manager, ofinterest resulting from the placement of monies received from clients in the courseof managing their properties constitutes the direct, permanent and necessary extensionof the taxable activity, so that the manager is acting as a taxable person in makingsuch an investment.‘

25.

    At this point, it is apparent that the Court has identified two types ofsituation as coming potentially within the Polysar qualification, namely share-dealingoperations and active management of property. However, each of these can beindependently justified by reference to the terms of the Sixth Directive. Transactions in shares are explicitly covered by the wording of an exemption(Article 13B(d)(5), quoted in footnote 3 above), while Article 4(2) covers 'theexploitation of tangible or intangible property ...‘. Advocate General Van Gervenin his Opinion in Polysar drew a careful distinction between the latter type ofactivity and simple investment when pointing out that both Rompelman and VanTiem 'were concerned not only with an investment, that is to say the acquisition ofproperty ... but also with the property acquired subsequently being made availableto a third party for consideration (in the former case by the letting of theapartment and in the latter by the grant of building rights over the plot)‘. (31) Hethen distinguished between the mere acquisition of property, on the one hand, andits being made available, on the other, for the purposes of determining whethersuch property has been economically exploited for VAT purposes. (32) The part ofhis Opinion which is particularly pertinent to the present case also casts the mostlight on the proper interpretation of the Polysar judgment and is worthy of fullcitation: (33)

'The question remains whether liability to tax may be inferred from the otheractivities of a holding company. The national court has pointed out that Polysar'sactivities are concerned solely with the holding of shares in subsidiary companies. It seems to me that such activities, which are undertaken in the exercise ofshareholders' rights, do not constitute ”economic activities” within the meaning ofthe directive. The exercise of those rights includes, for instance, participation in thegeneral meeting of the subsidiary's shareholders, the exercise of the right to voteat the meeting and the possibility of influencing company policy thereby and, whereappropriate, involvement in the decision appointing the company's directors orofficers and/or apportioning the subsidiary's profits, as well as the receipt of anydividends declared by the subsidiary or the exercise of shareholders' preferentialrights or options.

In addition to the aforesaid activities which a holding company carries on as ashareholder in other companies, there are activities which, like any other company,it carries on through its organs and which, in so far as they are conducted withinthe company (in its relations with the shareholders and the company's organs) alsocannot be regarded as ”economic activities”, within the meaning of the SixthDirective. Those activities include the administration of the holding company, themaking up of the annual accounts, the organisation of the general meeting, thedecision to spend the holding company's profits and to declare (and possibly payout) dividends.

Nor, in my view, is there any question of economic activities independently carriedon within the meaning of Article 4(1) of the Sixth Directive in the case of activitieswhich the holding company, or persons acting in its name, carries out in its capacityas director or officer of a subsidiary company. A director or officer of the companydoes not act on his own behalf but only binds the (subsidiary) company whoseinstrument he is; in other words, where he acts in the exercise of his duties underthe company instruments, there is no question of his acting ”independently”. Inthat regard, his actions must be equated with those of an employee who, asArticle 4(4) of the Sixth Directive expressly states, does not act ”independently”.‘

26.

    It follows from this passage that, contrary to the view advanced by Belgiumin this case, the mere appointment by a holding company of directors or officers,and I would say also managers, of a subsidiary company does not alter the natureof the relationship from the VAT point of view. In general, a holding companydoes not, by exercising its rights as shareholder, 'exploit‘ its 'intangible property‘in its shares in the sense of Article 4 of the Sixth Directive. As Advocate GeneralVan Gerven noted in respect of such a holding company, 'there are activitieswhich, like any other company, it carries on through its organs and which, in so faras they are conducted within the company (in its relations with the shareholdersand the company's organs), also cannot be regarded as ”economic activities” ...‘. (34) The Advocate General did not, however, deal with the suggestion implicit in thenational court's question in the present case that the provision of management andother services to a subsidiary, even pursuant to taxable transactions (and I presumecontractual relationships), leads to a different result. I do not believe it does. Tomy mind, the implication of Advocate General Van Gerven's remarks regardingacting 'in the exercise of ... duties under the company instruments‘ are equallyapplicable to objective contractual relationships such as those involved in this casebetween a parent and subsidiary.

27.

    The applicants pointed to some anomalies which would flow from treatingthe share dividend income of the parent companies as 'economic activities‘ whenthe latter supplied services under contract to its subsidiaries. The level ofdeductions would vary with the profitability of the latter. Full deduction would bepermissible if there were no profits or even if no dividends were declared. A smallpercentage reduction would apply when large dividends were declared. Thesituation would again be different if the services were carried out instead by aspecially nominated company within the group. (35)

28.

    In short, where the corporate structure is properly respected, dividends paidby a subsidiary to a parent do not consist of 'economic activities‘. The situationenvisaged by the exception in Polysar cannot in effect arise in any case where theveil of incorporation has not been illegally breached by the parent company. Itremains, of course, possible for it to apply to cases where there is no corporatestructure, i.e. where an unincorporated body or an individual directly exploitsproperty.

29.

    Finally, on this point, the Commission has suggested, in its writtenobservations, that the dividends could be regarded as constituting consideration,within the meaning of Article 11 of the Sixth Directive, for the provision ofmanagement services by the parent to the subsidiaries. Dividends are payableequally in respect of all shares of the same type in a company. In my opinion, itis fundamentally inconsistent with the corporate structure to treat the payment ofdividends as furnishing consideration in that sense. It is generally accepted incompany law that dividends comprise payments made out of profits to theshareholders in a company. (36) Indeed, the Court expressly stated in Sofitam that'the receipt of dividends is not consideration for any economic activity within themeaning of the Sixth Directive‘. (37) The situation could only be different where,notwithstanding the separate legal personality of the subsidiary, a controllingshareholder has been able to use its shareholding and consequential influence onthe management of the subsidiary to extract additional 'payment‘ for separatetaxable services provided by it to that subsidiary. There is nothing in the case-fileto suggest that this occurred in the instant case.

30.

    The decisive point is that denial of the right to deduct VAT inputs fromVAT paid on directly related outputs would patently contradict a basic tenet of theVAT system. As this would be the consequence of including non-economicactivities in the denominator of the fraction prescribed by Article 19(1) of the SixthDirective, I would recommend that the Court reject such an interpretation of theDirective.

(ii)    Interest on loans

31.

    The same result does not automatically follow for the receipt by theapplicants in respect of interest on loans to their subsidiaries. The loans at issuedo not necessarily partake of the character of investments as was the case with thebonds in Harnas & Helm. (38) In that case, during the relevant period Harnas &Helm held shares and bonds issued in third countries in respect of which it receiveddividends and interest. The Court held that 'income from the bonds derives fromthe mere fact of holding them, which entitles the holder to payments of interest‘and that '[s]uch interest cannot, therefore, be regarded as a return on an economicactivity or transaction carried out by the bondholder, since it derives from the mereownership of bonds‘. (39) However, it appears from the order for reference in thiscase and from the submissions of the parties that the applicants provide finance ona continuing basis to cover the cash-flow needs of their subsidiaries, which are oftennot in a position easily to raise finance independently.

32.

    Belgium, supported by the Commission at the hearing, relies on RégieDauphinoise. (40) The applicants' lending activities - it described them at thehearing as being the financial motors of the group - should be viewed as anextension of their business of providing taxable management services to itssubsidiaries. This is contradicted by the applicants who contend, principally, thatin lending they merely reinvest, in a manner akin to a private investor, sumsreceived by way of dividend. Alternatively, they suggest that, as the resources usedfor lending are merely ancillary to the shareholding activity, the interest earnedthereon should not be included in the denominator.

33.

    In Harnas & Helm the holding company had also made two ordinary loansto non-related companies. There was nothing in the case-file to indicate that suchlending activity occurred other than on a wholly occasional, if not rare, basis. Inthe present case, it is clear from the order for reference that lending to theirsubsidiaries is one of the applicants' ongoing activities. It seems to me thereforeto be much more akin to the money-management operations considered by theCourt in Régie Dauphinoise than to the portfolio-management activities at issue inWellcome Trust. It is on this basis, essentially, that Belgium argues that the activityshould be viewed as being economic.

34.

    However, in Régie Dauphinoise the sums invested were held by Régie, asAdvocate General Lenz stated, 'on the basis of its economic activity‘. (41) Here itwould appear that some, if not all, of the funds lent by the applicants were derivedfrom its dividend income. An analogy with Régie Dauphinoise could only be madeif the national court were to conclude that the lending activity was financed largelyfrom the proceeds generated by the applicants' taxable activity of providingservices. I agree with the view expressed by Advocate General VerLoren vanThemaat that it is 'the nature of the activities in question which is relevant‘ (42) fordetermining what constitutes an economic activity and I would reiterate the viewI expressed in my own Opinion in Harnas & Helm that: (43)

'Attention should be focused on the economic and commercial substance oftransactions that are alleged to constitute an economic activity, as opposed to theformal financial or commercial classification (namely, in this case, as bond or shareacquisitions and holdings) of those activities. It follows, in my opinion, that aperson who, like the appellant, deals in bonds may only be considered to becarrying on an economic activity if he is pursuing a business or commercialpurpose; in this respect he must provide services to his customers as opposedmerely to being a consumer of services.‘

35.

    In this case, I am of the view, although I confess not without somehesitation, that the lending activities of the applicants lack economic or commercialsubstance. The mere fact that the aim of the loans from the point of view of thesubsidiaries is to avoid having to borrow from credit institutions - lending which,as we are told by Belgium, is often refused due to the inadequacy of theautonomous security which may be offered by subsidiaries in industrial-holdinggroups - does not suffice to render the applicants' activity commercial. In otherwords, while financially the lending activity of a bank and that of the applicantsvis-à-vis their subsidiaries would differ little, the economic nature of their underlyingactivities is different. It may be compared with the difference between the activitiesgiving rise to the receipt of a dividend and those giving rise to a rent cheque, towhich I alluded in my Opinion in Harnas & Helm. (44) To my mind the lendingactivity of Harnas & Helm, apart from the fact that it clearly occurred onlyoccasionally, was nevertheless more economic in nature because, unlike theapplicants, it furnished loans to third parties.

36.

    My hesitation in making this recommendation derives from the expressprovision for an exemption from VAT in Article 13B(d)(1) of the Sixth Directivein respect of 'the granting and the negotiation of credit and the management ofcredit by the person granting it‘. This clearly indicates, to my mind, that suchactivity, when carried on as a business, is to be regarded as constituting 'economicactivity‘. However, I consider that, for such lending activity to be carried on on aneconomic basis for VAT purposes, the supposed grantor of credit must engage inthe activity in question not only on an ongoing basis, a condition satisfied here, butalso for commercial purposes, which, to my mind, are absent where it is clear thatthe sums lent were lent to subsidiaries within the same corporate group for thepurposes of permitting the latter to carry on their commercial activities vis-à-visthird parties. It is clear, especially from the intra-group nature of the loans atissue, that the lending activity of the applicants is not an extension of their taxableservice-provision activities but, instead, an extension of their non-taxable investmentactivities.

(iii)    General conclusions

37.

    Consequently, I recommend that share dividends should be excluded fromthe denominator of the fraction used to calculate the deductible proportions laiddown by Article 19(1) of the Sixth Council Directive. Similarly, interest earned onintra-group loans, even if made available on an ongoing basis, should also be soexcluded provided, first, that they are furnished from funds derived from incomeon such share dividends rather than from income derived from a separate taxableactivity and, second, that they are made available only to subsidiary companies.

38.

    The result of all this, in so far as Article 19(1) of the Sixth Directive isconcerned, is not necessarily that the applicants may deduct all of their VATinputs. To the extent that the national court is satisfied, notwithstanding theapplicants' contention to the contrary, that a not entirely insignificant proportionof those inputs relates to the performance of non-taxable transactions connectedwith the shareholding and lending activities of the applicants, no right to deductmay arise pursuant to Article 17(2) of the Sixth Directive. A taxable person mayonly deduct that proportion of its inputs which may properly be assigned to itseconomic activities. (45) Every taxable person is obliged by Article 22(2) of the SixthDirective to 'keep accounts in sufficient detail to permit application of the valueadded tax and inspection by the tax authority‘, while Article 22(4) requires 'everytaxable person‘ to 'submit a return within an interval to be determined by eachMember State‘, which 'may not exceed two months following the end of each taxperiod‘, whose duration is, subject to a maximum of a year, to be determined byeach Member State, although it may not 'exceed a year‘. The taxable person whoseeks to exercise the right to deduct in circumstances where some of its VAT inputsmay relate to non-taxable activities is obliged to establish, to the satisfaction of therelevant tax authorities, the proportion of those inputs which it claims areattributable to taxable transactions and thus capable of being deducted.

39.

    Article 19(1) of the Sixth Directive is, however, inapplicable. It can applyonly in cases where taxable but exempt activities are mixed with taxable ones, since,otherwise, as in this case where the applicants only engage, in my opinion, intaxable and non-taxable activities, there is no difference between the numeratorand the denominator of the fraction which that provision envisages. It is thereforefor the national court, in the final instance, to determine the extent to which someof the deductible VAT inputs claimed by the applicants may in fact have relatedto the exercise, respectively, of its non-taxable shareholding activities and itsintra-group lending activities and to exclude those inputs from the right ofdeduction claimed by them.

III - Conclusion

40.

    It follows, in my view, that the Court should answer the question referredto the Court by the Tribunal de Première Instance, Tournai as follows:

Share dividends should always be excluded from the denominator of the fractionused to calculate the deductible proportions laid down by Article 19(1) of the SixthCouncil Directive of 17 May 1977 on the harmonisation of the laws of the MemberStates relating to turnover taxes - Common system of value added tax: uniformbasis of assessment, where the economic relationship between the company owningthe shares and the company in which the shares are held is governed by lawfullyadopted legal arrangements including contracts for the provision of services and thenomination by a parent company of persons who carry out the activities of thesubsidiary. Furthermore, where one company in a group provides, even on acontinuing basis, loan finance to meet the regular borrowing needs of othercompanies in the same group, that activity does not constitute economic activityand the income from such finance should also be excluded from the denominatorof that fraction.

1: Original language: English.

2: -    See Case C-60/90 Polysar Investments Netherlands [1991] ECR I-3111 (hereinafter'Polysar‘).

3: -    At the material time, Floridienne was the group holding company, while Berginvest, itssubsidiary, was the parent company of the group's plastics subdivision.

4: -    This provision requires, in so far as is material in the present case, Member States toexempt from VAT 'transactions, including negotiation, excluding management andsafekeeping, in shares, interests in companies or associations, debentures and othersecurities ...‘.

5: -    In his view, the receipt of a dividend could not be equated with 'transactions, includingnegotiation, ... in shares ...‘ for the purposes of that provision.

6: -    Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws ofthe Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment; OJ 1977 L 145, p. 1.

7: -    See Articles 5(6) and 6(2) of the Sixth Directive which were discussed recently in CaseC-48/97 Kuwait Petroleum [1999] ECR I-2323.

8: -    Case C-186/89 [1990] ECR I-4363.

9: -    Polysar, cited in footnote 1 above, paragraph 13.

10: -    Ibid. (emphasis added).

11: -    Case C-155/94 Wellcome Trust v Commissioners of Customs and Excise [1996] ECR I-3013,paragraph 34 (hereinafter 'Wellcome Trust‘).

12: -    Case 80/95 Harnas & Helm v Staatssecretaris van Financiën [1997] ECR I-745 (hereinafter'Harnas & Helm‘).

13: -    Ibid., paragraph 20.

14: -    Case C-333/91 Sofitam v Ministre Chargé du Budget [1993] ECR I-3513 (hereinafter'Sofitam‘).

15: -    Case 268/83 Rompelman v Minister van Financiën [1985] ECR 655, paragraph 19(hereinafter 'Rompelman‘), Case 50/87 Commission v France [1988] ECR 4797,paragraph 15 and Sofitam, loc. cit., paragraph 10.

16: -    See the case-law cited in footnote 14 above.

17: -    Paragraph 12 of his Opinion (emphasis in original). The Court described it more generallyas 'a holding company‘; see paragraph 3.

18: -    Sofitam, paragraph 3.

19: -    Advocate General Van Gerven pointed out (paragraph 12 of his Opinion) that'[a]ccording to the available information, as well as managing its share portfolio, Sofitampursues ancillary activities that are subject to VAT‘.

20: -    Paragraph 13.

21: -    Paragraph 14.

22: -    Paragraph 15.

23: -    Paragraph 14. This statement was later cited at paragraph 12 of the judgment in Sofitam.

24: -    As regards Sofitam, see the discussion in paragraph 20 and the accompanying footnote 16above.

25: -    Paragraphs 35 and 16 of the respective judgments.

26: -    Case C-306/94 [1996] ECR I-3695 (hereinafter 'Régie Dauphinoise‘).

27: -    Paragraph 16.

28: -    Paragraph 17.

29: -    Paragraph 18.

30: -    Paragraph 18 (emphasis added).

31: -    Polysar, loc. cit., footnote 1 above, paragraph 5 of the Opinion (original emphasis).

32: -    Ibid.

33: -    Opinion of Advocate General Van Gerven, paragraph 6.

34: -    Ibid.

35: -    The applicants point out in their written observations that, with effect from 1 January1995, the management services in question have been provided by specialised subsidiaries. Moreover, counsel for the applicants pointed out at the hearing, without beingcontradicted by either the Commission or Belgium, that in certain Member States, notablythe United Kingdom, the members of a corporate group can opt for consolidated VATtreatment, in which case the central issue raised by the present case would not arisebecause the VAT inputs of the parent would be regarded as part of the deductible inputsof the group.

36: -    In Irish law, for example, under S. 45 of the Companies Amendment Act 1983,distributions or dividends in all registered companies may only be made from thecompany's accumulated realised profits, so far as not previously utilised by distribution orcapitalisation, less its accumulated realised losses, so far as not previously written-off in areduction or reorganisation of capital, i.e. current profits and any profits carried forward,less current losses and any losses carried forward. The link between profits and dividendsclearly also underlies company-law provisions that have been adopted by the Communitylegislature, as may be illustrated by Council Directive 82/121/EEC of 15 February 1982 oninformation to be published on a regular basis by companies the shares of which have beenadmitted to official stock-exchange listing, OJ 1982 L 48, p. 26. Article 5(4) of thatDirective provides that: 'Where the company has paid or proposes to pay an interimdividend, the figures must indicate the profit or loss after tax for the six-month period andthe interim dividend paid or proposed‘.

37: -    Cited in footnote 10 above, paragraph 13. The Court thus agreed with the Commission'sobservations in that case to the effect that 'dividends do not constitute consideration ...for an activity subject to VAT and still less for an activity exempt from VAT‘; seeparagraph 13 of the Opinion of Advocate General Van Gerven. In its oral observationsin the present case, the Commission accepted that it would be very difficult to determinethe proportion of dividends which constituted such consideration.

38: -    Cited in footnote 11 above.

39: -    Ibid., paragraph 18.

40: -    Cited in footnote 25 above.

41: -    Paragraph 20 of his Opinion in Régie Dauphinoise.

42: -    See his Opinion in Case 89/81 Staatssecretaris van Financiën v Hong Kong Trade [1982]ECR 1277, p. 1293 (emphasis in original).

43: -    Paragraph 24.

44: -    Ibid., paragraph 30.

45: -    See paragraph 16 above and paragraph 53 of my Opinion in Harnas & Helm.