C-51/76

JUDGMENT OF 1.2. 1977 — CASE 51/76

their national court and if the latter 3. In the case of goods purchased in were prevented from taking it into 1972 and intended to be used for the consideration as an element of purposes of the undertaking which do Community law. This is especially so not belong to the category of capital when the individual invokes a goods within the meaning of Article provision of a directive before a 17 of the directive, it is the duty of national court in order that the latter the national court before which the shall rule whether the competent rule as to immediate deduction set out

national authorities, in exercising the in Article 11 of the directive is choice which is left to them as to invoked to take those facts into the form and the methods for account in so far as a national implementing the directive, have kept implementing measure falls outside within the limits as to their discretion the limits of the margin of the set out in the directive. discretion left to the Member States.

In Case 51/76

Reference to the Court under Article 177 of the EEC Treaty by the Hoge Raad (Supreme Court) of the Netherlands for a preliminary ruling in the action pending before that court between

VERBOND VAN NEDERLANDSE ONDERNEMINGEN (Federation of Undertakings of the Netherlands), The Hague,

gives the following

NEDERLANDSE ONDERNEMINGEN v INSPECTEUR DER INVOERRECHTEN EN ACCIJNZEN

JUDGMENT

Facts

The order making the reference and the VAT (OJ English Special Edition 1969 written observations submitted under (II), p. 551). Article 20 of the Protocol on the Statute of the Court of Justice of the EEC may 2. The Netherlands adopted VAT by be summarized as follows: the 'Wet op de omzetbelasting' (Law on turnover tax) of 28 June 1968 (Staatsblad 329) with effect from 1 January 1969. I — Facts and procedure The wording of Articles 2 and 45 of that 1. Article 11 of the Second Council Law is as follows: Directive on VAT provides: 1. Where goods and services are used for Article 2 the purposes of his undertaking, the taxable person shall be authorized to Tax in respect of the delivery of goods deduct from the tax for which he is and the supply of services to the trader liable: and in respect of the importation of (a) value-added tax invoiced to him goods intended for him shall be in respect of goods supplied to deducted from the tax due in respect of him or in respect of services the supply of goods and services. rendered to him; (b) the value-added tax paid in Article 45 respect of imported goods; 1. In derogation from Articles 2 and 15, in respect of goods intended to be An exception to the general used by the trader as business assets authorization to make deduction is deduction may be made only for contained in the third indent of Article (a) ... 17 of the Directive, which provides: (b) ... (c) 67 % of the tax, in the case where 'With a view to the transition from the delivery or importation takes place present system of turnover taxes to the in 1972.

turnover tax 1968, the Inspector of contained in the Second Directive is to Customs and Excise, the defendant in be interpreted as meaning goods, the cost the main action, taking the view that the of which, in accordance with the goods in question had to be considered principles of business economy and as business assets under Netherlands accounting, is spread over several years. rules, limited the deduction of the tax to 67 % of the amount of the tax paid on But, says the plaintiff in the main action, this purchase by the plaintiff in the main the cost of the goods at issue is written action. off against profits in the year of acquisition as current expenditure. 4. The plaintiff in the main action contested the corrective assessment made One of the arguments put by the by the defendant in the main action Inspector to the Tariefcommissie was before the Tariefcommissie. One of its that the definition of the concept of arguments was that the right to make a 'capital goods' given by the plaintiff is in deduction laid down by Article 45 (1) of conflict with the opinion of various the Law of 1968 is contrary to the authoritative writers. principle of the right to make a deduction laid down by Article 11 (1) of According to the Inspector, it cannot be the Second Directive mentioned above, said that there is a virtually indissoluable in so far as the concept of 'business assets link between 'capital goods' and of an undertaking' is wider than that of 'investment', on the one hand, and the 'capital goods' contained in the third writing off of expenditure over several indent of Article 17 of the Directive. years, on the other hand.

operating the undertaking, with the respect of 'capital goods' not yet written exception of articles for resale, off at the time of introducing ready-made goods for sale, raw materials value-added tax. In addition, Article and semi-finished products, ancillary 11 (3) — the second and third materials, fertilizers, cattle fodder and subparagraphs of which cover goods and seeds and non-returnable packing services which are used both in materials. transactions giving entitlement to deduction and in transactions which do It follows from this definition of the not give entitlement to deduction, expression 'business assets' that it should deduction for the said goods and services also include materials used for being allowed only for that part of the maintenance, office supplies, advertising value-added tax which is proportional to material, and in a word costs which are the amount relating to the transactions generally described as general costs. giving entitlement to deduction (pro rata rule) — provides in its third The printed material acquired by the subparagraph that as regards 'capital plaintiff may be regarded as advertising goods' the adjustment shall be effected costs and the printer may be classified as on the basis of the variations of the pro a small tool or office supplies. rata figure which have occurred during a period of five years including the year According to the plaintiff in the main during which the goods were acquired action, the concept of 'capital goods' and the second indent of Article 17

NEDERLANDSE ONDERNEMINGEN v INSPECTEUR DER INVOERRECHTEN EN ACCIJNZEN

national legislature an appreciable measure of discretion to follow its own 6. The order of the Hoge Raad was national policy in the exercise of the entered in the Court Registry on 18 June powers thereby conferred on it. 1976.

5. The plaintiff in the main action Pursuant to Article 20 of the Protocol on appealed to the Hoge Raad on points of the Statute of the Court of Justice of the law against the decision of the EEC, written observations were lodged Tariefcommissie. on behalf of the Federation of Undertakings of the Netherlands by its By order of 9 June 1976 the Hoge Raad financial adviser, Professor A. E. de Moor, stayed its proceedings and referred the on behalf of the Belgian Government by following questions to the Court of the Director of Administration at the Justice pursuant to Article 177 of the Ministry for Foreign Affairs, W. Collins, EEC Treaty: on behalf of the Government of the 1. Is the term 'capital goods' contained Netherlands by the Secretary-General of in the third indent of Article 17 of the Ministry for Foreign Affairs, E. L. C.

JUDGMENT OF 1. 2. 1977 -CASE 51/76

Schiff, and on behalf of the Commission which are normally used for a period by its Legal Adviser, Rolf Wägenbaur, exceeding one year and which, by reason assisted by Hendrik Bronhorst, a member of this fact, are in principle treated as of the Legal Service. eligible for writing off for accountancy purposes. By general costs is meant costs Upon hearing the report of the (incurred through the purchase of goods Judge-Rapporteur and the views of or for the use of services) which Advocate-General, the Court decided to contribute directly or indirectly to the open the oral procedure without a manufacture or distribution of goods, but preparatory inquiry. which do not concern raw or assimilated

II — Written observations lodged The structure of and the procedures for with the Court the application of the common system of value-added tax were examined in greater 1. The Federation of Undertakings of detail in the opinion of the Commission the Netherlands points out that doubts of 3 June 1964 concerning the structure have been expressed several times in the of and procedures for application of the Parliament of the Netherlands as to the common system of value-added tax and correctness of the opinion that the in the explanatory notes on that opinion restriction of the right to make (OJ of 13. 7. 1964, p. 1800). On page deductions for business assets, set out in 1805 a distinction is made between Article 45 of the Netherlands Law of capital goods and goods attributable to 1968 on VAT is compatible with the general costs. Looked at as a whole, the provisions of the Second Directive. text appearing on pages 1805 and 1806, which deals with the financial deduction It argues, as to the first question referred made for capital goods, shows that the by the Hoge Raad, that the answer to the definition given in the ABC Report was question must be in the affirmative both followed, because mention is made on philological grounds and on grounds therein of the two methods of deduction of history and exegetics. which can be used for capital goods; immediate deduction and deduction pro The expression 'to invest' ist used in the rata temporis, that is to say after writing Netherlands as meaning: to lay out off. capital for a long period; be it from the point of view of the management of the undertaking or from the fiscal point of On 14 April 1965, the Commission view the investments are entered as assets submitted its proposal for a second when the profits are calculated and thus directive to the Council (published with are not set against profits during the year an explanatory note in the Bulletin of of acquisition. the European Economic Community No 5 of 1965, p. 17). These documents also The opinion is supported when the show that the concept of capital goods history of the Second Directive is looked was understood as meaning goods the at. The report produced by a working cost of which is spread over more than one year. party composed of experts from the Member States and the Commission, the 'ABC Report' defines capital goods as As for the exegetic interpretation of the follows: goods (other than materials Second Directive, the plaintiff in the physically forming part of manufactured main action argues that the third goods and other than goods intended for subparagraph of Article 11 (3) thereof is resale) which contribute directly or only meaningful if it concerns goods the indirectly to manufacture or distribution, cost of which is spread over several years.

The second indent of Article 17 shows According to the plaintiff in the main clearly that the expression 'capital goods' action Article 11 (1) fulfils the conditions should, in the context, be understood as required of a provision of a directive or meaning goods which are entered as an of a decision in those judgments in order asset and then written off over several to be directly applicable: the article is years. clear, it is not subject to any reservation, it does not require any additional

economic theory. 4. The Belgian Government suggests 2. Since the plaintiff in the main action that the Court should give a negative answers the first question in the answer to the first question referred by affirmative, it has no observations to the Hoge Raad, because an answer in the submit on the second question referred affirmative would require the Member by the Hoge Raad. States to define the expression 'capital goods' exclusively with reference to laws 3. As for the third question referred by in force and accounting practices within the Hoge Raad, the plaintiff in the main the national system. action is of the opinion that this From the context in which the words question should receive an answer in the affirmative subject to the reservation that 'capital goods' are used it would be taking into account the provisions of possible to arrive at a Community

JUDGMENT OF 1.2. 1977 — CASE 51/76

The answer to the question whether The Commission thinks that it may be capital goods are of are not involved in concluded from an examination of the

the present case depends on the nature various provisions of the Second of those goods and on how an Directive in which the concept of capital

NEDERLANDSE ONDERNEMINGEN v INSPECTEUR DER INVOERRECHTEN EN ACCIJNZEN

goods is used that the said concept is 10. As for the third question put by the used to define goods the cost of which is Hoge Raad, the Commission argues that not treated as current expenditure, but the wording of the question is such that spread over more than one year. it refers exclusively to Article 11 (1) (a) of the Second Directive given that ex However, one cannot really get any hypothesi 'capital goods' are not involved further towards a definition of what and that the goods in question are to be 'capital goods' are on the basis of the used for the purposes of the undertaking. Second Directive. In so far as more precise rules may be necessary at national The Commission thinks that, as thus level and for want of an exhaustive limited, the question put by the Hoge Community definition, it is for the Raad should be answered in the national legislature to lay down such affirmative. In this regard, the rules. Commission mentions, as does the plaintiff in the main action, the The history of the provisions relating to judgments of the Court in Cases 9 and 'capital goods' confirms the conclusion 33/70, Grad and S.p.a. Sace, and the set out above. judgment of 4 December 1974 in Case 41/74, van Duyn v Home Office ([1974] As for the definition of 'capital goods' ECR 1337). found in the ABC Report, the Commission observes that the said According to the Commission, this is a definition is subject to important provision giving taxable persons a right reservations: it is expressly stated in the which is not subject to any reservation or said report that the report is binding condition. This right to which taxable neither on the national governments nor persons are entitled means, of course, in the Commission. that the Member States are under an

It thus becomes clear, from an analysis of The Federation of Undertakings of the the Second Directive and of earlier Netherlands, represented by B. H. Ter documents, that the concept of capital Kuile, Advocate at the Bar of The Hague, goods as used in the Second Directive the Belgian Government, represented by refers to durable goods the acquisition or S. Habor, Fiscal Attache to the production cost of which is not treated as Permanent Representatives of Belgium to current expenditure but spread over more the EEC, the German Government than one year, according to the represented by Dr M. Seidel, Counsellor principles generally applicable. at the Ministry for Economic Affairs, the Commission, represented by its Legal 9. In the light of this answer, the Adviser, R. Wägenbaur, acting as Agent, Commission is of the opinion that the assisted by H. Bronkhorst of its Legal second question put by the Hoge Raad Service, submitted their observations at ceases to be relevant. the hearing on 17 November 1976.

JUDGMENT OF 1. 2. 1977 -CASE 51/76

Among the matters raised at that hearing Council of Ministers during which the were the following: Second Directive was approved show that the cases indicated in Article 11 (4) are On the first question put by the Hoge only mentioned as examples, as appears, Raad, the Federation of Undertakings of moreover, from the words 'in particular' the Netherlands pointed out that the included in the text of that paragraph. Netherlands legislation on VAT gave an Thus the Member States have the right to explanation, based on their permanent refuse any deduction in respect of nature, of the concept of 'capital goods' 'certain goods and services'. It should be mentioned in Article 11 (3) of the noted, it said, that most of the Member Second Directive, by defining such goods States have availed themselves of that

NEDERLANDSE ONDERNEMINGEN v INSPECTEUR DER INVOERRECHTEN EN ACCIJNZEN

As regards the third question put by the acquire a Community character when, at Hoge Raad, the German Government the next stage, the said national expressed doubts on the question provisions are themselves harmonized. whether in the present case there really is The Advocate-General delivered his a situation in which it may be said that Article 11 has a direct effect. For the rule opinion at the hearing on 14 December 1976. laid down in Article 11 cannot really be looked upon as a legislative provision In a letter addressed to the President of because it needs to be set out in more the Court on 11 January 1977, the specific and comprehensive terms, not Minister for Foreign Affairs of Belgium only at Community level, but also by way pointed out that the Advocate-General in of national rules to be made by the his opinion does not appear to have Member States empowered to do so. For given weight, in the interpretation of example, it is not clear from Article 11 Article 11 (4) of the Second Directive of that the deduction of VAT is only 11 April 1967, to the words 'in particular' possible when the taxable person has ('notamment') appearing in that provision obtained the goods or services in and requested the Court to consider question from another trader. reopening the oral procedure with a view to asking the Council to give official Finally, the German Government raises notice of the minutes of the meeting of the question whether, in cases where the 11 April 1967 which show that the cases Commission and the Council undertake mentioned in paragraph (4) are given by the gradual harmonization of a particular way of example. field, an examination of the direct effect or rules resulting from the first step The Court, after deliberation in the towards harmonization should not always Deliberation Room, established that be undertaken in each individual case. every factor needing to be considered for By definition, the said rules only the purpose of answering the questions constitute partial harmonization, and are put to it in the case had been taken into always rendered more specific by account and decided not to reopen the divergent national provisions. They only oral procedure.

4 That deduction system, however, is subject to exceptions laid down by other provisions of the directive which allow the Member States to make exceptions to it in specifically defined cases and within clearly stated limits.

5 Those exceptions include certain provisions concerning capital goods, particularly Article 17, which is in issue in this case.

6 The third indent of the first paragraph of that article provides that the Member States may exclude in whole or in part, during a certain transitional period, capital goods from the deduction system provided for in Article 11.

7 In application of that relieving provision, the Netherlands Law on turnover tax lays down transitional provisions whereby, for the year 1972, only 67 % of the tax on goods intended to be used by the trader as 'business assets' may be deducted.

8 The Federation claims that the latter expression, interpreted by the Netherlands tax authorities, has a wider meaning than the expression 'capital goods' used by the directive, and that the exception to the right to make deduction has thus been extended too widely, with the result that the Federation has had to bear tax not authorized by the directive.

The first two questions

14 However, the accounting methods and the procedures for writing off adopted by each particular undertaking in relation to its own financial interests cannot provide the decisive criterion for the definition of the concept at issue, given that the said concept has its place in a taxation system which, in principle, is based on the equality of undertakings before the revenue law.

15 Conversely, the decisive elements are the durability of use and the practices for writing off, as normally taken into consideration for the management of the undertaking in the sphere concerned.

16 In this respect, the Second Directive does not contain explicit guidance for defining uniformly and precisely the requirements which must be satisfied concerning durability and value, together with the rules applicable for writing off, in order that an object may be classified as capital goods for the purposes of the provisions at issue.

17 The Member States therefore have a certain margin of discretion as regards those requirements, provided that they pay due regard to the existence of an essential difference between capital goods and the other goods used in the management and day to day running of undertakings.

18 Therefore the appropriate answers to the first two question are

JUDGMENT OF 1.2. 1977 — CASE 51/76

20 This question raises the general problem of the legal nature of the provisions of a directive adopted under Article 189 of the Treaty.

21 On this, the Court has already said, most recently in its judgment of 4 December 1974 in Case 41/74 ([1974] ECR 1337 at p. 1348) that if, by virtue of the provisions of Article 189, regulations are directly applicable and, consequently, may by their very nature have direct effects, it does not follow from this that other categories of acts mentioned in that article can never have similar effects.

22 It would be incompatible with the binding effect attributed to a directive by Article 189 to exclude, in principle, the possibility that the obligation which it imposes may be invoked by those concerned.

NEDERLANDSE ONDERNEMINGEN v INSPECTEUR DER INVOERRECHTEN EN ACCIJNZEN

23 In particular, where the Community authorities have, by directive, imposed on Member States the obligation to pursue a particular course of conduct, the useful effect of such an act would be weakened if individuals were prevented from relying on it before their national courts and if the latter were prevented from taking it into consideration as an element of Community law.

34 This is especially so when the individual invokes a provision of a directive before a national court in order that the latter shall rule whether the

JUDGMENT OF 1. 2. 1977 — CASE 51/76

30 Therefore the appropriate answer to the third question is that, in the case of goods purchased in 1972 and intended to be used for the purposes of the undertaking which do not belong to the category of capital goods within the meaning of Article 17 of the directive, it is the duty of the national court before which the rule as to immediate deduction set out in Article 11 of the directive is invoked to take those facts into account in so far as a national

implementing measure falls outside the limits of the margin of the discretion left to the Member States.

Costs

31 The costs incurred by the Government of the Federal Republic of Germany, the Government of the Kingdom of Belgium, the Government of the Kingdom of the Netherlands and the Commission of the European Communities, which have submitted observations to the Court, are not recoverable.

32 As these proceedings are, in so far as the parties to the main action are concerned, a step in the action pending before the national court, the decision on costs is a matter for that court.

the existence of an essential difference between capital goods and the other goods used in the management and in the day to day running of undertakings.

3. In the case of goods purchased in 1972 and intended to be used for the purposes of the undertaking which do not belong to the category of capital goods within the meaning of Article 17 of the directive, it is the duty of the national court before which the rule as to immediate deduction set out in Article 11 of the directive is invoked to take those facts into account in

so far as a national implementing measure falls outside the limits of the margin of the discretion left to the Member States.

Kutscher Donner Pescatore Mertens de Wilmars Sørensen

Mackenzie Stuart O'Keeffe Bosco Touffait

Delivered in open court in Luxembourg on 1 February 1977.