C-89/81

JUDGMENT OF THE COURT 1 APRIL 1982

Staatssecretaris van Financiën v Hong Kong Trade Development Council (reference for a preliminary ruling from the Hoge Raad der Nederlanden)

(Refund of value added tax)

Case 89/81

Tax provisions — Harmonization of legislation — Turnover taxes — Common system of value added tax — Taxable person — Concept — Person providing services free of charge — Excluded (Council Directive 67/228, Art. 4)

A person who habitually provides the Second Directive on the harmon­ services for traders, free of charge in all ization of legislation of Member States cases, cannot be regarded as a taxable concerning turnover taxes. person within the meaning of Article 4 of

JUDGMENT OF 1. 4. 1982 — CASE 89/81

on the interpretation of Article 4 and the first sub-paragraph of Anicie 11 (2) of the Second Council Directive, 67 / 228 / EEC , of 11 April 1967, on the harmonization of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value added tax (Official Journal, English Special Edition 1967, p. 16),

THE COURT

composed of: J. Mertens de Wilmars, President, G. Bosco, A. Touffait and O. Due (Presidents of Chambers), P. Pescatore, Lord Mackenzie Stuart, A. O'Keeffe, T. Koopmans, U. Everling, A. Chloros and F. Grévisse, Judges,

Advocate General: P. VerLoren van Themaat Registrar: P. Heim

gives the following

Having applied in 1973 for approval as Having regard to the concurring opinion an undertaking within the meaning of of Mr Advocate General van Soest, the the second directive on value added tax, Hoge Raad decided to stay the the respondent in the main proceedings proceedings and referred two questions received, until 1978 and in respect of to the Court: each application submitted by it, a " 1 . Can a person who habitually refund from the Inspector of Taxes of provides services for traders be the input taxes paid in respect of its regarded as a taxable person within activities in Amsterdam, but in all cases the meaning of Article 4 of the "subject to amendment upon subsequent Second Directive [of the Council of investigation". the European Economic Community After carrying out a check at the of 11 April 1967 on the harmon­ beginning of 1978, the Inspector took ization of legislation of Member the view that the respondent in the main States concerning turnover taxes] in proceedings was not an undertaking and the event of those services being provided free of charge? made an adjusted assessment requiring repayment of the amounts which the 2. If Question 1 is answered in the Netherlands Government had paid affirmative : between 1973 and 1978. In response to Does the first sentence of Article an objection, the Inspector reduced the 11 (2) of the Second Directive assessment "to the amount in respect of prevent the deduction of turnover the year 1978", namely HFL 9 987.06. tax on goods and services used for That decision was the subject of an the purpose of providing services as appeal to the Gerechtshof, [Regional aforesaid?" Court of Appeal], Amsterdam which by judgment of 6 May 1980 held that since The order making the reference was the respondent was regularly and received at the Court Registry on 14 independently engaged in "business in April 1981. society by satisfying the needs of the community for such guidance and In accordance with Article 20 of the assistance", it constituted an undertaking Protocol on the Statute of the Court of and might consequently "deduct the Justice of the EEC, written observations turnover tax charged to it by other were submitted by the Netherlands undertakings". Government, represented by Mr Plug, the Secretary General and acting That decision was contested by the Minister for Foreign Affairs, acting as Staatssecretaris van Financiën who, in his Agent, by the respondent in the main submissions before the Hoge Raad, proceedings, represented by G. H. stated that the Gerechtshof "was not Warning, and by the Commission of the entitled to decide that the Trade Council European Communities, represented by must be treated as an undertaking within D. Gilmour, assisted by Th. Van Rijn, the meaning of the Wet op de members of its Legal Department, acting Omzetbelasting [Law on turnover tax]" as Agents.

On hearing the report of the Judge- regarding Article 12 (2), which impose Rapporteur and the views of the on the taxable person the obligation to Advocate General, the Court decided to issue an invoice which must show open the oral procedure without any separately the price exclusive of tax and preparatory inquiry. the corresponding tax. According to the Netherlands Government "it would be somewhat absurd to impose those conditions if a supplier or provider of II — Observations submitted services who delivers goods or provides

Accordingly, meaning of Article 4 of the Second it considers the wording of Article 2 of Directive if such provision of services is the First Directive and that of Article 2 carried out free of charge. In that of the Second Directive to be relevant. It connection, it is of the opinion that the follows from those provisions that "in answer to the first question must be the case of operations carried out free of negative." charge, which are therefore not taxable, the Community system of value added The respondent in the main proceedings, tax no longer operates and the stage of after pointing out that the principle of consumption has in fact been reached". neutrality must be observed with regard to value added tax, states the view that, As regards the first question, the as far as that tax is concerned, Netherlands Government maintains that "maximum neutrality is achieved where the respondent in the main proceedings the group of those who are defined as cannot be regarded as a taxable person taxable persons is as wide as possible". on the ground that, in its view, there can For that reason, Article 4 of the Second be no economic activity within the Directive makes it clear that "the pursuit meaning of Annex A, paragraph 2, of profit is not a precondition for the regarding Article 4 of the Second status of taxable person". Directive, where services are provided

STAATSSECRETARIS VAN FINANCIËN v HONG KONG TRADE

If setting up the Trade Development any of these three conditions is not Council seems to indicate that "that fulfilled, the provision of services is not organization may, with regard both to its taxable, but still constitutes a provision structure and to its activities, be of services — thus, the provision of considered as falling more within the services effected outside national public sector than within the private territory' by a taxable person constitutes a sector", a question which the Nether provision of services (see the second lands courts should examine on the basis subparagraph of Article 11 (2) of the both of Netherlands law and of Hong Second Directive). Kong law. Therefore , the provision of services free of charge may in principle also be It then puts Article 4 of the Second regarded as a provision of services within Directive back into its immediate the meaning of the Second Directive. context, before raising the question whether the Hong Kong Trade According to the respondent in the main Development Council is a taxable person proceedings, the question whether the within the meaning of that article ¡: provision of services free of charge may takes the view that to interpret m a: be considered as a provision of services provision regard should be had to Article within the meaning of the Second 4 of the Sixth Directive, one of the a;,"v- Directive must be examined in the light of which was to define the concept of of Article 6 thereof which regards as the taxable person "provision of services" " any transaction which does not constitute a supply of According to the Commission, "a; '••'•• goods within the meaning of Article 5 ". sight", the respondent in the :r,.r; That definition is so wide that it includes proceedings is a taxable person. nen.ti .

JUDGMENT OF 1. 4. 1982 — CASE 89/81

hardly any doubt that promotional Netherlands tax administration may rely activities" of the type of those carried on upon the Second Directive where the by the respondent in the main latter provides, as in the case in point, proceedings "are of an economic nature" for a right to deduct which is more and that it is of little importance that restrictive than that provided for by the those activities are not paid for by the Netherlands Law or 1968 on turnover direct beneficiaries of them. tax".

"Any person who habitually renders p rovision that the Netherlands legislature as not complied with the obligation laid services to undertakings without charge down in the first sentence of Article to the beneficiary may be regarded as a 11 (2) of the Second Directive. taxable person within the meaning of Article 4 of the Second Directive". For this type of dispute, a specific procedure is laid down in Articles 169 and 170 of the Treaty Rome; it would B — Second question therefore "not be correct" to seek to achieve the same object by the indirect Having replied to the first question in means of Article 177. the negative, the Netherlands Government considers "that there is no Moreover, the interests of the reason to answer the second question". Netherlands Government are not harmed since the government itself is the author The respondent in the main proceedings is of its own law. And if it did regard its of the opinion in the first place that this interests as being harmed, all it would question should be examined not only in need to do would be to change the law. relation to the wording of Article 11 of the Second Directive — in which case Finally, the case-law of the Court shows the answer "is so simple that it must be that it has relied on equitable grounds to admitted that it is not the one which the support the direct effect of directives. In Hoge Raad seeks" — but also "in particular it is clear from the judgment conjunction" with the Netherlands Law of 6 October 1970 (Case 9/70 Franz on turnover tax. Grad [1970] ECR 825), in particular paragraph 5 of the decision, that the In fact, the question for which an answer Court has expressed " the . idea of is actually sought is "whether the protection of the individual". It is

The Commission considers that, in so far "The first paragraph of Article 11 (2) of as it may be necessary to reply to the the Second Directive prevents the second question, the appropriate view is deduction of turnover tax levied on that "Article 11 (2), first sentence, goods and services used for the provision manifestly prevents deduction of the of services free of charge". turnover tax on goods and services used for the provision of services by the Hong Kong Trade Development Council", III — Oral procedure since by virtue of Article 2 only services provided against payment are subject to At the sitting on 12 January 1982 oral value added tax (see paragraph 12 of the argument was presented and replies to decision of 5 February 1981, judgment questions put by the Court were given by cited above) and that there may the following. Mr Bijl, acting as expert, therefore be no deduction of value added for the Netherlands Government; and tax levied on the value of goods and Thomas Van Rijn, acting as Agent, for services used for the provision of goods the Commission of the European and services free of charge, on the Communities. ground that the transaction is not The Advocate General delivered his taxable. opinion at the sitting on 2 March 1982.

Decision

1 By a judgment of 8 April 1981 , which was received at the Court on 14 April 1981, the Hoge Raad [ Supreme Court ] of the Netherlands submitted to the Court for a preliminary ruling under Article 177 of the EEC Treaty two questions on the interpretation of Articles 4 and 11 of the Second Council Directive, 67 / 228 / EEC , of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value added tax (Official Journal , English Special Edition 1967, p. 16).

2. If question 1 is answered in the affirmative: Does the first sentence of Article 11 (2) of the Second Directive prevent the deduction of turnover tax on goods and services used for the purpose of providing services as aforesaid?"

STAATSSECRETARIS VAN FINANCIËN v HONG KONG TRADE

4 Anicie 4, which is referred to in the first question, provides:

" 'Taxable person' means any person who independently and habitually engages in transactions pertaining to the activities of producers, traders or persons providing services, whether or not for gain."

5 The national court places emphasis on the fact that, in the case before it, the Trade Council's services are in all cases provided free of charge, because in Article 4, which defines a taxable person, the "transactions" pertaining to the activities of producers, traders or persons providing services are not described, whereas Anicie 2 of the same directive states that only services provided by a taxable person against payment are to be subject to value added tax. Consideration of those two articles, a literal analysis of which is not prima facie an appropriate way to resolve the issue as to whether or not an organization which habitually provides services free of charge may be regarded as a taxable person, indicates that it would be advisable to identify the relevant features of the common system of value added tax in the light of its purpose.

6 That purpose, which the Second Directive mentions in its preamble whilst at the same time referring to the First Directive, 67/227, of the same date (Official Journal, English Special Edition 1967, p. 14), is evident from the preamble to the latter directive, which refers to the need to achieve such harmonization of legislation concerning turnover taxes as will eliminate factors which may diston conditions of competition and therefore to secure neutrality in competition, in the sense that within each country similar goods should bear the same tax burden, whatever the length of the production and distribution chain.

10 Where a person's activity consists exclusively in providing services for no direct consideration, there is no basis of assessment and the free services in question are therefore not subject to value added tax. In such circumstances the person providing services must be assimilated to a final consumer because he is at the final stage of the production and distribution chain. In fact, the link between him and the recipient of the goods or service does not fall within any category of contract likely to be the subject of tax harmonization giving rise to neutrality in competition; in those circumstances, services provided free of charge are different in character from taxable transactions which, within the framework of the value added tax system, presuppose the stipulation of a price or consideration.

11 That difference is apparent from the context of the provision of which an interpretation is requested. The requirement that taxable transactions must be effected against payment is confirmed by the fact that the economic activities of taxable persons, within the meaning of Annex A, paragraph 2, first

STAATSSECRETARIS VAN FINANCIËN v HONG KONG TRADE

subparagraph, are necessarily activities which are carried on with the object of obtaining payment of consideration or which are likely to be rewarded by the payment of consideration, because if they are free of charge in all cases they do not fall within the system of value added tax, since they cannot, according to Article 8, constitute a basis of assessment. The need for payment is also clear from Article 12 of the same directive which imposes on every taxable person the obligation to issue an invoice in respect of goods supplied and services provided by him to another taxable person, to keep accounts to make possible inspection by the tax authorities and to lodge a declaration each month containing all the information required for calcu­ lation of the tax.

On those grounds,

THE COURT ,

in reply to the questions submitted to it by the Hoge Raad by order of 8 April 1981, hereby rules:

A person who habitually provides services for traders, in all cases free of charge, cannot be regarded as a taxable person within the meaning of Article 4 of the Second Directive.

Mertens de Wilmars Bosco Touffait

Due Pescatore Mackenzie Stuart O'Keeffe