C-50/88

2. the importation of goods.'

3. Defining the taxable amount, Article 6 of the Directive provides inter Article 11(A)(1)(c) of the Directive alia: provides: 'The taxable amount shall be.

* Original language English

OPINION OF MR JACOBS — CASE 50/88

6. It may be noticed that the provisions of Paragraph 1(1)(2)(b) of the German Law are in substance similar to those of 8. In order to resolve the dispute before it, Article 6(2)(a) of the Directive, with one the Finanzgericht (Finance Court) München exception: the Directive makes the charge referred a series of questions to the Court to tax subject to the condition that the VAT for a preliminary ruling by a decision of on the goods in question should be 9 December 1987, lodged at the Court deductible whereas the German Law Registry on 16 February 1988. The contains no such condition. questions are in the following terms:

KÜHNE v FINANZAMT MUNCHEN III

'I — How should Article 6(2) of the Sixth (3) If Question (2) is answered in the Directive be interpreted? negative:

(1) Does the conditional clause "where the value-added tax on such goods is (a) Does the second sentence of wholly or partly deductible" Article 6(2) allow Member States to make derogations only in the sense of refraining wholly or partly from taxing the use of goods within the meaning of Article 6(2)(a), or (a) exclude the taxation of private use only in cases where input tax is not deductible on account of use of the goods for exempt transactions in the business (Paragraph 15(2) of the (b) are they also authorized to tax such Law on turnover tax) or on account use irrespective of whether the VAT of use of the goods for purposes on the goods used is wholly or other than those of the taxable partly deductible? transactions of the taxable person (Article 17(2) of the Sixth Directive), or

matters in the Federal Republic of 10. The Portuguese Government, on the Germany? other hand, argues that the basic rule which the Sixth Directive establishes is that there cannot be any deduction where there is no taxable transaction, as in the case where goods are bought from a non-taxable person. The argument is in substance that III — If Question I(1)(a), (2) or (3)(b) the notion of deductibility does not arise in is answered in the affirmative or such a case, and that that interpretation Question 11(1) or (2) is answered in the properly leads to 'disguised taxation' in negative : certain cases, notwithstanding that it results in double taxation contrary to the pure phil­ osophy of the system of VAT. That is the system set up by the Sixth Directive, particularly Article 17(2), and the Directive was not concerned with disguised taxation. The fact that a separate directive was How should Article 11(A)(1)(c) of the Sixth considered necessary to deal with the case Directive be interpreted? Does the cost of second-hand goods demonstrates that consist of all the expenses incurred by the this was the basic rule. The German taxable person for the service or only of (or Government, which did not present any where appropriate a proportion of) the sums written observations to the Court but was disbursed by him for supplies of goods and represented at the hearing, expressly adopts services to the extent that the VAT on these the reasoning of the Portuguese is deductible?' Government and argues that, although taxation of the kind at issue does give rise to double taxation contrary to the VAT system, that double taxation must for the present be accepted because the VAT system in the Community is not yet fully 9. Written observations have been submitted harmonized. by the Commission in favour of the taxpayer and by the Portuguese Government in favour of the tax authorities. The thrust of the Commission's arguments is that the charging of tax on a supply which already contains a residual element of undeducted tax from an earlier marketing stage involves a double charge to tax which is contrary to the system of VAT. Such a double charge can occur where, as here, goods have been taken out of the 11. It should first be made clear that, commercial circuit when bought by a although it arises in connection with a car, non-taxable person and are subsequently the charge at issue in this case is not on a reintroduced into the commercial circuit supply of goods but on a supply of services, when bought second-hand by a taxable in the form of the use of a business car for person who has to pay output tax but is non-business purposes. Use of the car is a unable to reclaim input tax on the supply. convenient way of referring to the nature of The Commission submits that a national law the supply: Article 6(2)(a) expressly refers which gives rise to such a double charge is to 'the use of goods'. Secondly, there is in contrary to the Sixth Directive. reality no transaction for the charge to

relate to: no profit is made by the business, That is the issue raised by the first question no money changes hands, no invoice is referred for a preliminary ruling in this case. drawn up. Both under the Directive and under the German Law there is merely a deemed supply of services. Thus the Directive provides, by Article 6(2), that the matters defined 'shall be treated as supplies of services for consideration'. The purpose of the deeming provision in the Directive is to prevent a taxable person who has deducted input tax on goods from in effect making them available to a final consumer tax-free. According to the statement of reasons which accompanied the proposal for 13. In my view, 'the value-added tax' the Sixth Directive (Bulletin of the European referred to in the phrase 'where the Communities, Supplement 11/73, p. 11) value-added tax on such goods is wholly or under that provision 'tax is only charged if partly deductible' means all the VAT which the input tax on the goods so applied is has accumulated over the successive stages deductible; this provision is to avoid such of marketing and is incorporated in the applications escaping tax altogether'. price of the goods. The word 'deductible' in the same phrase has to be read subject to the provisions of the Sixth Directive governing deductions, contained in Title XI (Articles 17 to 20); so Article 6(2)(a) must be taken to mean: 'where the value-added tax on such goods is deductible in accordance with the provisions of Articles 17 and 18 of this Directive'. As the Court held in Case 268/83 Rompelman v Minister van Financiën [1985] ECR 655 at paragraph 19, 'the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of value-added tax therefore ensures that all economic ac­ 12. Article6(2)(a) of the Directive applies tivities, whatever their purpose or results, only 'where the value-added tax on such provided that they are themselves subject to goods is wholly or partly deductible'. Where VAT, are taxed in a wholly neutral way'. a service, such as the use of a car, is The clause 'where the value-added tax on supplied by a taxable person who has such goods is wholly or partly deductible' in purchased the car from another taxable Article 6(2)(a), must be given due weight person in the normal way, VAT is paid on and must be interpreted in the light of that the purchase and can be deducted by the objective, and I would therefore reject the purchaser, and thus the condition in German Government's assertion that Article 6(2)(a) is fulfilled. The use of the taxation does not depend on the existence car will then be subject to tax. However, the or absence of deduction. The Portuguese issue arises whether that condition is Government's argument, if I understand it fulfilled where input tax cannot be deducted correctly, is that when goods are sold on by because the goods in question were bought a non-taxable person the situation is wholly second-hand from a non-taxable person. outside the ambit of Article 17 because bv

16. Although not stated as a fact in the order for reference, it is implicit therein and in any event seems most likely that the various goods and services supplied in connection with the running of the car were obtained, unlike the car itself, from taxable persons who were able to supply invoices which would allow input tax to be 14. It follows in my view that the deducti­ deducted. In that case, the condition that bility condition in Article 6(2)(a) is not the VAT should be 'wholly or partly fulfilled, with the result that in principle deductible' would be fulfilled in respect of private use of a car such as that in the those transactions, with the result that, even present case does not fall within the terms though the use of the car itself was not of Article 6(2) (a) deeming it to be a chargeable to tax, the goods and services chargeable supply of services. That result supplied in connection with running it is consistent with the purpose of would fall within the charge to tax under Article 6(2)(a) which is to prevent Article 6(2)(a), unless they fell within the non-taxation, because there is no danger of charge to tax under Article 5(6) which

KUHNE v FINANZAMT MUNCHEN III

20. In my view, because it is a derogation, the second sentence of Article 6(2) falls to be construed narrowly, and the harmonizing purpose of the Directive requires powers of derogation granted to Member States to be 18. If the result of the foregoing approach read restrictively (see Case 249/84 Profant is that the use of the car itself is not taxable [1985] ECR 3237 at pp. 3257 and 3258, under the Directive and that tax is char­ especially paragraph 25). Therefore the geable only on the supplies of goods and narrower of the two possible constructions services connected with the running of the suggested by the national court should be car in respect of which the taxable person adopted, to the effect that Member States was entitled to deduct input tax, that would may derogate only by refraining from taxing resolve the question of the taxation of the use of goods under Article 6(2)(a). private use in a way which would lead neither to the cumulative imposition of VAT nor to a final consumption which was untaxed. That result would therefore be fully in conformity with the system.

21. Even if the second sentence of 19. The question then arises as to the effect Article 6(2) were read as authorizing of the second sentence of Article 6(2), Member States to impose tax under whereby 'Member States may derogate from Article 6(2)(a) irrespective of whether the the provisions of this paragraph provided VAT on the goods concerned was wholly or that such derogation does not lead to partly deductible, that authorization would distortion of competition' (the subject remain subject to the proviso that such matter of Question 1(3)). The referring imposition must not 'lead to distortion of court has expressed uncertainty as to competition'. In that connection the Court

has held (in Case 16/84 Commission second-hand goods, Article 32 of the v Netherlands [1985] ECR 2355 at p. 2371, Directive provides: paragraph 18, and in Case 17/84 Commission v Ireland [1985] ECR 2375 at p. 2380, paragraph 14): 'Second-hand goods which are reintroduced into commercial circulation are ... taxed once again, whereas second-hand goods which 'The Council, acting unanimously on a pass directly from one consumer to another proposal from the Commission, shall adopt remain burdened solely by the tax imposed before 31 December 1977 a Community on the occasion of the first sale to a taxation system to be applied to used goods, non-taxable consumer. Especially where the works of art, antiques and collectors' items. rate of VAT is high, that difference in treatment distorts competition between direct sales from one consumer to another and transactions passing through ordinary commercial channels, and thus places at a disadvantage branches of trade in which a large number of transactions involve Until this Community system becomes second-hand goods, such as the motor-car applicable, Member States applying a special trade in particular'. On that conception of system to these items at the time this distortion of competition, it seems that a Directive comes into force may retain that Member State would distort competition if system.' it derogated from the deductibility condition in Article 6(2) (a) by imposing a tax charge in respect of second-hand goods on which the VAT was not deductible. Accordingly I consider that the proviso in the second sentence of Article 6(2) would prevent 23. Nevertheless the Council has failed to Member States from imposing VAT on the adopt a Directive regarding second-hand use of goods within the meaning of goods, although the Commission put Article 6(2) (a) where those goods were forward a proposal in January 1978 second-hand goods bought from a (Official Journal 1978, C 26, p. 2) which non-taxable person. was amended in 1979 (Official Journal 1979, C 136, p. 8) and apparently withdrawn in November 1987. It appears that the Commission has recently prepared a fresh proposal for a directive on the subject (Official Journal 1989, C 76, p. 10). Thus at the present time the Community rules on 22. In the context of second-hand goods, it the VAT treatment of second-hand goods is appropriate also to consider the effect of remain incomplete. Article 32, although the national court has not enquired about it. It appears that the Council was unable, at the time that it adopted the Sixth Directive, to agree on a tax regime for second-hand goods, the Commission's proposals on that regime being set out and explained in the Bulletin 24. Three points arise as to the possible of the European Communities, Supplement effect of Article 32. First, it may be argued 11/73, pp. 23, 24 and 50. As to that second-hand goods are a reserved area,

excluded from the ambit of the Sixth not, however, find it necessary to express a Directive altogether. The express wording concluded view on that argument. of Article 32 does not, however, contain any such exclusion. It merely enjoins the Community legislator to adopt a Community system for those goods. To infer that this excludes second-hand goods from the Directive until such time as that system is adopted would risk leaving the Directive in part a dead letter, particularly where, as here, the Community legislator 26. Thirdly, as has been noted, the Council remains inactive long after the deadline set. has not yet fulfilled the requirement in the The better view, and the view more in first paragraph of Article 32 to adopt a accordance with the effectiveness of the Community taxation system for Directive, is that, subject only to the second second-hand goods. Therefore, under the paragraph of Article 32, to which I turn second paragraph of the Article, it continues below, the Directive applies to second-hand to be the case that 'Member States applying goods, in so far as its provisions are capable a special system to these items at the time of doing so, until the Community legislator this Directive comes into force may retain adopts a Community taxation system for that system'; and it may be asked whether second-hand goods. On that view, the first rules such as the German rules in question paragraph of Article 32 is wholly irrelevant are authorized as a 'special system' under to any case concerning second-hand goods. that provision. Nothing in the terms of Paragraph 1(1)(2)(b) or Paragraph 3(9) of the German Law on turnover tax appears to refer specifically to second-hand goods. They are expressed in entirely general terms. It seems impossible, even by the most strained interpretation, to treat any provision of national law expressed in entirely general terms without making a specific reference to second-hand goods as laying down a 'special system' applying to second-hand goods. Therefore, in my view, such provisions are not authorized as a 'special system' under Article 32. On that view, the further question does not arise as to whether the German rules were applied 25. Secondly, it may be thought that at the time the Sixth Directive 'came into Article 32 might apply to cases involving force'. the supply of second-hand goods but is inapplicable to any case involving the supply of services, and for that reason is inap­ plicable to the present case. Both the Commission and the German Government take that view. It is consistent with the fact that the 1978 proposal and its 1979 amendment as well as the Commission's latest proposal for a directive on the 27. Each of the three arguments considered taxation of second-hand goods concern thus leads to the conclusion that Article 32 only supplies of goods and not services. I do has no effect on the outcome of this case.

28. In the light of the answers I have does not have direct effect, and the proposed to Question I, it becomes Commission that it does, both of them necessary to address Question II. relying on the Court's case-law on the Question II(1) on the compatibility of subject. German legislation with Community law cannot be answered in the terms in which it is put by way of a preliminary ruling. Such questions may form the subject-matter of infringement proceedings under Article 169 of the EEC Treaty, but under Article 177 the Court is confined to ruling on the inter­ pretation or validity of the Community measure in question. 31. The criteria for the direct effect of such a provision are that it be sufficiently precise and that it be unconditional: see in particular Case 8/81 Becker v Finanzamt Münster-Innenstadt [1982] ECR 53 at p. 70 et seq. It seems to me that the deductibility condition in Article 6(2) (a) is clear and simple enough to satisfy the first criterion: the national court will have no difficulty in applying that condition. As to the second criterion, two matters fall to be considered. 29. If the national court applying the First, it might be asked whether Article 32 preliminary ruling finds that the national suspends the application of Article 6(2)(a) provision in question is irreconcilable with to second-hand goods. It contains no the Community provision as interpreted in general words to that effect but only a the preliminary ruling, it must decline to specific derogation, and for the reasons apply the national provision in favour of the already given I consider that derogation Community provision if the latter has direct inapplicable in the present case. In my view, effect: Case 106/77 Amministrazione delle therefore, Article 32 does not render finanze dello Stato v Simmenthai [1978] Article 6(2)(a) 'conditional' so as to prevent ECR 629. In that connection it is necessary it having direct effect. Secondly, the second to consider whether Article 6(2)(a) of the sentence of Article 6(2) enables Member Directive may have direct effect, which is States, at their discretion, to derogate from the object of Question 11(2). the provisions of the first sentence of Article 6(2), and it might be asked whether that renders Article 6(2)(a) 'conditional' so as to exclude its direct effect. For the reasons already given, I consider that the derogation in the second sentence of Article 6(2) does not apply to the deducti­ bility condition in Article 6(2)(a) but only allows the Member States to refrain from taxing the use of goods under Article 6(2)(a). On that view, the second sentence of Article 6(2) does not require any condition to be fulfilled before the 30. The Portuguese Government has made deductibility requirement comes into play. no submissions on this point. The German Accordingly, I take the view that Government considers that the provision

(4) Article 6(2)(a) of the Sixth Directive may be relied on by a taxable person before the courts of a Member State.'