C-111/92

LANGE ν FINANZAMT FÜRSTENFELDBRUCK

OPINION OF ADVOCATE GENERAL JACOBS delivered on 1 April 1993 *

My Lords, May tax exemptions be denied solely on the basis of the existence of an objective breach of national provisions concerning authoriza- tion or must it be shown that the exporter was himself aware of the breach in respect of each supply?' 1. In the present case the Finanzgericht München seeks a ruling on the interpretation of the Sixth Directive on value added tax (Council Directive 77/388/EEC; Official Journal 1977 L 145, p. 1). The Finanzgericht has referred two questions on the liability to value added tax (VAT) of illegal exports 2. It appears that during the years 1985 and which arc made in contravention of an 1986 the plaintiff was engaged in the export embargo imposed in every Member State. of computer systems from Germany. The The questions referred are the following: plaintiff applied for export permits under Paragraph 17(1) of the Aussenwirtschaftsver- ordnung (Foreign Trade Regulation, hereaf- ter 'AWV'), identifying the final destination of the exports as either Pakistan or Israel. On the basis of those applications the Ger- '1. Is Article 15(1) of the [Sixth Directive] man Federal Trade Office issued the required to be interpreted as meaning that the tax permits. The goods were dispatched to either exemption for export turnover provided Belgrade or Vienna, but were then diverted for therein is to be refused if, in breach to Bulgaria, Hungary, the USSR and Czech- of national provisions making exports oslovakia rather than being sent on to their subject to authorization, goods are sup- declared destinations. The order for refer- plied to countries for which no authori- ence docs not specify whether those diver- zation would be available in any Mem- sions were made with the knowledge of the ber State of the European Communities plaintiff. as a result of the existence of national embargoes?

4. The plaintiff claimed that the transactions in question were exempt from VAT, pursuant The Community provisions to Paragraph 4(1) of the Umsatzsteuergesetz 1980 (Turnover Tax Law, hereafter 'UStG'), which implements Article 15(1) and (2) of the Sixth Directive, and claimed the right to make deductions of 'input' tax pursuant to Paragraph 15, subparagraphs 1 and 3(la), of 6. By Article 2 of the Sixth Directive: the UStG, which implement Article 17(2) and Article 17(3)(b) of the Sixth Directive. The defendant Finanzamt took the view that, since the exports in question were unlawful, the plaintiff could not benefit from that exemption, and concluded that the transac- tions were liable to VAT. The plaintiff 'The following shall be subject to value appealed against that decision to the Finan- added tax: zgericht.

5. In what follows, I shall first set out the (1) the supply of goods or services effected relevant provisions of the Sixth Directive, for consideration within the territory of the and then turn to consider the questions country by a taxable person acting as such; referred. It should be noted from the outset, however, that the case raises three distinct

1 — On C O C O M restrictions and Community law, see Inge Govaere and Piet Eeckhout 'On dual use goods and dualist case law: the Aimé Richardt judgment on export controls' in Common Market Law Review 29 (1992), pp. 941-965. (2) the importation of goods.'

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LANGE ν FINANZAMT FURSTENFELDBRUCK

Article 3 defines the expression 'territory of (b) value added tax due or paid in respect of the country'. Article 15 provides that: imported goods;

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REPORT OF THE JUDGE-RAPPORTEUR — CASE C-111/92

illegal importation of drugs into the Com­ In Case 50/80 Horváth ν Hauptzollamt munity which are not confined 'within econ­ Hamburg-Jonas [1981] ECR 385 the Court omic channels strictly controlled by the held that customs duties could not be competent authorities for use for medical charged under the Common Customs Tariff and scientific purposes' (see paragraph 22 of in respect of the smuggling of a harmful sub­ the judgment). Similarly, in Case 269/86 Mol stance such as heroin intended for an unlaw­ ν Inspecteur der Invoerrechten en Accijnzen ful use. The Court observed, at paragraphs [1988] ECR 3627 and Case 289/86 Happy 9 to 11 of the judgment: Family ν Inspecteur der Omzetbelasting [1988] ECR 3655, the Court held that the illegal supply of drugs on the domestic mar­ ket of a Member State, other than for medi­ cal and scientific purposes, did not give rise to any liability to VAT. Most recently, in 'It is important to stress at the outset that the Case C-343/89 Witzemann [1990] ECR ... question referred ... is not concerned sim­ I-4477 the Court held that its reasoning in ply with the case of the illegal importation of the Einberger case applied a fortiori to any product but concerns the smuggling of a imports of counterfeit currency, since the harmful substance intended for an unlawful making, possession, importation and market­ use, which was destroyed as soon as it was ing of such currency are absolutely prohib­ discovered. ited in all the Member States: see paragraphs 14 and 20 of the judgment.

It is clear that the C o u r t ' s reasoning in rela­ because it falls outside the scope of the tion to the scope of the C o m m o n C u s t o m s Directive, on the other. As we have seen, Tariff applies equally to the scope of the Article 17(3)(b) provides that certain catego­ Sixth Directive: see Einberger, cited above, at ries of transaction which are exempt from paragraphs 17 to 20 of the judgment, and VAT give rise n o n e the less to a right to Witzemann, also cited above, at paragraph deduct ' i n p u t ' tax, that is to say a right to 18. T h u s , in the case of both customs duties deduct the VAT payable in respect of the and VAT, illegality may not in itself be suffi­ goods and services used for the purposes of cient to remove a transaction from the scope the transactions. In particular, the exemp­ of the applicable C o m m u n i t y legislation. As tions provided for in Article 15(1) and (2) of far as imports and domestic trade are con­ the Directive give rise to the right to deduct. cerned, it appears that a transaction will n o t T h u s , an illegal i m p o r t or an illegal domestic fall outside the scope of the Sixth Directive- supply which falls outside the scope of the unless it belongs to a category which is sys­ Directive enjoys a freedom from VAT which tematically prohibited in all the M e m b e r is not normally accorded to lawful imports States for reasons related to the special char­ or supplies. In contrast, an illegal export acteristics of the p r o d u c t s : see Mol, cited which fell outside the scope of the Directive above in paragraph 7, at paragraph 18 of the w o u l d n o t enjoy any advantage as c o m p a r e d judgment. with a lawful export: it would on the con­ trary suffer a disadvantage, since unlike the latter it w o u l d give rise to no right on the part of the exporter t o make a corresponding deduction of ' i n p u t ' tax (although the exports themselves would n o t be taxed).

rise to a right to deduct the corresponding certain specified destinations. In my view, 'input' tax. Such a right would not therefore there is no reason to extend the exception arise in the case of the illegal export of prod- established in the previous cases to cover a ucts such as counterfeit currency or prohib- case in which exports of a product are pro- ited drugs which, by the very nature of the hibited in respect of particular destinations, products concerned, cannot be lawfully even where the prohibitions in question are traded under the laws of any Member State. imposed by all the Member States acting in concert. Thus, where goods can as a general rule be legitimately traded both within and without the Community, the export of the goods to a prohibited destination is not in itself a transaction which must be considered 11. In my view, however, there is no com- alien to the scheme of the Directive. pelling reason to extend the range of transac- tions which can fall outside the scope of the Sixth Directive, even where the transactions in question involve exports rather than imports or domestic trade. It seems to me that in either case the fundamental principle is that of fiscal neutrality, according to which legal and illegal trade should as far as possi- ble be treated equally for VAT purposes. That principle is subject to only limited exceptions arising in cases where, by virtue of the nature of the products concerned, there is no competition between legal and 13. As I have already mentioned, the result illegal sectors: see the Court's judgment in of admitting the transactions in question to the Mol case, cited above in paragraph 7, at be within the scope of the Sixth Directive is paragraphs 17 and 18 of the judgment. that the exporter will be able to deduct a cor- responding amount of 'input' tax from his total liability to VAT. At first sight it might appear anomalous that a trader who has exported in contravention of an export embargo should be able to take advantage of such a right to deduct. However, like the 12. As the Commission suggests, the prohi- exemption from VAT enjoyed by exports, bition at issue in the present case can be dis- that right can be explained by the will of the tinguished from those at issue in previous Community legislature not to impose on cases involving illegal trade, in that those consumers in non-member States any burden cases concerned products commerce in of VAT, which is a tax intended to be borne which was intrinsically illegal, whereas the exclusively by consumers within the Com- present case concerns products, namely com- munity. Where 'input' tax cannot be puter hardware and software, which are as a deducted in respect of a particular transac- general rule the subject of legitimate transac- tion, it will normally be passed on to the tions. Accordingly, there is not an absolute consumer as an element of the purchase ban on the export of such goods to third price. The right to deduct 'input' tax should countries, although as in the present case not be seen as a benefit to the exporter, but there may be a prohibition on their export to simply as a consequence of the principle that

14. I conclude therefore that the transactions at issue in the present case fall within the scope of the Sixth Directive. It must there­ fore be considered whether the exemption provided by Article 15(1) of the Directive 16. It seems to me, therefore, that to refuse extends also to exports which are made in to allow such transactions an exemption contravention of a Community-wide would be to use the VAT system for an embargo. extraneous purpose, namely that of imposing penalties for the breach of national export restrictions. It is wrong as a matter of prin­ ciple to use fiscal law which has been harmo­ nized by the Community for the purpose of The VAT exemption on exports imposing such penalties, which are primarily a matter for the criminal law of the Member State concerned. In its case-law the Court has repeatedly emphasized that its rulings on the application of tax provisions to illegal transactions do not in any way affect the 15. As I have already mentioned, the defen­ power of Member States to prosecute or to dant Finanzamt took the view that VAT penalize breaches of their national laws: see should be charged on the transactions in for example Witzemann, cited above in para­ question, notwithstanding the exemption for graph 7, at paragraph 22 of the judgment. To exports provided by Article 15(1) of the use fiscal law for the purpose of imposing Directive. The Commission, on the other penalties not only subverts the proper appli­ hand, submits that the exemption must be cation of fiscal law; it might also be thought taken to apply to such transactions. It seems to distort the application of criminal law, to me that that submission is correct. Once it since it may result in the imposition of pen­ is accepted that the transactions cannot fall alties additional to those imposed by the

criminal courts. Moreover it offends against Knowledge of the breach the principle that penalties may not be imposed in the absence of a clear and unam- biguous legal basis: see Case 117/83 Könecke ν BALM [1984] ECR 3291, at paragraph 11 of the judgment. 19. In view of the conclusion I have reached, it is not necessary to consider whether it must be established that the exporter was aware of the breach in question. For, even if the exporter's knowledge were sufficient for the breach of the export prohibition to amount to a criminal offence under national law, that would not in my opinion be suffi­ 17. Even if the imposition of tax is not cient to deny the transaction an exemption regarded as a penalty, a corresponding prin­ under Article 15(1) of the Directive. ciple of fiscal law requires that tax should not be imposed in the absence of a specific legislative basis. As we have seen, there is no basis in the Sixth Directive for taxing goods exported outside Community territory; on the contrary, the Directive clearly states that 20. If however the first question referred such goods are to be exempt from taxation. were to be answered in the affirmative, it would be necessary to consider whether the exemption could still be refused where the breach of the export restrictions had been committed without the knowledge of the exporter. Such a situation might for instance arise where the goods were dispatched to a destination which was permitted under the 18. Supplies of goods falling within Arti­ applicable national law, but diverted by a cle 15(1) or (2) of the Directive are therefore third person in the course of shipment. Any exempt from VAT,- even where the supply is offence under national law would then have made in breach of national export restric­ been committed by the latter, and not by the tions. It makes no difference, in my view, exporter responsible for any payment of that the illegality in the present case con­ VAT. sisted in the breach of export prohibitions imposed by all the Member States acting in concert, so that the exports would have been unlawful in any Member State. Even if the prohibition were based on Community law, that would not in itself be a sufficient reason 21. In my opinion, it is difficult to see how for refusing exemption to exports made in an exemption from VAT could be refused in breach of the prohibition, in the absence of such a case. As the Commission points out, any Community provision for a refusal in the refusal of an exemption would have the such circumstances. It follows that the first effect of imposing a penalty for a breach of question referred by the Finanzgericht is to the prohibition on export. I have already be answered in the negative. suggested that such a use of the VAT system

is not permissible: see paragraphs 15 and countries. It is clear however that Arti- 16 above. Even if the exemption provisions cle 36 may only be invoked in respect of a of the Sixth Directive could be used for such restriction either upon trade within the a purpose, however, it seems to me that any Community or upon Community transit. such penalty would have to conform to the On the other hand, Article 11 of Regulation principle of proportionality laid down by No 2603/69 permits Member States to sub- Community law. ject exports to third countries to quantitative restrictions on grounds set out in the same terms as those mentioned in Article 36 of the Treaty, in particular on grounds of public policy or public security. 22. In the case of a quantitative restriction on intra-Community trade or on Commu- nity transit imposed by a Member State pur- suant to Article 36 of the Treaty, it is clear that both the restriction and any penalties imposed for its breach must be proportion- ate to the aim pursued: see Case C-367/89 Aimé Richardt [1991] ECR I-4621, 23. In the light of the Court's judgment in at paragraphs 22 to 24 of the judgment. It is Case C-62/88 Greece v Council [1990] ECR true that the Court's judgment in the Aimé 1-1527, there is I think no doubt that the Richardt case concerned the rules governing scope of the common commercial policy of Community transit, and not those governing the Community includes all measures which exports from the Community to third coun- regulate trade between the Community and tries. 2 Such exports are governed by the non-member States (with the exception of common commercial policy of the Commu- matters excluded by virtue of Articles nity, and in particular by Council Regulation 223 and 224 of the Treaty), even where such (EEC) No 2603/69 establishing common measures pursue an aim which is not in itself rules for exports (Official Journal, English commercial, such as the protection of health Special Edition 1969 (II), p. 590), as last or the safeguard of public security: sec para- amended by Council Regulation (EEC) graphs 16 to 18 of the judgment, and com- No 3918/91 (Official Journal 1991 L 372, pare also Council Regulation (EEC) No p. 31). Article 1 of Regulation No 2603/69 428/89 of 20 February 1989 concerning the provides that the exportation of products to export of certain chemical products (Official third countries shall not be subject to any Journal 1989 L 50, p. 1), a measure based on quantitative restriction other than those Article 113 of the Treaty controlling the which arc applied in conformity with the export of products which could be used for provisions of the regulation. At paragraph the production of chemical weapons. 3.1 of its written observations, the Commis- sion appears to suggest that a Member State may none the less in certain circumstances rely upon Article 36 of the Treaty in order to prohibit the exportation of products to third

Conclusion

25. I am accordingly of the opinion that the questions referred b y the Finanzgericht M ü n c h e n should be answered as follows:

Article 15(1) of the Sixth Council Directive 7 7 / 3 8 8 / E E C must be interpreted as meaning that value added tax may not be charged o n the export of goods to a third c o u n t r y b y the vendor, notwithstanding that the export is made in breach of a p r o - hibition on exports of those goods to that destination and that a similar prohibition is imposed u n d e r the national laws of all the M e m b e r States.

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