C-158/98

STAATSSECRETARIS VAN FINANCIËN V COFFEESHOP 'SIBERIË'

OPINION OF ADVOCATE GENERAL FENNELLY delivered on 11 March 1999 *

1. The Hoge Raad der Nederlanden 1asks thus governed by the reasoning of the whether VAT is payable on the rent of Court in Happy Family.2 coffee-shop tables for the sale of cannabis in the Netherlands. Underlying the question is the moral dilemma of whether it is a fact that to tax an activity is to condone it. Most legal systems have long resolved the issue by preferring not to allow moral scruple by a paradox to reward criminality by exempting it from taxation. Community I — The legal and factual background law is generally of the same view but has made an exception of the supply of narcotic drugs. The Hoge Raad's question arises in the context of the Dutch policy of tolerat- ing the supply of strictly limited amounts of 2. The defendant, a partnership trading cannabis in coffee shops. I shall first under the name V.O.F. Coffeeshop 'Siberië' summarise the Dutch legal background (hereinafter 'the defendant'), runs a 'coffee- and the order for reference. Secondly, I shop' in Amsterdam. 3 The Netherlands shall examine the principles underlying the states, in its observations, that Dutch coffee relevant case-law. Finally, I shall explore shops are establishments, not serving alco- whether it is possible to treat the hire of a hol, where 'soft' drugs are sold and con- table as a transaction, innocent in itself, sumed. They also typically supply coffee, and distinct from the illegal drug supply tea and soft drinks and provide gaming which it is designed to facilitate, or machines for the use of their patrons. 4 whether, by reason of the clear criminal From 1990 to 1993, narcotics derived from content of the transaction, but in spite of Indian hemp were sold at a table in the the officially approved policy of the Neth- defendant's coffee shop by an accredited erlands Government, it should be regarded huisdealer (house dealer). The defendant as inseparable from that drug supply and made the table available expressly for that purpose and the table hire paid to it by the house dealer was recorded in its accounts under the heading 'tafelhuur'. Customers

who enquired at the bar about the purchase ited in the Netherlands by the Opiumwet of drugs were directed to the relevant table (Opium Law, hereinafter 'the Law') of by a 'barkeeper' employed by the defen- 12 May 1928. 5 Cannabis is one of the dant. No VAT was paid by the defendant in hemp-based substances, mentioned on List respect of the proceeds of the table hire, II in the schedule to the Law, whose although it paid VAT in respect of its other intentional possession, sale and supply supplies, deducting VAT paid on its inputs. constitutes a criminal offence under Arti- The Netherlands tax authorities (the Staats- cle 3(1 )(B), which is punishable under secretaris van Financiën, hereinafter 'the Article 11. Equally, however, the Hoge plaintiff') made a demand on the defendant Raad points out that, pursuant to Arti- for additional VAT in the sum of NLG cle 48 of the "Wetboek van Strafrecht (Code 22 733 in respect of table hire. of Criminal Procedure), any person who intentionally provides the opportunity, resources or information for the commis- sion of that offence is liable to prosecution as an accomplice to a criminal offence.

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bis-based drugs if certain criteria, known as of narcotic drugs, should be interpreted as the AHOJ-G criteria, are satisfied. 8 also covering provision of the opportunity to deal in cannabis, since such an inter- pretation would further restrict the scope of the Sixth Directive and would ignore the evolution which it believes to have oc- curred in many Member States in society's view of the economic and illegal nature of conduct related to the supply of 'soft' 6. Article 2(1) of the Sixth VAT Directive drugs. The question referred is worded as provides that 'the supply of goods or follows: services effected for consideration within the territory of the country by a taxable person acting as such' shall be subject to VAT. 9In Happy Family the Court inter- preted that provision as meaning that 'no liability to turnover tax arises upon the unlawful supply of narcotic drugs within the territory of a Member State', save in respect of the strictly controlled trade for 'Must Article 2 of the Sixth Directive medical or scientific purposes. 10 therefore be interpreted as meaning that no liability to turnover tax arises in respect of a person who, for consideration, offers another person the opportunity to deal in cannabis products?'

7. The Hoge Raad notes that the illegality of providing an opportunity to deal in 'soft' drugs does not alter the fact that it constitutes the supply of a service. The Hoge Raad is uncertain, however, whether Happy Family, under which no liability to VAT arises in respect of the unlawful supply I I— Observations

9. The gravamen of the defendant's sub- Netherlands' international obligations missions is to emphasise its own illegal under the 1961 United Nations Single behaviour. The renting of the table to the Convention on Narcotic Drugs. 1 2It also house dealer for the purposes of facilitating observes that the Netherlands has designed the sale of unlawful drugs cannot be this policy in order to protect young people distinguished from actually selling them from exposure to 'hard' drugs. The pub- and, therefore, must not be subject to VAT. lication in the Nederlandse Staatscourant It denies that there has been any significant (Netherlands Official Journal) of the new development in the law and practice AHOJ-G policy gives it official recognition. regarding 'soft' drugs in either the Nether- In reality, most municipalities and districts lands or other Member States. Dutch local in the Netherlands permit the presence of authorities are not bound to apply the one or more coffee shops. The Commission AHOJ-G criteria and may, and, it asserts, observes that coffee shops' average turn- frequently do, bring proceedings in respect over is in the region of NLG 200 000, of drug dealing in coffee shops. which is equivalent to that of half the legitimate establishments providing ordin- ary bar-type services in the Netherlands, with which they are in competition. The Happy Family line of case-law is concerned with the importation or supply for con- sideration of narcotics whose importation or sale is strictly prohibited and which may not therefore enter into the ordinary trade channels in the Community. As an excep- 10. The Netherlands submits that this case tion to the principle of neutrality, that case- may be distinguished from Happy Family. law should not be extended to cover coffee First, it maintains that if the AHOJ-G shops, part of whose services are, in any criteria are respected, then, in the absence case, quite lawful. Finally, the Commission of local opposition, no criminal prosecu- submits that, since Happy Family, there has tions will be brought against the operators been a significant development in public of a coffee shop. Secondly, it contends that opinion in the Netherlands regarding the the latter's activities may be distinguished small-scale supply of 'soft' drugs. It submits from those considered by the Court in that such supplies have de facto become Happy Family; coffee-shop activities are not in themselves illegal since their poten- legitimate. tial illegality only arises from their connec- tion with those of the house dealer.

'The Sixth Directive, whose purpose is to achieve widespread harmonisation in the 13. The Court's narcotics case-law com- area of VAT, is based on the principle of mences in the early 1980s with a group of fiscal neutrality. That principle ... precludes cases concerning the unlawful import of a generalised differentiation between law- 'hard' narcotic drugs (heroin, cocaine, ful and unlawful transactions, except morphine) into Germany 16 and the ques- where, because of the special characteristics tion of the applicability of the Common of certain products, all competition Customs Tariff. The Court held that no between a lawful economic sector and an customs debt arose. As is clear from unlawful sector is precluded.' Einberger I, the starting point of the Court's reasoning is that such drugs 'dis- play special features in so far as their harmfulness is generally recognised and their importation and marketing are pro- hibited in all the Member States ...'. 1 7 The Court noted that this legal position was 'in To date, only two types of products have conformity with the Single Convention on been recognised as possessing 'special char- Narcotic Drugs, 1961 ... to which all the acteristics' as so described, to wit narcotic Member States [were] parties'. 18 The con- drugs and counterfeit currency.14 That list clusion that no customs debt arose fol- cannot be exhaustive and, in principle, may include services. None the less, as Advocate General Jacobs has observed, the exclusion 15 — Case C-283/95 Fischer [1998] ECR I-3369, paragraph 17 of the Opinion. 'constitutes an exception to the normal rule 16 — See Case 50/80 Horvath ν Hauptzollamt Hamburg-Jonas that lawful and unlawful transactions [1981] ECR 385; Case 221/81 Wolf ν Hauptzollamt Düsseldorf [1982] ECR 3681; Case 240/81 Einberger ν Hauptzollamt Freiburg [1982] ECR 3699 (hereinafter 'Einberger I'). 17 — Paragraph 8. 1 3 — Case C-111/92 Lange ν Finanzamt Fürstenfeldbruck 18 — Ibid., paragraph 9. It referred expressly to the preamble to [1993] ECR 1-4677 (hereinafter 'Lange'), paragraph 16. the Single Convention, which speaks (recital 3) of the 14 — See Opinion of Advocate General Léger in Case C-3/97 'serious evil' and the consequent 'social and economic Goodwin and Unstead [1998] ECR 1-3257, paragraph 9. danger to mankind' posed by such drugs.

lowed from the fact that the drugs entiation between lawful and unlawful remained within illegal channels and might transactions', 2 5 the Court stated that: 26 'not be marketed and integrated into the economy of the Community', 19 and from the terms of the prevailing legislation on customs duty which linked the customs debt with 'the economic nature of the duties on imports and ... the conditions under which the goods ... are integrated into the economy of the Community'. 2 0 '[T]hat is not true in the case of the supply of products, such as narcotic drugs, which have special characteristics inasmuch as, because of their very nature, they are subject to a total prohibition on their being put into circulation in all the Member States, with the exception of strictly con­ trolled economic channels for use for 14. Two years later, in Einberger II, 2 1 the medical or scientific purposes. In a specific Court, holding that there was no distinc­ situation of that kind where all competition tion between the liability to customs duties between a lawful economic sector and an and the liability to VAT, applied the above unlawful sector is precluded, the fact that reasoning to the collection of VAT on the no liability to value-added tax arises cannot import of the morphine, which had been in affect the principle of fiscal neutrality.' question in Einberger I. It completed the picture in Mol 22 and Happy Family 23 by applying the same reasoning generally to sales that are internal to the Member States. It recalled its earlier statements that the release of such goods 'into the eco­ nomic and commercial channels of the Community [was] absolutely precluded... [and that such] importation [could] give 15. The key elements of this case-law seem rise only to penalties under the criminal to me to be: firstly, the generally recognised law', all of which was 'wholly alien to the harmfulness of narcotic drugs, as con­ provisions of the Sixth Directive...'. 24 firmed by the Single Convention; secondly, Acknowledging that the principle of fiscal the existence of a total prohibition in all the neutrality precluded 'a generalised differ­ Member States on their entry into normal economic channels; thirdly, the fact that they can give rise only to criminal penalties. 19 — Paragraph 13. These are, however, observations of fact or 20 — Paragraph 14. 21 — Case 294/82 Einberger ν Hauptzollamt Freiburg [1984] of the prevailing position in national law ECR 1177 (hereinafter 'Einberger II'). Under Article 2(2) and do not in themselves constitute pro­ of the Sixth Directive, 'the importation of goods' is subject to VAT. nouncements of principles of Community 22 — Case 269/86 Mol ν Inspecteur der Invoerrechten en Accijnzen [1988] ECR 3627, which was concerned with sales of amphetamines. 23 — Cited in footnote 2 above. 25 — Happy Family, paragraph 20. 24 — Happy Family, paragraph 17. 26 — Ibid.

law. In Witzemann, 27 Advocate General duties nor VAT could be applied to imports Jacobs commented that the true basis of the of counterfeit currency, the exclusion rule was obscure 2 8and supported the regarding VAT developed in Einberger II, Commission's query regarding the legal Mol and Happy Family has not been basis of this case-law by suggesting that applied since. More recently in Lange the case, which itself concerned trade in (unlawful diversion of exports of poten- counterfeit currency, presented the Court tially strategic equipment to proscribed with a 'timely opportunity to clarify countries), 32 Goodwin and Unstead (delib- whether its case-law was founded on the erate non-payment of VAT in respect of Treaty itself ... or whether it was founded dealing in counterfeit perfumes), 33 and on secondary sources...'. 29 Regrettably, the Fischer (unlicensed operation of roulette Court does not appear to have responded games), 34 the Court, although restating the to this invitation although it considered principle that no VAT may be levied on that its case-law applied a fortiori to products which 'may not be marketed or counterfeit currency. 30 incorporated into economic channels', has distinguished, in each case, the degree of illegality affecting the supply of the pro- ducts or services at issue from the 'absolute prohibition' applicable in the drugs case- law and in Witzemann and, accordingly, declared VAT applicable. 35 Thus, although 16. In my view, the essence of the case-law the Court could conceivably in future be is that narcotic drugs, because dealing in them is absolutely prohibited in all the asked to consider, for instance if the Member States and can result only in proceeds of under-age prostitution, paedo- criminal proceedings, do not play any role phile pornography or trafficking in human in the normal economy. Consequently, the beings were at issue, whether the activity principle of fiscal neutrality simply does were subject to the requisite unconditional not come into play because 'all competition prohibition to fall within the exclusion, as between a lawful economic sector and an the activities of house dealers clearly fall unlawful sector is precluded ...'. 31 within the scope of the Happy Family

18. In the light of this case-law, there seem to me to be two possible approaches to the issue of whether the activities of the defendant should be subjected to VAT. 20. In the first place, it is clear from Happy Firstly, it must be considered whether, as Family that any supposed distinction suggested by the Netherlands Government, between trade in so-called 'hard' and 'soft' what is in question is simply table-hire drugs is as devoid of any legal basis in charges which are indisputably subject to Community law as it is in international or tax, in spite of the immediate and direct national law. 36Secondly, the Court has no link between that transaction and the sale basis in fact (there being no evidence of illegal drugs. Alternatively, if the hire of presented by the national court) as it has the table cannot be divorced from its no function in law to draw any such unlawful purpose, it becomes necessary to distinction. In so far as the European consider whether the sale of cannabis-based Union, as distinct from the Community, drugs within the terms of the Netherlands has taken any position on drug-related Government's official policy of tolerance issues, it does not appear to recognise any falls within or without the principles devel­ such distinction, which is also absent from oped in the case-law, in particular in Happy Article K.l of Title VI of the Treaty on Family. European Union as amended by the Treaty 3 of Amsterdam. 7That provision envisages,

inter alia, Union action to combat crime generated by the sales accrued to the including 'illegal drug trafficking'. association (at least in part) and, conse- quently, that they could be attributed to the association. 38For present purposes, how- ever, I must assume that in Netherlands law the association was deemed to be the vendor of the drugs. The difference between the activities of that association and those of the defendant in the present 21. The Hoge Raad may also have envi- case is that the latter does not sell the drugs saged that the Court would consider but, instead, rents a table to the house departing from its Happy Family reasoning dealer, an activity which, independent of consequent upon social developments in the unlawful purpose of the hire, is per- the Netherlands even if they were not fectly lawful. Is that a meaningful distinc- replicated in other Member States. How- tion for the purpose of the application of ever, the exclusion from VAT of sales of the reasoning of Happy Family ? narcotics is too entrenched in the case-law now to be reconsidered, save perhaps by the Community legislator.

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and thus taxable, because it forms part of the purpose of selling drugs and those sales the income of a lawful business operating are assisted directly by the coffee-shop in the mainstream of economic life and owner in advising customers. engaging in normal competition to which the principle of fiscal neutrality applies.

26. Two additional points help to illustrate this point. If the tables were being hired for the sale of 'hard' drugs completely outside 24. In my view, however, such an answer the AHOJ-G criteria, it would be easier to would be incomplete and unsatisfactory if see the hire as having the 'special charac- it did not address the illegality which the teristics' envisaged by the case-law. Yet, if transaction at issue shares with the sale of the essentially economic difference between drugs by the house dealer. To begin with, actual drug sales and hiring out of tables that approach seems unhappily dependent for that purpose were to form the basis for on the assumption that the hiring of tables distinguishing Happy Family, the same constitutes an autonomous market. The logic would compel the Court to declare Hoge Raad has said that the activity of the table hire obtained from dealers in 'hard' defendant is criminal as amounting to the drugs subject to VAT. Secondly, a distinc- giving of opportunity, resources and infor- tion based on the difference between table mation for the commission of the criminal hire and drug sales could quite easily be offence of drug dealing. circumvented. For example, the coffee-shop proprietor, while respecting the AHOJ-G criteria, could become a joint seller of the drugs or could employ the house dealer. Either of these devices would arguably bring the activity within Happy Family and would probably compel Dutch courts, faced in future with such revised selling arrangements, to seek further guidance from the Court.

29. It must be recalled that this assessment (iii) The de facto decriminalisation of was made against the background of a coffee-shop activities supposed total ban on trade in all narcotic drugs, including cannabis, and led the Court to exclude the application of the principle of neutrality because of the absence of all competition between lawful and unlawful activity. It seems to me at 28. In Happy Family, the Court held that least doubtful whether that can really be 'the total prohibition on the marketing of said of the current situation in the Nether- narcotic drugs [wa]s not affected by the lands, where an official distinction has been mere fact that, in view of their — obviously drawn between 'hard' and 'soft' drugs. limited — manpower and means and in order to use the available resources for combating narcotic drugs in a concerted manner, the national authorities responsi- ble for implementing that prohibition give lower priority to bringing proceedings against a certain type of trade in drugs, because they consider other types to be 30. Before reaching a conclusion on this more dangerous', and was adamant that aspect of the case, I would like to draw such a decision '[could] not put illegal attention to two undesirable consequences dealing on the same footing as economic of the current position regarding the exclu- channels which are strictly controlled by sion enunciated in the drugs case-law, the competent authorities in the medical which are well illustrated by the present and scientific field'. 39 The Court also noted case. Those engaged in drug dealing are that such dealings, 'albeit tolerated within permitted, even encouraged, to avail of certain limits, remain[ed] illegal and their opportunity to present observations m[ight] at any time be the subject of police before the Court to emphasise their own action when the competent authorities criminality. The defendants have, for exam- consider such action to be appropriate'. It ple, argued that they are guilty not merely added that the applicability of VAT to an of complicity but also of the primary illegal transaction could not depend on the offence of possession of drugs. Wrongdoers actual prosecution policy pursued in a should not reap benefits in proportion to Member State, once the transaction con- their wrongdoing. It is a well-established cerned remained prohibited, since other- principle of most legal systems that parties wise the harmonisation objective underly- should not be permitted to rely for their own benefit on their own criminal beha- viour. I would share the unhappiness 39 — Ibid., paragraph 29. expressed by Advocate General Léger in

32. It does not seem to me that the AHOJ- G policy, certainly in its present form, is based on a mere discretion whether or not 41 — The Commission cites in this respect in particular the to prosecute, motivated by considerations earlier guidelines of 28 October 1976 and 21 October 1994. 42 — See Het Nederlandse Drugbeleid: Continuïteit en Veran- dering (Drugs Policy in the Netherlands: Continuity and Change), Rijswijk, 1995 (hereinafter 'Continuity and 40 — Paragraph 18 of the Opinion. Change').

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Toler- ating relatively easy access to quantities of soft drugs for personal use is intended to keep the consumer markets for soft and hard drugs separate, thus creating a social barrier to the transition from soft to hard drugs.' 35. In these circumstances, I agree with the Commission that the small-scale retail, though illegal, sale of cannabis in coffee shops, deliberately channelled by official policy into a separate market, must be treated, as the Netherlands Government 34. The policy of toleration on the part of has itself recognised in Continuity and judicial authorities, which began with can- Change, as de facto decriminalised and, nabis sales in youth centres by bona fide consequently, as a commercial activity that dealers (such as occurred in Happy Family), is in partial but direct competition with has now been extended to coffee shops selling 'op commerciële basis' ('on a com- mercial basis') to adults. 45 Control and 46 — Although, in Continuity and Change, the Netherlands supervision is essentially assigned to local Government refers to the decriminalisering (decriminalisa- tion) of coffee-shop sales of Indian hemp, it is clear both authorities. A coffee shop is established in a from its observations in the present case and from the district with the approval of the relevant order for reference that they remain prohibited by Dutch criminal law. local regulatory triumvirate of mayor, chief 47 — In this respect, the Commission refers to a decision of the of police and public prosecutor. Of course, Hoge Raad of 5 March 1991, Nederlandse Jurisprudentie 1991, Nr 694 (nr. 88087), in which it upheld in principle a lower court's finding, in a case concerning a prosecution brought against a coffee-shop owner, that the interests of proper criminal procedures required that a prosecution 43 — See Continuity and Change, p. 2 of version produced to the brought in contravention of a generally known policy of non-prosecution be declared inadmissible unless justified Court by the Commission. by the Public Prosecutor's Office. However, the judgment 44 — Ibid., p. 3. under appeal was quashed because it did not establish the 45 — Continuity and Change, p. 3. existence of such a policy.

48 — There is another reason which supports the adoption of this more dynamic view of competition between coffee shops and the ordinary bar and coffee-house sector in the Netherlands. In a judgment of 28 January 1998 (cited in footnote 4 above), the Hoge Raad nas decided that coffee shops may exercise the right to deduct granted by the Sixth Directive in respect of all inputs paid in respect of the goods and services acquired by them in the course of their business, even though they are not liable, pursuant to 49 — The cardinal role of the principle that VAT exemptions be Happy Family, to pay output VAT on their supplies of narrowly construed in the interpretation of the Sixth 'sort' drugs. In circumstances where a full right to deduct is Directive has been confirmed consistently by the Court: accorded, while the liability to pay VAT applies only to see, inter alia, Case 235/85 Commission ν Netherlands certain supplies, it seems all the more critical, so as to [1987] ECR 1471, paragraph 19; Case 348/87 Stichting avoid actually favouring the activities of coffee shops over Uitvoering Financiële Acties ν Staatssecretaris van Finan­ those of ordinary hostelries, to subject the former to VAT ciën [1989] ECR 1737, paragraph 13; and Case C-149/97 in respect of all turnover realised from the exploitation of Institute of the Motor Industry ν Commissioners of their premises. Customs and Excise [1998] ECR I-7053, paragraph 17.

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IV — Conclusion

37. In the light of the foregoing, I recommend that the Court answer the question referred by the Hoge Raad der Nederlanden as follows: