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3. Schloßstraße acquired the aforesaid The matter to be resolved in this case is development rights in March 1991 and whether, in accordance with the provisions applied for a building permit a few days of Sixth Council Directive 77/388/EEC 1 later. As a result of problems over compli- (hereinafter 'the Sixth Directive'), a taxable ance with town-planning rules, it did not person retains the right to deduct if a obtain the permit until May 1993. The change in the law after the date on which national court has stated that at least until goods or services were acquired for the June 1993 the partners intended to transfer purpose of engaging in taxable economic the building permit to a third party. How- activities, deprives him of the right to opt to ever, since no purchaser was found, they waive the tax exemption for those activ- concluded a contract with an architect to ities, and whether the fact that the relevant construct the building. Work commenced assessment was subject to review has any in January 1994 and was completed in effect. December of the same year. Schloßstraße lets out 39.38% of the total area of the building for dwelling purposes, 13.96% to * Original language: Spanish. an architect's firm and the remaining 1 — Sixth Council Directive of 17 May 1977 on the harmonisa- 46.49% to a public limited company, tion of the laws of the Member States relating to turnover 90% of whose business, as a financial taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145 p. 1). service provider, was exempt from VAT.

6. The objection and the action brought by Schloßstraße against the Finanzamt deci- sion were dismissed. In its appeal on a point of law, Schloßstraße contends that the restriction of the option introduced by the new rule contained in Article 9(2) of the UStG is inapplicable to it since con- struction of the building must be deemed to have commenced on the date on which it applied for a building permit or, at least, the date of its grant. Furthermore, it infers from the Court's judgment in INZO 2 that it can rely on the principle of the protection of legitimate expectations to claim the right 5. Following a review, the Finanzamt to deduct tax paid during 1992 and 1993 Paderborn decided to amend Schloßstraße's (in particular on architect's and notarial returns and notices of assessment for 1992 fees). to 1994. The Finanzamt agreed to the deduction of tax only as to 13.96%, on the view that the only taxable use of the building was that of the architect's firm. According to the Finanzamt, it was no longer possible to allow deduction of tax in respect of the 46.49% of the building used by the public limited company for exempt 7. In its order for reference, the Bundesfi- operations since, for operations of that nanzhof expresses doubts as to the success- kind, the possibility of waiving the exemp- ful outcome of the appeal. It points out, tion had been removed with effect from first, that Schloßstraße cannot rely on the 1 January 1994 following the amendment transitional provisions of Article 27(2) of of Article 9(2) of the Umsatzsteuergesetz the UStG because construction of the (Law on value added tax, hereinafter the building did not begin until January 1994. 'UStG') by the Mißbrauchsbekämpfungs- The services already provided in 1992 and und Steuerbereinigungsgesetz (Law on the 1993 form part of the construction costs of simplification of tax legislation and com- the building and, therefore, of the building bating of fraud, hereinafter the 'StMBG') of 21 December 1993. The Finanzamt also considered that Schloßstraße could no 2 — Case C-110/94 [1996] ECR I-857.

Finally, the national court considers that Schloßstraße cannot claim a legitimate expectation of exercising the option provi- ded for by the old Article 9(2) of the UStG in respect of the planned leasing of the building because construction commenced only after the entry into force of the new rules. Since, according to the case-law of the Bundesfinanzhof relating to the UStG, a final decision on the right to deduction cannot be taken until the real use — rather than the intended use — of capital goods is ascertained, the Finanzamt was, in its view, right under Article 164(2) of the AO to amend the notices of assessment issued 8. Nevertheless, the Bundesfinanzhof subject to subsequent review and to dis- queried whether such an interpretation of allow deduction to the extent to which the the relevant provisions of German law is services provided were ultimately used for consistent with the case-law of the Court of tax-exempt operations. Justice on Article 17 of the Sixth Directive. It therefore stayed proceedings pending a preliminary ruling on the following ques- tions:

Next, the Bundesfinanzhof observes that the retroactive application of Article 9(2) 'According to the case-law of the Court of of the UStG, as amended, to tax charged on Justice (Case C-37/95 Ghent Coal Terminal the services provided in 1992 and 1993 NV, in which reference is made to Case does not infringe the constitutional princi- C-110/94 INZO), a taxable person can ple of non-retroactivity. At the time when retain the right to deduct tax charged on the new rule entered into force, the right of goods and services where, by reason of deduction in respect of the capital goods circumstances beyond his control, he has

III — Analysis of the questions In such a case, where there is a subsequent change in circumstances, does the right to deduct tax also continue to exist if, under national law, the tax assessments were allowed to be subject to a subsequent 10. The questions referred to the Court, review, enabling a quick tax assessment to which the Commission representative has be made solely on the basis of information described as 'difficult and technically com- supplied by the taxable person, but giving plicated', raise two problems. On the one the revenue authority the right to correct hand there is the problem of determining the tax assessment in every respect on the when a taxable person acquires the right to basis of factual and legal considerations?' deduct VAT paid on capital goods and on the other hand there is the question whe- ther Member States can abolish with retro- active effect, an acquired right to deduction on the ground, as in this case, that the initial assessment was provisional. 3 Before giving an opinion on these two questions, I believe we should consider the provisions I I— Observations submitted in the course of the Sixth Directive and of the German of the preliminary ruling procedure

3 — The question, on which the parties disagree and which Schloßstraße raised during the hearing, as to when con- struction of the building should be deemed to have commenced for the purpose of the UStG is, as the 9. The German Government and the Com- Bundesfinanzhof stated in its order for reference, a question mission have submitted written observa- of national law that cannot be examined here.

'Without prejudice to other Community Member States may restrict the scope of provisions, Member States shall exempt the this right of option and shall fix the details following under conditions which they of its use.' shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

13. In Germany, exemption from VAT on the leasing of land is established under Article 4(12)(a) of the UStG. Germany has availed itself of the opportunity afforded by the Sixth Directive to give its taxpayers the right to opt for taxation, as provided under Article 9(1) of that Law.

(b) the leasing or letting of immovable 14. In the version of the Law that was in property...' force before the amendments introduced by

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the StMBG of 21 December 1993, Arti- regulating the application of Article 9(2) as cle 9(2) of the UStG provided that: amended. Under that provision:

18. Thus, in Becker 5the Court held that leasing of immovable property are exempt 'by virtue of the power conferred upon from tax'. them [by Article 13C], the Member States may allow persons entitled to exemptions provided for by the directive to waive their exemptions in all cases or within certain limits or subject to certain detailed rules'.

20. One initial conclusion with regard to the present case can be drawn from that case-law. Under the 1994 StMBG, the German Government may lawfully restrict the scope of the right to opt for taxation on the letting and leasing of land. Article 13B and C allows Member States to decide, on the basis of their economic situation at a given time, whether to grant the right to 19. In its judgment in Belgocodex 6which opt for taxation and also the conditions or was delivered after this reference for a limits that will apply to the exercise of that preliminary ruling was made, and to which right. I shall return later, the Court held that:

21. That being said I shall now examine w h e t h e r , u n d e r C o m m u n i t y law, Schloßstraße had already acquired the right to make the deduction at the time the 1994 StMBG entered into force and whether that 'the Member States have wide discretion right could be retroactively withdrawn. under Article 13B and C. It is for them to assess whether they should or should not introduce the right of option, depending on what they consider to be expedient in the situation existing in their country at a given time. The freedom to grant or decline to grant the right of option is not restricted in time or by the fact that a contrary decision had been adopted in the past. Member B — Origin of the right to deduct VAT on States may therefore, within the sphere of investment costs their national powers, also revoke the right of option after having introduced it and return to the basic rule that letting and

23. Applying those considerations to the facts described, the German Government 2. In so far as the goods and services are argues that under Article 9(2) of the UStG used for the purposes of his taxable trans- as amended in 1994, Schloßstraße at no actions, the taxable person shall be entitled time enjoyed a provisional right to deduct to deduct from the tax which he is liable to input tax on the letting to the financial pay: services company, since the latter did not use the leased property for taxable opera- tions. It adds that the new version of the provision should be used as a basis since the taxable person did not let the building until after the entry into force of the StMBG, and the right to deduct should be determined (a) value added tax due or paid in respect when the operations in question take place of goods or services supplied or to be and should therefore take account of any supplied to him by another taxable legislative amendments made before the person; commencement of those operations.

...'7

7 — Original wording of Article 17 of the Sixth Directive. Paragraph 2 was subsequently amended by Article 1(22) of Council Directive 91/680/EEC of 16 December 1991, supplementing the common system of value added tax and amending Directive 77/388 with a view to the abolition of 24. In my view, the German Government's fiscal frontiers (OJ 1991 L 376, p. 1), and by Article 1(10) of Council Directive 95/7/EEC of 10 April 1995 amending argument is not consistent with the applic- Directive 77/388 and introducing new simplification mea- sures with regard to value added tax — scope of certain able provisions of the Sixth Directive as exemptions and practical arrangements for implementing interpreted by the Court of Justice. them (OJ 1995 L 102, p. 18).

27. The Court has stated repeatedly that 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 consequently ensures that 29. More specifically, in accordance with all economic activities, whatever their pur- the case-law of the Court investment pose or results, provided that they are expenditure incurred for the purposes of themselves subject to VAT, are taxed in a and with the view to commencing a busi- wholly neutral way. 8 ness must be regarded as an economic activity within the meaning of Article 4 of the Sixth Directive, 11 and the taxable person therefore has the right to deduct the VAT paid on it. Any other interpreta- tion would burden the trader with the cost of VAT in the course of his economic activity without allowing him to deduct it 28. The Court has also stated that in the in accordance with Article 17 and would absence of any provision empowering the create an arbitrary distinction between Member States to limit the right of deduc- investment expenditure incurred before tion granted to taxable persons, that right actual operation of a business and expen- must be exercised immediately in respect of diture incurred during operation. 12 all the taxes charged on transactions relat- ing to inputs. Such limitations on the right of deduction must be applied in a similar manner in all the Member States and therefore derogations are permitted only in the cases expressly provided for in the Directive. 9 In this sense the Court indicated 30. Furthermore, the right to deduct VAT on investment expenditure remains 8 — See, in particular, Case 268/83 Rompelman [1985] ECR 655, paragraph 19, Case 50/87 Commission v France [1988] ECR 4797, paragraph 15, and Case C-37/95 Ghent Coal [1998] ECR I-1, paragraph 15. 10 — BP Supergas, cited in footnote 9 above, paragraph 35. 9 — See in particular Commission v France, cited in footnote 8 11 — For a detailed examination of this case-law see my Opinion above, paragraphs 16 and 17, Case C-97/90 Lennartz on this same point in Case C-400/98 Breitsohl [2000] ECR [1991] ECR I-3795, paragraph 27, Case C-62/93 BP I-4321, ECR I-4324, points 18 and 27. Supergas 11995] ECR I-1883, paragraph 18, and Ghent 12 — Rompelman, cited in footnote 8 above, paragraphs 22 and Coal, cited in footnote 8 above, paragraph 15.

33. Returning to the present case, it is for the national court to verify Schloßstraße's actual intention when the investment expenditure at issue was made. 17 If its real intention was to use these investments to 31. It therefore follows from the relevant carry out taxable transactions — or even provisions of the Sixth Directive, as inter- transactions that might become taxable by preted by the Court, that the right to virtue of the right, later removed, to opt for deduct VAT on investment expenditure taxation — then, as the Commission has should be determined at the time when claimed, Schloßstraße should be deemed to the goods or services to which the expen- have acquired the right to deduct at the diture refers are delivered. If the taxable person declares that his actual intention is 16 — In the case of immovable property acquired as capital to use the investments in the performance goods, the adjustment period may be extended up to 20 of an activity which is taxable under the years (Article 20(2), last subparagraph, as amended by Directive 95/7, cited in footnote 7 above). Paragraph 2 also Sixth Directive or the national legislation in states that, 'By way of derogation from the preceding subparagraph, Member States may base the adjustment on force, he will immediately acquire the right a period of five full years starting from the time at which to deduct even though the planned activity the goods are first used' (my emphasis). However this option allowed to Member States is an exception to the never takes place. stated general rule. Moreover, Article 17, which refers to the right to deduct, gives Member States no such option. 17 — The national court states that, until at least June 1993, the intention of the partners was to transfer the building permit. However, it is for the national court to determine 13 — Ghent Coal, cited in footnote 8 above, paragraphs 19 and whether this fact, about which the order for reference does 20. not provide enough information, has any bearing on the 14 — INZO, cited in footnote 2 above, paragraph 21. legality of the provisional deduction allowed by the 15 — Ghent Coal, cited in footnote 8 above, paragraph 23. Finanzamt.

36. As a result of this derogation, the Belgian revenue authority refused to allow Belgocodex to make the deduction it claimed and the company therefore C — The ability of Member States to appealed to the Tribunal de Première remove, with retroactive effect, acquired Instance (Court of First Instance) Nivelles, rights to pay and deduct VAT which asked the Court of Justice for a ruling as to whether a Member State which has availed itself of the possibility provided for by Article 13C of the Sixth Council Directive and has thus given its taxpayers the right to opt for taxation of certain 34. In discussing this point, I shall again lettings of immovable property may abol- refer to the judgment in Belgocodex. 18 In ish, in a subsequent law, that right of option and thus reintroduce the exemption that case, the plaintiff in the main proceed- in full. ings had acquired a property which was to be renovated. He subsequently let the property to a company that used it for its economic activities. Belgocodex then deducted the input tax changed in respect of the renovation work. 37. Belgocodex claimed before the Court that the principle of the protection of legitimate expectations and the principle of legal certainty preclude retroactive repeal of the national legislation in ques- tion. It contended that, upon the adoption of the Belgian Law of 28 December 1992, 35. Belgocodex made the deduction on the it could legitimately count on the right of basis of the Law of 28 December 1992 option, whether the Royal Decree imple- amending the Belgian VAT Code and menting that law was adopted or not. introducing the right to opt for taxation of certain lettings of immovable property. However, the Law stated that the imple- menting regulations would state the form of option, its method of exercise and the 38. In its decision, the Court recalled that the principle of protection of legitimate 18 — Cited in footnote 6 above. expectations and the principle of legal

42. I should add that although, as I have said, Article 13B and C of the Sixth Direc- 40. The Commission claims that in the tive certainly does grant Member States present case such specific circumstances are wide discretion to regulate the right of lacking. In the light of the judgment in option, including the right to remove it, Ghent Coal, 19 it m a i n t a i n s t h a t that discretion may not be used to infringe Schloßstraße cannot be deprived of the Article 17(1) of the Directive by revoking right to deduct for reasons beyond its an acquired right to deduct. control. The Commission takes the view that a restriction of the right of option introduced by the adoption of a law upon which transitional provisions confer retro- active effect, should be regarded for these purposes as constituting reasons beyond 43. Any such revocation would, further- 19 — Cited in footnote 8 above. more, be a violation of the taxable person's

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20 — Joined Cases C-104/89 and C-37/90 Mulder v Council and Commission [1992] ECR I-3061, paragraph 15. 21 — Case 230/78 Eridania [1979] ECR 2749, paragraph 31. It is however clear that the change in the law introduced by the StMBG applies in full to the goods and services supplied to Schloßstraße from the date it entered into force, in other words from 1 January 1994. As the Court 47. Consequently, if during a tax inspec- has held, 'the field of application of this principle [respect tion it is discovered that a taxable person for legitimate expectations] cannot be extended to the point of generally preventing new rules from applying to has attempted to defraud the Treasury by the future effects of situations which arose under the earlier rules in the absence of obligations entered into with declaring as goods intended for company the public authorities' (Case 84/78 Tomadini [1979] ECR use goods actually acquired for his own 1801, paragraph 21). 22 — Paragraph 164 of the AO provides: private use, so as to be able to deduct the '1. Pending final review, taxes may, in general or in particular cases, be assessed subject to review, and no VAT paid on them, the tax authority can reasons need be stated for such assessment. 2. The assessment may be annulled or amended at any time whilst it remains reviewable... 23 — VAT is normally managed on a self-assessment basis under 4. When the prescribed period for assessment expires, the which the taxable persons calculate their own tax liability assessment shall cease to be subject to review...'. and pay it to the Treasury themselves.

IV — Conclusion

5 1 . In the light of the foregoing considerations, I propose that the Court reply as follows to the questions referred by the Bundesfinanzhof for a preliminary ruling:

Article 17(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes —

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Common system of value added tax: uniform basis of assessment must be interpreted as meaning that a Member State that decides to abolish the right to opt for deduction of tax on particular economic activities cannot withdraw, with retroactive effect, the right to deduct VAT paid on capital goods prior to the entry into force of that derogation for the purpose of engaging in those economic activities. This shall apply even if the deduction was initially granted to the taxable person subject to review.