C-142/99

FLORIDIENNE AND BERGINVEST

OPINION OF ADVOCATE GENERAL FENNELLY delivered on 4 April 2000 *

1. The present reference concerns the cal- shares, the applicants are involved in the culation of VAT deductions from tax management of the companies in which charged on management and technical- they hold shares by providing taxable advice services provided by mixed holding services to their subsidiaries, such as man- companies, i.e. companies that hold shares agement, technical assistance, accounting as well as carrying out taxable transactions, and advisory services. It would appear from to their subsidiaries. Do dividends paid by uncontested information provided by the the latter have the effect of reducing the applicants to the Court that such services deductions proportionately? All those who were also provided during the relevant have submitted observations to the Court period to former subsidiaries and to certain are ad idem in asking for clarification of the other companies with which the group did problematic proposition enunciated by the business. Furthermore the applicants have Court in Polysar 1that the maintenance of advanced certain sums by way of loans to shareholdings in companies would be the subsidiaries or to some of them but not, regarded as economic activity 'where the it seems, to other companies. Consequently, holding is accompanied by direct or indir- the applicants receive dividends on their ect involvement in the management' of shares and interest on their loans. They such companies. have claimed the right to deduct from the (output) VAT which they charge in respect of the services provided to their subsidiaries the entirety of the (input) VAT paid by them in the price of goods and services provided to them.

'Must share dividends and interest on loans always be excluded from the denominator of the fraction used to calculate the deduc- tible proportion, even where the company (i) Income from dividends receiving such dividends and interest has involved itself in the management of the undertakings paying them, save in the exercise of its rights as shareholder?' 5. Although findings of fact are exclusively a matter for the national court, it is important to note, immediately, that the findings contained in the order for refer- ence suggest that the relationships between the applicants and their subsidiaries are governed by objective legal measures, such as contracts for the provision of services 4. The national court has described the and the appointment of managers to serve applicants' involvement in the management on the boards of the subsidiaries. of the subsidiaries as follows:

6. The applicants claim that the receipt of dividends and interest amount to simple enjoyment of the fruits of investment and '[T]hey carry out other activities on behalf do not constitute 'economic activity' within of their subsidiaries, such as management the scope of Community VAT. These and technical assistance, financing and receipts should not, therefore, be taken advising, and they are directly involved in into account when calculating permitted the management of the companies in which deductions. Belgium relies essentially for its they hold shares, some of its managers contrary view on the participation of the being on the boards of those companies. applicants in the management of their

7. It is necessary to consider the principal relevant provisions of the Sixth VAT Direc- tive. 5

3 — This provision requires, in so far as is material in the present case, Member States to exempt from VAT 'transactions, including negotiation, excluding management and safekeep- ing, in shares, interests in companies or associations, debentures and other securities ...'. 4 — In his view, the receipt of a dividend could not be equated In addition, Article 4(3) permits Member with 'transactions, including negotiation, ... in shares ...' for States also to 'treat as a taxable person the purposes of that provision. 5 — Sixth Council Directive 77/388/EEC of 17 May 1977 on the anyone who carries out, on an occasional harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: basis, a transaction relating to the activities uniform basis of assessment; OJ 1977 L 145, p. 1. referred to in paragraph 2 ...', before men-

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activities which are not subservient to any or to be paid in the course of all his other business activity, and the receipt of economic activities'. 14 income therefrom' were also 'not to be regarded as economic activities conferring on the person concerned the status of a taxable person'. 12

15. Article 17(1) declares the general prin- ciple of a 'right to deduct ...'. The material part of Article 17(2) states that:

13. In none of these three cases did the taxpayer carry out any taxable transac- tions. Each had sought treatment as a taxable person by virtue of its investment activities so as to be able to exercise a right 'In so far as the goods and services are used to deduct VAT inputs. Consequently no for the purposes of his taxable transactions, issue arose about the apportionment of the taxable person shall be entitled to VAT deductions as no deductions were deduct from the tax which he is liable to possible. pay:

— as denominator, the total amount, 'As regards goods and services to be used exclusive of value added tax, of turn- by a taxable person both for transactions over per year attributable to transac- covered by paragraphs 2 and 3, in respect tions included in the numerator and to of which value added tax is deductible, and transactions in respect of which value for transactions in respect of which value added tax is not deductible. The Mem- added tax is not deductible, only such ber States may also include in the proportion of the value added tax shall be denominator the amount of subsidies, deductible as is attributable to the former other than those specified in Arti- transactions. cle 11A(1)(a).

This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable The proportion shall be determined on an person.' annual basis, fixed as a percentage and rounded up to a figure not exceeding the next unit.'

Article 19(1) provides:

18. Belgium claims that the applicants should be permitted to make deductions pro rata according to the proportion that 'The proportion deductible under the first the turnover of their taxable transactions subparagraph of Article 17(5) shall be bears to their total turnover, including made up of a fraction having: dividends and interest received from their subsidiaries. The Commission has argued in its written observations that the Sixth Directive contains no rule regarding the method of taking account of income relat- ing to private activities outside the scope of — as numerator, the total amount, exclu- the Directive and that Member States are, sive of value added tax, of turnover per accordingly, free to decide on the deduct-

ibility of VAT inputs relating to such amount of its taxable receipts and the activities. annual amount of its total receipts, includ- ing the dividends which it had received'. 17 Sofitam raised directly, therefore, the issue of the interpretation of Article 19(1) of the Sixth Directive. However, unlike in the present case, there was no suggestion that Sofitam was involved in any way in the management of its subsidiaries. 18 In those 19. I have serious doubts about the correct- circumstances, the Court ruled that as 'the ness of the Commission's suggestion. If receipt of dividends is not the consideration Member States chose to permit deduction for any economic activity ... it does not fall of VAT in respect of purely private activ- within the scope of VAT... [and that] ities, which would amount in reality to dividends resulting from holdings fall out- reimbursement in most cases, there would side the deduction entitlement'. 19 It con- potentially be a very serious loss of VAT cluded that: 20 revenue, a small percentage of which, it must be recalled, is paid to the Community budget. It would amount to relieving the consumer from the burden of VAT, which would be contrary to a central tenet of the system. 15 In any event it does not arise on the facts of this case. 'Consequently, dividends must be excluded from the calculation of the deductible proportion referred to in Articles 17 and 19 of the Sixth Directive, if the objective of wholly neutral taxation ensured by the common system of VAT is not to be 20. The first part of the response to the jeopardised.' more relevant argument of the Belgian State and to the question posed by the national court is to be found in Sofitam. Sofitam, to use the expression employed by Advocate General Van Gerven in his Opi- nion in that case, was a 'mixed holding company', like the applicants in the present case. 16It had receipts from share dividends Finally, the Court stated explicitly that the and from taxable transactions. France took 'share dividends received by an undertaking the same view as is now taken by Belgium which is not subject to VAT in respect of the in this case, to wit that Sofitam should be whole of its transactions are to be excluded allowed to deduct 'only up to the percen- tage resulting from the ratio between the 17 — Sofitam, paragraph 3. 18 — Advocate General Van Gerven pointed out (paragraph 12 of his Opinion) that '[a]ccording to the available informa- 15 — See the case-law cited in footnote 14 above. tion, as well as managing its share portfolio, Sofitam pursues ancillary activities that are subject to VAT'. 16 — Paragraph 12 of his Opinion (emphasis in original). The Court described it more generally as 'a holding company'; 19 — Paragraph 13. see paragraph 3. 20 — Paragraph 14.

21. It follows to my mind that the divi- dends involved in this case should similarly be excluded, unless the management activ- ities of the applicants in relation to their subsidiaries call for a different interpreta- 23. However, this language, i.e. the refer- tion of Article 19(1). It is this possibility ence to extensions of taxable activity, that is central to the present case. In suggests rather that the Court had in mind Polysar, the Court, having ruled that the its judgment in Régie Dauphinoise-Cabinet investment activities of a pure holding A. Forest v Ministre du Budget. 25 Régie company did not amount to 'economic was involved principally in the manage- activities', stated that it would be 'other- ment of property. It managed rented prop- wise where the holding is accompanied by erty on behalf of the owners and acted as a direct or indirect involvement in the man- manager of condominiums. It received agement of the companies in which the advances from the owners, which were holding has been acquired, without preju- paid into a bank account operated by dice to the rights held by the holding Régie, which then invested them, by way company as shareholder'. 22 of diverse treasury placements, with finan- cial institutions on its own account. Régie apparently, however, became the owner of the sums invested and was entitled to retain the interest earned on the placements, albeit subject to a contractual obligation ultimately to repay the relevant principal amounts. In reality, therefore, as the appli- 22. The situation contemplated by this cants contended at the hearing, Régie's qualification did not arise on the facts of remuneration from its additional invest- Polysar or on those of any of the later ment activities was limited to the interest cases. 23 In Wellcome Trust and Harnas & received. Helm, the Court mentioned, by reference to Article 13B(d)(5) of the Sixth Directive, that 'transactions ... effected as part of a commercial share-dealing activity or in order to secure a direct or indirect involve- ment in the management of the companies 24. The Court accepted that the placements by Régie with financial institutions could 21 — Paragraph 15. 22 — Paragraph 14. This statement was later cited at para- graph 12 of the judgment in Sofitam. 24 — Paragraphs 35 and 16 of the respective judgments. 23 — As regards Sofitam, see the discussion in paragraph 20 and 25 — Case C-306/94 [1996] ECR I-3695 (hereinafter 'Régie the accompanying footnote 16 above. Dauphinoise').

'be regarded as services supplied to those as coming potentially within the Polysar institutions, consisting in the loan of money qualification, namely share-dealing opera- for a fixed period, duly remunerated by the tions and active management of property. payment of interest' 26 and, moreover, that However, each of these can be indepen- 'unlike the receipt of dividends by a holding dently justified by reference to the terms of company ... interest received by a property the Sixth Directive. Transactions in shares management company on investments are explicitly covered by the wording of an made for its own account of sums paid by exemption (Article 13B(d)(5), quoted in co-owners and lessees cannot be excluded footnote 3 above), while Article 4(2) cov- from the scope of VAT, since the interest ers 'the exploitation of tangible or intangi- does not arise simply from the ownership of ble property...'. Advocate General Van the asset, but is the consideration for Gerven in his Opinion in Polysar drew a placing capital at the disposition of a third careful distinction between the latter type party'. 27 The Court was nevertheless care- of activity and simple investment when ful to distinguish the activities of an under- pointing out that both Rompelman and taking like Régie from simple 'placements Van Tiem 'were concerned not only with made with banks by the manager of a an investment, that is to say the acquisition condominium' who was not 'acting as a of property ... but also with the property taxable person'. 28 Accordingly, it conclu- acquired subsequently being made avail- ded that: 29 able to a third party for consideration (in the former case by the letting of the apartment and in the latter by the grant of building rights over the plot)'. 30 He then distinguished between the mere acquisition of property, on the one hand, and its being made available, on the other, for the '... in the case at issue in the main purposes of determining whether such proceedings, the receipt, by such a man- property has been economically exploited ager, of interest resulting from the place- for VAT purposes. 31 The part of his ment of monies received from clients in the Opinion which is particularly pertinent to course of managing their properties consti- the present case also casts the most light on tutes the direct, permanent and necessary the proper interpretation of the Polysar extension of the taxable activity, so that the judgment and is worthy of full citation: 32 manager is acting as a taxable person in making such an investment.'

court has pointed out that Polysar's activ- profits and to declare (and possibly pay ities are concerned solely with the holding out) dividends. of shares in subsidiary companies. It seems to me that such activities, which are under- taken in the exercise of shareholders' rights, do not constitute "economic activities" within the meaning of the directive. The exercise of those rights includes, for instance, participation in the general meet- ing of the subsidiary's shareholders, the Nor, in my view, is there any question of exercise of the right to vote at the meeting economic activities independently carried and the possibility of influencing company on within the meaning of Article 4(1) of the policy thereby and, where appropriate, Sixth Directive in the case of activities involvement in the decision appointing the which the holding company, or persons company's directors or officers and/or acting in its name, carries out in its capacity apportioning the subsidiary's profits, as as director or officer of a subsidiary well as the receipt of any dividends company. A director or officer of the declared by the subsidiary or the exercise company does not act on his own behalf of shareholders' preferential rights or but only binds the (subsidiary) company options. whose instrument he is; in other words, where he acts in the exercise of his duties under the company instruments, there is no question of his acting "independently". In that regard, his actions must be equated with those of an employee who, as Arti- cle 4(4) of the Sixth Directive expressly states, does not act "independently".'

which, like any other company, it carries on instead by a specially nominated company through its organs and which, in so far as within the group. 34 they are conducted within the company (in its relations with the shareholders and the company's organs), also cannot be regarded as "economic activities"...'. 33 The Advo- cate General did not, however, deal with the suggestion implicit in the national court's question in the present case that 28. In short, where the corporate structure the provision of management and other is properly respected, dividends paid by a services to a subsidiary, even pursuant to subsidiary to a parent do not consist of taxable transactions (and I presume con- 'economic activities'. The situation envi- tractual relationships), leads to a different saged by the exception in Polysar cannot in result. I do not believe it does. To my mind, effect arise in any case where the veil of the implication of Advocate General Van incorporation has not been illegally brea- Gerven's remarks regarding acting 'in the ched by the parent company. It remains, of exercise of ... duties under the company course, possible for it to apply to cases instruments' are equally applicable to where there is no corporate structure, i.e. objective contractual relationships such as where an unincorporated body or an indi- those involved in this case between a parent vidual directly exploits property. and subsidiary.

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comprise payments made out of profits to on directly related outputs would patently the shareholders in a company. 35 Indeed, contradict a basic tenet of the VAT system. the Court expressly stated in Sofitam that As this would be the consequence of 'the receipt of dividends is not considera- including non-economic activities in the tion for any economic activity within the denominator of the fraction prescribed by meaning of the Sixth Directive'. 36 The Article 19(1) of the Sixth Directive, I would situation could only be different where, recommend that the Court reject such an notwithstanding the separate legal person- interpretation of the Directive. ality of the subsidiary, a controlling share- holder has been able to use its shareholding and consequential influence on the manage- ment of the subsidiary to extract additional 'payment' for separate taxable services provided by it to that subsidiary. There is nothing in the case-file to suggest that this occurred in the instant case.

(ii) Interest on loans

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it derives from the mere ownership of in the case-file to indicate that such lending bonds'. 38 However, it appears from the activity occurred other than on a wholly order for reference in this case and from the occasional, if not rare, basis. In the present submissions of the parties that the appli- case, it is clear from the order for reference cants provide finance on a continuing basis that lending to their subsidiaries is one of to cover the cash-flow needs of their the applicants' ongoing activities. It seems subsidiaries, which are often not in a to me therefore to be much more akin to position easily to raise finance indepen- the money-management operations consid- dently. ered by the Court in Régie Dauphinoise than to the portfolio-management activities at issue in Wellcome Trust. It is on this basis, essentially, that Belgium argues that the activity should be viewed as being economic.

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would reiterate the view I expressed in my little, the economic nature of their under- own Opinion in Harnas & Helm that: 4 2 lying activities is different. It may be compared with the difference between the activities giving rise to the receipt of a dividend and those giving rise to a rent cheque, to which I alluded in my Opinion in Harnas & Helm. 43 To my mind the lending activity of Harnas & Helm, apart 'Attention should be focused on the eco- from the fact that it clearly occurred only nomic and commercial substance of trans- occasionally, was nevertheless more eco- actions that are alleged to constitute an nomic in nature because, unlike the appli- economic activity, as opposed to the formal cants, it furnished loans to third parties. financial or commercial classification (namely, in this case, as bond or share acquisitions and holdings) of those activ- ities. It follows, in my opinion, that a person who, like the appellant, deals in bonds may only be considered to be carrying on an economic activity if he is pursuing a business or commercial purpose; in this respect he must provide services to his customers as opposed merely to being a consumer of services.'

group for the purposes of permitting the entirely insignificant proportion of those latter to carry on their commercial activ- inputs relates to the performance of non- ities vis-à-vis third parties. It is clear, taxable transactions connected with the especially from the intra-group nature of shareholding and lending activities of the the loans at issue, that the lending activity applicants, no right to deduct may arise of the applicants is not an extension of their pursuant to Article 17(2) of the Sixth taxable service-provision activities but, Directive. A taxable person may only instead, an extension of their non-taxable deduct that proportion of its inputs which investment activities. may properly be assigned to its economic activities. 44 Every taxable person is obliged by Article 22(2) of the Sixth Directive to 'keep accounts in sufficient detail to permit application of the value added tax and inspection by the tax authority', while Article 22(4) requires 'every taxable per- son' to 'submit a return within an interval to be determined by each Member State', (iii) General conclusions which 'may not exceed two months follow- ing the end of each tax period', whose duration is, subject to a maximum of a year, to be determined by each Member State, although it may not 'exceed a year'. 37. Consequently, I recommend that share The taxable person who seeks to exercise dividends should be excluded from the the right to deduct in circumstances where denominator of the fraction used to calcu- some of its VAT inputs may relate to non- late the deductible proportions laid down taxable activities is obliged to establish, to by Article 19(1) of the Sixth Council the satisfaction of the relevant tax autho- Directive. Similarly, interest earned on rities, the proportion of those inputs which intra-group loans, even if made available it claims are attributable to taxable trans- on an ongoing basis, should also be so actions and thus capable of being deducted. excluded provided, first, that they are furnished from funds derived from income on such share dividends rather than from income derived from a separate taxable activity and, second, that they are made available only to subsidiary companies.

Share dividends should always be excluded from the denominator of the fraction used to calculate the deductible proportions laid down by Article 19(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 — Common system of value added tax: uniform basis of assessment, where the economic relationship between the company owning the shares and the company in which the shares are held is governed by lawfully adopted legal arrangements including contracts for the provision of services and the nomination by a parent company of persons who carry out the activities of the subsidiary. Furthermore, where one company in a group provides, even on a continuing basis, loan finance to meet the regular borrowing needs of other companies in the same group, that activity does not constitute economic activity and the income from such finance should also be excluded from the denominator of that fraction.

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