C-177/99

AMPAFRANCE AND SANOFI

OPINION OF ADVOCATE GENERAL COSMAS delivered on 23 March 2000 *

Table of contents

I — Introduction I - 7016 II — Facts and procedure I - 7016 A — Case C-177/99 I - 7016 B — Case C-181/99 I - 7017 III — The legal background of the two cases under consideration I - 7017 A — Relevant provisions of the Sixth Directive I - 7017 B — National tax law I - 7020 C — Impugned Council Decision 89/487 I - 7021 IV — Case-law of the Court of Justice I - 7022 A — Article 17 of the Sixth Directive I - 7023 B — Article 27 of the Sixth Directive I - 7026 V — Subject-matter of Decision 89/487 I - 7028 A — Arguments of the parties I - 7028 B — My view of the problems raised above I - 7031 (a) The provisions of the Sixth Directive in respect of which Decision 89/487 authorised derogation I - 7031 (b)The scope of the exclusion from the right to deduct VAT authorised by Decision 89/487 I - 7032 VI — The legality of Council Decision 89/487 I - 7035 A — Arguments of the parties I - 7035 (a) Ampafrance I - 7035 (b) Sanofi I - 7037 (c) French Government I - 7038 (d) Commission I - 7040 (e) Council I - 7041 B — My view of the problems set out above I - 7042 VII— Conclusion I - 7049

* Original language: Greek.

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I I— Facts and procedure 'The resolution of this dispute depends on whether the provisions of the Decision [89/487/EEC] of 28 July 1989 of the Council of the European Communities authorising the French Government to A —Case C-177/99 derogate from the standstill clause intro- duced by Sixth Directive 77/388/EEC of the Council of 17 May 1977 and to extend to 2. In the course of its business activities third parties exclusions of expenditure on Ampafrance SA (hereinafter 'Ampafrance') accommodation, food, hospitality and incurs sundry expenditure on accommoda- entertainment from the right to deduct tax tion, food, hospitality and entertainment are compatible, first, with the objectives of both for its staff and for third parties. It the Sixth Directive and in particular Arti- therefore attempted to deduct the full cle 27... and, second, with the principle of amount of the value added tax (VAT) on proportionality between the tax objective expenditure of this kind for June 1993. The pursued and the means employed. Only the answer to that question, the solution of which is not obvious, will enable an 1 — OJ 1989 L 239, p. 21. assessment to be made of whether the pleas 2 — OJ 1977 L 145, p. 1. in this application are well-founded. It is

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III— The legal background of the two 5. The company Sanofi Winthrop SA, cases under consideration which became, following mergers, first Sanofi on 12 May 1998 and then Sanofi- Synthelabo on 18 May 1999 (hereinafter 'Sanofi'), brought an action before the national court against the Director of Tax Services of Val-de-Marne on the following grounds: the competent tax authorities had not approved the deduction of VAT relating to expenditure incurred in November and A — Relevant provisions of the Sixth December 1993 to provide hospitality for Directive suppliers and clients by the Choay Clin Midy and Millot Solac laboratories, whose rights and obligations had been taken over by the applicant. The resolution of the dispute required an examination of the legality of Decision 89/487, on which the 7. Article 17 of the Sixth Directive con- current provisions of Article 236 of cerns the origin and scope of the right to Annex II to the CGI were based. deduct VAT. Under paragraph 2:

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'In so far as the goods and services are used Until the above rules come into force, for the purpose of his taxed transactions, Member States may retain all the exclu- the taxable person shall be entitled to sions provided for under their national laws deduct from the tax which he is liable to when this Directive came into force.' pay:

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10. Moreover, in its Proposal for a Twelfth avoidance. Measures intended to simplify Directive of 25 January 1983, 4the Com- the procedure for charging the tax, except mission formulated specific and detailed to a negligible extent, may not affect the rules prohibiting deduction of the tax in amount of tax due at the final consumption respect of expenditure on transport, accom- stage. modation, food and drink, and also on hospitality, entertainment and luxuries. That proposal was withdrawn following continual disagreements within the Council and, since then, it has not been possible to adopt common rules concerning the restric- 2. A Member State wishing to introduce tions which must be imposed on the right the measures referred to in paragraph 1 to deduct VAT. Recently, in a proposal for shall inform the Commission of them and a directive submitted to the Council on shall provide the Commission with all 17 June 1998, 5the Commission suggested relevant information. that the deduction of VAT on expenditure on accommodation, food and drink should be restricted to 50%, owing to the dual business and private nature of the expen- diture in question. On the other hand, the 3. The Commission shall inform the other Commission considered that deduction of Member States of the proposed measures VAT should be excluded in respect of within one month. expenditure on luxuries, amusements or entertainment, because such expenditure is not of a strictly business nature.

4. The Council's decision shall be deemed to have been adopted if, within two months of the other Member States being informed as laid down in the previous paragraph, 11. Under Article 27 of the Sixth Directive: neither the Commission nor any Member State has requested that the matter be raised by the Council.

13. After the Sixth Directive came into However, that exclusion shall not apply to force, that is, after 1 January 1979, Decree the tax on expenditure incurred in order to No 79-1163 of 29 December 1979 7was provide free accommodation at the place of adopted. Article 25 of that Decree replaced work for employees responsible for the Article 236 of the CGI with the following security or supervision of an industrial or provision: commercial complex or a works site.'

'Tax on goods or services used by persons not employed by the undertakings or by the Article 11: 'The tax on expenditure incur- management or staff of the undertaking, red in order to satisfy the personal needs of such as accommodation or lodging, the cost the management and staff of undertakings, of hospitality, food or entertainment or any and in particular the tax on the cost of expenditure directly or indirectly connected providing hospitality, food and entertain- with travel or residence shall not be deduc- ment, shall not be deductible. tible.

6 — JORF of 28 July 1967, p. 7541. 7 — JORF of 31 December 1979, p. 3333.

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However, that exclusion shall not apply to ity and entertainment shall be excluded work clothes or protective clothing, pre- from the right of deduction. mises and equipment provided to staff at the workplace, or to accommodation pro- vided free of charge for security or super- visory staff at the workplace.' However, that exclusion shall not apply to:

tem of the Sixth Directive, on the basis of 2. The exclusion referred to in paragraph 1 Article 27 thereof. In particular, they asked shall not apply to: for permission to prohibit deduction of VAT on expenditure on accommodation, restaurants, hospitality and entertainment.

— expenditure incurred by a taxable per- son in respect of the supply by him of accommodation, meals, food or drink for consideration,

17. In the preamble to Decision 89/487, the Council had regard to the fact that 'this measure is aimed at excluding other expen- diture in respect of accommodation, res- taurants, hospitality and entertainment — expenditure on accommodation provi- from the right to deduct VAT previously ded free of charge for security, caretak- charged, in order to prevent tax evasion ing or supervisory staff on works, sites and avoidance'. or business premises,

— expenditure incurred by a taxable per- son in carrying out his contractual or 18. Article 1 of Decision 89/487 provides: legal responsibility towards customers.'

IV — Case-law of the Court of Justice ' 1 . By way of derogation from the second subparagraph of Article 17(6) of the Sixth Directive, the French Republic is hereby authorised, on a temporary basis and until such time as Community rules determining 19. Before analysing the various compo- the treatment of expenditure referred to in nents of the reply to the questions referred the first subparagraph of that paragraph for a preliminary ruling in this case, it is come into force, to exclude expenditure in necessary to consider the focal points of the respect of accommodation, food, hospital- interpretation placed on Articles 17 and 27 ity and entertainment from the right to of the Sixth Directive in the case-law of the deduct value added tax previously charged. Court of Justice.

11 — Ibidem, paragraph 15. Emphasis added. 12 — Ibidem, paragraph 16. 13 — Ibidem, paragraph 19. In that judgment the Court 21. In particular, in its judgment in Com- ultimately held that the French fiscal system, which, for undertakings that let immovable property which they had mission v France, 10 the Court declared that acquired or had built, limited the right to deduct value- 'from the features of VAT... it may be added tax paid on inputs where the amount of the proceeds of the letting of such immovable property was inferred... that the deduction system is ess than one fifteenth of its value, was contrary to the applicable Community tax rules. meant to relieve the trader entirely of the 14 — Case 165/86 Intiem (1988) ECR 1471. burden of VAT payable or paid in the 15 — Ibidem, paragraph 14. course of all his economic activities. The 16 — It must be pointed out, however, that Article 17 cannot be interpreted so widely as to extend the right to deduct VAT common system of VAT consequently to circumstances or economic activities which do not fall ensures that all economic activities, what- clearly within the scope of that article. For example, in Case C-4/94 BLP Croup [1995] ECR I-983, the Court ever their purpose or results, provided that held that, 'to give the right to deduct under paragraph 2, the goods or services in question must have a direct and they are then subject to VAT, are taxed in a immediate link with the taxable transactions, and... the ultimate aim pursued by the taxable person is irrelevant in this respect' (paragraph 19). Accordingly, except in the cases expressly provided for by the Community directives relating to VAT, 'where a taxable person supplies services 9 — As regards the principle of tax neutrality, see Case 268/83 to another taxable person who uses them for an exempt Rompeiman [1985] ECR 655; Case C-110/94 Inzo [1996] transaction, the latter person is not entitled to deduct the ECR I-857; and Case C-37/95 Ghent Coal Terminal [1998] input VAT paid, even if the ultimate purpose of the ECR I-1, which are cited by Ampafrance. transaction is the carrying out of a taxable transaction' 10 — Case 50/87 Commission v France [1988] ECR 4797. (paragraph 28).

26. The Court followed the same line of argument in the case of Royscot and Others, 22 which concerned, as did Case C-43/96 Commission v France, the compat- ibility with Community law of national derogations which prohibited the deduc- tion of VAT on the purchase of motor cars. 24. The standstill clause in Article 17(6) of The Court held that it followed from the the Sixth Directive is considered to be such wording of the disputed standstill clause a derogation from the general deduction 'which is clear and unambiguous, that rule. Nevertheless, in two recent judg- Article 11(4) authorised Member States to ments, the Court has refused to interpret exclude from the right of deduction even this exception strictly and has thereby expenditure which is strictly business- accorded the Member States considerable related...'. 23 Consequently, the discretion latitude. 20 — Case C-43/96 Commission v France (1998] ECR I-3903. 21 — Paragraph 18 of Case C-43/96 Commission v France, cited 17 — Case C-62/93 BP Supergas [1995] ECR I-1883. in footnote 20. 18 — Ibidem, paragraph 16. 22 — Case C-305/97 Royscot and Others [1999] ECR I-6671. 19 — Ibidem, paragraph 18. 23 — Ibidem, paragraph 23.

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conferred on the Member States is espe- clause, of subsequent amendments to cially wide; the only restriction imposed on domestic law. 26 the national authorities is that they may not 'exclude all and any goods and services from the system of the right of deduc- tion;..'. 24

28. To understand the approach taken by the Court regarding the interpretation of Article 17(6) of the Sixth Directive it is

27. Another aspect of that judgment is also from the common provisions contained in the Sixth Directive, and under which, the German Government significant. The Commission had main- contended, German legislation governing the taxation of travel agencies ought to be considered compatible with tained that a Member State might lose the Community law. However, the Court held that, since Germany had not, and did not deny that it had not, right to retain exclusions of the right of maintained, for the various transactions performed by deduction, based on the standstill clause travel agencies, the general VAT scheme applicable before the Sixth Directive came into force, but had adopted a contained in Article 17 of the Sixth Direc- special tax scheme, it could no longer rely on the standstill

Directive. It observed that to construe a standstill clause of the clause do not justify the Member narrowly, to the effect that a Member State may maintain the legal system existing at the time of the adoption of the States losing their rights under the clause. Sixth Directive, but may not limit its scope or abolish it, In any event, however, the Court did not even only partially, would have adverse effects for the uniform application of the Sixth Directive (see para- deal in depth with the matter of the effects, graph 20 of the judgment in Norbury Developments). It is evident from the aforementioned judgments that, with regard to application of the standstill where a Member State has applied a standstill clause in the Sixth Directive to retain the national legislation adopted before the Sixth Directive came into force, it may introduce amendments or limitations to that legislation, on condition, however, that those amendments are not in 24 — Ibidem, paragraph 24. breach of the fundamental principle of legal certainty.

question. However, the Commission argues, the United powers conferred on the Member States by the standstill Kingdom lost that right following an amendment of clause are not necessarily withdrawn from them merely national law which was contrary to the standstill clause because they have amended the national scheme which has in Article 17(6) of the Sixth Directive.' been retained by virtue of the clause.

B — Article 27 of the Sixth Directive

29. So far as concerns Article 27 of the Sixth Directive, which provides that the Council may authorise any Member State 31. Subsequently, in its judgment in Direct to introduce special national measures for Cosmetics I, 32 the Court pointed out that derogation from the directive, in order to the derogations provided for in Article 27 of the Directive were by way of exceptions. National legislation which diverges from 27 — See points 9 and 10 of this Opinion. the rules of the Sixth Directive, pursuant to 28 — The first subparagraph of Article 17(6) of the Sixth Directive. I should say that, in my opinion, such ineffi- Article 27(5), cannot be interpreted widely. ciency may justify an action against the Council under Subsequent amendments to that legislation Article 232 EC. 29 — Paragraph 19 of the judgment in Case C-43/96 Commis- sion v France, cited in footnote 20, and paragraphs 14 to 19 of the Opinion delivered in that case by Advocate General Jacobs. 31 —Judgment in Case 324/82 Commission v Belgium [1984] 30 — Points 74 to 77 of the Opinion delivered by Advocate ECR 1861. General Léger in Case C-305/97 Royscot and Others, cited 32 — Case 5/84 Direct Cosmetics v Commissioners of Customs in footnote 22. and Excise [1985] ECR 617.

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which extend the scope of application of 33. That case-law also served as a basis for the national rules derogating from the Sixth the judgment in BP Supergas, 37 according Directive are compatible with Community to which national measures derogating law only if they are approved by the from the Sixth Directive 'do not accord Council in accordance with the provisions with Community law unless they remain of Article 27(2) of the Sixth Directive. within the limits of the objectives referred to in Article 27(1) and have also been notified to the Commission and impliedly or expressly authorised by the Council in the circumstances specified in para- graphs (1) to (4) of Article 27.' 38

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objective facts show that the taxable person stances of a Member State ultimately has acted properly.' 41 On these grounds the excluding almost all goods and services Court limited the scope of application of from the right of deduction scheme. the authorisation granted to Germany by the Council.

V — Subject-matter of Decision 89/487

37. Ampafrance first of all sets out its view 41 — Ibidem, paragraph 26. of the applicable tax law in France. It

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nature. Ampafrance also points out that, in not only that which taxpaying companies its judgment of 3 February 1989 in the incur in respect of third parties. Ampa- Alitalia case, the French Conseil d'État held france maintains that, since the French that the exclusion of the right to deduct Republic had kept the 1967 Decree in VAT payable on the expenditure at issue, force, the standstill clause in Article 17 of which the taxable person had incurred for the Sixth Directive allowed it to exclude the benefit of third parties, was incompa- from the right to deduction of VAT only tible with Community law.

expenditure relating to accommodation, therefore lost the opportunity to invoke the standstill clause at the time it initiated the procedure under Article 27 of the Sixth 42 — It invokes, in particular, the judgments of 9 July 1977 in Directive. Ampafrance draws the conclu- Chaussures Myris and 13 February 1980 in SA Loca- france. sion that the logical consequence of this is

39. Sanofi took the same view during the hearing. It maintained that the subject- matter of the impugned decision included all expenditure relating to accommodation, 41. In this respect the Commission explains restaurants, hospitality and entertainment, that the derogation from the general provi- irrespective of the status of the person for sions of the Sixth Directive which was whose benefit it was incurred. introduced by Decision 89/487 relates to Article 17(2) of the Sixth Directive, not Article 17(6) as inadvertently stated in Decision 89/487. According to the Com- mission, the request submitted by the 40. On the other hand, the French Govern- French authorities referred to Article 17(2) ment claims that the subject-matter of of the Sixth Directive and consisted in the Decision 89/487 is manifestly narrower amendment of the current national legisla- than as described by the applicants in the tion towards extending the exclusion from main action. In this connection it cites the the right to deduction of VAT particularly judgment given by the French Conseil in respect of expenditure incurred by tax- d'État in the Alitalia case, from which it paying companies for the benefit of third infers a contrario that the general exclusion parties. The Commission maintains that from the right to deduction of VAT on that narrow interpretation of Decision expenditure relating to accommodation 89/487 is based only on the judgment of and so forth for the management and staff the Conseil d'État in the Alitalia case, in of taxpaying companies, an exclusion which it held that the extension of the which had already been introduced by the national scheme of exclusions from the 1967 Decree, was covered by the standstill right to deduct VAT was contrary to clause in Article 17(6) of the Sixth Direc- Community law only in so far as it tive and was not, therefore, contrary to concerned the specific category of expen- Community law. After the Alitalia judg- diture incurred for the benefit of third ment, and in order to tackle the specific parties. problem of the tax treatment of expendi- ture incurred by companies for the benefit of third parties, the French Republic deci- ded to take advantage of the opportunity offered to it by Article 27(1) of the Sixth Directive and submitted a request to the 42. At the hearing the parties attached Commission. The French Government great importance to the problem of speci- maintains that, as a consequence, given fying from which provisions of the Sixth the context in which the request was Directive the French Republic sought the submitted to the Community institutions, authorisation to derogate granted to it by

Decision 89/487. The Commission again of Article 17(6) of the Sixth Directive and/ argued that Article 17(2) was involved, not or those of Article 17(2). I am of the Article 17(6) as inadvertently indicated in opinion that the first of thesepropositions the text of the decision. The French Gov- cannot be upheld. The question might be ernment and the Council considered that raised, first of all, of what the introduction the derogation in question was perfectly of derogations from the standstill clause in correct and, in any event, concerned both the second subparagraph of Article 17(6) Article 17(2) and Article 17(6) of the Sixth consists in. A probable explanation is that Directive. The applicants in the main Decision 89/487 authorised the French proceedings pointed out that, since the text Republic to extend the scope of the stand- of Decision 89/487 referred to Article 17(6) still clause in question by introducing of the Sixth Directive, the Commission exclusions from the right to deduct VAT could not maintain that that was merely an going beyond those provided by national oversight. In so far as it authorised the law at the time the Sixth Directive came introduction of derogations from Arti- into force. In that case, however, it cannot cle 17(6), Decision 89/487 was invalid. be a question of extending the subject- matter of the standstill clause, since the problem which arises in France is not that pre-existing legislation is being retained but that new national provisions, which are contrary to the content of the Sixth Direc- tive, are being introduced. Those national provisions do not run counter to the standstill clause in Article 17(6) of the Sixth Directive; they are merely not covered by the clause in question. They do, how- ever, conflict with the provisions of Arti- B — My view of the problems raised above cle 17(2), and that is why it was necessary to apply to the Council for the authorisa- tion provided for in Article 27. It is there- fore contrary to the rationale of the Sixth Directive to rely on Article 27 of that directive in order to introduce national derogations from the standstill clause. Article 27 gives the Member States the opportunity to derogate from the provi- sions of the Sixth Directive by adopting (a) The provisions of the Sixth Directive in new measures, not by retaining provisions respect of which Decision 89/487 author- which were in force before that directive ised derogation was adopted. Such provisions are, in any case, covered by the standstill clause in Article 17(6), although it is not necessary for them to be approved by the Council under the procedure established in Arti- cle 27 of the Sixth Directive. Accordingly, the reference to Article 17(6) in Decision 89/487 is obviously incorrect and the 43. First of all, I shall examine whether Commission is right in pointing out that Decision 89/487 related to the provisions

46. It remains to be determined whether 45. However, I consider that this would be the exclusion from the right to deduct VAT too stringent a solution. I do not think that on expenditure relating to accommodation, the fact that the parties who cooperated in food, hospitality and entertainment, the adoption of the Community act in authorised by Decision 89/487, covers all question defined the relevant legal context such expenditure, irrespective of the status incorrectly is sufficient to justify an auto- of the persons for whose benefit it has been matic and irrevocable declaration that the incurred, or whether it applies only to

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48. As regards Decision 89/487 itself, it 47. I consider that the reasoning of the should be pointed out that its scope of French authorities, as expressed in their application is clearly defined. It excludes letter of 13 April 1989 to the Commission, from the right to deduct VAT all expendi- contains a fundamental contradiction. ture 'in respect of accommodation, food, Firstly, they imply that, under national hospitality and entertainment', irrespective law, the exclusion from the right to deduct of the status of the person for whose benefit VAT on the expenditure in question, relat- the company incurs it. In other words, the ing to the staff and management of com- Community legislature allows derogations panies, is based on the aforementioned from the generally accepted rules of Arti- 1967 Decree which, in principle, is covered cle 17 of the Sixth Directive in connection by the standstill clause in Article 17(6) of with the expenditure in question generally. the Sixth Directive; on the other hand, the exclusion from the right to deduct VAT on expenditure of the same kind incurred by companies for the benefit of third parties, especially after the judgment given by the Conseil d'État in the Alitalia case, does not seem to have a legal basis in the national 49. The question arises whether, as the legislation prior to the Sixth Directive. French Republic and, indirectly, the Com- Secondly, the French Republic's request mission maintain, Decision 89/487, cor- for authorisation to derogate from the rules rectly interpreted, applies only to cases of

exclusion of the right to deduct VAT on seek an interpretation contra legem of expenditure incurred for the benefit of third Decision 89/487. parties and not for the benefit of the staff or management of the company, in view of the fact that the latter category of expenditure is already covered by national provisions which fall under the standstill clause in Article 17(6) of the Sixth Directive. I am unable to endorse the proposed solution which I have just described. It is tanta- mount to recognising the possibility of interpreting the content of an act of the Community institutions in the light of national law in a way that is contrary to its wording. Indeed, the wording of Deci- sion 89/487 leaves no room for doubt with 50. Finally, it should be pointed out that regard to its conceptual scope; it provides the position in French law invoked by the the French Republic with the opportunity French Republic is anything but clear. The to exclude from the right to deduct VAT all judgment of the Conseil d'État in the expenditure in respect of accommodation, Alitalia case merely gave indications — food, hospitality and entertainment, irre- which may be rebutted — that exclusion spective of the status of the persons for from the right to deduct VAT on the whose benefit it is incurred and irrespective expenditure at issue, incurred for the ben- of whether the expenditure is closely or efit of the management and staff of an loosely connected with the business activity undertaking, an exclusion for which the of the taxable person. To accept the posi- 1979 Decree made provision, was covered tion that Decision 89/487, despite its by the standstill clause, by means of the clarity, does not apply to all the cases earlier 1967 Decree. Moreover, it is not described in its provisions, but only to some clear whether the passage in Decision of them, having regard to the national 89/487 which authorises exclusion from legislation previously in force, first of all the right to deduct VAT on 'expenditure in undermines the very foundations of the respect of accommodation, food, hospital- Community legal order, because it makes ity and entertainment' is identical in sense the interpretation of a Community rule to the content of Articles 7 and 11 of the subject to the circumstances and specific 1967 Decree, under which, on the one features of national law. It also infringes the hand, 'the tax on expenditure incurred in fundamental principle of legal certainty, order to provide accommodation or lod- inasmuch as it allows a rule to be inter- ging for the management and staff of preted in a sense which conflicts with its undertakings shall not be deductible', and, wording, misleading those concerned as on the other, 'the tax on expenditure regards its scope of application. In any incurred in order to satisfy the personal event, in accordance with the general legal needs of the management and staff of principle nemo auditur proprium turpitu- undertakings, and in particular the tax on the cost of providing hospitality, food and dinem allegans, the French Republic cannot entertainment, shall not be deductible'. Leaving aside the difference in wording, the question arises as to whether the provisions of the 1967 Decree in question

51. In the light of the foregoing, I believe that it would not be right to attempt to restore the meaning of Decision 89/487 A — Arguments of the parties through French law and to reformulate the content of the decision to the effect that it authorises the French Republic to exclude certain expenditure from the right to deduct VAT only in cases in which the expenditure is incurred for the benefit of persons outside the taxpaying company, (a) Ampafrance and not when it relates to the management and staff. I therefore take the view that the 52. Ampafrance maintains that Decision 89/487 is contrary to the objectives of Article 27(1) of the Sixth Directive and 43 — See, above, the arguments developed on this point by does not satisfy the requirements of the Ampafrance and the case-law of the Conseil d'État to principle of proportionality. which that party refers (point 37 of this Opinion). 44 — That solution is also supported by a literal interpretation of the 1967 Decree, from which it seems clear that, although the accommodation expenses of the management and staff of undertakings are excluded altogether from the right to deduct VAT, the other, related expenditure (food, entertainment, etc.) is excluded only if it is incurred in 53. As far as concerns the objectives of connection with the 'private needs' of the workers. Article 27, these are only to simplify the

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Accordingly, Consequently, the French authorities were in so far as they create an irrebuttable not seeking to take action against the risks presumption that an exclusion from the exhaustively listed by the Sixth Directive, right to deduct VAT is possible even when it but to establish a mechanism which would is shown that there is no risk at all for the make it possible for them no longer to have levying of the tax, the Community provi- to examine whether or not certain expen- sions in question are disproportionate to diture was business expenditure.

incurred in the interests of the company. Annex II to the CGI provides that VAT According to Ampafrance, that observation charged on goods and services which is enough to establish that there is no actual taxable persons acquire or obtain for risk of tax evasion or avoidance linked to themselves is deductible only if those goods deduction on expenditure in respect of and services are 'necessary' to their business hospitality. Furthermore, Ampafrance activity. The strict application of that rule believes that Decision 89/487 was adopted would be enough to ensure fiscal legality in a way that constituted an abuse of the and to make it possible to carry out process prescribed by Article 27 of the effective tax inspections.

45 — Sec the judgment in Skripalle, cited in footnote 39, paragraph 30. 46 — See point 14 above.

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general expenses with the fiscal year's question referred for a preliminary ruling, results. Lastly, Ampafrance infers from the which disputes the validity of an act of the judgment in Case 324/82 Commission v Community institutions, is admissible, it Belgium 47 that the national measures to concentrates its analysis on the issue of prevent tax evasion or avoidance may proportionality. It maintains that Decision derogate from the general scheme of the 89/487 does not satisfy the requirements of Sixth Directive only within the limits which the principle of proportionality because the are strictly necessary to achieve that objec- objective pursued by the decision could be tive. Since there are measures which are less achieved by other means less prejudicial to onerous for taxable persons than a general the objectives of the Sixth Directive. It also and systematic exclusion from the right to believes that the case pending has simila- deduct VAT on the expenditure at issue, this rities with Case 324/82 Commission v exclusion is incompatible with Community Belgium, 48 in which the Court held that law. national provisions derogating wholly and systematically from the rules of the Sixth Directive were disproportionate to the objective pursued. Furthermore, according to Sanofi's observations, the statement of reasons for Decision 89/487 is very brief and consequently does not explain why the 55. To sum up, Ampafrance considers that derogation proposed by the French Repub- Decision 89/487 does not fulfil the require- lic had to be authorised. Those omissions in ments of the principle of proportionality its statement of reasons mean that the because it introduces, in a general and proportionality of the decision adopted absolute way, an irrebuttable presumption cannot be reviewed, and Decision 89/487 of the existence of a risk of tax evasion and is therefore unlawful. avoidance without the tax authorities hav- ing to show proof of the risk and without the taxable person being able to adduce evidence in rebuttal, although under French law there are less restrictive measures for dealing with this kind of situation.

question is not considered by the French (c) French Government legislature as automatically constituting tax evasion or avoidance. Consequently, the. introduction of an irrebuttable presump- tion of tax evasion or avoidance constitutes a disproportionate measure for protecting fiscal legality, inasmuch as this could have been ensured by an effective, specific inspection of the expenditure concerned. Sanofi believes that such a form of effective inspection is provided by Article 230 of Annex II to the CGI, under which any expenditure which is not incurred in the 'interest' of the company may not be 59. The French Government points out, subject to a deduction in respect of VAT. first, that the fundamental objective of the VAT system is to tax final consumption, not intermediate consumption which takes place in the course of another taxable activity. 4 9 However, in the case of certain categories of expenditure, it is not always easy to establish whether it is incurred to meet business or private needs, which is the criterion for establishing whether the con- sumption is final or intermediate. This difficulty suffices to pave the way for tax evasion or avoidance on the part of taxable 58. Lastly, Sanofi puts forward two further persons, as the Commission has already arguments: first, it refers to the national pointed out in its proposals for the Sixth law of a large number of Member States, and Twelfth Directives. 50 This is also the under which the expenditure in question is reason why Article 27(1) of the Sixth deductible; it does not, therefore, under- Directive provided for the possibility of stand the difficulties in controlling tax adopting special derogating measures to evasion and avoidance to which the French deal with the risk of tax evasion or Government has referred and which the avoidance. That being the case, in view Council has conceded do exist. Secondly, it of the risks of tax-free final consumption, points out that the derogation at issue, particularly in respect of expenditure on which Decision 89/487 authorised the accommodation, food, hospitality and French Republic to introduce, is provi- entertainment, and of the difficulty in sional in nature; nevertheless, the Council's distinguishing between business and private inability to adopt the measures envisaged in expenditure, the French Government con- the first subparagraph of Article 17(6) of siders that Decision 89/487, at issue in this the Sixth Directive is perpetuating that case, is wholly compatible with the objec- temporary situation and inevitably makes tive defined in Article 27 of the Sixth the derogation disproportionate to the Directive. objective pursued. In the light of the above considerations, Sanofi proposes that the Court should declare Decision 89/487 49 — The French Government refers Case C-165/88 ORO Amsterdam Beheer [1989] ECR 4081, paragraph 20. invalid. 50 — See points 9 and 10 of this Opinion.

60. The French Government also draws hand, Article 1(2) of Decision 89/487 lists attention to the fact that, for the same the cases in which, because the expenditure reasons, most of the Member States imple- in question is of a business nature, VAT ment similar measures. With regard speci- may be deducted. fically to its own case (France), it maintains that the judgment of the Conseil d'État in the Alitalia case 51 created a significant risk of tax evasion and avoidance on the part of undertakings and made it more difficult to monitor the purpose of the expenditure at issue, in so far as it encouraged under- 62. According to the French Government, takings to incur ever higher expenditure for the exclusion from the right to deduct VAT, the benefit of third parties. which is at issue in this case, is necessary since there are no other satisfactory means of monitoring the nature of the expenditure in question. For example, it is not possible to establish, from the receipts issued in the name of a company, the persons for whose benefit the expenditure has been incurred. 61. As regards the principle of proportion- Furthermore, to allow the relevant sums to ality, the French Government considers that be deducted on the basis of information Decision 89/487 meets the requirements of supplied by the company itself would have the principle, as set out in the case-law of the undesirable result of multiplying the the Court. It recalls in particular the view legal and extralegal disputes relating to the taken by the Court in its judgment in real nature of the expenditure in question. Molenheide and Others, 52 in which it held that 'in accordance with the principle of proportionality, the Member States must employ means which, whilst enabling them effectively to attain the objective pursued by their domestic laws, are the least detri- mental to the objectives and the principles 63. The French Government also takes the laid down by the relevant Community view that a comparison of the situation legislation.' The French Government main- before the Court in this case and the system tains that exclusion from the right to in force in France, as regards corporation deduct VAT in respect of expenditure in tax, is irrelevant, owing to the fundamental relation to accommodation, food, hospital- differences between that tax and VAT. VAT ity and entertainment, for which Decision is a tax on final consumption and is based 89/487 provides, is limited to cases in on a mechanism which ensures the neutral- which there is an actual risk of tax evasion ity of the tax; VAT deductions apply or avoidance and which relate to circum- exclusively to expenditure incurred for the stances in which it is impossible to deter- purpose of taxed operations. On the other mine whether the expenditure in question is hand, corporation tax and income tax are of a business or private nature; on the other calculated on income or net profits, that is to say, gross sums from which the expen- diture necessary to acquire the income or 51 — See point 14 above. profits is deducted. Moreover, the French 52 — Joined Cases C-286/94, C-340/95, C-401/95 and C-47/96 [1997] ECR I-7281, paragraph 46. Government would consider arbitrary a

64. At the hearing, the French Government requested that the Court, if it ultimately held that Decision 89/487 was unlawful, should limit the effects of its judgment by declaring the decision invalid ex nunc; it 66. The Commission concludes, in the light based this request on the need to protect of the foregoing considerations, that it was the legitimate expectations of the French fully entitled to accept the reasons given by authorities with respect to the lawfulness of the French authorities that there was, in the decision. this case, a significant risk of breach of the VAT rules: companies are likely to incur expenditure, in the form of gifts or other benefits in kind, from which VAT should not be deducted because it is not connected to their activities, without its being estab- lished to what extent such expenditure relates to the company's management and (d) Commission staff or to third parties. Furthermore, the French authorities themselves have speci- fied the circumstances in which there is no risk of tax evasion or avoidance and have 65. The Commission recalls the case-law of omitted them from the exclusions from the the Court of Justice relating to the applica- right to deduct VAT; these are the circum- tion of the principle of proportionality in stances listed in Article 1(2) of Decision connection, specifically, with Article 27 of 89/487. the Sixth Directive. It deduces from this that it would be contrary to Community law to impose restrictions on the right to deduct VAT in circumstances in which, first, it has been objectively proved that no 67. The Commission also points out that tax evasion or avoidance can be attributed the temporary derogation authorised by to the taxable person and, secondly, the restrictions introduced do not comprise derogations that are absolutely necessary 53 — The first subparagraph of Article 17(6) of the Sixth in order to prevent the risk of tax evasion Directive.

Decision 89/487 applies, in actual fact, to (e) Council circumstances in which there is a serious risk of tax evasion or avoidance. It con- siders that the risk is sufficiently proven, even though the statement of reasons for the decision is succinct. It refers, in parti- cular, to certain specific cultural features of France, where some transactions are con- cluded 'between the fruit and the cheese', which explains why other Member States, in which such matters are conducted very 69. In its observations, the Council argues differently, have not provided for similar that Decision 89/487 is lawful. It considers exclusions. The Commission adds that the that the decision is justified because it is disputed prohibition authorised by the difficult, if not impossible, to ascertain Council has the advantage of clarity, sim- effectively the nature (business or other- plicity and legal certainty, for both busi- wise) of the expenditure in question. More- nesses and tax authorities. Consequently, over, according to the Council, the Com- the Commission maintains that the mea- munity legislature's compliance with the sures covered by Decision 89/487 are principle of proportionality is apparent in warranted and satisfy all the requirements the fact that Article 1(2) of Decision of the principle of proportionality, that is to 89/487 stipulates the circumstances in say, they are necessary, appropriate and which VAT on the expenditure in question proportionate, in the strict sense of the may be deducted in so far as it is objectively word. proved that it is connected with the busi- ness activity of the company. The Council also points out that, under the provisions of the Sixth Directive, VAT is deductible only in respect of expenditure which is strictly business expenditure, which excludes VAT relating to expenditure on what might be described as 'luxuries'. It also considers that Decision 89/487 is justified irrespec- tive of whether it is established that there is an intention on the part of the taxable person to evade or avoid tax or whether 68. However, the Commission believes that there is tax evasion or avoidance. The mere the national authorities, when called upon fact that the nature of the expenditure to implement the general and vague mea- concerned enables it to be used as a sure approved by Decision 89/487, must potential means of evading or avoiding carry out a specific review of tax situations, tax, which is difficult for the tax authorities so as to distinguish the cases in which there to monitor, is enough to justify the provi- is a genuine risk of tax evasion or avoid- sions in question. It is not certain that the ance from those in which it is possible to use of another method of dealing with the establish objectively that certain expendi- problem, such as imposing a fixed limit on ture relating to accommodation, food, the amount of the deductions, would be hospitality and entertainment is strictly more consistent with the objective of the business expenditure and is eligible for a Directive, that is, deduction of VAT on deduction of VAT. intermediate business expenditure; such a

72. That is where the problem lies in this case. There is, of course, expenditure which B — My view of the problems set out above it is very difficult to categorise as business or other expenditure. Expenditure relating to accommodation, food, hospitality and entertainment, on which this analysis is concentrated, presents the greatest degree of difficulty in this respect, since its con- nection with a company's business activity 70. First of all, I do not dispute that the is not clear, which may well facilitate tax combating of tax evasion and avoidance is evasion or avoidance. Indeed, this is why it a legitimate and important aim of any tax has not been possible to adopt an overall authority seeking to implement the objec- legislative solution to the problem at Com- tives of the Sixth Directive and the proper munity level, as is evidenced by the diffi- working of the VAT mechanism. If that culties encountered during the preparation were not the case, the risk that taxation on of the Sixth and Twelfth Directives. 54 Even final consumption might be evaded would more so, for some of this expenditure it be contrary to the very philosophy of the may well be impossible in practice to tax system in question. separate business expenditure entitled to deduction of VAT from private benefits which are subject to tax, when only a total exclusion from the right to deduct VAT makes it possible to safeguard the public interest, namely penalising certain kinds of unlawful conduct on the part of taxable persons. It should be pointed out, once 71. In that connection, the Community again, that the proper working of the VAT legislature provided for a fundamental mechanism developed by Community tax distinction between expenditure of a legislation obviously requires action to strictly business character and that which counteract any kind of tax evasion or is unconnected with the taxpayer's business avoidance; the Community legislature activity, and has expressly excluded expen- recognises this necessity when it allows diture on luxuries, amusements or enter- the Member States to request and obtain tainment from the right to deduct VAT. from the Council authorisation to adopt, Only strictly business expenditure may be under Article 27 of the Sixth Directive, considered to relate to goods or services 'used [by the taxpayer] for the purposes of his taxable transactions', within the mean- 54 — See points 9 and 10 of this Opinion.

special measures for derogation from the 74. As a result, it is not impossible for the general provisions of that directive in order unqualified application of the system to to 'prevent certain types of tax evasion or exclude the right to deduct VAT introduced avoidance.' by Decision 89/487 to lead to the exclusion of the right to deduct VAT relating to company business expenditure; nor is that possibility disputed by those parties which maintain that the Community act under examination is lawful. In that way, how- ever, the attempt to rectify a problem created by a possible malfunctioning of the procedure for charging VAT (risk of tax evasion or avoidance), has, at the same time, an adverse and equally serious effect on that tax system, since it subjects to the tax certain forms of intermediate consump- tion, contrary to the fundamental principle of tax neutrality. I think that, if the Sixth 73. From the foregoing observations, it Directive is correctly interpreted and imple- seems clear that the contested provisions mented, a tax mechanism problem cannot of Decision 89/487 prima facie follow the be resolved by resorting to a solution which logic of Article 27 of the Sixth Directive, is just as problematical from the point of inasmuch as they serve the objectives view of compatibility with the fundamental described in that article. However, it cannot rules governing the operation of the necessarily be concluded from those obser- mechanism in question. In any event, an vations that the provisions in question are exclusion from the right to deduct VAT as in keeping with the overall objectives of the wide and unqualified as the one at issue Sixth Directive and may be incorporated here is contrary to the objectives of that into the regulatory system which that directive and upsets the balance of the directive creates. The problem is a conse- provisions it contains. By that I mean that quence of the fact that, if the right to Article 27 of the Sixth Directive cannot be deduct VAT is excluded in respect of all used as a weapon with which to undermine expenditure on accommodation, food, hos- one of the bases of that directive, namely pitality and entertainment, with the sole tax neutrality. exception of the three situations listed in Article 1(2) of Decision 89/487, it is exclu- ded in respect of expenditure which may be shown to have a genuine connection with the production process of undertakings, that is to say, strictly business expenditure. Ampafrance cites the example of the expenditure incurred by a company in respect of hospitality for commercial repre- 75. In that connection, it is not irrelevant sentatives or customers when presenting its from a legal point of view that the con- products for sale; it is indisputable that, up tested Community provisions amount to to a certain point, that expenditure is the adoption of an irrebuttable presump- directly connected to the company's activ- tion in respect of a given category of tax ities and cannot be regarded as final charges. In my view, the introduction of a consumption. presumption of that kind raises questions

as to its compatibility with the fundamental Court of Justice does not view the phenom rules of the Community legal order. The enon of irrebuttable presumptions very principle of the rule of law, the mainte favourably. nance of equal treatment in tax matters and the guarantee of full and effective judicial protection — notions which are receiving greater and greater emphasis nowadays in the legal system constructed by the Com munity — are hardly compatible with the idea of introducing irrebuttable presump tions designed to provide a legal solution to 76. To these considerations may be added specific problems such as the legal classifi others concerning the principle of propor cation, from a tax point of view, of a tionality. It must be pointed out that the category of expenditure. It is no accident possibility of considering that the above- that there is a tendency, in the national mentioned irrebuttable presumptions are legal systems of the Member States, to consistent with the general objectives of the consider 'legal axioms' of this kind anti- Sixth Directive and do not by their nature constitutional. 5 5 Indeed, it is not certain raise any other issue of legality from a that they are compatible with the principles Community point of view has no bearing of the European Convention on Human on the appraisals made with regard to the Rights, observance of which is expressly principle of proportionality. Irrespective of imposed by the EC Treaty. 56 Furthermore, the manner chosen to resolve the problems there are indications in its case-law that the 57 — Case C-208/88 Commission v Denmark [1990] ECR I-4445 and Case C-367/88 Commission v Ireland [1990] ECR I-4465. In those judgments the Court held to 55 — In this case, I shall merely cite the example of Greece, be contrary to existing Community law a national where the Τινχοφμιο υιτ Επιλσαυιατ (Council of State), measure introducing an allowance for beer imported in although it had initially considered irrebuttable tax the personal luggage of travellers, but limited to a certain presumptions to be constitutional in certain circumstances amount; the Court considered that the contested measure (StE 434/1983, EDD 1984, 75), has finally held that a tax raised an irrebuttable presumption that the importation

. . therefore involves on-the- presumptions are unconstitutional), D. 9, p. 761; spot verification of a practical nature on the p a r tof the Kypraios, 'Τα αντισυνταγματικά αμάχητα τεκμήρια του national authorities, which may make it possible for the Ν. 820/9978' (The unconstitutional irrebuttable presump non-commercial nature of an importation of a seemingly tions of Law No 820/9978), DFN 1980, p. 679; Paulo- large number of litres of beer to be taken into considera poulos, Ή αναδρομικότητα των φορολογικών νόμων' tion.

. . a obtain a 'fair hearing', a right guaranteed by Article 6(1) of quantitative criterion which permits a presumption to be the ECHR, which has been interpreted in the well-known raised without, however, preventing it from being rebut judgments of 29 April 1988 in Belilos, Series A No 132; ted. . . . Accordingly, there would seem to be some scope for 17 January 1970 in Delcourt, Series A No 11; and an orderly application of the Directive which does not go 25 March 1983 in Minelli, Series A No 62. Moreover, it too far and seek to achieve the impossible, namely is no accident that the same court has equated certain fiscal verification of each individual case, ana which does not penalties imposed by the administrative authorities to the undermine the very core of the Community system.

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at issue, it is necessary, if the legality of quately explain why the prohibition in Decision 89/487 is to be upheld, for its paragraph 1 is the only effective means of provisions to be deemed necessary and achieving the aim pursued, namely, to appropriate to the achievement of the remedy situations of tax evasion or avoid- specific objective pursued and for them to ance. More generally, the flaws in the affect the objectives and principles of the statement of reasons for Decision 89/487 Sixth Directive as little as possible. 58 could alone constitute valid grounds for annulment.

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OPINION OF MR COSMAS — JOINED CASES C-177/99 AND C-181/99

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AMPAFRANCE AND SANOFI

I - 7047

OPINION OF MR COSMAS — JOINED CASES C-177/99 AND C-181/99

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AMPAFRANCE AND SANOFI

the Sixth Directive. This gives rise to the which predate the Sixth Directive. How- following inconsistency: although Commu- ever, that inconsistency, which clearly is not nity law provides, in principle, for the conducive to improving the Community deduction of VAT on the business expendi- and national tax system, can be eliminated ture incurred by companies, that deduction only if the Council adopts legislative mea- may be excluded by national provisions sures in respect of the problem at issue.

VE — Conclusion

89. In the light of the above, I propose that the Court reply as follows to the questions referred for a preliminary ruling:

Council Decision 89/487/EEC of 28 July 1989 authorising the French Republic to apply a measure derogating from the second subparagraph of Article 17(6) of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes, is unlawful.