C-345/99

2. Although the Court has not joined the two actions, I have decided to address them both in the same Opinion. I have done so because addressing the two cases in the same Opinion makes it possible to reach a better understanding of the central problem 4. The Commission's application in Case at issue, namely the interpretation of the C-40/00 concerns these facts. France rein- second subparagraph of Article 17(6) of troduced, with effect from 1 January 1998, the Directive. I am well aware that, a system in which the deduction of value although the two cases are without doubt added tax is excluded for diesel used as fuel connected as regards substance, they are in vehicles not eligible for deduction. An not identical. exclusion of this type existed previously in France, when the Directive came into force in 1979. It remained in force until 30 June 1 — Original language: Dutch. 1982. However, on 1 July 1982, France 2 —OJ 1977 L 145, p. 1. introduced partial deductibility. That was

I - 4495

OPINION OF MR GEELHOED — CASES C-345/99 AND C-40/00

abolished again on 1 January 1998. The (b) value added tax due or paid in respect issue is whether France was entitled to of imported goods; reintroduce an exclusion from the directive which had no longer been fully in force.

(c) value added tax due under Arti- Community law cles 5(7)(a) and 6(3).'

5. The purpose of the Directive — within the framework of a harmonised system of turnover taxes introducing a value added tax —· is, inter alia, to harmonise the deduction regimes in so far as they affect 7. Article 17(6) is also relevant in the the effective level of taxation. 3 present case; it reads as follows:

sions provided for under their national laws The actions when this Directive comes into force.'

Case C-345/99 8. No Community provision for the pur- poses of Article 17(6) has to this day been adopted, even though the period laid down in this paragraph expired long ago. 4

10. When the Directive came into force on 1 January 1979, the French legislation provided that private vehicles did not benefit from deduction of VAT unless they were used for public passenger transport. From 1 January 1993, French tax legisla- tion (Article 273fA of the Code général des 9. I note further Article 27 of the Directive, impôts (General Taxation Code)) intro- which introduces the possibility of derogat- duced a right of deduction for means of ing from the Directive. Paragraph (1) reads transport designated for driving instruction as follows: (road transport, air transport, etc.) provi- ded such means of transport are not used for any other business purpose.

The Commission's complaints 12. French tax legislation has provided (Article 298, 4-1° of the Code genéral des impôts) since 1 January 1998 that VAT on purchases, imports, intra-Community acquisitions and supplies of, and services relating to, diesel used as fuel (etc.) is not deductible. Before 1 January 1998, the following regime applied in France. At the The interpretation of the second subpara- time of the entry into force of the Directive graph of Article 17(6) (1 January 1979), the deductibility of diesel used as fuel was excluded completely. However, on 1 July 1982 the legislature introduced partial deductibility. That par- tial deductibility went from 10% in 1982 to 80% in 1991 and, since then, the rate of 14. The Commission points out, first, that VAT deduction has remained at 50%. the second subparagraph of Article 17(6) is Partial deduction was abolished again on a derogation from the general rule and 1 January 1998. must be strictly interpreted. This provision allows Member States to maintain only the exclusions from the deductibility of VAT which already existed in their national legislation when the Directive came into force. The Commission submits that, 13. By a letter of 24 July 1998, the Com- according to the settled case-law of the mission formally notified France that it Court, deductibility is a fundamental fea- considered the reintroduction of the total ture of the VAT system and that limitations exclusion incompatible with Article 17 of on the right of deduction are only possible the Directive. In its reply of 30 October in cases expressly provided for by the 1998 to the formal notification, the French Directive. 5 The second subparagraph of Government contended that it was free to modify the deduction regime provided that it remained within the parameters of the 5 — The Commission cites in particular the judgments in Case C-37/95 Ghent Coal Terminal [1998] ECR I-1, and Case national legislation in existence when the C-97/90 Lennartz [1991] ECR I-3795.

16. The Commission considers that the second subparagraph of Article 17(6) imposes a 'standstill' 6obligation pending the adoption of Community legislation. The Commission asserts, in Case C-345/99, that there is a 'standstill' obliga- Further complaints in relation to Case tion and not one requiring the progressive C-345/99 'disarmament' of the Member States. 7 This obligation serves to prevent unilateral mea- sures by Member States, capable of leading to comparable measures by other Member States, which would have the effect of 18. On the premiss that the second sub- increasing distortion of competition and paragraph of Article 17(6) does not apply impeding the acceptance of Community in the case at issue, the Commission examines in the light of the provisions of Article 17(2) the limited right of deduction 6 — The Commission refers i n this regard to the judgment in Case C-43/96 Commission v France [1998] ECR I-3903. introduced by France. 7 — Tile Commission uses this metaphor to d e s c r i b e the alternative view — which it does not support — that the freedom of action of the Memher States is progressively limited. 8 — Case C-136/97 [1999] ECR I-2491.

I - 4499

OPINION OF MR GEELHOED — CASES C-345/99 AND C-40/00

23. The Commission's final argument relates to the earlier amendments to the right to deduct VAT in French legislation. Contrary to what the French Government asserts, the Commission has never formally 21. The Commission points out that France been notified of the amendments to French could have achieved the same result with- law. In this context, the Commission cites out breaching the Directive if it had the settled case-law of the Court, which requested a derogation under Article 27. allows it freedom to choose when to Other provisions of the Directive, such as address a formal notification to a Member the pro rata rule in Article 19, also provide State. In those circumstances, the Commis- protection against abuse of the possibility sion's alleged failure to act can never give to deduct. Such protection was an impor- rise to a legitimate expectation on the part tant reason for the French Government's of the French Government that its conduct decision to make the right of deduction complies with Community law. 10 subject to a condition.

10 — The Commission cites in particular the judgment in Case 9 — Cited above in footnote 5. C-317/92 Commission v Germany [1994] ECR I-2039.

I - 4500

COMMISSION V FRANCE

France's defence right to deduct is possible, as only then can there be no question of introducing provi- sions on exclusion which already existed when the Directive came into force.

The interpretation of the second subpara- graph of Article 17(6)

12 — C'iteti above m footnote 5. 11 — Case C-305/97- [1999] ECR I-6671. 1 3— Cited above in footnote 8.

I-4501

OPINION OF MR GEELHOED — CASES C-345/99 AND C-40/00

influence on the neutrality and harmonisa- subparagraph of Article 17(6) means that it tion of the VAT system. need not go into the possibility suggested by the Commission of seeking a derogation under Article 27 of the Directive. The French Government also does not consider the methods referred to by the Commission for recognising the types of business use, such as designation for the purpose of Further issues in Case C-345/99 instruction.

28. In this case, one of the principal arguments of the French Government is that the 1993 measure establishes no new system excluding the right to deduct VAT, but involves only the amendment of an existing exclusion, within the framework of 31. France points out that the Commission the second subparagraph of Article 17(6). previously commenced a pre-litigation pro- The aim is to modify and render more cedure in 1990 which it terminated in flexible the exclusion of the right of deduc- 1994. The Commission then recommenced tion; it is not to lay down any new basis for the procedure in 1998, relying on the same deductibility. grounds.

Further issues in Case C-40/00 subparagraph of Article 17(6) occupies a central place. That interpretation is, in large measure, determined by the Court's case-law on Article 17, and by a judgment concerning Article 28 of the Directive. 33. The French Government points out that excluding the right to deduct VAT serves an environmental objective. It con- tributes to the achievement of an objective to which the Community legal order atta- ches great importance. The French Govern- ment is surprised that the Commission doubts the effectiveness of the measure. A 36. Article 17 of the Directive, which reg- measure of this kind can, naturally, never ulates the right to deduct VAT, has given resolve the environmental problems con- rise to extensive case-law. In the recent nected with air quality, but it is part of a judgment in Joined Cases C-177/99 and series of fiscal measures designed to encou- C-181/99 Ampa france and Sanofi, 1 5the rage the purchase and use of less polluting Court has again described the nature of the vehicles. right of deduction in the Community VAT system. Thus, the Court has stated that it is a 'fundamental principle' of the VAT system that the tax applies after deduction has been made of the VAT which has been levied directly on transactions relating to 34. Finally, the French Government denies inputs. 16 The Court points out that it is that it failed to notify the Commission of settled case-law that the right of deduction the earlier amendments to the legislation. It is an integral part of the VAT scheme and produces correspondence from 1990, 1991 may only be limited in the cases expressly and 1992, and shows that the 1991 mea- provided for by the Directive. Indeed, any sure, of which the Commission was notified limitation on the right of deduction affects by letter of 6 November 1992, gave rise to the level of the tax burden and must be no comment by the latter. That measure applied in a similar manner in all the reduced the deduction authorised from Member States. 80% to 50%.

tive more generally. 17 He notes that the maintained in force national legislation right to deduct constitutes one of the excluding the deductibility of VAT on foundations of the Community tax system means of transport constituting the tools and is directly related to the fundamental of the taxable person's business. In so principles of fiscal neutrality 18 and equality doing, the Court gave a wide interpretation of treatment in taxation. In its judgment in to the derogation provided for by Arti- Commission v France, 19 the Court refers in cle 17(6), ruling that the power provided this regard to the need for all economic for in the second subparagraph is not activities to be 'taxed in a wholly neutral limited to expenditure which does not have way'. Advocate General Cosmas also a strictly business character. The Court's points out once again in the Opinion I decision was made, in particular, on the have cited that derogations from this right basis of the origins of the Directive. More- to deduct are permitted only in the cases over, that case was to a large extent expressly provided for by the Directive. concerned with the same issues as Case C-345/99, namely the deduction for vehi- cles designated for driving instruction.

42. The judgment in Royscot 24 is of impor- tance for another reason. In it, the Court considers the transitional character of the second subparagraph of Article 17(6). This provision must be interpreted as meaning 44. Apart from the case-law on Article 17 that Member States can maintain exclu- of the Directive, there is another judgment sions of the right to deduct VAT even if by concerning the directive which is of parti- the expiry of the time-limit in the first cular significance in these proceedings. In subparagraph the Council has failed to its judgment in Norbury, 26 the Court determine what expenditure is ineligible for adopted the following assessment of the a deduction of VAT. 25 transitional rule in Article 28(3)(b) of the Directive, according to which Member States may continue to exempt certain activities from VAT: 'Whilst that provision precludes the introduction of new exemp- tions or the extension of the scope of existing exemptions following the entry into force of the Sixth Directive, it does not prevent a reduction of those exemp- 43. In summary, I deduce from the case-law tions ...\ 2 7 A different assessment would relating to Article 17 of the Directive that have the following undesirable conse- the right of deduction is a fundamental quence: 'A Member State might find itself feature of the VAT system, from which compelled to maintain all the exemptions there may be no exclusions unless the existing at the date of adoption of the Sixth Directive provides for them explicitly. The Directive, even if it regarded it as possible, system also implies, however, that where appropriate and desirable progressively to implement the system laid down in the directive in the sphere under considera- 23 — Point 26 of the Opinion. tion'. 28 24 — Cited above in footnote 11. 25 — This observation is consistent with the previous case-law or the Court, namely the judgment in Case C-165/88 ORO Amsterdam Beheer and Concerto [I9S9| F.CR 4081, 26 — Cited above m footnote 8. concerning the previous Article 32 or Directive 7 "/.188, which contained a transitional provision relating to used 27 — Paragraph 20 of the judgment. goods which corresponded to Article 1 7 6 ) . 28 — Paragraph 21 of the judgment.

47. In addition, in view of the nature of the Directive, the opportunities to derogate from the deductibility of VAT are of a limited nature. In its judgment in Len- nartz, 29 the Court ruled that the right to 50. I share the Commission's view that the deduct 'must be exercised immediately in second subparagraph of Article 17(6) of respect of all the taxes charged on transac- 30 — Paragraph 27 of the judgment. 31 — Recently confirmed in Royscot (cited above, in particular 29 — Cited above in footnote 5. in point 24 of this Opinion).

I - 4506

COMMISSION V FRANCE

54. Taken together, these factors lead to the following assessment of the second subpar- agraph of Article 17(6) of the Directive. This provision is to be understood as transitional and temporary, necessary because, when the Directive entered into 52. The primary question in the present force, it was not yet possible to achieve cases is whether the French measures fully the aim of the Directive. That may be remain within the ambit of the second attributed to the fact that, at that time, the subparagraph of Article 17(6). Only if it is Member States were not yet willing — for established that a measure is within that which there may in fact be good reasons — to replace existing provisions completely by a harmonised system. The temporary char- 32 — Cited above i n footnote 5. acter of this transitional regime is empha- 33 — Cited above in footnote 11. sised by the time-limit of four years referred 34 — See also point 40 of this Opinion. to in the first subparagraph of Arti-

I - 4507

OPINION OF MR GEELHOED — CASES C-345/99 AND C-40/00

57. Overall, I share the view of the Com- mission that the 'standstill' nature of the 35 — Cited above in footnote 15.

I - 4508

COMMISSION V FRANCE

not. The fact that there was a previous of Article 17(6) if it introduces a partial or disparity between Member States is not, in conditional right to deduct. my opinion, relevant in such a case.

63. That view is, in my opinion, not at all 60. At this stage, I reach the following supported by the wording of the provision interim conclusion: as soon as a Member itself or by the case-law relating to it. It State has abolished a derogating national does not, in my opinion, follow from the provision, it may no longer, in the sector in nature of a 'standstill' clause that it is by question, have recourse to the transitional definition impossible for Member States, provisions of the second subparagraph of where they have the choice of maintaining Article 17(6), or it will fall outside their or abolishing an exclusion, to be entitled to ambit. However that may be, the situation decide to abolish it in part or progressively. is not as simple in either of these cases, The greater power will usually include the because in neither was there a complete lesser. abolition of a national derogating provi- sion.

in a wider manner an exclusion whose use factors considered above that the abolition was limited at a given moment by a legal of a condition of a national exclusion falls provision. I have in mind the French within the ambit of the second subpara- provision which is the subject of Case graph of Article 17(6). I will now address C-40/00, in which the partial right to the question whether France has acted deduct has been replaced by a total exclu- within the discretion allowed by Commu- sion. In my view, the character of the nity law. 'standstill' clause in the second subpara- graph of Article 17(6) implies that the possibility of derogation has disappeared in respect of the part for which the exclusion of the right of deduction has been abolished. For that part, it is no longer possible to speak of the maintenance of an 68. I base my opinion at this point on the exclusion. France has thus also gone judgments in Commission v France and beyond the ambit of the second subpara- Royscot. 37 In these judgments, the Court graph of Article 17(6). recognised that Member States operating an exclusion from the right to deduct VAT enjoyed a reasonable discretion. In the exercise of that discretion Member States may also decide, at a particular time, to apply a part of the exclusion no longer. As the last judgment I have mentioned makes 66. I also consider it significant that in clear, this discretion is not, however, abso- Case C-40/00 the amendment to the French lute and its exercise may not negate the legislation takes us further from, rather system of the Directive. It is only if a than nearer to, the object sought by the measure moves further from the objective Directive, namely the implementation of a sought by the Directive, rather than nearer harmonised system of turnover tax by the to it, that it may be said that it negates the introduction of a value added tax. A system of the Directive. measure of this kind, which precisely reduces the degree of harmonisation, is on that account contrary to the aim and content of the Directive. I would point out that, by reason of the principle that the greater power includes the lesser, there was a serious argument for permitting the 69. The Commission further points out progressive or partial withdrawal of an that the French measures could trigger exclusion. That argument does not run in comparable measures on the part of other the present case. Member States, which would increase dis- tortion of competition and impede the implementation of Community measures of harmonisation, or jeopardise the existing degree of harmonisation. Having regard to the limited ambit of the discretion allowed

— if a Member State abolishes an exclu- sion measure, it moves outside the ambit of Article 17(6); 72. The Commission's other complaints presuppose that the French measure should be assessed in the light of Article 17(2) of the Directive. I believe that the supposition is mistaken, as the factors considered above demonstrate. The measure must in fact be — a Member State may partly abolish an analysed by reference to the criterion laid exclusion measure (Case C-345/99) on down in Royscot, 38 on the basis of which condition that, in doing so, it does not the measure may not negate the Directive. negate the system of the Directive;

— in this case, it falls outside the ambit of 73. In my view, it is plain that it cannot be Article 17(6) in respect of the part of maintained that the measure has this effect. the exclusion abolished; I consider that the interpretation given by the French Government of the system in force is relevant. The requirement of exclu- sive designation for driving instruction is nothing other than a limitation on the category of means of transport for which the deduction may be used. In applying this — in that event, it is not permitted later to reintroduce an exclusion (Case C-40/00) by reference to Article 17(6). 38 — Cited above ID footnote' 11.

I-4511

OPINION OF MR GEELHOED — CASES C-345/99 AND C-40/00

provision, France does no more than abol- the protection of the environment. It rightly ish the exclusion for a specified category of claims that this is a factor given great vehicles, while maintaining it for other importance in Community law. That does vehicles. not alter the fact that national measures aimed at protecting the environment may not be contrary to acts of Community law such as, in this case, Article 17(6) of the Directive. I do not consider, in the circum- stances of this case, that the question 74. Even after considering these further whether the national measure is also likely complaints, my provisional conclusion is to be effective for the protection of the unchanged. environment is decisive.

I - 4512

COMMISSION V FRANCE

78. The final point at issue concerns the French Government as to the compliance Commission's silence at an earlier stage, with Community law of its actions. That namely on the amendment to French taxa- does not alter the fact that it appears from tion law in 1991, when the percentage of the file that it seems likely that the French the permitted deduction was reduced from Government did inform the Commission of 80 to 50%. As the Commission rightly the previous measures. asserts, the Court deals with this issue in its case-law, declaring that the Commission is free to determine the time at which it conveys a formal notification to a Member State. In the circumstances of this case, the alleged silence of the Commission could 79. Even after considering these further never have the effect of giving rise to a complaints, my provisional conclusion is legitimate expectation on the part of the unchanged.

Conclusion

80. Having regard to the facts and circumstances I have described above, I propose that the Court should rule as follows.

In Case C-345/99:

(b) Order the French Republic to pay the costs pursuant to Article 69(2) of the Rules of Procedure.

I - 4514