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3. Article 27 of Sixth Directive 77/388 5. Those Member States which apply on 1 provides as follows: January 1977 special measures of the type referred to in paragraph 1 above may retain them providing they notify the Commission of them before 1 January 1978 and providing that where such derogations are designed to simplify the procedure for '1. The Council, acting unanimously on a charging tax they conform with the require- proposal from the Commission, may ment laid down in paragraph 1 above.' authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax 4. Article 2 of Decision 2000/186 provides or to prevent certain types of tax evasion or that: avoidance. Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the amount of tax due at the final consumption stage. 'By way of derogation from Article 17(2) of Directive 77/388/EEC, as amended by Article 28f of that Directive, and from Article 6(2)(a) of that Directive, the Federal Republic of Germany is hereby authorised to limit to 50% the right to deduct the VAT 2. A Member State wishing to introduce the charged on expenditure on vehicles not measures referred to in paragraph 1 shall used exclusively for business purposes and inform the Commission of them and shall not to treat as supplies of services for provide the Commission with all relevant consideration the use for private purposes information. of vehicles belonging to a taxable person's business.

6. Paragraph 15(1) of the Umsatzsteuerge- setz (hereinafter: 'the UStG') provides that: 8. Under Paragraph 27(3) of the UStG:

'A trader may deduct the following amounts of input tax: 'Paragraph 15(1)(b) of the UStG and Paragraph 15a(3)(2) shall be applied for the first time to vehicles purchased or manufactured, imported, acquired within the Community or hired after 31 March 1999.' 1. the tax shown separately in invoices within the meaning of Paragraph 14 in respect of goods or services which have been supplied to his business by other traders.'

III — Facts and procedure

7. Paragraph 15(1)(b) of the UStG provides as follows: A — The main proceedings

9. Mr Sudholz runs a painting business. In 'Amounts of input tax charged on the April 1999 he purchased a passenger car for purchase or manufacture, importation, DEM 55 086.21, plus turnover tax at 16% acquisition within the Community, hire or amounting to DEM 8 813.79. He assigned

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12. Mr Sudholz raised an objection against the decision of the Finanzamt. The Finan- zamt rejected that objection and Mr Sud- holz brought an action before the Finanz- gericht which declared the action well- B — Observations of the Bundesfinanzhof founded. The Finanzgericht held that Mr Sudholz was entitled to rely on the rules — more favourable to him — laid down in Article 17 of the Sixth Directive and 15. In its order for reference the national considered that the limitations on the right court states that in the present case the to deduct input tax were contrary to requirements of Paragraph 15(1 )(b) of the Community law where — as in this case UStG, read in conjunction with Para- — limitations to that effect were not graph 27(3) thereof, are fulfilled. Firstly, it provided for before the Sixth Directive is established that Mr Sudholz used the entered into force and appropriate author- vehicle 70% for business purposes. Since

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20. In that connection it refers to the 4 —BGBl.I 1999,402. reasons stated for Article 2 of Decision

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2000/186. It is stated that the ceiling on a C — The questions submitted for a pre- taxable person's right to deduct VAT is liminary ruling justified by the proven difficulty of actually verifying the breakdown between business and private expenditure on this type of good and by the consequent likelihood of 22. In the light of the foregoing, the tax evasion or abuse. In addition, such Bundesfinanzhof considered it necessary to measure will allow a more simplified system refer the following questions for a pre- of taxation of the private use of vehicles liminary ruling by an order of 30 Novem- (fifth recital in the preamble). The sixth ber 2000, received at the registry of the recital in the preamble states that the ceiling Court of Justice on 15 January 2001: does not apply to expenditure on vehicles which represent a taxable person's current assets and may not be applied where a vehicle is used up to a maximum of 5% for private purposes. In the seventh recital in the preamble it is therefore inferred that it '(a) Is Article 2 of the Council Decision can thus be ensured that this derogation 2000/186/EC of 28 February 2000 from the principle of a taxable person's authorising the Federal Republic of right to deduct all the tax paid in connec- Germany to apply measures derogat- tion with his taxable activities does not go ing from Articles 6 and 17 of the Sixth beyond what is needed to prevent tax Directive 77/388/EEC on the harmoni- evasion or avoidance. sation of the laws of the Member States relating to turnover taxes — common system of value added tax: uniform basis of assessment invalid because the procedure prior to the adoption of the decision did not meet the criteria laid down in Article 27 of Directive 77/388?

23. Pursuant to Article 20 of the Protocol on the EC Statute of the Court of Justice, written observations were submitted by the German and Netherlands Governments, the Council and the Commission. In its written observations the Netherlands Government 25. The German Government claims that examined only the first and second ques- according to the earlier version of Arti- tion. At the hearing before the Court on 10 cle 27, that is to say Article 13 of the July 2002 the German Government, the Second VAT Directive, the Member State Council and the Commission presented oral could not adopt any measures for deroga- argument in support of the forms of order tion until the period for other Member respectively sought. States entering objections had expired or, where there had been objections, until the Council had adopted a favourable decision. No such prohibition on adopting a national measure for derogation in advance of authorisation therefor is provided for in Article 27. The German Government con- tends that under Article 27(2) the Member State is merely required to inform the IV — Arguments Commission before adopting a particular national measure for derogation. In the present case the German Government informed the Commission of the measure concerned on 11 December 1998. By letter of 19 February 1999 it supplemented this A — The first question submitted for a information. By letter of 23 August 1999 it preliminary ruling reaffirmed the content of the earlier letters. The German Government considers that it cannot be held responsible for the fact that the Commission postponed the procedure until far beyond 1 April 1999. 24. In the view of the intervening parties, the first question submitted for a prelimin- ary ruling relates in particular to the interpretation of the word 'authorise' con- tained in Article 27( 1 ) of the Sixth Direc- tive. They take the view that this word does not mean that authorisation from the Council must precede the adoption of a national measure for derogation from the 26. The Commission infers from Article 27 Sixth Directive. They contend that under (2) of the Sixth Directive that the author-

B — The second question submitted for a 27. All the intervening parties take the view preliminary ruling that Community law, and in particular Article 27, does not require that a Member State publish a request for authorisation. Under Article 27(3), the other Member States are to be informed of the measures which a Member State intends to adopt in derogation of the Sixth Directive. The German Government and the Commission refer to the opinion in Skripalle, 5in which 29. The German Government takes the the Advocate General states that BP Super- view that the national court's uncertainty gas 6implies that there is no Community- as to the validity of the measures adopted law obligation to publish under Article 27. on account of the retroactive effect of Decision 2000/186 is unfounded. In its view, a national rule can just as well be approved retrospectively. Moreover, it con- 5 — Opinion of Advocate General Fennelly in Case C-63/96 tends that a decision of the Council adopted Skripalle [1997] ECR I-2847. pursuant to Article 27 cannot adversely 6 — Case C-62/93 BP Supergas v Greek State [1995] ECR I-1883. affect the legitimate expectations of those

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concerned since such a decision concerns measures in the Member States. In that only the Member State and the Community regard the application of retroactive effect institutions. Furthermore, the taxable per- to such measures can be necessary to attain sons had an opportunity to take note of the the specific objective of general interest. change in the system of tax deduction as a Consequently, it considers that the Council draft law thereon had been published. was able to give retroactive effect to the authorisation in the decision.

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32. In the view of the Council, Article 3 of 50% rule where a vehicle is used 10-49% Decision 2000/186 is valid and thus the for business purposes. Such effects are decision has retroactive effect as from the typical of flat-rate measures and ceilings. date referred to in Article 3. The Council points out that the German Government submitted the request for authorisation on 11 December 1998 and it was received at the Commission on 8 January 1999. The fact that the decision was not adopted until later is due to the delay in the procedure at the Commission. Like the German Govern- 34. In the view of the Commission, Arti- ment, the Council recalls that a decision cle 2 of Decision 2000/186 is contrary to adopted pursuant to Article 27 cannot per the principle of proportionality. 8 In its se impose an obligation on an individual as proposal of 13 December 1999 for a it is directed at the Member State. It is for Council Decision 9 it proposed, at the the Member State to ensure that a measure request of the German Government, that a such as that referred to in Article 27 does flat-rate 50% ceiling on the right to deduct not adversely affect the legitimate expecta- should not apply where a taxable person is tions of those concerned. able to demonstrate that he usually uses the vehicle for business purposes more than 50% of the time. The Commission empha- sises that under Article 27(1) measures intended to simplify the procedure for charging the tax may not, except to a negligible extent, affect the amount of tax due at the final consumption stage.

that the flat-rate ceiling aimed at combating exception relates to new laws. Under tax evasion or avoidance is consistent with Article 27(1) of the directive, special mea- the principle of proportionality. sures for derogation from the provisions of the directive are possible where the new measure is intended to simplify taxation or where the measure is intended to prevent certain types of tax evasion or avoidance. The Member State must be authorised to do so by the Council. The procedure to be V — Appraisal followed in that respect is laid down in Article 27(2) to (4). A Member State wishing to introduce a measure on the basis of one of the alternatives referred to in paragraph 1 must inform the Commission A — The first question submitted for a thereof and provide it with the relevant preliminary ruling information (paragraph 2). The Commis- sion in turn must inform the other Member States (paragraph 3). Authorisation can 36. The first question concerns procedural then be granted either by an express requirements. By this question the national decision of the Council or, after a certain court seeks to ascertain whether or not period of time, by implicit authorisation Article 2 of Decision 2000/186 is invalid (paragraph 4). because the procedure followed prior to its adoption did not comply with Article 27 of the Sixth Directive. There are three aspects in this regard: the term 'authorise' in Article 27(1) of the directive; the fact that the request for authorisation was not published by the Federal Republic; and the question whether or not the authorisation goes beyond the request.

Italian versions, for example, also speak of fore at that point the measure introduced is 'to authorise' and 'autorizzare' respectively. contrary to Community law and it is by no means certain that this possible infringe- ment will be redressed by authorisation with retroactive effect. Therefore, the pre- mature introduction into the national legal system of a measure for derogation by a Member State can constitute an infringe- ment of Community law. However, it does 39. As the Council also notes, the adoption not per se have any effect on the validity of of national taxation measures falls within the authorisation decision itself. the exclusive competence of the Member State concerned. However, it must ensure that its taxation measures are compatible with Community law. Article 27 of the Sixth Directive does not relate to the authorisation to adopt measures in the field of VAT but to authorisation to adopt measures for derogation from the directive. As is evident from the above paragraph, it is clear that it cannot be inferred from the terminology used in Article 27 in most 40. The second procedural aspect concerns language versions that such approval must the fact that the Federal Republic of by definition be granted in advance. Never- Germany did not publish the request for theless, it is clear from Article 27(2) that a authorisation to introduce measures for Member State wishing to introduce mea- derogation. As has been correctly observed sures for derogation must inform the by various intervening parties, no such Commission of them and provide it with requirement to publish can be inferred from all relevant information. Consequently, it the wording of Article 27 of the Sixth follows that the (beginning of the) author- Directive. They refer to the opinion of isation procedure at any rate must precede Advocate General Fennelly in Skripalle. 10 the actual introduction of the national That case related inter alia to whether or measure for derogation. However, this still not non-publication of a decision authoris- does not answer the question whether or ing measures can affect the validity or not authorisation may also be granted after effectiveness thereof. The Court did not the introduction of the national measure for deal with this question. However, Advocate derogation or, in other words, whether this General Fennelly concluded that there is no measure may be introduced pending the requirement to publish such decisions under outcome of the authorisation procedure. Article 191(3) of the Treaty (now Arti- The directive does not expressly prohibit cle 254 EC) and that Article 27 of the Sixth this. If it is assumed that authorisation may Directive likewise does not impose, in also be granted retrospectively, the answer terms, any obligation to publish an author- must be in the affirmative. However, I isation thereunder. He went on to state that should point out that a Member State he did not think that non-publication of a which introduces the proposed measure Council decision authorising measures during the authorisation procedure does so entirely at its own risk. At that point no authorisation has been granted and there- 10 — Cited in footnote 5.

41. The present case does not relate to the publication of a decision authorising mea- 43. The objective of the notification sures which has been published in the referred to in Article 27(2) of the Sixth Official Journal, in accordance with long- Directive and the provision of the relevant established practice, but to the publication information is to enable the Commission of the request for such authorisation. and, if necessary, the Council to verify Nevertheless, I consider that the reasoning whether the derogating arrangements are followed by Advocate General Fennelly within the scope of the objectives referred should also be followed by analogy in this to in Article 27(1) thereof. 11 Under case. If no requirement to publish can be Article 27(1) of the directive, a clear inferred from Article 27 of the Sixth distinction must be drawn between simpli- Directive as regards decisions to be issued fication measures, on the one hand, and pursuant thereto, the same also applies to measures relating to the prevention of tax requests from the Member States for the evasion and avoidance, on the other. It is issue of such decisions. Under this provi- clear from the case-law that where a request sion, it is required only that the Commis- for authorisation is based on the second sion be informed of the intention and that it alternative, the authorisation cannot extend in turn then inform the other Member beyond that purpose. 12 Therefore, the States. In the present case that was done Member State may not rely on the first on 8 January 1999 and 11 October 1999 alternative subsequently, that is to say after respectively. The other Member States must the authorisation has been granted. How- be informed because they have the right to ever, this does not prevent the relevant request that the matter be raised by the Member State from extending its request Council. Moreover, a provision requiring during the authorisation procedure by publication of requests for authorisation basing it also on the other alternatives set would make sense only if a larger circle out in Article 27(1). That appears to be so than that at present were granted some in the present case. Any other view would influence over the outcome of the proce- imply that the Member State concerned has dure. first to withdraw its request in order to submit a fresh request thereafter. That would not be very effective. Furthermore, it consequently follows that where author- isation is requested and granted in respect of both alternatives, the preconditions relating to both alternatives must also be 42. The final aspect of the first question relates to whether decision 2000/186 may go beyond the request. It is claimed that the Federal Republic based its request only on 11 — BP Supergas, cited in footnote 6, paragraph 23. grounds relating to the prevention of tax 12 — Skripalle, cited in footnote 5.

46. This question relates to the retroactive effect of Article 3 of the decision. It is clear from the case-law of the Court that retro- active effect may be given to a Community decision only in exceptional cases, that is to say where the purpose to be achieved so 44. The Commission further noted that demands and where the legitimate expecta- Community institutions are entitled to tions of those concerned are duly examine the request in the light of the respected.13These requirements arise from criterion of simplification, even if the the principles of legal certainty and the government concerned has not asked them protection of legitimate interests. to do so. It bases this view on the objective of Article 27 of the Sixth Directive which forms part of the chapter relating to simplification procedures. I do not concur with this view. It is for the Member State to decide which alternatives it wishes to put forward to obtain authorisation to adopt a 47. Firstly, it should be noted that Arti- measure for derogation. This is true in cle 17 of the Sixth Directive confers rights particular since the directive draws a clear on taxable persons, 14 that the right to distinction between the two alternatives for deduct forms a fundamental part of the measures for derogation and the associated VAT system, 15 and that this right arises at conditions. Neither the Council nor the the time when the deductible tax becomes Commission may interfere in this discre- chargeable. Derogations are permitted tionary power of the Member State. There- fore, a request for authorisation from a Member State cannot simply be comple- 13 — See, for example, Case 98/78 Racke [1979] ECR 69; Case mented by them. Nor have they done so in 99/78 Weingut Gustav Decker [1979] ECR 101; and Case C-337/88 SAFA [1990] ECR I-1. the present case because both alternatives 14 — BP Supergas, cited in footnote 6. were put forward by Germany in the course 15 — See, for example, Ampafrance and Sanofi, cited in of the procedure. footnote 8. 16 — See, for example, C-400/98 Breitsohl [2000] ECR I-4321.

48. The question is now whether he may be deprived of this right retrospectively. It follows from the case-law of the Court that the principle of the protection of legitimate expectations precludes the abolition or limitation of a right to deduction conferred on taxpayers by the Sixth Directive. — thirdly, individuals may legitimately expect that rights created under exist-

17 — BP Supergas, cited in footnote 6, paragraph 22; and Case 5/84 Direct Cosmetics [1985] ECR617, paragraph 24. 18 — Case C-62/00 [2002] ECR I-6325.

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ing rules will not be retroactively mitted a procedural irregularity, such irre- abridged. Only in very exceptional gularity can never constitute a reason for cases is it possible to derogate from abridging retroactively the rights which this general principle, for example in taxable persons may derive from Commu- the case of overriding economic neces- nity law. They have no influence over the sity relating to the management of course of the authorisation procedure. common organisation of agricultural markets or on grounds of overriding public interest.'

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54. The second argument likewise does not 57. The Court interprets possible applica- hold water. Although the authorisation tions of Article 27 of the Sixth Directive procedure laid down in Article 27 takes strictly on the basis of the principle of place between the Community and the proportionality. Member States, the outcome of this proce- dure can have a considerable effect on the rights which citizens may derive from Article 17 of the Sixth Directive. As stated at paragraph 47 above, the nature of the 58. In Commission v Belgium 19 the Court rights means that they can be amended or pointed to the principle of proportionality limited only by a Council decision taken by ruling that departures from the measure pursuant to Article 27 of the directive. for charging laid down in the directive are Therefore, Mr Sudholz has an interest in possible only is so far as is strictly necessary the decision being taken lawfully and in it for achieving the aim in view, namely the conforming in substantive terms with Com- prevention of tax evasion or avoidance. munity law. This case-law was subsequently confirmed in Skripalle 20 and Ampafrance and Sanofi. 21 In the latter judgment, which was given after the authorisation at issue in this case had been granted, the Court makes 55. In the light of the foregoing I conclude it clear that there is no risk of tax evasion or that giving retroactive effect to Decision avoidance where it is evident from objec- 2000/186 breaches the Community-law tively verifiable evidence that the expendi- principles of legal certainty and of the ture was incurred for strictly business protection of legitimate expectations and purposes. Although the Court considers that therefore Article 3 of this decision is that a measure for derogation involving invalid in so far as it concerns retroactive standard amounts is justified under certain effect as from 1 April 1999. circumstances, such a measure is to be regarded as disproportionate if it excludes certain expenditure from the right to deduct VAT without making any provision for the taxable person to demonstrate the absence of tax evasion or avoidance in the relevant case. C — The third question submitted for a preliminary ruling

62. On these grounds, I consider that the 60. The case-law cited above relates to authorisation granted in Article 2 of Deci- measures for derogation intended to pre- sion 2000/186 is invalid because it contains vent fraud or improper use. In my view, the a limitation on the rights which taxable examination in the light of the principle of persons derive from Article 17(2) (a) of the proportionality carried out therein also Sixth Directive which is disproportionate applies to national measures for derogation and contrary to Article 27(1). intended to bring about simplification. The in principle legitimate aim of simplifying the procedure for charging VAT must be weighed up against the limitations on the taxable persons' rights following therefrom. That is also evident from the wording of the final sentence of Article 27(1) of the Sixth Directive. The neutrality rule laid down therein is to be construed as a specific case 63. For the sake of completeness, I should of the principle of proportionality. note that the proposal for a decision authorising a measure for derogation, made by the Commission to the Council, did indeed make provision for the taxable person to demonstrate that the purchased vehicles would be used more than 50% for business purposes. This proposal would 61. If the authorisation granted in the thus have met the criteria laid down above. present case is examined in the light of the However, the Council amended the Com- foregoing, it is clear that — in so far as it is mission proposal in a restrictive sense in intended to combat fraud — it does not precisely this regard by stipulating that the make provision for the taxable person to right to deduct VAT would continue to furnish proof to the contrary and thus exist only in so far as the persons concerned breaches the principle of proportionality. used vehicles less than 5% for private The absence of such provision results in this purposes. 22 measure affecting the amount of tax due at the final consumption stage to more than a negligible extent in all cases in which the 22 — See the seventh recital in the preamble to Decision taxable person uses a vehicle — consider- 2000/186. In a footnote reference is made to Skripalle. The Council appears thereby to argue that the German ably — more than 50% for business measure is consistent with the principle of proportionality.

65. These arguments confuse the role and position of the Community legislature with that of the Community executive. Within the bounds established by Community law, 67. It follows from the answer which I the Community legislature may adapt propose that the Court should give to the secondary Community law at its discretion third question that the decision is invalid in in accordance with its political and policy its entirety. Therefore, strictly speaking no views. This is also true of VAT which forms answer need be given to the second ques- the subject matter of the Sixth Directive. tion. If the Court does not concur with my However, the Community executive, which opinion as regards the third question, it is called upon to apply existing Community follows from the proposed answer to the legislation, is required to comply with the second question that Article 3 of the rules laid down in that legislation. From the decision is at any rate invalid in so far as point of view of legal certainty the principle it was given retroactive effect as from 1 of legality must be strictly adhered to, April 1999.

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VI — Conclusion

68. Having regard to the foregoing, I propose that the Court should answer the questions referred by the Bundesfinanzhof as follows:

First question: The procedure prior to the adoption of Council Decision 2000/186/EC of 28 February 2000 authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes — common system of value added tax: uniform basis of assessment meets the requirements laid down in Article 27 of Directive 77/388/EEC.