C-77/01

EDM

OPINION OF ADVOCATE GENERAL LÉGER delivered on 12 September 2002 1

1. In this case, the Court is called upon to I — Relevant legislation interpret 'economic activities' and 'inciden- tal transactions', concepts referred to in Articles 4 and 19 respectively of Sixth Directive 77/388/EEC. 2 The scope of the Sixth Directive

2. This case arises from a dispute between the Portuguese tax authorities and a mixed holding company 3 which has deducted the input value added tax (hereinafter 'VAT') 3. For the purposes of securing the Eur- globally without distinguishing between its opean Community's own resources and various activities. The Tribunal Central ensuring that the common system of turn- Administrativo (Central Administrative over taxes is non-discriminatory, the Com- Court), Portugal, has asked the Court to munity legislature sought to include in the determine the extent to which the loans scope of the Sixth Directive the broadest granted by that holding company to the possible range of economic transactions companies in which it holds shares, its other whilst making provision for some of those financial activities and the operations it has transactions to be covered by an exemp- performed in the context of three consor- tion. 5 tia 4 affect its entitlement to deduct VAT.

'1. the granting and the negotiation of credit and the management of credit by the person granting it; 6. Under Article 4(1) of the Sixth Directive, 'taxable person' means any person who independently carries out any economic activity specified in Article 4(2).

2. the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit; 7. Article 4(2) of the Sixth Directive provides:

3. transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, 'The economic activities referred to in cheques and other negotiable instru- paragraph 1 shall comprise all activities of ments, but excluding debt collection producers, traders and persons supplying and factoring; services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.'

5. transactions, including negotiation, excluding management and safekeep- 8. Some transactions, which constitute ing, in shares, interests in companies or economic activities and are therefore, in associations, debentures and other principle, covered by the Sixth Directive, securities ...'

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11. The taxable person effects that deduc- tion by way of subtraction from the total amount of value added tax due for a given tax period. Where for a given tax period the 14. Article 19(2) reads: amount of authorised deductions exceeds the amount of tax due, the Member States may either make a refund or carry the excess forward to the following period according to conditions which they deter- mine. 7 'By way of derogation from the provisions of paragraph 1, there shall be excluded from the calculation of the deductible proportion, amounts of turnover attributa- ble to the supplies of capital goods used by 12. Where a taxable person uses taxable the taxable person for the purposes of his goods or services both for transactions in business. Amounts of turnover attributable respect of which value added tax is to transactions specified in Article 13B(d), deductible and for exempt transactions in in so far as these are incidental transactions, respect of which no such right is enjoyed, and to incidental real estate and financial transactions shall also be excluded. ...'

6 — Article 17(2) of the Sixth Directive. 7 — Article 18(2) and (4) of the Sixth Directive. 8 — Article 17(5) of the Sixth Directive.

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OPINION OF MR LÉGER — CASE C-77/01

I I— Facts and procedure deposit was discovered whose exploitation would be viable, a company would be formed to carry out that activity.

15. Empresa de Desenvolvimento Mineiro SGPS SA (EDM), formerly Empresa de Desenvolvimento Mineiro SA (EDM), (hereinafter 'EDM') is a holding company in the mining sector. It carried out its activities as a public undertaking before it 18. EDM's participation in those consortia was converted, in September 1989, into a involved developing activities of a technical legal person governed by private law and nature and coordinating operations in its continued its activities as a limited com- capacity as manager and taking part in pany. advisory boards and technical committees established for that purpose.

24. The tax authority also pointed out that, 22. However, EDM was considered by the even though EDM only occasionally sold its tax authority also to have carried out company shares, its disposal of securities exempt transactions and should conse- and its other treasury operations had quently be considered to be a mixed taxable generated revenue greater than the proceeds person required to apply the proportional from its taxable transactions. 11 method for calculating deduction.

23. According to the tax authority, there is no right to deduct in respect of: 25. The tax authority therefore concluded that all of that revenue should be included in the denominator of the fraction used to calculate the deductible proportion on the ground that it constituted the principal activity pursued by EDM. 12 — dividends from capital shares in com- panies;

— interest on loans granted to under- 26. It set the amount of VAT improperly takings in which EDM has shares; deducted by EDM at PTE 137 933 862.

— proceeds from the sale of shares and other negotiable securities; 27. The Tribunal Tributário de Primeira Instância de Lisboa (Tax Court of First Instance, Lisbon), Portugal, allowed EDM's

— profits from other treasury operations; 11 — Order for reference, p. 22. and 12 — Order for reference, pp. 17 and 18.

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I I I— The questions referred for a pre- (3) Is an undertaking's financial activity liminary ruling which generates annual income which is clearly higher than that from the activity described in its statutes as its principal activity to be regarded as 30. In the view of the Tribunal Central "incidental" for the purposes of Article Administrativo, an interpretation of the 19(2) of the Sixth Directive?'

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IV — Assessment 34. As the Court has held on a number of occasions with regard to the receipt of dividends, where the transaction concerned does not fall within the scope of VAT, it falls outside the entitlement to deduct. 16 Introductory remarks

31. According to the grounds of the order for reference, 13 the referring court seeks to ascertain whether the operations performed by EDM in the context of the three consortia, the interest on the loans it has 35. This means, first, that the revenue from granted, the proceeds from the sale of activities falling outside the scope of VAT shares and other negotiable securities and must not be included in the fraction used to the revenue from other treasury operations calculate the deductible proportion. Sec- it has made must be included in the ondly, the taxable person may not deduct denominator of the fraction used to calcu- the tax he has paid for the supply of goods late the deductible proportion. or services attributable to activities falling outside the scope of the Sixth Directive since, as far as that tax is concerned, he is in the position of the final consumer.

32. In order to answer that question, it is necessary to establish whether the transac- tions concerned fall within the scope of the Sixth Directive. 14

41. As to the first of those conditions, the 38. It should be noted that Article 4 of the Court described the circumstances in which Sixth Directive gives VAT a very wide the granting of such loans could, in itself, be scope. 17 Thus, under Article 4(2) of the considered an economic activity within the Sixth Directive, 'economic activities' meaning of Article 4(2) of the Sixth include, inter alia, any exploitation of Directive. tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis. 18

42. According to the Court, that activity must not be carried out merely on an occasional basis and must not be confined

46. In all cases, the granting of loans by a 43. The Court did not explain specifically holding company to its subsidiaries must what is meant by 'business or commercial not be an occasional activity; on the purpose'. It is not easy to give a more contrary, it must take place with a degree specific definition of that concept on a of regularity so that the holding company theoretical approach. 22 can obtain income from it on a continuing basis.

44. The business purpose, as I see it, involves a holding company introducing 47. The second condition to which the permanent human and logistical resources Court alludes in the abovementioned judg- arranged in the same way as the resources ment in Floridienneand Berginvest and of a credit institution and on a greater scale which is based on the concept of 'the direct, than the resources belonging to a private permanent and necessary extension of a investor which are used merely for his own taxable activity' is taken from Régie dau- needs. phinoise, cited above, a judgment to which the Court expressly refers.

49. It is therefore necessary to consider the extent to which the granting of loans by 52. It is therefore for the national court to EDM to its subsidiaries fulfils the require- assess whether, in the present case, the ments corresponding to the two conditions loans granted by EDM to its subsidiaries described by the Court in Floridienne and correspond to an occasional transaction or Berginvest, cited above. whether they serve a business or commer- cial purpose to provide income for EDM on a continuing basis.

50. The order for reference contains no further information on the loans at issue other than as regards the interest they generated in the financial years 1988 to 53. However, it is necessary to assess 1991. 26 whether those loans constitute the direct, permanent and necessary extension of the taxable activity on the part of EDM within the meaning of Régie dauphinoise, cited above.

54. It should be borne in mind that EDM's 58. I thus consider that the concept of principal object is, on the one hand, 'direct, permanent and necessary extension' prospecting and exploitation in the mineral should be interpreted strictly. I base that sector with a view to investment therein, in view on the considerations set out below. particular through the setting-up of under- takings and, on the other hand, managing the shares it holds in companies in that sector. 29 59. First of all, that concept has been established by case-law but is not included in the Sixth Directive. In that directive, the criterion for application of VAT is perfor- 55. Furthermore, it is apparent from the mance of an economic activity by a taxable order for reference that the referring court person acting as such. considered that the sales of shares and other negotiable securities by EDM during the period in question, as well as its other treasury operations, likewise constituted an economic activity. 60. Next, the circumstances of the Régie dauphinoise case, cited above, used by the Court to establish that concept, were very specific. As I see it, the Court considered 56. Contrary to the view expressed by the that the receipt by the manager of a Portuguese Government,31 I take the view condominium of interest resulting from that the granting of loans to companies in the placement of monies he receives from which EDM holds shares cannot be con- clients in the course of managing their sidered the direct, permanent and necessary properties constituted the direct, permanent extension of any of those various activities. and necessary extension of the taxable activity because it cannot seriously be considered, from either a practical or an economic point of view, that that manager would place those funds elsewhere than in a credit institution without obtaining any 57. Nor is there such a direct, permanent income in that respect. The receipt of such and necessary link, to my mind, with the interest therefore constituted the logical and activity assigned to EDM prior to its indissociable consequence of the manager's conversion into a legal person governed taxable activity. by private law, that is to say with the assistance it afforded to the companies in which it holds shares in obtaining loans from credit institutions or with its furnish- ing of loan guarantees. 61. Lastly, that strict interpretation is also justified by the consideration that the concept of 'incidental transactions', referred 29 — Sec point 16 of this Opinion. 30 — Page 22. to in Article 19(2) of the Sixth Directive, 31 — Paragraph 41 of its observations. must not be made redundant. As the Court

62. In the light of those considerations, I 64. This matter is specifically covered in propose that the Court's answer to the first the third question referred. question referred should be that Article 4(2) of the Sixth Directive must be interpreted as meaning that the annual granting of inter- est-bearing loans by a holding company to the companies in which it holds shares, where the holding company's principal The second question activity is to manage those shareholdings and, to a certain extent, also to guarantee the loans taken out by those companies, constitutes an economic activity provided that those loans are not granted on an occasional basis and are effected with a 65. By its second question, the national business or commercial purpose charac- court seeks to establish whether the perfor- terised, in particular, by a concern to mance of operations, in the context of maximise returns on capital investment. consortia as in the present case, by a company which is both a member and the administrator of the consortia, in return for payment in consideration of the value of 32 — See paragraph 22 of Régie dauphinoise, cited above. Having pointed out that the receipt of interest from the those operations by the other members of placements in question constitutes the direct, permanent the consortia, constitutes an economic and necessary extension of the taxable activity of property management companies, the Court states: 'Such place- activity within the meaning of Article 4(2) ments cannot therefore be characterised as incidental financial transactions within the meaning of Article 19(2) of the Sixth Directive, particularly where of the Sixth Directive.' The Court reasserted that view in Floridienne and Berginvest, cited above, paragraph 27, those operations exceed the company's pointing out that the loans in point are subject to VAT if share as stipulated in the respective con- they constitute either an economic activity of the operator or the direct, permanent and necessary extension of a tracts. taxable activity, without, however, being incidental to that activity. The part of the sentence that I have italicised does not introduce an additional condition, although it could be interpreted as such on a first reading. It would, after all, be illogical to assume that the Court sought to add a further condition at that point in the reasoning process in the light of the successive stages of the assessment process under which it is necessary first of all to establish whether a transaction falls within the scope of the Sixth Directive before it can be assessed whether it is an incidental 66. The referring court is seeking in fact to transaction. establish whether the operations performed I-4310

70. On that basis, EDM issued invoices 67. It should be noted that economic setting out the operations carried out and activities carried out by taxable persons indicating their cost for the purpose of are subject to tax only if they have been settling the accounts between the members performed for consideration. This means of the respective consortia. that the taxable person must be in receipt of consideration and that there must be a direct link between the supply of goods or services and the consideration received. It is precisely that consideration which consti- 71. EDM takes the view that such settling tutes the taxable amount in terms of of accounts must not be treated as a VAT. 33 payment but, rather, as a refund or reimbursement based on the principle that there should be no unjustified enrichment. It its view, those operations did not, there- fore, constitute the supply of goods or 68. In that regard, the Court has held that services in return for consideration and the consideration must be capable of being was outside the scope of the Sixth Directive. expressed in money, 34 a requirement also applying to reductions in the price of main supplies. 35

75. In this regard, the operations per- formed by the other members of the consortia cannot, to my mind, be regarded The third question as consideration for the operations per- formed by EDM since they are carried out in performance of the consortium contracts. I therefore consider there to be no direct link between the operations performed by EDM in accordance with its contractual obligations and the operations carried out by the other members of the consortia. 78. By its third question, the national court seeks essentially to ascertain whether Arti- cle 19(2) of the Sixth Directive must be interpreted as meaning that the financial activity of an undertaking whose annual 76. I therefore propose that the Court's revenue is considerably higher than that answer to the second question referred produced by the activity which is its should be that the performance of opera- principal object, according to its statutes, tions, in the context of consortia as in the constitutes an incidental activity. present case, by a company which is both a member and the administrator of the consortia, in return for payment in con- sideration of the value of those operations by the other members of the consortia, constitutes an economic activity within the meaning of Article 4(2) of the Sixth Directive, where those operations exceed 79. It is apparent from the order for the company's share as stipulated in the reference 37 that the financial transactions respective contracts. at issue here do not merely involve the annual granting of loans by EDM to the companies in which it holds shares; they also involve sales of shares and other negotiable securities as well as other treas- ury operations. 77. It follows that the turnover attributable to those operations not covered by EDM's contractual obligations must be included in the denominator of the fraction used to 37 — Page 22.

85. Like the interest on the loans granted by EDM to its subsidiaries, the revenue 83. In this connection, it may be seen from from the sale of shares and other negotiable EDM's answer to the Court's written securities must be included in the denomi- questions that that company made place- nator of the fraction used to calculate the ments during that period which were, for deductible proportion pursuant to Arti- the most part, short-term placements. It is cle 19(1) of the Sixth Directive unless, in also apparent from consideration of the accordance with Article 19(2), incidental income received by EDM in the course of its transactions are involved. financial activities that, although the pro- ceeds from the sale of its shares decreased continuously from 1988 to 1991, 38 that drop was largely offset by increasing 39 — Sales or other negotiable securities brought m revenue of PTE 2 7 8 4 9 6 2 4 . 7 0 , PTE 112 169 9 5 9 . 1 0 , revenue from the sale of its other negotiable PTE 311 100 000 and PTE 927 430 231.70 from 1988 to 1991 respectively and the other treasury operations yielded PTE 1 1 171 205, PTE 212 227 393.30 and PTE 208 359 328.20 from 1989 to 1991 respectively. 40 — See, to that effect, the Opinion of Advocate General Van 38 — PTE 482 431 400, PTE 301 040 000, PTE 624 452 and (¡erven in the abovementioned case of Palysar Investments PTE 314 840 from 1988 to 1991 respectively. Netherlands (point 12).

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87. In order to answer the question referred by the national court, the wording, the scheme and the objectives of the Community provisions should be consid- ered in turn, following the Court's methods 90. However, such consideration of the of interpretation. 41 wording provides no insight into the criterion to be taken as the basis for assessing that quantitative condition or, in particular, into whether, as the national court seeks to establish, such an assessment must be based on the turnover from the activities concerned or, for example, on the size of the workload they represented. 88. As regards, first of all, the literal meaning of the adjective 'accessoire'' (inci- dental), it denotes something happening in connection with or resulting from the main event 42 or something subordinate to some- thing more important. 43 Applied to the transactions referred to in the Sixth Direc- 91. In my view, the scheme of the rules tive, 'accessoire' (incidental) therefore governing deduction suggests that account means that the transactions concerned do should be taken of the turnover from the 46 not belong directly to the main activity of activities concerned. the taxpayer but are closely linked to it and

44 — That literal interpretation corresponds to the wording used in several other language versions. See, in this connection, 41 — Case C-191/99 Kvaerner [2001] ECR I-4447, paragraph the Opinion of Advocate General Lenz in the above- 30. mentioned case of Régie dauphinoise (point 38). 42 — See Le Petit Robert, Dictionnaire de la langue française, 45 — Idem. Paris, ed. Dictionnaires Le Robert, 1996. 46 — See, to this effect, the explanatory memorandum to the first 43 — See Hachette, Dictionnaire de la langue française, Paris, ed. Commission proposal for the Sixth Directive, Bulletin of Hachette, 1980. the European Communities, Supplement 11/73, p. 20.

95. The objectives of the rules governing deduction contained in the Sixth Directive support the interpretation I propose. 98. Such a general assumption can no longer be made if the exempt financial activities generate revenue higher than that produced by the activity described in the 47 — That article provides that 'Member States shall also grant statutes of the taxable person as the to every taxable person the right to a deduction or refund of the value added tax referred to in paragraph 2 in so far principal activity. as the goods and services are used for the purposes of ... any of the transactions exempted under Article 13B(a) and (d), paragraphs 1 to 5, when the customer is established outside the Community or when these transactions are directly linked with goods intended to be exported to a country outside the Community'. 48 — Régie dauphinoise, cited above, paragraph 21.

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101. Unlike EDM, I see no contradiction whatsoever between that interpretation and case-law. As I have already mentioned, the Court had no occasion in Régie dauphi- noise, cited above, to present a positive 103. Therefore, in the circumstances of this definition of 'incidental transactions'. It did case, the interest on the loans granted on an no more than conclude, very logically, from annual basis by EDM to the companies in its analysis that the investment activities at which it holds shares, in so far as those issue in that case constituted the direct, loans constitute an economic activity within the meaning of Article 4(2) of the Sixth Directive, and the revenue from EDM's other financial activities must be included in 49 — EDM's income from its taxed activities amounted to PTE the denominator of the fraction used to 82 079 528, PTE 72 836 992, PTE 22 597 883 and PTE 73 019 855 from 1988 to 1991 respectively. It should be calculate the deductible proportion. noted at this point that the financial transactions carried out by EDM, excluding interest on the loans granted to its subsidiaries, generated, over the same years, revenue of PTE 510 281 024.70, PTE 424 381 164.10, PTE 523 961 845.30 and PTE 1 136 104 399.90 respec- tively. 50 — Paragraph 37.

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104. Should such an outcome be detrimen- 105. In the light of those considerations I tal to EDM because it would mean that its propose that the Court's answer to the third deduction entitlements are reduced to a question referred should be that Article 19 level below that which corresponds to the (2) of the Sixth Directive must be inter- use of goods and services in respect of its preted as meaning that, in so far as it exempt activities, it is for EDM, in my view, constitutes an economic activity, the finan- to take the necessary steps as far as the cial activity of an undertaking whose competent tax authorities are concerned in annual revenue is higher than that pro- order to distinguish in future between those duced by the activity which is its principal activities, or some of those activities, and its activity, according to its statutes, does not taxed activities. constitute an incidental activity.

(2) The performance of operations in the context of consortia as in the present case, by a company which is both a member and the administrator of the consortia, in return for payment in consideration of the value of those operations by the other members of the consortia, constitutes an economic activity within the meaning of Article 4(2) of Sixth Directive 77/388, where those operations exceed the company's share as stipulated in the respective contracts.

(3) Article 19(2) of Sixth Directive 77/388 must be interpreted as meaning that, in so far as it constitutes an economic activity, the financial activity of an undertaking whose annual revenue is higher than that produced by the activity which is its principal activity, according to its statutes, does not constitute an incidental activity.

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