Opinion of the Advocate General — ECLI:EU:C:2001:116
Date: 2001-02-22
Based on: Treaty establishing the European Economic Community (1957)
Subject matter: Taxation;Value added tax
Procedure: Action for failure to fulfil obligations - successful;Action for failure to fulfil obligations - unfounded
Origin: France

summary, I deduce from the case-law relating to Article 17 of the Directive that the right of deduction is a fundamental feature of the VAT system, from which there may be no exclusions unless the Directive provides for them explicitly. The system also implies, however, that where the Member States are explicitly permitted freedom of action that cannot be intended to be excessively limited. It is for the Council to set limits to such freedom of action by adopting the Community measures required by the Directive. 44. Apart from the case-law on Article 17 of the Directive, there is another judgment concerning the directive which is of particular significance in these proceedings. In its judgment in Norbury, (26) the Court adopted the following assessment of the 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 exemptions 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 exemptions .... (27) A different assessment would have the following undesirable consequence: A Member State might find itself compelled to maintain all the exemptions existing at the date of adoption of the Sixth Directive, even if it regarded it as possible, appropriate and desirable progressively to implement the system laid down in the directive in the sphere under consideration. (28) Analysis The interpretation of the second subparagraph of Article 17(6) 45. Before I come to the analysis itself of these cases, I would like to draw attention to certain points on which the parties are agreed and which in my view are not at issue here, in order to assist a full understanding of the matter. 46. First is the fact that the scope of the national power to make use of the second subparagraph of Article 17(6) is limited to the adoption of national rules restricting the right to deduct VAT at most to the extent that such rules already existed in the relevant Member State when the Directive entered into force. 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 Lennartz, (29) the Court ruled that the right to deduct must be exercised immediately in respect of all the taxes charged on transactions ... Such limitations on the right of deduction must be applied in a similar manner in all the Member States and therefore derogations are permitted only in the cases expressly provided for in the Directive. (30) 48. Lastly, I point out that the proceedings concern only the existing situation, in which the Council has failed to adopt the Community provisions referred to in the first subparagraph of Article 17(6). I add, for the sake of completeness in this connection, that according to the settled case-law of the Court (31) the power given to Member States to maintain their existing legislation excluding the right of deduction remains until the Council adopts the measures referred to in that article, even though the time-limit laid down in Article 17(6) for adopting such measures has long since expired. 49. I come now to the assessment of the actual cases, which in my view relate essentially to the leeway given to Member States in the second subparagraph of Article 17(6). 50. I share the Commission's view that the second subparagraph of Article 17(6) of the Directive is a provision that must be interpreted strictly. It constitutes a derogation from the aim of the Directive, which is to establish a harmonised turnover tax system by the introduction of a value added tax. The Directive seeks likewise to harmonise the rules on deduction as a part of that system. I also deduce from Lennartz (32) a strict interpretation of the right to deduct. Indeed, this right to deduct must be available in respect of all transactions which have borne value added tax, subject only to a few restrictions expressly provided for. 51. These factors do not in any way affect the fact that a Member State which has recourse to an exclusion expressly provided for by the Directive has a wide discretion. That discretion is only limited to the extent defined by the Court in Royscot: (33) the use of this power must not negate the system of the Directive. (34) 52. The primary question in the present cases is whether the French measures remain within the ambit of the second subparagraph of Article 17(6). Only if it is established that a measure is within that ambit can it be considered whether the discretion has been exceeded. 53. The ambit of the provision is in my view limited in two ways. First, the power of Member States to maintain exclusions by virtue of the second subparagraph of Article 17(6) is limited to the situation, understood to be a temporary one, which exists for so long as the Council has not adopted Community provisions. The Directive envisages that these provisions should be adopted during the four years following its entry into force. Secondly, the Directive speaks of the retention of the national rules which already existed in the Member States when it entered into force. 54. Taken together, these factors lead to the following assessment of the second subparagraph of Article 17(6) of the Directive. This provision is to be understood as transitional and temporary, necessary because, when the Directive entered into force, it was not yet possible to achieve fully the aim of the Directive. That may be attributed to the fact that, at that time, the Member States were not yet willing - for which there may in fact be good reasons - to replace existing provisions completely by a harmonised system. The temporary character of this transitional regime is emphasised by the time-limit of four years referred to in the first subparagraph of Article 17(6). This does not in any way affect the fact that the time-limit proved not to have been complied with - far from it - and that it is still plainly not possible to this day to achieve the aim of the Directive fully. 55. The proceedings before us are concerned essentially with the meaning to be attributed to the temporary or transitional character of the derogation referred to in the second subparagraph of Article 17(6). Is it above all a standstill clause, or is it rather another ordinary derogation, which has different effects in different Member States, depending on the national legislation in existence on 1 January 1979? 56. I understand the arguments advanced on this issue by the parties as follows. The Commission sees the standstill character of the provision as central. The provision allows the maintenance for a certain period of time of derogating national rules existing at the time of the entry into force of the Directive. On the other hand, the French Government relies on the nature of the derogating provision. That provision freezes the situation existing on 1 January 1979. It is the situation in existence at that moment which determines the margin of discretion of Member States. Only a decision of the Council, adopted in accordance with the first subparagraph of Article 17(6), can reduce the extent of that discretion. 57. Overall, I share the view of the Commission that the standstill nature of the clause predominates. As I have already noted above, this provision was needed because, when the Directive was adopted, it was not yet possible to achieve its aim fully. The Court commented on the purpose of Article 17 of the Directive in Ampafrance and Sanofi. (35) Briefly, it was of the view that the right to deduct is a fundamental principle of the VAT system, which must be implemented in the same way in all Member States. 58. As soon as a Member State abrogates a derogating national provision - one which excludes the right to deduct under the second subparagraph of Article 17(6) - that purpose is achieved. The tax burden is then the same in the sector in question in the Member States. A Member State may not then reintroduce the derogating provision subsequently. To do so would be to create a disparity between the legislation of Member States on the basis of a justification which did exist previously but which has now disappeared. 59. I would like to add the following further argument. In a situation in which the legislation of the Member States has (meanwhile) become parallel, no good reason can be put forward to justify one Member State making use of an exclusion referred to in the Directive, and the others not. The fact that there was a previous disparity between Member States is not, in my opinion, relevant in such a case. 60. At this stage, I reach the following interim conclusion: as soon as a Member State has abolished a derogating national provision, it may no longer, in the sector in question, have recourse to the transitional provisions of the second subparagraph of Article 17(6), or it will fall outside their ambit. However that may be, the situation is not as simple in either of these cases, because in neither was there a complete abolition of a national derogating provision. 61. It is now necessary to determine whether the temporary transitional regime also ceases to apply if a Member State amends the national derogating provision, or abolishes it in whole or in part. The two cases at issue concern this type of situation. Case C-345/99 concerns the introduction of the right to deduct subject to a condition. Case C-40/00 concerns the introduction first of a partial right to deduct, followed by an alteration of the percentage of VAT deductible and, lastly, a return to a total exclusion of the right to deduct (the real subject of the dispute). 62. As we know, the Commission considers that a Member State falls outside the ambit of Article 17(6) if it introduces a partial or conditional right to deduct. 63. That view is, in my opinion, not at all supported by the wording of the provision itself or by the case-law relating to it. It does not, in my opinion, follow from the nature of a standstill clause that it is by definition impossible for Member States, where they have the choice of maintaining or abolishing an exclusion, to be entitled to decide to abolish it in part or progressively. The greater power will usually include the lesser. 64. I refer in this connection to Norbury (36) in particular, where the Court emphasised the importance - from the point of view of the objective to be achieved by the Directive - that a Member State should be free to implement the Directive progressively in the relevant area. The Commission's argument that this reasoning - applied in the context of Article 28 of the Directive - does not apply to Article 17 of the Directive is unconvincing. Both articles provide for a transitional regime, necessary because complete harmonisation was not yet possible. 65. I consider that the situation is different, however, if a Member State applies afresh in a wider manner an exclusion whose use was limited at a given moment by a legal provision. I have in mind the French provision which is the subject of Case C-40/00, in which the partial right to deduct has been replaced by a total exclusion. In my view, the character of the standstill clause in the second subparagraph 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 exclusion. France has thus also gone beyond the ambit of the second subparagraph of Article 17(6). 66. I also consider it significant that in Case C-40/00 the amendment to the French legislation takes us further from, rather than nearer to, the object sought by the Directive, namely the implementation of a harmonised system of turnover tax by the introduction of a value added tax. A 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 progressive or partial withdrawal of an exclusion. That argument does not run in the present case. 67. The situation is otherwise is Case C-345/99. In my view, it follows from the factors considered above that the abolition of a condition of a national exclusion falls within the ambit of the second subparagraph of Article 17(6). I will now address the question whether France has acted within the discretion allowed by Community law. 68. I base my opinion at this point on the judgments in Commission v France and Royscot. (37) In these judgments, the Court 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 clear, this discretion is not, however, absolute and its exercise may not negate the system of the Directive. It is only if a measure moves further from the objective sought by the Directive, rather than nearer to it, that it may be said that it negates the system of the Directive. 69. The Commission further points out that the French measures could trigger comparable measures on the part of other Member States, which would increase distortion 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 by the second subparagraph of Article 17(6), I no more share the Commission's concerns than does the French Government. 70. To summarise, I reach the following assessment: - if a Member State abolishes an exclusion measure, it moves outside the ambit of Article 17(6); - a Member State may partly abolish an exclusion measure (Case C-345/99) on condition that, in doing so, it does not negate the system of the Directive; - in this case, it falls outside the ambit of Article 17(6) in respect of the part of the exclusion abolished; - in that event, it is not permitted later to reintroduce an exclusion (Case C-40/00) by reference to Article 17(6). 71. In brief, my analysis of the second subparagraph of Article 17(6) leads me to the conclusion that the measure at issue in Case C-345/99 is permitted by the Directive, whilst that is not so with regard to the measure which is the subject of the proceedings in Case C-40/00. Further issues in Case C-345/99 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 analysed by reference to the criterion laid down in Royscot, (38) on the basis of which the measure may not negate the Directive. 73. In my view, it is plain that it cannot be maintained that the measure has this effect. I consider that the interpretation given by the French Government of the system in force is relevant. The requirement of exclusive 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 provision, France does no more than abolish the exclusion for a specified category of vehicles, while maintaining it for other vehicles. 74. Even after considering these further complaints, my provisional conclusion is unchanged. Further issues in Case C-40/00 75. For the sake of completeness, I point out that the French legislature previously adopted - during the period before 1991 (39) - measures which led progressively to a diminution in the percentage excluded from deduction of VAT. Since those measures are not the subject of these proceedings, I will confine myself to noting that such measures have as their aim, or at least as their effect, a movement towards the objective of the Directive. From that point of view, such measures differ in essence from that which is the subject of the present proceedings. 76. The French Government emphasises the purpose of the measure at issue, namely the protection of the environment. It rightly claims that this is a factor given great importance in Community law. That does 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 circumstances of this case, that the question whether the national measure is also likely to be effective for the protection of the environment is decisive. 77. None the less, I will point out what follows for the sake of completeness. The Commission doubts that the measure - having regard to its limited scope - could contribute effectively to the protection of the environment. The French Government replies that the measure is not the only one in question but is part of a group of measures aimed at combating the problem of atmospheric pollution. What is decisive, in my view, is that an approach such as that adopted by France, which has chosen to address the problem of the environment by means of a selection of measures, does not seem on the face of it to be a dubious one. I do not therefore agree with the Commission's reasoning on this. But I am also not convinced by the factors which France relies on. Although, in general terms, I accept the French argument that a group of measures may constitute an appropriate way of resolving the problems of the environment, the French Government has failed to show that the system at issue relating to the deduction of value added tax is a necessary element of this group of measures. 78. The final point at issue concerns the Commission's silence at an earlier stage, namely on the amendment to French taxation law in 1991, when the percentage of the permitted deduction was reduced from 80% to 50%. As the Commission rightly 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 never have the effect of giving rise to a legitimate expectation on the part of the French Government as to the compliance with Community law of its actions. That does not alter the fact that it appears from the file that it seems likely that the French Government did inform the Commission of the previous measures. 79. Even after considering these further complaints, my provisional conclusion is 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: (a) Dismiss the application. (b) Order the Commission to pay the costs pursuant to Article 69(2) of the Rules of Procedure. In Case C-40/00: (a) Declare that the French Republic has failed to fulfil its obligations under Article 17(2) and (6) of the Sixth Council Directive (77/388/EEC) by reintroducing, with effect from 1 January 1998, a system excluding the right to deduct the VAT borne by diesel used as fuel in vehicles. (b) Order the French Republic to pay the costs pursuant to Article 69(2) of the Rules of Procedure. 1: - Original language: Dutch. 2: - OJ 1977 L 145, p. 1. 3: - See the recitals in the preamble to the Directive. 4: - By virtue of Article 12 of the Directive, it entered into force in the Member States on 1 January 1979 at the latest. 5: - The Commission cites in particular the judgments in Case C-37/95 Ghent Coal Terminal [1998] ECR I-1, and Case C-97/90 Lennartz [1991] ECR I-3795. 6: - The Commission refers in this regard to the judgment in Case C-43/96 Commission v France [1998] ECR I-3903. 7: - The Commission uses this metaphor to describe the alternative view - which it does not support - that the freedom of action of the Member States is progressively limited. 8: - Case C-136/97 [1999] ECR I-2491. 9: - Cited above in footnote 5. 10: - The Commission cites in particular the judgment in Case C-317/92 Commission v Germany [1994] ECR I-2039. 11: - Case C-305/97 [1999] ECR I-6671. 12: - Cited above in footnote 5. 13: - Cited above in footnote 8. 14: - Cited in footnote 8. The argument put by the Commission at the hearing is reproduced in paragraph 18 of the Opinion of Advocate General Fennelly. 15: - [2000] ECR I-7013. 16: - See paragraph 34 of the judgment. The Court refers on this issue to paragraphs 16 and 18 of its judgment in Case C-62/93 BP Supergas [1995] ECR I-1883. 17: - See point 20 et seq. of the Opinion. 18: - Advocate General Cosmas refers in this connection to the judgments in Case 286/83 Rompelman [1985] ECR 665, Case C-110/94 Inzo [1996] ECR I-857, and Case C-37/95 Ghent Coal Terminal [1998] ECR I-1. 19: - Case 50/87 [1988] ECR 4797. 20: - Cited above in footnote 6. 21: - Cited above in footnote 11. 22: - Paragraphs 26 and 24 of the judgment. 23: - Point 26 of the Opinion. 24: - Cited above in footnote 11. 25: - This observation is consistent with the previous case-law of the Court, namely the judgment in Case C-165/88 ORO Amsterdam Beheer and Concerto [1989] ECR 4081, concerning the previous Article 32 of Directive 77/388, which contained a transitional provision relating to used goods which corresponded to Article 17(6). 26: - Cited above in footnote 8. 27: - Paragraph 20 of the judgment. 28: - Paragraph 21 of the judgment. 29: - Cited above in footnote 5. 30: - Paragraph 27 of the judgment. 31: - Recently confirmed in Royscot (cited above, in particular in point 24 of this Opinion). 32: - Cited above in footnote 5. 33: - Cited above in footnote 11. 34: - See also point 40 of this Opinion. 35: - Cited above in footnote 15. 36: - Cited above in footnote 8. 37: - Cited above in footnotes 6 and 11 respectively. 38: - Cited above in footnote 11. 39: - As already indicated, the deductible percentage of VAT was again reduced in that year, from 80% to 50%.