61994C0215
OPINION OF ADVOCATE GENERAL
JACOBS
delivered on 23 November 1995 (
*1
)
1.
In this case the Bundesfinanzhof (German Federal Finance Court) seeks a preliminary ruling from the Court on the interpretation of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (
1
) (‘the Sixth Directive’). The Bundesfinanzhof raises the important question of the status, for value added tax purposes, of compensation received by agricultural producers for undertaking to cease production of a certain crop or product.
2.
Jürgen Mohr, the plaintiff in the main proceedings, was the owner of an agricultural holding on which he kept a herd of dairy cattle. In March 1987 he applied to the Federal Office for Food and Forestry (Bundesamt für Ernährung und Forstwirtschaft) for a grant for discontinuing milk production. His application was based on the German regulation of 6 August 1986 (EG-Milchaufgabevergütungsverordnung (
2
)) fixing compensation for the definitive discontinuation of milk production. He undertook in the application to discontinue milk production and not to make any claim for a milk reference quantity under Article 5c of Council Regulation (EEC) No 804/68 of 27 June 1968 (
3
) as amended by Regulation (EEC) No 1335/86. (
4
) He was awarded the sum of DM 385980 in a single payment on 23 September 1987. He sold his cattle and converted the business into a ‘riding centre’. Thus he ceased all milk production in 1987.
3.
The plaintiff did not include the amount of the compensation received in the declaration he made to the Finanzamt (Tax Office) of his turnover for 1987.
4.
The Finanzamt, the defendant in the main proceedings, regarded the compensation as consideration received for a taxable supply, namely the discontinuation of milk production, and assessed it to turnover tax.
5.
The plaintiff unsuccessfully challenged the decision of the Finanzamt before the Finanzgericht, which upheld the decision to tax the compensation. He then brought the matter before the Bundesfinanzhof. The Bundesfinanzhof noted that the Court had not yet determined whether subsidies granted to producers on grounds relating to common organizations of markets are taxable under Articles 2(1), 6(1) and 11(A)(1)(a) of the Sixth Directive. It also noted that the treatment for VAT purposes of compensation for the discontinuation of agricultural production varied from one Member State to another. It therefore referred the following two questions to the Court:
‘1.
Does a farmer who is a taxable person and definitively discontinues milk production thereby make a supply of services within the meaning of Article 6(1) of the Sixth Directive of 17 May 1977 on the harmonization of the laws of Member States relating to turnover taxes (77/388/EEC)?
2.
Is the compensation received for such discontinuation under Council Regulation (EEC) No 1336/86 of 6 May 1986 (OJ 1986 L 119, p. 21) a monetary payment which is taxable under Article 11(A)(1)(a) of the Sixth Directive?’
The Community legislation
6.
Article 2 of the Sixth Directive provides:
‘The following shall be subject to value added tax:
—
the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;
—
the importation of goods.’
7.
Article 6(1) of the Sixth Directive provides:
‘1.
“Supply of services” shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5.
Such transactions may include inter alia:
—
assignments of intangible property whether or not it is the subject of a document establishing title,
—
obligations to refrain from an act or to tolerate an act or situation,
—
the performances of services in performance of an order made by or in the name of a public authority or in pursuance of the law.’
8.
Article 11(A)(1)(a) of the Sixth Directive provides:
‘The taxable amount shall be:
(a)
in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies.’
9.
Council Regulation No 1336/86 of 6 May 1986 fixing compensation for the definitive discontinuation of milk production established a scheme under which a milk producer who undertakes to discontinue milk production definitively receives compensation financed by the Community. In particular, the third recital of the preamble states:
‘... in order to facilitate the reduction of deliveries and direct sales involved in reducing guaranteed global quantities, a Community system should be established to finance the discontinuation of milk production by granting any producer, at the latter's request and provided that he fulfils certain eligibility requirements, compensation in return for his undertaking to discontinue definitively all milk production’.
10.
Article 1 of Regulation No 1336/86 provides for compensation to be paid to a producer who undertakes to discontinue milk production definitively. Article 2 of the Regulation fixes the amount of compensation to be paid to producers, provides for the Community to finance the payment of the compensation and states that the compensation is paid for seven years.
11.
Article 2(2) of Commission Regulation (EEC) No 2321/86 of 24 July 1986, (
5
) which lays down detailed rules for the application of Council Regulation No 1336/86, provides:
‘For each producer, ... the request shall include at least the following information:
...
(c)
a declaration by the producer certifying that he undertakes:
—
to discontinue milk production definitively no later than 31 March following the date of acceptance of his request,
—
to give up any entitlement to a reference quantity in the context of the arrangements provided for in Article 5c of Regulation (EEC) No 804/68.’
The background to Regulation No 1336/86
12.
Before I turn to the national court's questions, it may be helpful briefly to describe the background to Regulation No 1336/86. By Council Regulation No 804/68 of 27 June 1968 (
6
) a common organization of the market in milk and milk products was established. The common organization of the market seeks to achieve the objectives set out by Article 39 of the Treaty. The regulation established a ‘target price’ mechanism with accompanying intervention measures to guarantee the agreed target price. It soon became apparent, however, that there was an imbalance between supply and demand on the Community market: milk production exceeded demand. Thus, from 1974 onwards, the Community took a number of measures to stimulate demand for milk and milk products, including subsidies for the use of certain types of milk products, subsidies for the consumption of milk by schoolchildren as well as export refunds to encourage sales on world markets.
13.
Those measures did not however prove sufficient to remedy the imbalance between supply and demand. The Council therefore adopted Regulation (EEC) No 1079/77 of 17 May 1977 on a co-responsibility levy and on measures for expanding the markets in milk and milk products. (
7
) The purpose of the Regulation was to impose a levy on all milk delivered to dairies of between 1.5% and 4% of the target price so that producers would bear some of the cost of their surplus production. In addition, the Council adopted Regulation (EEC) No 1078/77 of 17 May 1977 introducing a system of premiums for the non-marketing of milk and milk products and for the conversion of dairy herds. (
8
) The aim of that Regulation, according to the first recital of its preamble, was to encourage the trend of producers to cease milk production or the marketing of milk and milk products. To that end, producers who undertook to refrain from marketing milk and milk products for five years and those who undertook to convert their dairy herds to meat production for a period of four years were to receive compensation from public funds provided by both the Guidance Section and the Guarantee Section of the European Agricultural Guidance and Guarantee Fund.
The third recital of that Regulation stated:
‘... the amount of the premiums should be fixed at a level such that they may be considered as some compensation for loss of income from the marketing of the products in question ...’.
14.
Another system which was introduced by the Council to control milk production was the quota system. It was set up initially in 1984 by Council Regulation (EEC) No 856/84 of 31 March 1984 (
9
) amending Regulation No 804/68 on the common organization of the market in milk and milk products. The quota system has since then been the central measure for restricting supply.
15.
The Community embarked on the measures described above to reduce surplus production instead of deciding to cut prices. The view was taken at the time that a direct cut in prices sufficient to restore balance to the market could not be made without bringing about a drastic reduction in farmers' incomes. (
10
) Such a reduction of incomes would have had dramatic social and regional consequences.
16.
Thus Regulation No 1336/86 is to be seen in the context of a series of measures adopted by the Community in order to limit production of milk without a sudden reduction of the income of the farmers concerned. Indeed, Regulation No 1336/86 is in many respects a continuation of the policy pursued by Regulation No 1078/77, except that Regulation No 1336/86 requires that the producer undertakes to cease milk production definitively and not for a specified number of years as laid down by Regulation No 1078/77.
17.
It may be noted, moreover, that Regulation No 1336/86 is not the only regulation which provides for the granting to producers of compensation from Community funds for undertaking to cease or limit production. Indeed, there is a plethora of such regulations. Council Regulation (EEC) No 1765/92 of 30 June 1992 establishing a support system for producers of certain arable crops (
11
) provides for compensation to be paid to producers who ‘set aside’ areas of land so that arable crops will not be produced on them. Council Regulation (EEC) No 1200/90 of 7 May 1990 on the improvement of the Community production of apples provides for a premium to be paid to apple producers who undertake to grub up apple orchards and to refrain from planting apple trees (Article 2). (
12
) Council Regulation (EEC) No 1442/88 of 24 May 1988 on the granting, for the 1988/89 to 1995/96 wine years, of permanent abandonment premiums in respect of winegrowing areas (
13
) contains similar provisions with respect to vines. More generally in the agricultural sector, Article 5 of Council Regulation (EEC) No 4256/88 of 19 December 1988, laying down provisions for implementing Regulation (EEC) No 2052/88 as regards the EAGGF Guidance Section, (
14
) contains a list of the types of action undertaken by the Member States to encourage the adjustment of agricultural structures which may be assisted by the Community Structural Funds. Article 21(6) of Council Regulation (EEC) No 4253/88 of 19 December 1988, laying down provisions for implementing Regulation (EEC) No 2052/88 as regards coordination of the activities of the different Structural Funds between themselves and with the operations of the European Investment Bank and the other existing financial instruments, (
15
) envisages that the action undertaken by the Member States referred to above may be designed to support agricultural incomes.
18.
Outside the field of agriculture, Council Regulation (EEC) No 1101/89 of 27 April 1989 on structural improvements in inland waterway transport (
16
) provides for a premium to be paid to barge owners who undertake to scrap barges in order to reduce the overcapacity of the fleet on the Rhine. However, in that Regulation, the premium was not financed by the Community budget but by contributions paid into a fund by the industry itself.
19.
All of the Community legislation mentioned above has a common theme: funding is made available in the form of grants, premiums or income support as an incentive for producers of products or suppliers of services to adjust their supply in the interests of the management of the market in question. It is clear that Regulation No 1336/86 is only one of many regulations which encourage producers or suppliers to withhold supply.
The submissions
20.
The German and Italian Governments both submit that a milk producer who undertakes to discontinue production supplies a service within the meaning of Article 6(1) of the Directive and that the compensation received by the producer constitutes a monetary payment taxable under Article 11(A)(1)(a) of the Directive.
21.
The starting point of the German Government's argument is that the transaction involved in the application of Regulation No 1336/86 constitutes a taxable supply effected for consideration within the meaning of Article 2(1) of the Sixth Directive. According to the Government, the payment of the premium and the undertaking to abandon production are mutually dependent conditions. As a consequence, there exists the direct link between the service provided by the milk producer and the payment of the compensation which, according to the judgment in Staatssecretaris van Financiën v Coöperatieve Aardappelenbewaarplaats GA, (
17
) is necessary in order for a transaction to be characterized as a taxable one under the Directive. Furthermore, the German Government submits that the undertaking to cease the production of milk constitutes a service within the meaning of Article 6(1), second indent, being an obligation to refrain from the act of producing milk. The compensation received is paid to the producer as the price for the undertaking to cease milk production and thus its amount represents the taxable amount within the meaning of Article 11 of the Directive.
22.
The Italian Government also submits that the premium paid under Regulation No 1336/86 is not designed to compensate for the loss of the herd but is paid as consideration for the undertaking to cease milk production. Although the establishment of the system may have as its motive the public interest, that motive is irrelevant as far as the characterization of the operation for tax purposes is concerned. According to the Italian Government, the activity of the producer, in ceasing to produce milk, is an economic one because he receives financial consideration for the behaviour which he undertakes to adopt.
23.
The French Government and the Commission both submit that the milk producer who discontinues production does not supply a taxable service within the meaning of the Sixth Directive. The French Government submits that the undertaking to discontinue production is not a taxable supply within the meaning of Article 2 of the Directive and does not constitute a service as defined by Article 6(1). It submits that the milk producer is not supplying a service of an individual nature to the body that pays the compensation: the service rendered is of a general kind and is provided in the pursuit of a public interest goal. Furthermore, the French Government submits that the amount of compensation is fixed according to general public interest considerations, may vary from one Member State to another and may even, as is the case in France, be subject to adjustment to a certain level of production. Thus, according to the French Government, there is no direct link between the amount of the compensation paid to a given producer and any ‘benefit’ received by the paying agency. It follows that the amount of the premium is not the taxable amount within the meaning of Article 11 of the Directive. Finally, the French Government submits that the premium does not constitute a subsidy ‘directly linked to the price’ of the supply, within the meaning of Article 11(A)(1)(a) of the Directive, because the milk producer is not supplying anything for which customers are charged a price.
24.
The Commission submits, as does the French Government, that the operation envisaged by Regulation No 1336/86 does not constitute a taxable supply within the meaning of Article 2(1) of the Directive.
According to the Commission, a transaction becomes taxable if there is a supplier who supplies a service which is of direct and individual benefit to a recipient. Although the national intervention agency which pays the compensation and the milk producer are bound by mutual obligations, the intervention agency does not become a recipient of a service provided by the producer. Likewise, according to the Commission, the producer provides no service to the intervention agency. The Commission submits that the situation is analogous to the one in which a traveller switches from travel by car to travel by rail because the railway company offers a lower fare subsidised by the state in order to reduce road traffic. The rail passenger receives a premium in the form of a lower priced ticket but provides no service in the legal sense except that he contributes to the realization of a public interest goal. The Commission concludes that in the light of its interpretation of Articles 2(1) and 6(1) of the Directive it is unnecessary to consider whether the premium is the taxable amount within the meaning of Article 11.
Legal appraisal
25.
In order to answer the national court's question it is necessary to consider the aims of the Community VAT legislation and the characteristics of the tax which it introduced. Article 2 of the First Council Directive (67/227/EEC) of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes (
18
) provides:
‘The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.
On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.’
26.
Thus VAT is a general tax on consumption of goods and services. In keeping with the VAT legislation's underlying aim of fiscal neutrality, the definition given to the ‘supply of goods’ in Article 5 of the Sixth Directive and the residual definition of ‘supply of services’ in Article 6(1) ensure the broad application of the tax to all forms of consumption. (
19
) Thus, for example, a service may consist merely in undertaking to refrain from an act. (
20
) It is also immaterial that a supply of goods or services is made by order of a public authority or pursuant to the law. (
21
) Accordingly, the fact that a charge for certain services, such as power, telecommunications or transport, is imposed by law is also immaterial. (
22
)
27.
The scope of the tax is nevertheless limited by its character as a tax on consumption. A trader must supply goods or services for consumption by identifiable customers in return for a price paid by the customer or by a third parry. In the present case that requirement is not met. As is apparent from the discussion at paragraphs to 17 above, the Community, by compensating farmers through the medium of the competent national authorities for the loss of income resulting from discontinuation of milk production, does not acquire goods or services for its own use but acts in the common interest of promoting the proper functioning of the Community milk market. The present case is therefore plainly distinguishable from cases which, it has been argued, are analogous, for example the case where the vendor of a business gives an undertaking to the purchaser not to set up business in competition; there the purchaser receives a service of personal benefit to him in the form of an undertaking to refrain certain acts. It is also distinguishable from cases in which a public authority is the direct recipient of a supply of goods or services which it uses for its public activities, for example where it purchases materials and equipment for office use or obtains land by compulsory purchase for a road-building scheme. In such cases the public authority is a consumer as in a private transaction. In the present case the public authorities, whether Community or national, cannot be regarded as consumers of a service.
28.
Nór can farmers who continue to produce milk be regarded as consumers of a service provided by the farmers discontinuing production. It may be true that they receive a benefit in so far as the discontinuation programme set up by Regulation No 1336/86 allows them to remain on the market without incurring the reduction of incomes which would have resulted from a lowering of target prices. However, that benefit is both speculative and unquantifiable. It is moreover of the kind which accrues to traders remaining on any market on which the public authorities intervene in the general interest in order to remedy a situation of excess supply and to support prices.
29.
The absence of consumption in any real sense distinguishes the present case from earlier cases, such as Apple and Pear Development Council v Commissioners of Customs and Exise. (
23
) There the Court held that the mandatory charge imposed on growers of apples and pears by the Development Council to finance the activities which it undertook on behalf of the industry did not constitute consideration for services rendered. However, it seems to me that the rationale for the Court's decision was less the absence of an identifiable class of customers to which services were provided than the particular combination of a mandatory charge and the absence of any relationship between the charge and the level of benefits received by individual growers. I do not therefore think that the case is directly in point.
30.
Finally, it seems to me that the conclusion that the definitive discontinuation of milk production is not a taxable supply does not entail the risk of tax avoidance. If the milk producer sells any assets in the event of discontinuation, that sale will be a taxable supply of goods within the meaning of Article 5(1) of the Sixth Directive. Moreover, by virtue of Article 5(7)(c) of the Directive Member States may treat the retention by a taxable person, upon the cessation of a taxable economic activity, of goods on which VAT was deducted as a supply made for consideration.
Conclusion
31.
Accordingly, in my opinion the questions referred by the Bundesfinanzhof should be answered as follows:
A farmer who undertakes to discontinue milk production definitively in accordance with Article 1(1) of Council Regulation (EEC) No 1336/86 of 6 May 1986 fixing compensation for the definitive discontinuation of milk production does not make a taxable supply of services effected for consideration within the meaning of Article 2(1) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes —Common system of value added tax: uniform basis of assessment. The compensation received for such discontinuation is not taxable under the Directive.
(
*1
)	Original language: English.
(
1
)	OJ 1977 L 145, p. 1.
(
2
)	Bundesgesetzblatt I 1986, 1277.
(
3
)	OJ, English Special Edition 1968 (I), p. 176.
(
4
)	O] 1986 L 119, p. 19.
(
5
)	OJ 1986 L 202, p. 13.
(
6
)	Cited at note.
(
7
)	OJ 1977 L 131, p. 6.
(
8
)	OJ 1977 L 131, p. 1.
(
9
)	OJ 1984 L 90, p. 10.
(
10
)	Court of Auditors, Special Report No 4/93 on the implementation or the quota system intended to control milk production together with the Commission's reply, OJ 1994 C 12, p. 1 at p. 11.
(
11
)	OJ 1992 L 181, p. 12 (Corrigenda: OJ 1992 L 208, p. 34 and OJ 1993 L 90, p. 37).
(
12
)	OJ 1990 L 119, p. 63.
(
13
)	OJ 1988 L 132, p. 3.
(
14
)	OJ 1988 L 374, p. 25.
(
15
)	OJ 1988 L 374, p. 1.
(
16
)	OJ 1989 L 116, p. 25.
(
17
)	Case 154/80 [1981] ECR 445. See also Case C-16/93 Tolsma v inspecteur der Omzetbelasting [1994] ECR I-743.
(
18
)	OJ, English Special Edition 1967, p. 14.
(
19
)	Farmer and Lyal, EC Tax Law, Oxford 1994, p. 93.
(
20
)	Article 6(1), second subparagraph, second indent.
(
21
)	See Articles 5(4)(a) and 6(1), second subparagraph, third indent.
(
22
)	Farmer and Lyal, op. cit., p. 125.
(
23
)	Case 102/86 [1988] ECR 1443.