COMMISSION OF THE EUROPEAN COMMUNITIES 
C0M(92) 591 final 
Brussels, 22 December 1992 
REPORT FROM THE COMMISSION TO THE COUNCIL 
PRESENTED IN ACCORDANCE WITH ARTICLE 2 
OF THE COUNCIL DECISION 89/488/EEC 
OF 28 JULY 1989 
(Application of a measure derogating from 
Article 17(2) of the sixth Directive 77/388/EEC 
on the harmonization of the laws of the Member States 
relating to turnover taxes) 
Proposal for a 
COUNCIL DECISION 
authorizing the French Republic to extend the 
application of a measure derogating from Article 17(2) 
of the sixth Directive 77/388/EEC on the harmonization 
of the laws of the Member States 
relating to turnover taxes 
(presented by the Commission) 
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REPORT FROM THE COMMISSION TO THE COUNCIL 
PRESENTED IN ACCORDANCE WITH ARTICLE 2 
OF THE COUNCIL DECISION 89/488/EEC 
OF 28 JULY 1989 
(Application of a measure derogating from 
Article 17(2) of the sixth Directive 77/388/EEC 
on the harmonization of the laws of the Member States 
relating to turnover taxes) 
~>l^o -
!• INTRODUCTION 
By Council Decision 89/48Ç/EEC of 28 July 1989,* the French Republic was 
authorized on the basis of Article 27 of the sixth VAT Directive, still in 
force, to derogate from Article 17(2) of the sixth VAT Directive. 
The derogation consists in excluding altogether from the right to deduct VAT 
previously charged expenditure in respect of goods and services in cases 
where private use of those goods and services accounts for more than 90% of 
their total use. 
The Council Decision authorizes application of that derogation until 
31 December 1992. Article 2 stipulates that the Commission is to present to 
the Council, prior to the date of expiry of the derogation, a report on its 
application, accompanied, if appropriate, by a proposal for a Council 
Decision authorizing its extension. 
The purpose of the present report is to give an account of the application 
of the derogation and to examine the application for an extension submitted 
by the French Republic by letter registered by the Secretariat-General of 
the Commission on 22 October 1992. 
**• APPLICATION OF THE DEROGATION 
1. Background 
On 3 February 1989 the French Council of State, in the "Alitalia" case, 
gave a condemnatory ruling in respect of Article 230-1 of Annex II to 
the French General Tax Code, which excluded from the right to deduct VAT 
previously charged expenditure on goods and services not used 
exclusively for the purposes of the taxable person's business. 
By that ruling, and in accordance with Community law, exclusive use 
ceased to be one of the conditions governing the right to deduct VAT in 
France. From now on, where goods and services are used partly for non­
business purposes, tax is deducted in full but, instead, private use of 
goods or services is taxed on the basis of Article 6(2) of the sixth 
Directive. 
OJ No L 239, 16.8.1989. 
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In the interests of simplification, the French Republic has requested 
authorization from the Council to continue on a temporary basis to 
exclude from the right to deduct VAT previously charged on expenditure 
on goods and services in cases where private use of those goods and 
services accounts for more than 90% of their total use. Such a 
provision is designed to avoid having to tax self-services, something 
which would raise difficulties since the taxable amount would be based 
on an assessment of the value of self-supplies resulting from the 
private use of the goods. 
2. Entry into force in France 
Articles 1, 3 and 5 of Decree No 89-885 of 14 December 1989, published 
in the Official Journal of the French Republic of 15 December 1989 
(p. 15578), transpose the Council Decision into national law. The 
Decree entered into force in Paris on 17 December 1989 and in the 
provinces, in principle, on 18 December 1989. It gave rise inter alia 
to new Article 230-1 of the General Tax Code and was the subject of an 
Administrative Instruction of 21 February 1990, published in the 
Official Tax Gazette (ref. 3 D-3-90) and registered in the 
administrative documentation under reference 3-D-1512 (updated on 
1 May 1990). 
3. Quantitative assessment of private use (threshold of 90%) 
The quantitative assessment is based on the following: 
- nature of the goods or services; 
function of the goods or services; 
- possible use of the goods or services in the business under 
consideration; 
- apportionment of the periods of use of the goods or services under 
consideration in terms of the calendar year or as a fraction of the 
calendar year in cases where possible total use can, in any event, 
be only seasonal (e.g. pleasure boats). 
4. Practical application of the derogation in France 
The derogation in question is applied in the following circumstances: 
Purchases by a business of goods and services that are to be made 
immediately available to, or used in connection with the main 
activity of the business by, the head of the business, the managers, 
the staff or a third party: in this case, exclusion from the right 
to deduct tax is automatic. 
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Examples 
. Purchase or leasing of a video camera for the use of the manager, 
with the camera being used exceptionally for in-house vocational 
training purposes; 
. Pleasure vessel used essentially for private purposes but rented 
out for one week of each year. 
Purchase of goods and services that are normally used for the 
purposes of the business but which, after being used for one year, 
are found to have been used for private purposes to the extent of 
more than 90% of their total use: In this case, after the first 
year of use, the business will have to make an adjustment in respect 
of the VAT initially deducted. The adjustment will consist in 
payment of all the tax deducted. 
Where the circumstances referred to above are discovered during the 
adjustment period provided for in Article 20(2) of the sixth 
Directive, tax is paid in respect of the years of the adjustment 
period that have elapsed. It will, therefore, be equal to the 
amount of the previous deduction less one fifth (movable property) 
or one tenth (immovable property) for each year that has elapsed. 
5. Special case of local authorities (non-taxable institutional persons 
within the meaning of Article 4(5) of the sixth Directive) 
In this case, the use of goods and services for the purposes of an 
activity falling outside the scope of VAT is regarded by France as 
corresponding to private use. 
Example 
Computer used simultaneousy by a municipality for the purposes of 
taxable transactions and for the purposes of non-taxable services 
supplied by it in connection with civil status and social 
assistance. 
In addition, the French administration has informed its departments 
that, in any event, in the interests of simplification, there is no 
reason to call into question the situation of local authorities 
which, in cases where a capital good is used for both non-taxable 
and taxable transactions, consider that use in respect of the former 
accounts for more than 90% of their total use even where this is not 
actually the case. 
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6. Position of the French administration on the application of 
the derogation 
The French administration takes the view that the derogation has 
simplified administration of the tax, both for itself and for the 
businesses concerned. Moreover, as far as it is aware, no dispute 
regarding application of the derogation has arisen between itself and 
the businesses concerned. Until recently, the derogation had, in any 
event, been applied only in a very few, marginal cases not caught by the 
statistics. 
III. APPLICATION FOR AN EXTENSION OF THE AUTHORIZATION 
In this connection, the French Republic points out that the derogation in 
question might be applied more often in future in view of the fact that, 
since 1991, a number of liberal professions (lawyers, solicitors, 
translators, interpreters, sports people, authors and artists) have carried 
out transactions that are taxed and no longer exempt. 
Now, such professionals, given the liberal nature of their activities, 
commonly use goods forming part of their business for their own private 
purposes (e.g. mixed-use apartment, computer, or even photographic or hi-fi 
equipment in the case of a performing artist). If the derogation did not 
apply, such private use would require supervision by the tax authorities of 
such equipment throughout its useful life and, in any case, taxation of the 
self-supplies resulting from such private use. Calculation of the taxable 
amount for such supplies would not be straightforward and it would be no 
easy matter convincing the person liable to pay tax that the taxable amount 
had been calculated correctly since, in such circumstances, 
Article 11(A)(1)(c) of the sixth Directive stipulates that the taxable 
amount is the full cost to the taxable person of the self-supplies 
corresponding to the private use of the business asset (e.g. in the case of 
a car, purchase, fuel, repairs, maintenance, etc.). 
IV. OPINION OF THE COMMISSION DEPARTMENTS 
1. Case for extending the derogation 
Since the derogation in question is designed to avoid "consumption 
without taxation", the Commission departments take the view that it is 
justified. 
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However, they are also aware of the fact that, from a financial 
viewpoint (in terms of a cash-flow benefit), taxation of the use for 
private purposes of goods or services is more favourable for the person 
liable to pay tax than is automatic exclusion of the right to deduct VAT 
previously charged. However, in cases where private use accounts for 
more than 90% of total use, the cash-flow benefit is not justified since 
the business makes virtually no use of the goods or services in 
question. 
2. Period covered by the derogation 
The Commission departments take the view that a definite expiry date 
should be set for the derogation so that an assessment can be made 
notably in the light of the progress in Community work on the proposal 
for a twelfth. VAT Directive and in the light of the actual application 
of the derogation. Bearing in mind the observations set out below, the 
derogation could, therefore, be extended on a temporary basis until 
adoption of the twelfth VAT Directive if that takes place by 
31 December 1996. If the twelfth VAT Directive were not adopted by that 
date, the derogation would, in any event, expire on 31 December 1996. 
3. Application of the derogation in France 
1.1 Application of the derogation to local authorities calls for the 
following observations and questions from the Commission: 
France has been authorized to exclude "expenditure in 
respect of goods and services in cases where private use of 
those goods and services accounts for more than 90% of their 
total use" from the right to deduct value added tax 
previously charged. 
The Commission departments consider that partial use of 
goods by a local authority for activities; falling outside 
the scope of VAT pursuant to Article 4(5) of the sixth 
Directive could not be regarded as giving rise to private 
use within the meaning of Article 6(2) of the sixth 
Directive. Nor do such cases involve use for purposes other 
than those of the local authority since the very purpose of 
local authorities is to carry out transactions as public 
authorities. 
A local authority should, in fact, be regarded as using the 
goods in question partly for the purposes of a "non-taxable 
transaction". 
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The Commission departments would note that, from a strictly 
legal viewpoint, the sixth Directive provides for an option 
to tax only in respect of "the application of goods by a 
taxable person for the purposes of a non-taxable 
transaction", that is to say, in the case in point, where 
self-supplies of goods take place. Where goods are used for 
the purposes of a non-taxable transaction, the 
sixth Directive does not introduce on either an optional or 
a compulsory basis any arrangement "parallel" to that 
provided for in Article 5(7) (b) with a view to bringing a 
self-supply of services within the scope of VAT. 
In such cases, however, there is no denying that local 
authorities must be treated in the same way as fully taxable 
persons and that, where they use goods or services partly 
for the purposes of a non-taxable transaction, such use 
should be taxed if VAT previously charged on those goods and 
services was deductible. For this to happen, the 
Member States should agree to treat such use as use for 
purposes other than those of the business within the meaning 
of Article 6(2) of the sixth Directive. Such treatment 
could be the subject of a decision by the VAT Committee. 
Accordingly, the Commission departments propose that the 
legal arrangements for the derogation granted to France 
should be adjusted in such a way as to duly establish that 
it applies to the type of use in question here. France 
would then be authorized to "exclude expenditure in respect 
of goods and services in cases where use of those goods and 
services for the purposes of a non-taxable transaction 
accounts for more than 90% of their total use from the right 
to deduct value added tax previously charged". 
1.2 More generally, the Commission departments would note that France 
makes extensive use of the derogation in that it applies it as soon 
as use for non-business purposes accounts for more than 90% of total 
use. Now, Article 1 of the Council Decision introducing the 
derogation is concerned solely with those cases where private use 
accounts for more than 90% of total use. As a result, uses other 
than those for the private purposes of the taxable person or his 
staff are not expressly concerned by the derogation. Among other 
things, private use by a third party is not covered. 
In this respect, the Commission departments, which would like to 
observe the neutrality of VAT and take the view that any consumption 
without taxation should be avoided, propose that the legal 
arrangements for the derogation be improved by restoring a parallel 
with Article 6(2) of the sixth Directive, which, in the absence of 
any derogation, should be applied in its entirety. Accordingly, the 
derogation could apply in all cases where goods are, in any event, 
used for purposes other than those of the business. 
3 
Proposal for a 
COUNCIL DECISION 
authorizing the French Republic to extend the 
application of a measure derogating from Article 17(2) 
of the sixth Directive 77/388/EEC on the harmonization 
of the laws of the Member States 
relating to turnover taxes 
£ 
EXPLANATORY MEMORANDUM 
1. By letter registered by the Secretariat-General of the Commission on 
22 October 1992, the Government of the French Republic submitted a 
request for an extension of the derogation previously granted to it for 
a limited period by Council Decision 89/488/EEC of 28 July 1989, which 
was based on Article 27 of the sixth VAT Directive with a view to 
avoiding tax evasion and avoidance. 
2 
This derogation from Article 17(2) of the sixth VAT Directive consists 
in excluding altogether from the right to deduct VAT previously charged 
expenditure in respect of goods and services in cases where private use 
of those goods and services accounts for more than 90% of their total 
use. 
2. The Council Decision authorizes application of that derogation until 
31 December 1992. Article 2 stipulates that the Commission is to 
present to the Council, prior to the date of expiry of the derogation, a 
report on the application of the derogation, accompanied, if 
appropriate, by a proposal for a Council Decision authorizing its 
extension. 
3. In support of its request, the Government of the French Republic points 
out that the derogation in question will probably have to be applied more 
often in future in view of the fact that, since 1991, a number of liberal 
professions (lawyers, solicitors, translators, interpreters, sports people, 
authors and artists) have been carrying out, on the basis of the eighteenth 
VAT Directive, operations that are taxed and no longer exempt, with such 
individuals, on account of the liberal nature of their profession, using 
goods forming part of the assets of their business for their own private 
use. If the derogation did not exist, such private use would necessitate 
surveillance by the tax authorities of such goods throughout their useful 
life and, in any case, the taxation of self-supplies resulting from such 
private use. Calculation of the taxable amount for such supplies would not 
be straightforward and it would be no easy matter convincing the person 
liable to pay the tax that the taxable amount had been calculated correctly. 
1 OJ No L 239, 16.8.1989. 
2 OJ No L 145, 13.6.19^7. 
3 OJ No L 226, 3.8.1989. 
9 
Under such circumstances, it is advisable to withhold any entitlement to 
tax deduction rather than to tax self-supplies, notably with a view to 
preventing tax evasion and avoidance, which have hitherto been so easy 
to perpetrate. 
However, the Commission report on the application of the derogation over 
the period 1990-92 showed that the legal arrangements for the derogation 
should be adapted so as to ensure that they cover local authorities and 
all possible types of use for purposes other than those of the business. 
The Commission proposal for a Decision also sets a definite date for the 
expiry of the derogation so that a new assessment of its application can 
be made in four years' time. 
4. The Commission informed the other Member States by letter dated 
20 November 1992 of the French request for an extension. 
^o 
Proposal for a 
COUNCIL DECISION 
authorizing the French Republic to extend the application 
of a measure derogating from Article 17(2) 
of the sixth Directive (77/388/EEC) 
on the harmonization of the laws of the Member States 
relating to turnover taxes 
THE COUNCIL OF THE EUROPEAN COMMUNITIES, 
Having regard to the Treaty establishing the European Economic Community, 
Having regard to the sixth Council Directive 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, as last 
amended by the Council Directive of 16 December 1991 with a view to the 
•* 2 
abolition of fiscal frontiers, 
Having regard to the proposal from the Commission consequent upon its report 
on the application by the French Republic of Council Decision 89/488/EEC of 
28 July 1989, 
Whereas, under Article 27(1) of the sixth Directive, the Council, acting 
unanimously on a proposal from the Commission, may authorize any 
Member State to introduce special measures for derogation from that 
Directive, in order to simplify the procedure for charging tax or to prevent 
certain types of tax evasion or avoidance; 
1 OJ No L 145, 13.6.1977, p. 1. 
2 OJ No L 376, 31.12.1991, p. 1. 
11 
Whereas, by letter registered by the Secretariat-General of the Commission 
on 22 October 1992, the French Republic requested authorization to extend 
application of the derogation previously granted to it for a limited period 
by Council Decision 89/488/EEC of 28 July 19893 on the basis of Article 27 
of the sixth Directive; 
Whereas the said measure consists in excluding altogether from the right to 
deduct VAT previously charged expenditure in respect of goods and services 
in cases where private use of such goods and services accounts for more than 
90% of their total use, in order to refrain from taxing self-supplies the 
taxable amount of which is particularly difficult to establish under those 
circumstances ; 
Whereas, moreover, the said measure makes it possible to prevent certain 
types of tax evasion or avoidance and, in any event, combats certain forms 
of consumption without taxation while, at the same time, simplifying the VAT 
treatment of certain transactions; 
Whereas the said measure constitutes a derogation from Article 17(2) of the 
sixth Directive, whereby a taxable person is entitled to deduct the tax 
charged on goods and services used by him in so far as those goods and 
services are used for the purposes of his taxable transactions; 
Whereas the said measure also constitutes, as demonstrated in the Commission 
report on its application over the period 1990-92, a derogation from 
Article 6(2) of the sixth Directive, whereby the use of goods forming part 
of the assets of a business for the private use of the taxable person or of 
his staff or, more generally, for purposes other than those of his business 
where the value added tax on such goods is wholly or partly deductible must 
be treated as a supply of services for consideration; 
Whereas the request for an extension of the said measure can be accepted 
subject to certain conditions and adjustments to its legal arrangements in 
accordance with the observations made by the Commission in respect of its 
application over the period 1990-92; 
OJ No L 239, 16.8.1989. 
Whereas, without a new authorization from the Council based on a proposal 
from the Commission, the said measure cannot be extended beyond 
31 December 1996, by which time the Commission is to present a report on its 
application to the Council; 
Whereas the temporary extension of the said derogation will not a priori 
affect the amount of tax due at the final consumption stage, taking into 
account Article 11(A)(1)(b) of the sixth Directive, which defines the 
taxable amount for self-services caught by Article 6(2) of that Directive; 
Whereas, moreover, it will not a priori have a negative effect on the 
European Communities' own resources accruing from value added tax; 
Whereas the other Member States were informed on 20 November 1992 of the 
request for an extension of the said derogation submitted by the Government 
of the French Republic, 
HAS ADOPTED THIS DECISION: 
Article 1 
By way of derogation from Articles 6(2) and 17(2) of the sixth Council 
Directive (77/388/EEC), as last amended by Directive 91/680/EEC, the French 
Republic is hereby authorized until 31 December 1996 to exclude expenditure 
in respect of goods and services in eases where use of such goods and 
services for the private use of the taxable person or of his staff or, more 
generally, for purposes other than those of his business account for more 
than 90% of their total use from the right to deduct value added tax 
4 3 
previously charged. Similarly, the French Republic is hereby authorized 
until 31 December 1996 to exclude expenditure in respect of goods and 
services in cases where use of those goods and services for the purposes of 
a non-taxable transaction accounts for more than 90% of their total use from 
the right to deduct value added tax previously charged. 
Article 2 
On the basis of a report on the application of the authorizations referred 
to in Article 1, accompanied, if appropriate, by a proposal for a Decision, 
the Council shall determine on the basis of that proposal before 
31 December 1996 whether the said authorizations are to be extended. 
Article 3 
This Decision is addressed to the French Republic. 
Done at Brussels, For the Council 
The President 

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COM (92) 591 final 
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