COMMISSION OF THE EUROPEAN COMMUNITIES 
SEC(92)1006 final Brussels, 2 July 1992. 
Report from the commission to the council 
on the transitional provisions resulting from 
-Article 28(3) of the Sixth Directive, 
77/388/EEC, and 
-Article 1(1) of the Eighteenth Directive, 
89/465/EEC 
presented in accordance with Article 3 
of the Eighteenth council Directive of 18 July 1989 
2 
The common system of value added tax should in principle include a uniform 
basis of assessment. This objective was not entirely achieved by the Sixth 
Directive (77/388/EEC) on the harmonization of the laws of the 
Member States relating to turnover taxes, which authorizes the 
Member States to apply, for a transitional period, certain derogations to 
the normal arrangements of the common system of value added tax. 
These derogations were established to give the Member States and the 
economic sectors concerned time to make the necessary adjustments. 
(1) Articles 13 and 15 of the Sixth Directive of 17 May 1977 list a number 
of transactions which are permanently exempt from value added tax. 
Article 28(3)(a) of the Directive authorizes the Member states, for a 
transitional period, to derogate from the general rule, so that tax may 
continue to be applied to those exempted transactions listed in Annex E 
to the Directive. 
Likewise, Article 28(3)(b) authorizes the Member States to continue to 
exempt the activities set out in Annex F under conditions existing in 
the Member State concerned, even though the activities in question 
should, under Articles 5 and 6 of the Sixth Directive, normally fall 
within the scope of VAT. 
(2) The Sixth Directive also lays down that the Council, acting on the 
basis of a report from the commission, shall review the situation with 
regard to the derogations set out in Article 28(3) and determine 
whether any or all of these derogations should be abolished. 
(3) The abolition of these derogations should be sought for the following 
reasons: 
(a) Their withdrawal is necessary in order to improve the functioning 
of the VAT system: they all tend to obstruct a complete 
harmonization of VAT at Community level and may consequently result 
in competition being distorted between the Member States. 
3 
(b) Moreover, Article 2 of council Regulation (EEC, Euratom) No 1553/89 
of 29 May 1989 on the definitive uniform arrangements for the 
collection of own resources accruing from value added tax lays down 
that the following, inter alia, shall be taken into account for 
determining the VAT resources base: 
-transactions which Member States continue to subject to tax 
pursuant to Article 28(3)(a) of Directive 77/388/EEC; 
-transactions which Member States continue to exempt pursuant to 
Article 28(3)(b) of Directive 77/388/EEC. 
These derogations therefore have appreciable consequences for the 
method of calculating own resources and make their control more 
difficult. 
(c) Finally, note was taken in the declaration included in the minutes 
of the Council meeting at which the Eighteenth Directive was 
adopted (Fisc 105 -7716/89) that any necessary amendments to the 
list of exempted transactions and taxable transactions as laid down 
in Article 28(3) should have the effect of guaranteeing equality of 
tax treatment between the Member States in accordance with the 
principles of the EEC Treaty. 
(4) With all this in mind, and acting on a proposal from the Commission, 
the Council decided in its Directive of 18 July 1989, to abolish some 
of the derogations. 
Thus, the number of Annex E derogations was reduced from 13 to 4 (two 
never having been used); the number of Annex F derogations was reduced 
from 27 to 14. 
(5) The Council also provided, in Article 3 of the Eighteenth Directive, 
that it would review the situation with regard to the other derogations 
resulting from 
Article 28(3) of the Sixth Directive of 17 May 1977 and 
the second subparagraph of Article 1(1) of the Eighteenth Directive 
of 18 July 1989, 
having regard to any distortions of competition which had resulted from 
their having been applied or which might arise from measures to 
complete the internal market. 
* 
* * 
4 
The purpose of this report is to assess the situation as regards the 
derogations which have not been abolished by the Eighteenth Directive, 
taking account of economic conditions and the completion of the internal 
market. 
It successively examines: 
the derogations in respect of which the Commission has undertaken to 
present specific proposals to the Council, and 
the consequences of the application of the other derogations, or others 
which are likely to arise as the internal market approaches completion. 
5 
I. DEROGATIONS WHICH SHOULD BE DEALT WITH BY SEPARATE PROPOSALS 
1. Specific proposals are necessary for some of the derogations laid 
down by Article 28<3>Ca> and (b) <Annexes E and F), and these will 
not therefore be examined anv further in this report. The 
following derogation& are concerned: 
ElS The services of travel agents -journeys outside the Community 
(cf. point F27 and Article 28(3)(g)) 
In order to take account of the practical difficulties of 
taxing the margin of travel agents, a matter already raised 
within the VAT Committee, and in accordance with the 
undertaking given during the procedure for adopting the 
Eighteenth Directive, the Commission will be putting a specific 
proposal for a Directive to the Council. 
FlO Transactions of hospitals (private clinics) 
The proposal for a Nineteenth Directive (COM(84) 648) would 
extend exemption to hospitals other than those covered by 
Article 13A(l) (b) of the Sixth Directive, which are already 
exempt. Widening the scope of the exemption referred to in 
that Article would therefore make the derogation set out in 
point 10 of Annex F redundant. 
F17 Passenger transport and the transport of goods related to 
passenger transport 
The implementation of Article 28(5) will be the subject of a 
separate proposal in accordance with the Commission's programme 
for 1992. 
Consequently, a proposal for a Directive on the VAT 
arrangements applicable to passenger transport will be 
presented to the Council as soon as possible. 
6 
F26 Transactions concerning gold other than gold for industrial use 
In accordance with the undertaking given during discussions on 
the Eighteenth Directive, the Commission will send the Council 
a specific proposal for a Directive concerning the VAT 
arrangements applicable to such transactions. Technical 
discussions have already commenced with a view to drawing up a 
working document. 
F27 The services of travel agents (journeys within the Community) 
(see ElS) 
2. Derogation under Article 28(3> Cg> of the Sixth Directive 
<possibility of exemotincr the services of travel agents without 
repayment of input tax> 
This derogation will also be examined in fresh proposals on the 
transactions of travel agents (see ElS). 
7 
II. ANALYSIS OF ~ DEROGATIONS STILL IN EXISTENCE 
A. General remarks 
Application by the Member States of the remaining derogations 
inevitably influences the level of their budgetary revenues. 
Maintaining them may also distort competition between firms in the 
various Member States. Taking both these aspects into account, the 
Commission intends to complete the process of harmonization on the 
basis of a pragmatic approach. 
1. Maintaining derogations which enlarge or restrict the scope of 
VAT in a Member State which takes advantage of them affects the 
level of that State's VAT revenues. The derogations which 
still exist have the effect 
either of maintaining taxation on transactions which are to 
be exempt in the final arrangements (Article 28(3)(a) and 
AnnexE of the Sixth Directive), 
or of maintaining 
transactions (Article 
Directive). exemption of normally taxable 
28(3) (b) and Annex F of the Sixth 
Abolition of the remaLnLng derogations should therefore lead to 
a loss of revenues in the former case and an increase in 
resources in the latter for each Member State affected by their 
withdrawal. In this respect, there are more derogations left 
in Annex F (14) than in Annex E (4). Putting aside any other 
considerations, a Member state should therefore be pleased from 
a budgetary point of view to abolish the Annex F derogations it 
applies. 
Maintaining the existing derogations also forces the Commission 
departments to make corrections to the method of calculating 
own resources on the basis of the information supplied by the 
Member States. 
2. Moreover, the Council has expressly asked the Commission for a 
report1 enabling it to decide whether these derogations should 
be abolished "having regard to any distortions of competition 
which have resulted from their having been applied or which 
might arise from measures to complete the internal market". 
1 Article 3 of the Eighteenth Directive. 
8 
We should therefore examine both the transitional and permanent 
arrangements in order to assess the risks of competition being 
distorted. 
The application of each of the derogations maintained by the 
Eighteenth Directive is briefly analysed below by reference to 
this criterion. 
Nevertheless it should first be stressed that significant 
differences in rates for the same goods and services are 
also liable to distort competition. 
In the case of the supply of goods, the VAT rules currently 
in force or those which would result from the transitional 
arrangements do not give rise to any apparent distortion of 
competition as far as the applicable rate is concerned, 
which is systematically that of the country of import 
(current rules) or the country of destination (transitional 
arrangements) • This would not be the case if, as the 
Commission proposed in August 1987, the non-taxable or 
exempt person to whom the goods are supplied had to pay VAT 
at the rate of the country of origin. 
As for services, distortions of competition may arise if, 
as stipulated by Article 9(1) of the Sixth Directive, the 
place where a service is supplied is deemed to be the place 
where the supplier has established his business. 
An alignment of rates, as proposed by the Commission, is 
therefore vital if existing distortions are to be reduced. 
In some cases, moreover, distortions of competition due 
exclusively to the maintenance of one derogation or another 
are necessarily limited. This is because some derogations 
are applied by a very small number of Member States (see 
Annex 1). In addition, various factors such as distance, 
convenience, service, etc., directly influence a 
purchaser's choice and therefore sometimes make the 
distortion purely theoretical. 
Furthermore, the Sixth Directive contains more derogations 
than simply those laid down by Article 28(3). 
9 
3. This being the case, the derogations which remained following 
adoption of the Eighteenth Directive retain a transitional 
character under the Sixth Directive. They should in principle 
be eliminated in order to complete the process of harmonization 
between the Member States' laws on turnover taxes. 
However, as it was asked to do by the Council, and in 
accordance with Article 28(4) of the Sixth Directive, the 
Commission intends to propose abolition of only those 
derogations whose maintenance would go against the principle of 
equality of tax treatment between the Member States. 
4. Nevertheless, the Member States could, as a rule of thumb, be 
granted a right of option in replacement for some of the 
derogations whose abolition is still recommended even though no 
real distortion of competition results from their application. 
The main advantage of such a provision would be that it would 
allow all the Member States, and in particular those who do not 
at present "benefit" from any derogations, to adapt their laws. 
Of course, this possibility should not result in the general 
principles of the Sixth Directive being undermined, nor should 
it give rise to fresh instances of competition being distorted 
between the Member States. 
5. The abolition of a derogation, whether or not compensated for 
by a right of option granted to all Member States, should 
become effective not later than 1 January 1993, the date on 
which the transitional arrangements enter into force in the 
context of the abolition of tax frontiers. 
E2 -10 
B. Transactions referred to in Annex E 
Services suoolied by dental technicians and dental prostheses 
supplied by dentists and dental technicians 
These are the transactions referred to in Article 13A(l)(e) of the Sixth 
Directive, i.e. services supplied by dental technicians in their 
professional capacity and dental prostheses supplied by dentists and dental 
technicians. This provisions exempts neither the purchase of prostheses 
within a country nor their import by dental technicians, but solely 
transactions between the dental technician or the dentist and their 
customers. 
Of the two Member States which tax the said transactions (Germany, 
Belgium), only Germany has expressed the wish, during preparatory 
discussions for the Eighteenth Directive, to maintain the derogation for 
budgetary reasons. 
Its abolition, already envisaged by the Commission in 1984 in its proposal 
for the Eighteenth Directive, is justified by the fact that the maintenance 
of taxation requires dentists to distinguish between taxable and non­
taxable transactions. Moreover, such a derogation could not possibly be 
permanent in nature. 
E7 -11 
Activities of public radio and television bodies other than those 
of a commercial nature. 
The commercial activities of public radio and television bodies are taxable 
pursuant to the third subparagraph of Article 4(5) and Annex D of the Sixth 
VAT Directive. 
In contrast, non-commercial activities are exempt under Article 13A(l)(q) 
of the same Directive. Article 28(3) (a) nevertheless authorized the 
Member States to continue taxing the said transactions on a transitional 
basis. 
Two Member States apply derogation E7 (Denmark and Italy). All the other 
Member States are deemed to exempt non-commercial activities. Abolition of 
the derogation would merely confirm the distinction made in the Sixth 
Directive between taxable, commercial activities and exempted, non­
commercial activities. 
The Commission notes that services supplied to television viewers by a 
public channel are basically no different to those supplied by a private 
one. The public channels are also seeking to attract an ever wider 
audience in order to increase the volume of their revenues other than from 
licence fees. Public and private channels are thus competing more directly 
than hiterto. 
As new technologies (cable, satellite television, etc.) are breaking down 
the frontiers between States, a national public channel is able to compete 
with a public or private channel in another Member State. 
Current developments on the European audiovisual scene are also 
characterized by the internationalization of production and the market. 
Exemption has the effect of maintaining distortions of competition to the 
detriment of public channels, much of whose revenue comes from licence 
fees. Unlike their competitors in the private sector, public channels 
cannot fully deduct the tax charged on goods and services acquired for the 
purposes of their activity. 
The only means of ensuring that all broadcasting bodies are treated equally 
is to tax non-commerical activity. 
12 
In addition, taxation would have a very limited impact on the level of such 
fees since Member States could apply a reduced rate. And since the level 
of the fee is fixed by the public authorities, Member States may choose, if 
they wish, not to pass on the full tax in the fee paid by users of the 
public service. 
The Commission is therefore seeking both the abolition of the derogation 
which allows some Member States to continue taxing the "non-commercial" 
activities of public radio and television bodies and the amendment of the 
Sixth Directive, so as to make all transactions of the said bodies taxable 
in all Member States. 
However, account should also be taken of the particular social and cultural 
concerns of each Member State regarding public service radio and 
television. Member States might wish to see such concerns prevail over 
economic considerations linked to competition between public and private 
radio and television broadcasters. 
It is therefore planned that those Member States which currently exempt the 
non-commercial transactions of public radio and television bodies may 
continue to do so after 1 January 1993. 
At all events, the VAT status of such bodies will be reviewed by the 
Commission, and the Council will have to take a decision about this 
derogation on the basis of a Commission proposal which will be l''lt forward 
by 31 December 1996. 
Ell -13 
Supplies of buildings not newly constructed, in so far as they are 
made by taxable persons who were entitled to deduction of input tax 
on the building concerned. 
This derogation allows the taxation of supplies of building effected after 
their initial occupation by taxable persons having exercised their right to 
deduct input tax on the buildings concerned at the time of their initial 
supply. 
Only three of the Member States derogate from the principle of exemption 
set out in Article 13B (g) of the Sixth Directive (Ireland, Italy and 
France) and thus subject such supplies to VAT. In most of t!le other 
Member States, such supplies give rise to the collection of registration or 
transfer tax, which are not generally deductible by the taxable person to 
whom the building is supplied. 
To the extent that the goods in question are immovable, maintaining the 
derogation cannot have any real consequences for competition. 
Such distortions could arise only if the tax burden linked to acquisition 
is very different from one country to another and, consequently, this 
influences a firm's decision concerning its future location. This being 
said, that factor does not seem to be the only one to determine its choice 
given, for example, the existence of aid which the public authorities may 
grant to firms to encourage them to locate in one country in preference to 
another and the influence of each firm's commercial policies. 
Nevertheless, as completion of the internal market approaches, the 
abolition of this derogation seems necessary in order to make the common 
system of value added tax as neutral as possible for all involved. 
In addition, since these transactions are exempted pursuant to Article 
13B(g), the Member States will be able to apply Article 13C(b) and grant 
the right of option to their taxable persons with regard to the taxation of 
these transactions. 
14 
c. Transactions referred to in Annex F 
Fl -Admission to sporting events 
The first derogation of Annex F allows the Member States to exempt 
admission fees to sporting events, which would normally be taxable. Three 
Member States currently exempt these transactions (France, Ireland and 
Luxembourg) • 
The Commission had envisaged abolishing this derogation in its initial 
proposal for the Eighteenth Directive. During discussions, it had been 
asked by Parliament to draw a distinction between amateur and professional 
sport so that only professional sporting events, i.e. events involving 
sportsmen who receive direct or indirect remuneration, >-Jould be taxed. 
Thus, admission fees to sporting events involving only sportsmen who 
receive no direct or indirect remuneration for their participation would be 
the only category which could continue to be exempted. 
The Commission refused to make this amendment because the development and 
current practice of sport does not allow such a distinction to be made. 
Moreover, accepting it would have led to a partial derogation being 
maintained in favour of "amateur" sport, which would have been contrary to 
the final objective of abolishing all derogations. 
In the light of the previous deliberations of the Working Party on 
Financial Questions, and in view of the fact that any taxes other than VAT 
which might be applied to admission to sporting events accrue to the local 
authorities, the Commission proposes to leave it to the discretion of each 
Member State to decide which tax arrangements its considers the most 
appropriate. 
None the less, the maintenance of a situation of treatment differing from 
one country to another should not give rise to distortions of competition 
in this sector since the venue of a sporting event is not linked to the tax 
arrangements applied to admission fees by a Member State. 
Consequently, the Commission intends to propose abolition of the derogation 
whilst giving the Member states the possibility of opting for an exemption 
of admission fees to some or all sporting events. 
F2 -15 
Services supplied by authors, artists, performers, lawyers and 
other members of the liberal professions 
All the activities of members of the above professions are subject to VAT 
in accordance with the combined provisions of Articles 2 and 4 of the Sixth 
Directive. Derogations from the principle of taxation are permitted only 
under Article 13 or under this transitional provision. Six Member States 
are currently applying the F2 derogation (Belgium, Denmark, Spain, Greece, 
Ireland and the Netherlands). 
Services supplied by lawvers and other members of the liberal 
professions 
Where the services supplied by lawyers and other members of the liberal 
professions, such as notaries, bailiffs, journalists, accountants, etc., 
are supplied to taxable persons, the fact of taxation enables customers to 
deduct the VAT invoiced to th~m, and likewise the supplier can recuperate 
any input tax paid. Conversely, exemption of the service does not 
authorize the deduction of input taxes, which form part of the cost price 
of the service. 
Distortions of competition might emerge if a Member State were to continue 
applying the derogation. 
This is because, under Article 9(2) (e) of the Sixth VAT Directive, the 
place where certain transactions are deemed to occur is the place where the 
taxable customer has established his business. Consequently, the supply of 
the service will always be taxable if the transaction is not exempted in 
the Member State in which the taxable customer is established, whatever the 
arrangements applicable in the Member State of the supplier. It will never 
be taxed in the Member State of the taxable customer if the derogation is 
applied by that State. 
In these circumstances, the derogation does not create any major 
distortions of competition. 
However, it should be noted that a supplier established in a Member State 
which applies the derogation cannot exercise any right of deduction, even 
if the service is taxable in the State of the customer. The consequence of 
this is that the base net of VAT of the invoiced service necessarily 
includes elements on which non-deductible VAT has been charged. 
16 
If the customer is not taxable, the place at which the service is supplied 
is taken to be the place at which the supplier is established. A service 
supplied in a Member State which applies the derogation is therefore never 
subject to VAT irrespective of the arrangements in force in the 
Member State of the customer. Maintaining this possibility of total 
exemption, which leads to distortions of competition, cannot be allowed. 
Finally, application of the permanent arrangements would have the effect, 
if the derogation were maintained, of aggravating distortions of 
competition since, under those arrangements, the place at which the service 
is supplied would be the place at which the supplier is established in the 
Community irrespective of the status of the customer, provided he is 
established in the Community. 
The objective of neutrality with 
achieved only if the transactions 
arrangements throughout the EEC. 
derogation's abolition. regard to VAT can therefore be totally 
in question are subject to uniform tax 
The Commission therefore proposes the 
17 
Services supplied by authors, artists and performers 
Point 2 of Annex F also covers services supplied by authors, artists and 
performers. 
In its initial proposal for a Seventh Directive,1 and subsequently in its 
proposal for a Nineteenth Directive, 2 the Commission envisaged exempting 
artistic output and deliveries of works of art by the artist who created 
them. 
In line with the opinions 
Parliament,3 the Commission 
Nineteenth Directive the of the Economic and Social Committee and 
deleted from the text of the proposal for a 
provisions exempting artistic output.4 
authors, artists and performers and supplies 
who created them remain in principle subject Consequently, the services of 
of works of art by the artist 
to VAT. 
The Annex F derogation has the effect of allowing only the supply of 
services to be exempted. 
Since hesitations have emerged concerning the nature of some transactions 
carried out by artists (deliveries or the supply of services), and in 
particular by creators of works of art,5 abolition of the derogation would 
have the advantage of harmonizing the tax arrangements applicable to all 
transactions carried out by such persons in each Member State. 
Nevertheless, it emerges that exempting the said services does not allow 
taxable persons to exercise their right to deduct input tax. consequently, 
contrary to the general principles of value added tax, taxable customers 
pay residual tax. 
While it does not question the principle that services supplied by authors, 
artists and performers should be taxed, the commission would nevertheless 
point out that some difficulties in applying that principle will arise 
1 OJ No C 26. 1.2.1978; OJ No c 136, 31.5.1979. 
2 COM(84)648, 6.12.1984. 
3 Opinions of 3 July 1985 and 6 April 1987 respectively. 
4 COM(87)315, 1.7.91. 
5 Deliveries of creators of works of art are not dealt with by the 
particular arrangements outlined in the proposal for a Seventh 
Directive. 
18 
owing to the nature of the activities in question. Furthermore, the 
majority of authors and artists who should be taxed in the normal way could 
qualify for the SME arrangements on the basis of their turnover (see 
COM(86)444). 
The Comission therefore considers it appropriate to await the final 
adoption of the special arrangements for small and medium-sized enterprises 
before taking steps to abolish the derogation; it therefore proposes that 
it be maintained for authors, artists and performers. 
FS -19 
Telecommunications services supplied by public postal services and 
supplies of goods incidental thereto 
Now that these transactions have, since 1 November 1987, again been made 
liable to VAT in France, there are five Member States which continue to 
apply the derogation (Germany, Ireland, Italy, Luxembourg and the 
Netherlands). 
Of these five, Italy applies the exemption solely to telegraphic services. 
Germany, which considers that public telecommunications services should in 
future be subject to VAT, has started gradually to introduce tax on 
services and goods alike. Generalized taxation should be in force not 
later than 31 December 1995. Ireland has also decided to tax these 
transactions with effect from 1 January 1991. 
This situation is not satisfactory because exempted taxable persons are 
unable to deduct input tax, a factor which might significantly curb 
investment. Moreover, the taxable customer of exempted suppliers cannot 
exercise any right of deduction even though their activities may be subject 
to VAT. 
Furthermore, competition may be distorted if the public service is not 
taxable even though private firms competing with it are. This is because 
exemption in a Member State of services supplied by a public postal service 
has the consequence not only of strengthening the position of the public 
body compared with any taxable competitors it may have but also of 
distorting competition between the Member States. If a public body is 
granted exemption, this can only encourage exempted taxable persons (banks, 
insurance companies, etc.), which are the main consumers of 
telecommunications services, to locate certain activities in countries in 
which the goods and services acquired are not liable to tax. 
Finally, the need for greater standardization of equipment, deregulation 
and an opening-up of national markets was stressed in the study of the 
benefits resulting from the existence of a genuine European single market 
20 
in telecommunications services and equipment. 1 Consequently, the 
distortions resulting from different arrangements applying in different 
countries will in future be all the greater as the telecommunications 
market is made subject to less restrictive national rules than in the past 
and competition becomes keener in this growing sector of the economy. 
Developments in some countries and the points raised above militate in 
favour of the derogation's abolition, with the effect that the supply of 
all telecommunications services and goods incidental thereto will be 
uniformly taxed in each Member State, whatever the status of the supplier. 
1 cf. Research on the cost of Non-Europe -Basic Findings -Vol. 1, 
pp. 293 et seg. and pp. 329 et seg. 
F6 -21 
Services supplied by undertakers and cremation services, together 
with goods related thereto 
Abolition of this derogation, which is used by six Member States (Denmark, 
Ireland, Italy, the Netherlands, the United Kingdom and Portugal), was not 
proposed by the Commission in the context of the Eighteenth Directive in 
view of the social and exceptional nature of the services in question. 
Moreover, maintaining the exemption would manifestly not distort 
competition. The Commission therefore proposes that the derogation be 
abolished and that the Member States be given the possibility of opting for 
exemption. 
22 
F7- Transactions carried out by blind persons or workshops for the 
blind provided these exemptions do not give rise to significant 
distortion of competition 
The Member States may derogate from the principle of taxation by exempting 
transactions carried out by blind persons or workshops for the blind 
provided such exemption does not give rise to significant distortion of 
competition. 
Three Member States apply the derogation (Germany, France and the 
Nether lands ) • 
The derogation may in theory give 
between taxable and private persons 
(supply of services or goods). rise to distortions of competition 
carrying out the same transactions 
Moreover, the social treatment of the blind cannot validly be based on 
exemption from VAT, which brings only an apparent and very relative 
advantage since exemption does not authorize deduction of tax paid on the 
goods and services acquired for the purposes of their activity. The 
Commission has always felt that the same objective can be achieved through 
specific grants, benefits and any other means the Member State may see fit 
to use. 
Furthermore, the exemption which this section of the population may enjoy 
discriminates against persons suffering from a different handicap and the 
similar structures which employ them. 
That said, the Commission does not dispute the social nature of such a 
measure. Consequently, while proposing that the derogation be abolished, 
the Commission suggests that Member States be permitted to opt for 
exemption provided, of course, that such exemption does not give rise to 
significant distortion of competition. 
FB -23 
The supply of goods and services to official bodies responsible for 
the construction, setting out and maintenance of cemeteries, graves 
and monuments commemorating war dead 
This derogation used by two Member States (Belgium and France) provides for 
exemption in the case of the supply of goods and services to official 
bodies responsible for the construction, setting out and maintenance of 
cemeteries, graves and monuments commemorating war dead. 
Application of this derogation does not distort competition between the 
Member States since the market in question, which is one involving 
immovable property, is limited in economic terms. 
The Commission proposes to leave the Member States with the possibility of 
opting for exemption, specifying however that this necessarily excludes any 
right to deduct tax on goods and services necessary for carrying out the 
transactions covered by the derogation. 
24 
Fl2 -The supply of water bv public authorities 
Four Member States exempt the supply of water by public authorities 
(France, Greece, Ireland and Luxembourg). 
The decision by certain Member States to exempt water distribution may 
distort competition between the Member States. This is because the current 
trend in this, in all respects, important sector of the economy is, in a 
number of Member States, one of national public contracts being opened up 
to competition and of the public services responsible for distribution 
being privatized. 
In addition, water distribution demands a major investment effort on the 
part of the public or private bodies involved. Public bodies are penalized 
by their exemption since they are unable to deduct VAT paid on goods and 
services acquired for the purposes of their activity, whereas the non­
public ones can exercise that right. The Commission would also point out 
that taxing the supply of water by public authorities would have a very 
minor impact on the price level and would affect overall demand only 
slightly or not at all given the rate which would be applied. Since water 
is an item of basic necessity, the rate applicable would, in the 
Commission's view, be the reduced rate of between 4% and 9%.1 
For these reasons, the Commission proposes that this derogation be 
abolished. 
1 See Commission proposal, COM(87)321. 
Fl6 -25 
The supply before first occupation of buildings and the supply of 
building land 
The supply of new buildings and building land is a very important economic 
activity which involves both households and firms. Such transactions are 
caught by the general rule laid down in the Sixth Directive, namely that 
the supply of goods or services effected for consideration within the 
territory of the country by a taxable person acting as such is subject to 
VAT. 
Furthermore, the Sixth Directive extends the scope of the tax by permitting 
Member States to treat as taxable persons individuals who carry out similar 
transactions on an occasional basis (Article 4(3)). 
The derogation allows the Member States to exempt the supply before first 
occupation of buildings and the supply of building land. Eight countries 
exempt the transactions in question either wholly or partially (Belgium, 
Denmark, France, Germany, Luxembourg, the United Kingdom, Greece and 
Portugal). This derogation matches that set out at point 11 of AnnexE, 
which allows the Member States to charge VAT on the supply of previously 
occupied buildings which would normally be exempt. 
The result of this derogation is that an exempted contractor will not be 
able to deduct tax charged on the goods and services acquired for the 
purposes of his exempted activity, and the taxable purchaser of property 
sold at a price incorporating non-deducted input taxes will be unable to 
exercise any right of deduction even though he might have been charged 
taxes other than VAT. 
It should be noted that reconstituting the base of such transactions for 
own resources purposes raises many problems for the authorities in the 
Member States and for the Commission departments. 
Nevertheless, the Commission would argue that, in view in particular of the 
difficult economic situation currently obtaining in this sector in certain 
Member States and of social concern about the cost of housing, it does not 
seem appropriate to consider abolishing the derogation at this stage. 
The Council will have to take a decision about the derogation on the basis 
of a fresh Commission proposal to be put forward by 31 December 1996. 
F23 -26 
The supply, modification, reoair, maintenance, chartering and 
hiring of aircraft used by State institutions 
Four Member States make use of the derogation (Denmark, Belgium, Greece and 
Italy). Its application does not distort competition between the 
Member States. 
However, taxing these transactions, which would have no impact on the 
budget of the Member State concerned, would allow the real cost of the 
expenditure involved to become apparent. It would also have the advantage 
of allowing businesses carrying out these transactions to deduct tax 
charged on the goods and services they have acquired for the purposes of 
that activity. 
Finally, taxation would make unnecessary any calculation for the purposes 
of determining compensation (own resources), which is proving very 
difficult because of the sensitive nature of information relating to these 
transactions. 
For these reasons, the Commission is proposing that the derogation be 
abolished. 
F25 -27 
The supply, modification, repair, maintenance, chartering and 
hiring of warships 
Five Member states make use of the derogation (Denmark, Belgium, Greece, 
Italy, Netherlands). Its application does not distort competition between 
the Member States. 
However, taxing these transactions, which would have no impact on the 
budget of the Member State concerned, would allow the real cost of the 
expenditure involved to become apparent. It would also have the advantage 
of allowing businesses carrying out ~hese transactions to deduct tax 
charged on the goods and services they have acquired for the purposes of 
that activity. 
Finally, taxation would make unnecessary any calculation for the purposes 
of determining compensation (own resources), which is proving very 
difficult because of the sensitive nature of information relating to these 
transactions. 
For these reasons, the Commission is proposing that the derogation be 
abolished. 
28 
D. Other transitional provisions resulting from Article 28(3) 
Article 28(3)(c) and Annex G of the Sixth Directive <paragraph 1> 
The effect of this provision is to 
allow the Member States which exempt transactions specified in Annex E 
to maintain the right of option for taxation if that option has already 
been taken up by a taxable person; 
allow the Member States to grant taxable persons the right to opt for 
taxation of the transactions specified in Annex F which they exempt on 
a transitional basis. 
Maintaining the right of option is thus linked to the fate of the 
derogations set out in Annexes E and F. 
Notwithstanding its application by the Member States to the transactions 
referred to at points ElS, F2, FlO, F16, F17, F26 and F27, it should be 
possible to abolish this derogation in so far as the Commission is 
proposing abolition of all the other derogations (see Annex 2). 
29 
Article 28(3> (d) 
This Article authorizes the Member States to continue to apply provisions 
derogating from the principle of immediate deduction laid down in the first 
paragraph of Article 18(2) and in Article 17(1) of the Sixth Directive (the 
right to deduct arising at the time when the deductible tax becomes 
chargeable). 
Only France makes use of this derogation by applying the so-called "one­
month interval" rule. 
The Commission would point out that the basic rule of immediate deduction 
of input VAT, as it emerges from the first paragraph of Article 18(2), is 
intended to relieve the taxable person entirely of the weight of tax due or 
paid, particularly on goods or services which are or will be supplied to 
him by another taxable person. 
Application 
distortions of 
of 
Member States. the derogation 
competition to does 
the not have 
detriment the effect of creating 
of firms in the other 
Sudden abolition would moreover have a very substantial immediate impact on 
the budget of the Member State concerned. 
Even so, application of the derogation constitutes a permanent burden on 
firms, which are forced to grant a non-interest bearing cash advance. 
There is consequently reason for France to take early steps to remove the 
derogation progressively. 
At this stage, the Commission is not proposing abolition, therefore. 
The derogation will be re-examined as progress is made in the Council's 
work on the 12th Directive.1 
l COM(84) 84 final, 16 February 1984. 
30 
Article 28(3> (e) 
1. This provisions allows the Member States to derogate in particular 
from: 
Article 5(4)(c): the Member States may thus not consider the 
transfer of goods pursuant to a contract on which commission is 
payable on purchase or sale as constituting supply of goods (in 
this situation, the commission agent buys and sells on behalf of 
third parties in his own name, even if he never actually owns the 
goods); 
Article 6(4): the Member States may consider that a taxable person 
acting in his own name who takes part in a supply of services is 
not deemed to h~ve received and supplied those services himself. 
The first two derogations thus allow an agent acting in his own name to 
be treated simply as a supplier of services and not as a taxable person 
himself carrying out purchase/resale transactions, provided he .is 
acting pursuant to a contract on which commission is payable on 
purchase or sale, or as a taxable person supplying services to the 
customer on a personal basis. 
Consequently, the agen"': supplying services is taxable on the 
remuneration received in respect of his own service. The place at 
which the service is taxed is defined by Article 9 of the Sixth 
Directive, and the right to deduct can be exercised solely in respect 
of the elements which form part of the activity of agent. 
In relations between the Member States, an examination of the various 
situations resulting from application of the derogation reveals that 
its maintenance does not at present have the effect of creating 
distortions of competition as compared with the arrangements applicable 
to commission transactions which are considered to constitute the 
supply of goods under Article 5(4)(c) or the supply of services within 
the meaning of Article 6(4). 
Even so, maintaining this derogation in the final arrangements would be 
liable to distort competition each time the purchase of a commission 
agent established in the country of final consumption enabled a non­
taxable person to buy in a low-rate Member State goods which, if the 
commission agent were considered to be buyer/re-seller, would be 
31 
subject to the higher rate of the country of consumption. 
The Commission therefore proposes its abolition. 
In the case of professionals who purchase used goods, works of art, 
antiques and collectors' items for the purpose of resale, the 
Commission has presented to the Council a proposal for a Seventh VAT 
Directive (see COM(88)846) which defines the special arrangements which 
might be applied when goods have been bought from non-taxable persons 
or taxable persons who did not have any right to deduct VAT at the time 
of acquisition. 
Since this proposal is currently being examined by the Council bodies, 
account should be taken in this context of the situation which might 
result from abolishing this derogation as regards commission agents who 
purchase or sell. 
2. Other derogation resulting from Article 28(3)(e) 
Article 28(3)(e) also permits derogation from Article 11A(3)(c) of the 
Sixth Directive. Consequently, the Member States have been able to 
include in the taxable amount for VAT repayments of expenses paid out 
by a taxable person in the name and for the account of his purchaser or 
customer. There is no reason to maintain this derogation, and its 
abolition is therefore also proposed. 
32 
Article 28C3lCf) 
This Article allows the Member State to use the difference between the 
selling price and the purchase price as the taxable amount for buildings 
and building land purchased for the purpose of resale by a taxable person 
for whom tax was not deductible at the time of the purchase. 
The derogation therefore applies to taxable persons who trade in buildings 
not newly constructed or in building land the purchase of which fell 
outside the scope of VAT. 
The goods in question are in some cases purchased by enterprises as part of 
their activity. 
The purchase price of such goods is a component of the coat price of the 
goods produced or of the services supplied by the same enterprises. 
Consequently, total non-taxation (see Fl6 derogation) or even reduced 
taxation distorts competition at the expense of certain enterprises within 
the Community. 
The Commission therefore considers that the current derogation should be 
abolished. 
33 
E. Derogation under the second subparagraph of Article 1(1) of the 
Eighteenth Directive 
1. Indents (m) and (n) of Article 13A(1) of the Sixth Directive exempt 
certain services closely linked to sport or physical education 
supplied by non-profit-making organizations, and 
certain cultural services and goods closely linked thereto supplied 
by bodies governed by public law or by other cultural bodies 
recognized by the Member State concerned. 
The Member States were authorized by Article 28(3) (points 4 and 5 of 
Annex E) to tax such normally exempt transactions on a transitional 
basis. Bodies governed by public law or other cultural bodies 
recognized by the Member State would thus be subject to VAT on their 
activities in the same way as a person governed by private law. 
The second subparagraph of Article 1(1) of the Eighteenth Directive 
authorized those Member States which, on 1 January 1989, applied the 
derogation by taxing the said transactions to make the exemptions in 
Article 13A(1)(m) and (n) subject to the conditions of the final indent 
of Article 13A(2) (a). One Member State, the United Kingdom, was 
therefore able to continue taxing public bodies since exemption would 
be likely to create distortions of competition such as to place at a 
disadvantage commercial enterprises liable to VAT. 
2. The effective extension of the initial derogation made possible by the 
second subparagraph of Article 1(1) of the Eighteenth Directive should 
be abolished for the following reasons. 
(a) By permitting the transactions of bodies governed by public law and 
other recognized cultural bodies to be taxed on the grounds that 
non-taxation might create distortions of competition such as to 
place taxable commercial enterprises at a disadvantage, the 
derogation resulting from the Eighteenth Directive goes against 
indents (m) and (n) of Article 13A(1) of the Sixth Directive, which 
provides that bodies governed by public law are exempt from VAT in 
respect of the activities they carry out in their capacity as 
public authorities. 
34 
However, the exemptions laid down in Article 13A are activities 
performed in the public interest "which are listed .and described in 
great detail"l with a view to the drawing-up of a common list of 
exemptions enabling the Communities' own resources to be collected 
in a uniform manner in all Member States.2 Allowing a Member State 
to tax an activity exempted under Article 13A on the basis of the 
final indent of Article 13A(2)(a) (or even Article 4(5) therefore 
goes against the basic rules and objectives of the Sixth Directive 
and would render Article 13A devoid of any meaning. 
(b) In addition, there is no 
public bodies (indents (m) 
which might be applicable 
(Article 13A(2) (a)). This legal justification for extending to 
and (n) of Article 13A(l)) conditions 
to bodies not governed by public law 
is because the conditions which the 
Member States are authorized to determine must be aimed solely at 
ensuring the correct application of the exemptions laid down or to 
prevent evasion. They cannot be used to achieve an objective 
contrary to that envisaged by the Sixth Directive, i.e. exemption 
of public bodies. 
Moreover, each of the provisions of Article 13 must, according to the 
case law of the Court of Justice, be interpreted restrictively since 
they constitute an exception to the general principle of taxation laid 
down by the Sixth Directive. Article 13A(2) (a) cannot therefore be 
used to tax the transactions referred to in indents (m) and (n) of 
Article 13A(l). 
Even so, a different interpretation of the Sixth Directive would also 
permit the conditions of Article 13A(2) (a) to be extended to the 
transactions referred to in indents (b) , (g) , (h) , ( i) and ( 1) of 
Article 13A(l). Consequently, the Member state concerned, which 
currently subjects normally exempted bodies to VAT, must correctly 
apply the Sixth Directive by exempting the bodies referred to in 
indents (m) and (n) of Article 13A(l), although it would still be able 
to apply the conditions set out in Article 13A(2)(a) to the exemption 
of principle granted to bodies other than those governed by public law. 
1 court Judgment of 11 July 1985 in case 107/84 commission v Federal 
Republic of Germany. 
2 see the recitals to the Sixth Directive. 
35 
3. tinaliy, the first subparagraph of: Articie 1 ( 1) of the Eighteenth 
Directive clearly abolished the derogations referred to in points 4 and 
5 of Annex E; the Member States which nevertheless obtained an 
eHtenslon df this de~ogatton have thet'efore been granted an extra 
period of time to bring their laws irtto line with the Sixth Directive. 
For the reasons indicated above, the Commission will ask the Council to 
abolish the derogation resulting fr~ the Eighteenth Directive. 
Annex E D 
E 2 X 
E 7 
E 11 ··'· 
E 15 X 
Annex F 
F 1 
F 2 
F 5 X 
F 6 
F 7 X 
F 8 
F 10 
F 12 
F 16 X 
F 17 
F 23 
F 25 
F 26 
F 27 X 
TOTAL 6 Annex 1. Application by the r~ember States of the derogations set out in Annexes E 
and F to the Sixth Directive 
-
DK B ES F GR IT IRL L NL p UK TOTAL 
X 2 
X X . 2 
X X X 3 
X X 3 
X X X 3 
X X X X X X 6 
X X X X 5 
X X X X X X 6 
X X 3 
X X 2 
X 1 
X X X X 4 
X X X X X X X 8 
X X X X X X X 7 
X X X X 4 
X X X X X 5 
X X X 3 
X X X 4 
8 7 1 8 5 7 7 7 7 5 3 71 
~~ - ·----~-~i.._____ LN 
"' 
Annex 2 
Annex E 
E2 
E7 
Ell 
El5 
Annex F 
Fl Summary of Commission proposals (derogations under 
Article 28(3) of the Sixth Directive and Article 1(1) 
of the Eighteenth Directive) 
Maintenance Abolition Option Specific 
proposal 
X 
X 
X 
X 
", 
X X 
F2 <Lawyers) X 
F2 (artists) X 
F5 X 
F6 X X 
F7 X X 
FS X X 
FlO X 
F12 X 
F16 X 
F17 X 
F23 X 
F25 X 
F26 X 
F27 X 37 
38 
Maintenance Abolition Option Specific 
proposal 
Other 
derogations 
28 (3)(c) X 
28 (3)(d) X 
28 (3)(e) X 
28 (3)(f) X 
28 (3)(g) X 
Derogation 
under Article 
1<1) of the X 
Eighteenth 
Directive