OPINION OF MR ADVOCATE GENERAL

VERLOREN VAN THEMAAT

DELIVERED ON 2 MARCH 1982 ( 1 )

Mr President,

Members of the Court,

1. The facts and questions

As is often the case, in the present proceedings for a preliminary ruling the facts emerging from the judgment making the reference are useful in throwing light on the questions referred to this Court. I therefore begin with a short summary of the most important facts — including the course of the national proceedings —, to which I shall refer by using letters of the alphabet.

A — The Hong Kong Trade Development Council (hereinafter referred to as “the Trade Council”) is an organization founded under Hong Kong law in 1966 and also established in Hong Kong for the promotion of trade between Hong Kong and other countries. According to the facts referred to in the judgment of the Gerechtshof [Regional Court of Appeal], Amsterdam, quoted by the Hoge Raad (Supreme Court], its legal form may be compared with that of a Netherlands “bedrijfschap” [trade organization] or “produktschap” [production board]. According to the Gerechtshof, the Trade Council is composed of nominated and ex officio members from the groups representing various interests in industry, trade and credit enumerated in its judgment as well as from the Government of Hong Kong.

B — The Trade Council has offices in various important trade centres, including — since 1972 — Amsterdam. The activities which were and are carried on from the office in Amsterdam consist mainly in providing information and advice about Hong Kong and opportunities for trade with Hong Kong for undertakings in the Netherlands and in other West European countries as well as in providing information about the opportunities for trade with the Netherlands and other West European countries for undertakings in Hong Kong. As a rule, that information is provided free of charge. The same applies to the other services provided for undertakings by the Trade Council's Amsterdam office. The executive director of the Amsterdam office is appointed by the Governor of Hong Kong in consultation with the Trade Council and he in turn appoints the staff and other employees.

C — The Trade Council's income consists of an annual fixed contribution from the Hong Kong Government, supplemented by funds obtained by means of a charge amounting to 0.5 % of the value of goods imported into or exported from Hong Kong. The charge is levied by the Government, which remits the proceeds to the Trade Council after deducting the costs of collection. In 1972 the annual fixed contribution amounted to 6 million Hong Kong dollars and the net yield from the charge to approximately 18 million Hong Kong dollars. The expenses of the Amsterdam office are paid by the Trade Council.

D — In 1973 the Trade Council submitted to the Inspector of Turnover Taxes, Amsterdam, an application containing a statement of its objects. procedure, composition and financing, and the Inspector recorded the Council, as thus represented in Amsterdam, in the register of businesses. Apart from the miscalculation of a few minor sums, the Trade Council, in each of its declarations, declared only the input tax which it had paid. Each application for the refund of input tax was granted with the proviso that “the application is granted subject to amendment upon subsequent investigation”.

After carrying out a check at the beginning of 1978, however, the Inspector took the view that the Trade Council was not an undertaking and made a subsequent assessment. The Trade Council successfully appealed against that assessment to the Gerechtshof, Amsterdam, whereupon the Staatssecretaris van Financiën [Secretary of State for Finance] appealed in cassation against the Gerechtshofs decision on the ground that the Gerechtshof was not entitled to decide that the Trade Council should be regarded as an undertaking within the meaning of the Wet op de Omzetbelasting [Law on turnover tax] with the right to deduct input tax, inter alia because the Gerechtshofs view conflicted with the Second Council Directive of 11 April 1967 (Directive 67/228/EEC) on the harmonization of legislation of Member States concerning turnover taxes (Official Journal, English Special Edition 1967, p. 16). For further details of the legal arguments which played a rôle in the proceedings before the Netherlands courts, I refer to the judgment making the reference.

In connection with the appeal in cassation, the Hoge Raad of the Netherlands referred the following two questions to the Court of Justice for a preliminary ruling:

“1. Can a person who habitually provides services for traders be regarded as a taxable person within the meaning of Article 4 of the Second Directive [of the Council of the European Economic Community of 11 April 1967 on the harmonization of legislation of Member States concerning turnover tax] in the event of those services being provided free of charge?

2. If Question 1 is answered in the affirmative : Does the first sentence of Article 11 (2) of the Second Directive prevent the deduction of turnover tax on goods and services used for the purpose of providing services as aforesaid?”

2. The relevant provisions of the directive

Before giving further consideration to the questions posed, I consider it useful to review the main provisions of the directive which, in view of the facts of the basic dispute, may be important. At the same time, I shall pay attention to the relationship between those provisions of the directive which the Court is asked to interpret and other provisions thereof which are important for a proper understanding of the former.

As has been stated, the basic dispute concerns the right to deduct, or in this case to receive a refund of, the value added tax which the Trade Council's Amsterdam Office itself had to pay on goods and services supplied to it. That matter is governed by Article 11 of the directive. The first subparagraph of Article 11(2) provides that: “Value added tax on goods and services used in nontaxable or exempt transactions shall not be deductible.” The second question referred to the Court relates to that subparagraph.

As appears from the abovementioned subparagraph, the right to deduct input tax is dependent on a number of preconditions. In particular, there is no right of deduction — except as provided for in the second subparagraph of Article 11 (2), which is not wholly unimportant in this case — if the goods or services on which the tax is paid are used in nontaxable or exempt transactions. Moreover, it is clear from Article 11 (1) that the right of deduction applies exclusively to those who are themselves taxable persons. The first question referred to the Court concerns the latter condition, that is to say the Trade Council's subjective liability to tax. As appears from the judgment making the reference, in the view of the Staatssecretaris van Financiën, the Trade Council has no subjective liability to tax under the rules contained in the Netherlands Wet op de Omzetbelasting, 1968 (Article 1 in conjunction with Article 7), which limit such liability to “undertakings”, and it therefore cannot claim the right conferred on undertakings in Articles 2 and 15 of that Law to deduct input tax. The Gerechtshof's wider view of the concept of undertaking is, it is claimed, incompatible with the Second Directive.

For the application of the first subparagraph of Article 11 (2), the following questions must therefore be considered, in so far as is relevant here:

(1) Whether the Trade Council is subjectively a taxable person This is governed by Article 4 of the directive, to which, as has been stated, the first question referred to the Court relates. It is necessary in thai regard to determine when a person “independently and habitually engages in transactions pertaining to the activities of producers, traders or persons providing services, whether or not for gain.”

(2) Whether the Trade Council is objectively a taxable person This question must not be confused with the question relating to subjective liability to tax. From the judgment making the reference and from the provisions of the Netherlands Law, it seems to me to follow that the whole problem in this case arose because in Articles 2 and 15 the Netherlands Law confers on every undertaking (subjectively a taxable person) the right to deduct input tax and does not also make that right subject to the existence of objective liability to tax as defined in Article 2 of the directive. The question of objective liability to tax is dealt with in Articles 2, 5 and 6 of the directive. It is apparent merely from a reading of Article 2, on which the second question asks the Court, although only indirectly, to give a ruling, that it is only the provision of services against payment that is to be subject to value added tax. Moreover, it is also important to point out, in connection with the facts previously stated under B, that it is only the provision of services against payment within the territory of the country that is to be subject to value added tax. The second subparagraph of Article 11 (2) of the directive provides that deduction of input tax is possible if the provision or services takes place abroad against payment. From the judgment making the reference (first paragraph on page 7) it might be inferred that the Gerechtshof in this case perhaps assumed that payments were made from Hong Kong. However, the latter point seems to be important for proper understanding of the tacts, but not for the answer to the questions referred to the Court, since an interpretation of the second subparagraph of Article 11 (2) has not been requested. Article 6 (2) of the directive is particularly important for the purpose of answering the questions posed. It is clear from that provision that the rules laid down in the directive as regards the taxation of the provision of services are to be compulsorily applicable only to services listed in Annex B. Point 4 of that list of services, “commercial advertising services”, seems to be of particular importance in this case. Although it is not immediately clear that the services provided by the Trade Council may be qualified as such, the Court has nevertheless not been requested to give a ruling on the interpretation of that annex.

(3) Whether there is a basis of assessment and whether to that extent there may be said to be liability to tax within the meaning of the first subparagraph of Article 11(2) The basis of assessment is determined in Article 8 of the directive. Subparagraph (a) of the first paragraph of that article confirms once again that it is only services provided against payment that are taxable. Articles 9 and 10 of the directive concerning rates of tax and exemptions are not of direct importance in this case. Although during the proceedings some attention was paid to Article 12 of the directive, in the final analysis it seems to me that no clear arguments can be derived from that aniele for the purpose of answering the questions referred to the Court. The aniele provides that every taxable person is to be required to keep accounts, issue invoices and lodge declarations. Since, as appears from the clear wording of Article 12, those obligations are to be imposed on all taxable persons, they undoubtedly ought to apply also to taxable persons who either have no objective liability to tax or are exempt from tax. In such cases there may, in connection with the provisions of Article 11 (2), be some doubt as to the purpose of imposing those administrative obligations but not as to the duty to impose them. Consequently, it is not possible — contrary to the opinion expressed by the Netherlands Government in its written obsenations — to adduce a teleological or systematic argument based on the practical aims of Article 12 in support of a narrow interpretation of the concept of “taxable person”. As has already been stated, the concept of “taxable person” relates exclusively to the subjective liability to tax. Nevertheless, in order to ensure proper control, subjectively taxable persons who do not engage in taxable transactions should be subject to the administrative duties provided for in Article 12 of the directive. Contrary to the opinion of the Netherlands Government, the draftsmen of the directive clearly considered that requirement important. It will be clear from the remainder of my opinion why it may indeed be important from the point of view of control. Since the provisions of the directive on objective liability to tax and on exemptions make it possible that taxable persons are nevertheless not liable to tax (but are to be subject to the administrative obligations contained in Article 12), the concept of “taxable person” under the scheme of the directive clearly covers a wider group of persons than those who are actually liable to tax.

3. The first question

3.1. As has already been stated, the first question referred to the Court asks whether a person who habitually provides sen-ices for traders may be regarded as a taxable person within the meaning of Article 4 of the Second Directive (on the harmonization of turnover taxes) in the event of those services being provided free of charge.

3.2. Since Article 1 of the directive also confers binding force on Annexes A and B, in order to answer that question consideration must be given to the provisions relating to Article 4 contained in Annex A as well as to the wording and purpose of that article. Moreover, regard should also be had to the scheme of the directive as a whole and within that framework particularly to Article 2, previously analysed, which concerns the objective liability to tax.

3.3. So far as the wording and scope of Article 4 are concerned, the crux of the matter is in my opinion the concept of engaging in “transactions pertaining to the activities of producers, traders or persons providing services”. As appears from the wording of the questions and the exposition of the facts, it is assumed that the Trade Council operates independently and habuually pursues the activities needing to be defined. In my opinion, moreover, the expression “whether or not for gain” in Article 4 is only explanatory and of secondary importance. That expression is therefore intended merely to clarify that it is not the aim but rather the nature of the activities in question which is relevant

3.4. In mv opinion, on a meaningful interpretation of the wording of Article 4, transactions may be regarded as pertaining to the activities of producers, traders or persons providing services, wherever the following two conditions are met: (a) the services must be provided for undertakings; fb) the transactions must be of such a nature as might be engaged in by independent suppliers of sen-ices who operate for gain. In this case the relevance of the second condition lies in the fact that it is quite conceivable that a trade promotion sen-ice such as the present might be set up by Hong Kong trade and industry themselves and also financed by Hong Kong trade and industry in proportion to the results of the trade promotion activities on Hong Kong's imports and expons. The nature of the activities would not change at all as a result of such an arrangement. The method of payment for those activities under such an arrangement would moreover the equivalent in economic terms to the principal source of finance under the present structure of the serice As appears from the facts already set c_-under C. under the present arrangement the Trade Council is in principle financed from sources the size of -a nu. is directly proportionate to the Lite which the trade promotion har, o. imports and exports Finales, it would be conceivable that a resourceful under taking might itself hit upon the ulei engaging in wholly equivalent activities for the promotion ot Hong Kong juc and industry or another group of foreign undertakings. In order to finance those activities, it might then conclude contract with the government or with the organization in the foreign industry concerned, whereby the amount of the payments would again be determined; an equivalent basis to that which decided upon in this case, that on the basis of the volume of trade with the country concerned. Those alternatives emphasize and explain the fact that it is the economic nature of the activities in question which is relevant for the purposes of Article 4 and not the legal form or the method of financing those activities.

3.5. The explanatory provisions relating to Article 4 contained in Point 2 of Annex A confirm that the conclusion thus arrived at is correct. In the first paragraph thereof it is stated that the basic concept referred to in that provision must be interpreted widely so as “to cover all economic activities”. In the second paragraph it is added that if a Member State intends not to tax certain activities, it should achieve its purpose by means of exemptions rather than by excluding from the scope of the tax persons pursuing such activities. Admittedly, it follows from the fifth paragraph that public corporate bodies, such as that which, according to the national court's findings of fact, is concerned here, are not as a general rule to be considered as taxable persons. However, that applies exclusively in respect of activities which they pursue in their official capacity as official authorities. The latter reservation seems to me to be a provision of Community law, the interpretation of which cannot simply be left to the national court. I propose that the Court of Justice should interpret that provision as meaning that activities pursued by public corporate bodies in their official capacity as official authorities can in no case be regarded as meaning activities which by their nature might also be pursued by independent traders who operate for gain. Such an interpretation is also supported by the second and third subparagraphs of Article 4 (5) of the Sixth Council Directive on turnover taxes (Official Journal 1977, L 145, p. 1). It does not seem to me to be strictly necessary to amplify the conclusion which I have already reached with regard to the interpretation of Article 4, but it is desirable in order to emphasize it.

3.6. As has already been stated, the expression “whether or not for gain” contained in Article 4 is in my opinion intended only to make it clear that it is not the object but rather the nature of the activities in question which is important. The correctness of that interpretation is in my opinion also clearly demonstrated by Article 4 (1) of the Sixth Directive on turnover taxes, to which the Commission refers in its written observations. Unlike the Commission, however, I consider that that expression in Article 4 of the Second Directive is not in itself decisive with regard to the basic question posed by the Hoge Raad, that is to say whether the fact that the Trade Council provides services free of charge is relevant for purposes of the applicability of Article 4 of the Second Directive. Even transactions which are not for gain will as a rule be provided subject to payment of expenses. However, there is in my opinion another compelling reason why the receipt or non-receipt of payment cannot constitute a supplementary criterion for the applicability of Article 4. As the Commission's representative stated in answer to a question put by the Court during the hearing, economic reality displays every conceivable intermediate form between independent organizations which always receive payment for the services which they provide, those which sometimes do and sometimes do not and those which never receive such payment. It would be difficult for rules on subjective liability to tax to take account of such a variety of intermediate forms. The matter of the receipt of payment belongs rather to the rules on objective liability to tax. Consequently, that matter is dealt with in Article 2 of the Second Directive. That article offers a clear rule for services provided both occasionally and habitually against payment, which, however, implies that tax should be imposed on the habitual provision of services even where payment is required only occasionally. That again presupposes that in such a case a taxable person can be identified. As appears from the facts mentioned under D and on account of the ever-present possibility of changes in this regard in the future, that point may also be of practical importance in the present case. In any event, the systematic argument derived from Article 2 of the directive supports the interpretation of Article 4 of the directive which I have put forward.

3.7. I therefore conclude that the first question submitted should be answered as follows:

“A person who independently and habitually provides services for undertakings should — regardless of whether that person is constituted under private or public law — be regarded as a taxable person within the meaning of Article 4 of the Second Council Directive on the harmonization of legislation of Member States concerning turnover taxes (Official Journal, English Special Edition 1967, p. 16), if that person's activities by their nature might also be provided by independent suppliers of services who operate for gain. The question whether or not those services are provided against payment is important for the determination of objective liability to tax on the basis of Article 2, but not for the interpretation of Article 4 of the Second Directive.”

4. The second question

If the first question is answered in the affirmative, the second question referred to the Court must also be answered. I would remind the Court that that question reads as follows:

“Does the first sentence of Article 11 (2) of the Second Directive prevent the deduction of turnover tax on goods and services used for the purpose of providing services as aforesaid?”

I agree with the Commission that the content alone of this question raises few problems. It is clear from the wording of the first subparagraph of Article 11 (2) that input tax paid by a taxable person on goods and sen-ices which he uses for the provision of nontaxable services may not be taken into account for the purposes of deduction or refund. As has been stated earlier, it follows from Anieles 2 and 8 of the directive that in the case of services which are provided free of charge within the territory of the country there can be no objective liability to tax or basis of assessment and such services are therefore not taxable. Without prejudice to the second subparagraph of Article 11 (2), deduction of input tax is therefore to that extent not possible.

Both the wording of the question and the facts pertaining to the main issue make it clear, however, that the aim of the question was different and may be clarified by the following, somewhat amplified formulation of the question: “Does the first subparagraph of Article 11 (2) of the Second Directive of itself, that is to say without national implementing provisions pertaining thereto, prevent a national tax authority from allowing deduction of turnover tax on goods and services which are used by a taxable person within the meaning of the directive for the provision of services free of charge.” Seen in this perspective, it is clear that, in putting the question, the Hoge Raad wishes to know whether the tax authority of a Member State can rely upon a provision of the directive to charge taxable persons in a case for which the Member State concerned has made no provision in its implementing provisions. As has been stated earlier, in so far as is important in this case, in the Netherlands Law, in particular in Articles 2 and 15 thereof, the right to deduct input tax is not, or at least not clearly, made dependent upon the existence of objective liability to tax within the meaning of Article 2 of the directive. In particular, subject to the following paragraphs of that article, which are not applicable in this case, Article 15 (1) of the Law seems to confer the right of deduction on any subjectively taxable person (undertaking). That at the same time explains why the concept of undertaking plays such a critical role in the main proceedings in cassation.

The refusal to recognize a taxable person's right to deduct tax paid must in my opinion, in the context of the question as formulated above, be equated with the imposition of liability to taxation. The existing liability to tax is indeed maintained by the refusal of a deduction. In economic terms, that gives rise to a result similar to that of the imposition of liability to tax. The Hoge Raad's question should therefore in my view be answered in the negative. Article 189 of the EEC Treaty clearly provides that a directive is binding (only) upon each Member State to which it is addressed. The unanimous view expressed in the extensive literature which I have consulted on this subject is that it may indeed be inferred from the judgments of the Court that individuals can derive from directives personal rights on which they may rely against the government, but not that directives can directly give rise to obligations for individuals (in this case to repay tax already deducted). From the Court's most recent decisions I can at most infer that an individual may rely on the illegality of a derogation by the national legislature from a directive if it affects him adversely. In that regard, I refer inter alia to paragraph 29 of the judgment of the Court in Case 51/76 Verbond van Nederlandse Ondernemingen v Inspecteur der Invoerrechten en Accijnzen [1977] ECR 113, to paragraphs 9 and 18 of the judgment in Case 38/77 Enka v Inspecteur der Invoerrechten en Accijnzen [1977] ECR 2203, to paragraphs 20 to 22 of the judgment in Case 21/78 Delkvist v Anklagemyndigheden [1978] ECR 2327, to paragraphs 18 to 23 of the judgment in Case 148/78 Pubblico Ministero v Ratti [1979] ECR 1629 and to paragraphs 17 to 25 of the recent judgment of 19 January 1982 in Case 8/81 Ursula Becker v Finanzamt Münster-Innenstadt. In my opinion a similar idea was also by implication the basis of the Court's judgment of 5 February 1981 in Case 154/80 Staatssecretańs van Financiën v Coöperatieve Aardappelenbewaarplaats [1981] ECR 445.

If the Member State itself could, in the event of a deficiency in its legislation, rely on the direct effect of a directive as against an individual, this would in my opinion be equivalent to conferring on the directive in question binding effect as against individuals, in the sense that there could arise directly from directives not only rights as against the Member State bound by the directive but also financial obligations for individuals, in this case obligations to repay tax or the loss by the taxable person of his right of deduction. As I have already stated, neither in Article 189 of the Treaty, nor in the directive in question, nor in the judgments of the Court can I find support for such an interpretation. Judge Pescatore correctly pointed out in his recent and richly-documented article entitled “L'effet des directives communautaires, une tentative de démythification” (Recueil Dalloz, 1980, p. 171) that in determining the legal effects of directives account must always be taken, on the one hand, of the binding effect for Member States and, on the other, of the need for the adoption of implementing measures by the Member States. The directive cannot therefore make good deficiencies in the implementing measures at the expense of individuals (in this case, taxable persons). Judge Pescatore also concludes at page 176, paragraph 2, of the abovementioned article that individuals can be bound only by national provisions implementing directives and that a directive as such may not be relied upon by a Member State as against individuals. In this particular respect there is an essential difference between it and a regulation, which for example might prohibit certain kinds of national aid in the form of tax concessions. Unlike a directive, such a regulation has general application. Like a decision declaring an aid incompatible with Community law, it can therefore in itself, unlike a directive, impose an obligation on Member States to reclaim benefits obtained which are incompatible with Community law. A directive can impose only an obligation on a Member State to adopt the necessary implementing measures. The obligation to repay, however, then results from the implementing measures.

In my opinion, the second question should therefore be answered as follows:

“The first subparagraph of Article 11 (2) of the Second Directive on turnover taxes prevents, without prejudice to the second subparagraph thereof, the deduction of turnover tax on goods and services used by a taxable person, within the meaning of Article 4 of the directive, for the provision of services free of charge in all cases, in so far as provision to that effect is made in the national legislation.”

( 1 ) Translated from the Dutch.