OPINION OF ADVOCATE GENERAL

VAN GERVEN

delivered on 15 September 1993 ( *1 )

1. The present case concerns a request by the German Bundesfinanzhof for a preliminary ruling on Articles 5(1), 17(2) and 20(2) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value-added tax: uniform basis of assessment ( 1 ) (hereinafter ‘the Directive’). The preliminary questions have arisen in connection with a dispute between the Finanzamt Uelzen (hereinafter ‘the Finanzamt’) and the Dieter Armbrecht.

Background

2. Mr Armbrecht, a hotelier, owned an immovable property comprising a guesthouse, a restaurant and a private dwelling. In 1981 he sold the property for DM 1150000. By virtue of the German Umsatzsteuergesetz 1980 (1980 Law on Turnover Tax) such a sale is in principle exempt from turnover tax. ( 2 ) If, however, the sale is a transaction which is ‘carried out for another trader for the purposes of his business’, the trader may treat it as taxable. ( 3 ) Pursuant to that provision Armbrecht voluntarily opted to tax the sale of his immovable property. In his 1981 turnover tax declaration Armbrecht, however, treated as taxable only the part of the goods used for business purposes. He considered the price of DM 157705 in respect of the private dwelling to be free of VAT. In any event he maintains that he charged the purchaser of the goods VAT only on the part used for business purposes and not for the private dwelling. ( 4 )

3. Following an inspection the Finanzamt rejected that classification and included the private dwelling within the charge to turnover tax. It takes the view that the splitting of Armbrecht's immovable property into a part used for business purposes and a part used for private purposes is in practice impossible. Certain parts of the goods are of both a business and a private nature. ( 5 ) Since the land and the building constitute a single asset for the purposes of German civil law, ( 6 ) they necessarily also constitute a whole for the purposes of tax law. ( 7 ) Armbrecht appealed against the Finanzamt's decision to the Finanzgericht, which found in its favour. The Finanzgericht considered that a building that is used partly for business purposes and partly as a dwelling constitutes for the purposes of tax law — in contrast to civil law — two separate economic goods. Since Armbrecht did not charge the purchaser turnover tax on the private dwelling he himself is not liable for tax.

4. The Finanzamt appealed against the judgment of the Finanzgericht to the Bundesfinanzhof. That appeal led to three preliminary questions, all of which are essentially directed towards ascertaining whether under the Directive — and hence also under the German legislation implementing the Directive — separate treatment for the purposes of fiscal law may be accorded to the part of an immovable property such as Mr Armbrecht's which is used as a dwelling. Owing to their technical nature I shall briefly place the questions, the text of which is set out in full in the Report for the Hearing, in the context of the Community and German law on turnover tax.

The first preliminary question

5. According to Article 2(1) of the Directive, implemented in German law by Paragraph 1(1)(1) of the 1980 Law, the following are subject to value-added tax: ‘the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such’. By virtue of Article 5(1) of the Directive, implemented by Paragraph 3(1) of the 1980 Law, ‘a supply of goods’ means: ‘the transfer of the right to dispose of tangible property as owner’. The Bundesfinanzhof asks whether ‘where an immovable property is disposed of, ... the proportion of the property used for business purposes constitute [s] a separate item of supply for the purposes of Article 5(1) of [the Directive]’ or, as I understand the question, whether only the sale of both the private and business parts together can be considered a supply for the purposes of Article 5(1). In the first case the private part of an immovable property is not subject to turnover tax because — and on the assumption that (see point 13 below) — the vendor is not acting as a taxable person for the purposes of Article 2(1) of the Directive upon the sale thereof.

6. The argument of the Finanzamt and the German Government to the effect that a building such as that belonging to Mr Armbrecht constitutes a single asset under German civil law and hence must also be regarded as a whole for the purposes of tax law is, in my view, inapposite. ( 8 ) Quite apart from the question whether it is desirable to demand that tax law and civil law be given a similar interpretation, there can be no question of making the interpretation of Community law — namely the Directive, which the German Law on Turnover Tax implements — dependent on the interpretation of the national hw of a Member State. In the past the Court has always held that the concepts used in the VAT Directives are to be given a Community meaning, unless the directives themselves leave it to the Member States to determine the meaning of a concept. ( 9 ) In particular, in the interpretation of the concept of ‘supply’ in Article 5(1) of the Directive national provisions of the Member States must give way to a coherent Community law approach, as the Court held: ‘This view is in accordance with the purpose of the Directive, which is designed inter alia to base the common system on VAT on a uniform definition of taxable transactions. This objective might be jeopardized if the preconditions for a supply of goods varied from one Member State to another, as do the conditions governing the transfer of ownership under civil law’. ( 10 )

7. As far as is necessary, it may be noted that it is not at all certain that German civil law precludes a division of an immovable property into independent economic entities. Indeed in its observations to the Court the Commission stated that the German Bürgerliches Gesetzbuch (‘Civil Code’) envisages partial ownership (‘Teilbesitz’) of an asset, ( 11 ) and the German law concerning the ownership of dwellings (the Wohneigentumsgesetz or WEiG) regulates a number of forms of partial legal or economic ownership. ( 12 ) Moreover, again according to the Commission, Paragraph 93 of the Civil Code provides only with respect to the ‘Wezentliche Bestandteile’ (essential parts) of an asset — that is to say the parts ‘which cannot be separated from one another, without one or other of them being destroyed or substantially altered’ — that they cannot be the subject of separate rights. It is difficult to see (and moreover is not alleged by any of the parties) that the business and private parts of the same building can in themselves constitute essential components within the meaning of that provision. Finally, it appears from what was said at the hearing that the German legislation concerning the taxation of immovable business assets provides for — compulsory — division of a building with multiple functions into different entities. Why should such a division therefore not be possible for the purposes of turnover tax?

8. As I have said, I am therefore of the opinion that the German civil law cannot provide guidance for the interpretation of Article 5(1) of the Directive, as implemented by Paragraph 3(1) of the 1980 Law on Turnover Tax. Guidance on the interpretation of those anieles is instead to be derived from the Court's judgment of 6 May 1992 in de Jong. ( 13 ) That judgment, which was given just after the Bundesfinanzhof decided on 28 April 1992 to make the present request for a preliminary ruling, concerns Article 5(6) of the Directive. That Article assimilates to a taxable supply for consideration: ‘the application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value-added tax on the goods in question or the component parts thereof was wholly or partly deductible ...’.

9. De Jong, a builder, acquired for private use, and hence free of turnover tax, a plot of land with a building. He later sold half of the land without charging turnover tax. He subsequently demolished the building and, in the course of his business, built two dwellings, one for the purchaser of the half of the land and one for himself. He subsequently used the latter dwelling exclusively for private purposes. In his turnover tax declaration he treated as taxable the goods and services which he had withdrawn from his business under Article 5(6) for the purposes of constructing the private dwelling. The land, on the other hand, he considered to be free from tax since it had already formed part of his private assets. The Netherlands tax authorities took the view, however, that the land on which the private dwelling was built was also to be regarded as taxable because ‘as a result of the construction of a dwelling on the land made available for that purpose a new immovable asset was created for the purposes of turnover tax consisting in the building and the accompanying land’ (paragraph 13). The Court rejected that view and stated expressly: ‘irrespective of whether the Und and the building are inseparable under national legislation ... it is necessary to distinguish for the purposes of Article 5(6) of the Sixth Directive between the taxation of land which a taxable person holds in his private capacity and the taxation of a building which he has constructed on that land in the course of his business’ (paragraph 19).

10. The preliminary question to which the Court replied in de Jong does not differ essentially from the present question. In both cases the question is in substance whether under Article 5 of the Directive two parts of an immovable entity (land and building or business and private parts of a building) which are economically divisible but are said to be inextricably linked or to be regarded as a whole under the national law of a Member State may only give rise to a single taxable transaction. It is apparent from the judgment in de Jong that a plot of building land which a taxable person holds in his private capacity is subject to different treatment for the purposes of turnover tax than a building which the taxable person has constructed in the course of his business and which consequently belongs to his business assets. The fact that a building constructed in the course of a taxable person's business constitutes under the applicable national law a single entity with the privately held land on which it is built does not — contrary to what the Netherlands Government (but not the German Government ( 14 )) argued in de Jong ( 15 )-lead to the conclusion that the land and the building are to be treated for the purposes of the Directive as a single asset belonging to the taxable person's business.

11. This case also concerns two parts of an immovable entity, namely the business and private parts of a building of which the latter was privately held before the transfer and apparently was also transferred as such by the taxable person. Just as in de Jong it must be assumed that for the purposes of the Directive both parts may be transferred separately. This means in particular that the business part of the building can itself constitute the subject of a supply for the purposes of Article 5(1) of the Directive. That is so notwithstanding the Finanzamtes argument that the existence within the immovable property of a number of parts which are used for mixed private and business purposes makes a division of the property into business and private parts impossible (supra, point 3). It is still possible to calculate as a percentage the extent to which the common parts are used for business or private use. The German turnover tax authorities appear to be familiar with such calculations. ( 16 )

12. The above reasoning derived from the de Jong judgment seems to me, moreover, to be the most in keeping with Article 5(1) of the Directive. According to that Article {supra, point 5) a ‘supply of goods’ means ‘the transfer of the right to dispose of tangible property as owner’. From that definition I infer that what is decisive is the economic function which the transferor, as the person entitled to dispose of the goods, has accorded to the goods or parts thereof. It is not disputed that prior to the transfer Armbrecht used certain parts of his asset for business purposes and others for private purposes. This also refutes the argument put forward at the hearing that a division according to the use of immovable property which is to be sold could lead to a sudden change in the subject of the sale transaction. ( 17 ) In my view, it appears from Article 5(1) that what is decisive is the state in which the transferred goods are to be found at the moment of the transfer, that is to say, the moment at which the holder of the goods has ‘the right to dispose of (the goods) as owner’. It is therefore the manner in which the goods are divided at the moment of the transfer which is decisive for the purposes of the tax treatment under the Directive, which is unaffected by changes after the transfer. ( 18 )

13. I wish to add the following clarification to the foregoing. Exemption from turnover tax requires that the private dwelling which is to be sold should have remained or have been brought outside the scope of application of the turnover tax system. Part of an immovable asset used for business purposes can therefore only be the subject of a separate taxable supply — or, expressed in other terms, the sale of the part of the asset used for private purposes is only free from turnover tax — if the part used for private purposes actually belongs to the private assets of the vendor at the time of the sale. That is, for example, not the case, as the Commission correctly observes, where a vendor has himself paid and deducted turnover tax when he purchased the dwelling. In that case the dwelling did not become part of the vendor's private assets, even if it was only used for private purposes. Nor is the vendor exempt from turnover tax in respect of the sale of a private dwelling if he charges tax to his purchaser. ( 19 ) In both cases the vendor has by implication indicated that the immovable property comes within the scope of the turnover tax system. On the other hand, exemption from turnover tax on the sale of the private part of an immovable property should, in my view, be granted to a vendor who did not himself pay or deduct turnover tax on the purchase of the property and who has, moreover, taken no steps in order to bring his private dwelling within the scope of turnover tax.

14. In answer to the first preliminary question I therefore conclude that the part of an immovable property used for business purposes constitutes in itself the subject of a supply within the meaning of Article 5(1) of the Directive on the sale of the asset and that the part belonging to the private assets of the vendor — on condition that the vendor kept it outside the scope of turnover tax — does not constitute, together with the business part, a single taxable supply within the meaning of that provision.

The second preliminary question

15. This question concerns the deduction of input tax. That deduction, which is dealt with in Chapter 11 (Articles 17 to 20) of the Directive, is intended to prevent turnover tax being paid on the full price of goods or a service where the component of those goods or that service have already been subject to turnover tax. Thus, the system of deducting input tax is intended to guarantee the neutrality of turnover tax, as is apparent from Article 2 of the First VAT Directive: ( 20 ) ‘The principle of the common system of value-added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of goods and services, whatever the number of transactions which take pUce in the production and distribution process before the stage at which tax is charged. On each transaction, value-added tax, calculated on the price of goods or services at the rate applicable to such goods or services, shall he chargeable after the deduction of the amount of value-added tax borne directly by the various cost components....’ (my emphasis).

16. Article 17(2) of the Sixth Directive, which implements that principle, ( 21 ) provides that input tax may be deducted ‘[i] n so far as the goods and services are used for the purposes of ... taxable transactions’. The Bundesfinanzhof has asked the Court whether the whole of an asset such as that belonging to Armbrecht or only the business part is used for the purpose of taxable transactions within the meaning of that article. If the Court does not follow me in the answer to the first preliminary question and takes the view that a trader such as Armbrecht is also liable for turnover tax on the sale price of the part of the immovable property used as a private dwelling, then no problem arises. It is clear that he may also deduct input tax in respect of that part of the purchase price. A problem does arise however if the Court, as I have proposed, gives an affirmative reply to the first preliminary question. In that case the question arises whether a trader who is not liable for turnover tax in respect of a certain amount may deduct turnover tax in respect of that amount.

17. In the abovementioned judgment of 11 July 1991 in Lennartz the Court held that a taxable person who uses goods for both business and private purposes is in principle entitled to deduct input tax without restriction ‘however small the proportion of business use’. ( 22 ) As the Bundesfinanzhof correctly states, however, there is a material difference between the situation in Lennartz and the present situation. Lennartz concerned a car in respect of which the court could not determine which parts precisely were intended for private or business use. This case concerns immovable property which can be precisely divided into a private part and a business part. In other words, Lennartz concerned a single economic asset taxable as a whole that was used for business and private purposes. The present case concerns two divisible parts of an immovable asset {supra, point 10), one used for business purposes and taxable, the other for private purposes and not taxable.

18. In my view the nontaxable part does not give rise to deduction of input tax. The fundamental neutrality of the system of turnover tax {supra, point 14) requires a logical connection between the extent to which goods are taxable and the extent to which goods can give rise to tax deduction of input tax. That connection is determined by the Directive itself, which permits deduction of input tax only ‘in so far as’ goods and services are used for taxable use {supra, point 16). It also forms the basis of the Court's case-law concerning turnover tax on immovable goods: ‘As the Court pointed out in its judgment of 5 May 1982 in Case 15/81 {Schul v Inspecteur der Invoerrechten en Accijnzen [1982] ECR 1409), a basic element of the VAT system is that VAT is chargeable on each transaction only after deduction of the amount of the VAT borne directly by the cost of the various components of the price of the goods ...’ (my emphasis). ( 23 ) The close connection between liability to tax and deductibility of input tax would be disrupted if it were accepted that the untaxed part of an immovable asset none the less gave rise to deduction of input tax, which would be deducted from the tax to which the taxable part of the asset gives rise.

19. In answer to the second preliminary question I conclude therefore that the part of an immovable asset used for private purposes that is free of turnover tax on the basis of the interpretation of Article 5(1) proposed above (at point 13) is not used for taxable transactions for the purposes of Article 17(2) of the Directive and thus cannot give rise to deductions of input tax. Moreover, I should stress that that conclusion is in keeping with the Lennartz judgment. In that judgment the Court held that a car which at the time of its sale was wholly subject to turnover tax must also give rise to deduction of input tax in its entirety and without restriction. Wholly by analogy I propose that the Court hold that an immovable asset which at the time of its sale is only partially subject to turnover tax should only partially give rise to input tax deductions. The underlying reasoning is the same.

The third preliminary question

20. By its third question the Bundesfinanzhof wishes to ascertain whether any adjustment of the input tax deduction can be restricted to the part of an immovable asset used for business purposes. Such an adjustment, which in Germany is governed by Paragraph 15(a) of the 1980 Law on Turnover Tax, is the subject of Article 20 of the Directive. That article provides inter alia: ‘1. The initial deduction shall be deducted according to the procedures laid down by the Member States, in particular: (a) where that deduction was higher or lower than that to which the taxable person was entitled; (b) where after the return is made some change occurs in the factors used to determine the amount to be deducted ...; 2. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured. ... In the case of immovable property acquired as capital goods, the adjustment period may be extended up to ten years.’

21. Just as the answer to the second preliminary question follows logically from the answer to the first question, the answer to the third preliminary question is determined by the answer to the second question. In answer to that question (supra, point 19) I stated that a part of an immovable asset used for private purposes and exempt from VAT is not used for taxable transactions within the meaning of Article 17(2) of the Directive and thus does not give rise to the deduction of input tax. Where no deduction of input tax can take place, nor can there be any adjustment of such deductions.

22. The adjustment of the deduction of input tax under Article 20(2) of the Directive can therefore certainly be restricted to the parts of an immovable property used for business purposes, which implies an affirmative answer to the third preliminary question. What is more, since adjustment of deductions is only possible in so far as the deduction is itself possible, the deduction cannot concern that part of the immovable property that forms part of the private assets of the vendor.

Conclusion

In conclusion I propose that the Court decide as follows:

(1) The part of an immovable asset used for business purposes constitutes, on the sale of the asset, of itself the subject of a supply for the purposes of Article 5(1) of Council Directive 77/388/EEC of 17 May 1987 provided that the private part of the immovable asset concerned belongs at the time of the sale to the private assets of the vendor and has been kept by him outside the scope of turnover tax.

(2) In so far as the part of an immovable asset used for private purposes is free from turnover tax on the basis of the foregoing, that part is not to be regarded as being used for the purposes of taxable transactions within the meaning of Article 17(2) of Directive 77/388/EEC.

(3) The adjustment of the deduction of input tax under Article 20(2) of Directive 77/388/EEC can be restricted to the part of an immovable asset used for business purposes. That adjustment cannot relate to the part of an immovable asset used for private purposes which is free from turnover tax on the grounds stated in reply to the first question.

( *1 ) Original language: Dutch.

( 1 ) OJ 1977 L 145, p. 1.

( 2 ) This may be explained by the fact that the sale already falls under the Grunderwerbsteuergesetz, the German law relating to transfer tax on the purchase of land. See Paragraph 4(9)(a) of the 1980 Law on Turnover Tax, which corresponds to Article 13B(g) of the directive.

( 3 ) See Paragraph 9 of the 1980 Law, which corresponds to Article 13C of the directive. Opting for taxation may be financially more advantageous because it allows input tax (.infra, point 15) to be deducted (see Paragraph 15(2) of the 1980 Law).

( 4 ) Although in the notarial act a purchase price of DM 1150000‘plus 13% VAT’ was agreed, he claims that the reference to VAT concerned only those parts of the goods used for the purposes of the business.

( 5 ) The Bundesfinanzhof cites as examples ‘the heating system, the roof, the staircase and parts which are essential to the structure of the house’.

( 6 ) More specifically, for the purposes of Paragraph 90 of the Bürgerliches Gesetzbuch (BGB).

( 7 ) More specifically, for the purposes of Paragraph 3(1) of the 1980 Law.

( 8 ) A similar line of reasoning was in fact rejected by the Court in its judgment in Case 73/85 Kerrutt [1986] ECR 2219, which also concerned the charging of turnover tax on immovable property. The judgment concerned the construction of a building under the so called ‘Bauherrenmodell’, under which co-proprietors purchase a plot of land and conclude an agreement to erect a building on the land. Notwithstanding the case-law of the Bundesfinanzhof according to which the purchase and construction contracts were to be regarded as a single transaction for the purposes of Grunderwerbsteuer (see footnote 2 supra), ‘if each of the two partial contracts is devoid of purpose without the other’ (paragraph 4), the Court held that supplies made in connection with a construction contract ‘cannot be regarded as forming ... a unity’ with the supply of a plot of land by another contractor to the builder (paragraph 15).

( 9 ) Judgment in Case 51/76 Verbond van Nederlandse Ondernemingen [1977] ECR 113, paragraphs 10 and 11.

( 10 ) Judgment in Case C-320/88 Safe [1990] ECR I-285, paragraph 8. See also paragraph 11 of my Opinion in the judgment in Case C-186/89 Van Tiem [1990] ECR I-4363, at p. 4377.

( 11 ) Paragraph 865 of the Civil Code refers to the ownership of part of an asset, ‘insbesondere abgesonderte Wohnräume oder andere Räume’.

( 12 ) The Commission mentions the separate property right (‘Sondereigentum’) which can exist in relation to an apartment or single room (Paragraph 3 of the WEiG) and the letting or business tenancy in perpetuity (Paragraph 31 of the (WEiG).

( 13 ) Case C-20/91 [1992] ECR I-2847.

( 14 ) A short comparison should be made between the German Government's position in de Jong and its position in the present case. According to Paragraph 94(1) of the German Civil Code a plot of land and the building situated on the land constitute inextricably linked ‘essential components’ of the same asset. None the less, in de Jong the German Government subscribed to the Commission's view that the land and building may be treated separately for the purposes of turnover tax. It is not clear why the same Government now takes a contrary view, particularly since it is not clear that under German law the parts concerned in this case constitute ‘essential components’ of a single asset {supra, point 7).

( 15 ) See paragraphs 13 and 14 of the judgment.

( 16 ) See in that connection the judgment in Case C-97/90 Lennarti [1991] ECR I-3795, which concerned a German administrative practice which provided that no account was taken of the business use of economic goods if such use represented less than 10% of the total use.

( 17 ) The representative of the Finanzamt referred to the example of the sale of a building with ten rooms. The vendor uses three for business purposes and the other seven for private fturposes. The purchaser, however, wishes to use five rooms or Dusiness purposes and five rooms for private purposes. If it is assumed that the business and private parts constitute separate items, then the latter change during the sale. Three business rooms are supplied but five are received, whereas of the seven private rooms supplied only five are received.

( 18 ) Moreover, changes after the transfer may also substantially alter the sales transaction where the asset is not divided, for example, because a trader sells his business premises to someone who wishes to use it as a private dwelling.

( 19 ) It is for the national court to determine whether Armbrecht in this case charged turnover tax to the purchaser in respect of the private dwelling: supra, footnote 4.

( 20 ) Council Directive 67/227/EEC of 11 April 1967 on the harmonization of legislation of Member Sutes concerning turnover taxes (OJ, English Special Edition 1967, p. 14). For later amendments to that article see the Opinion of Advocate General Jacobs in Lenrmrtz [1991]ECR I-3795, at p. I-3815.

( 21 ) See the judgment in Case 50/87 Commission v France [1988] ECR 4797, paragraph 23.

( 22 ) Lennartz, cited above at footnote 16, paragraph 35. See also points 58 and 59 of the Opinion of Advocate General Jacobs [1991] ECR I-3826 and I-3827.

( 23 ) Judgment in Case 268/83 Rompelman v Minister van Finanzien [1985] ECR 655, paragraph 16. The case concerned the (future) acquisition and letting of units in premises.