Proposal for a COUNCIL DECISION authorizing the French republic to extend the application of a measure derogating from Article 17(2) of the sixth Directive 77/388/EEC on the harmonization of the laws of the Member States relating to turnover taxes
Date: 1992-12-22
Institutions: European Commission
Subjects: France, VAT, basis of tax assessment, goods and services, tax harmonisation, tax relief

COMMISSION OF THE EUROPEAN  COMMUNITIES 

C0M(92) 591  final 

Brussels, 22 December  1992 

REPORT FROM THE COMMISSION TO THE COUNCIL 

PRESENTED  IN ACCORDANCE WITH ARTICLE 2 

OF THE COUNCIL  DECISION 89/488/EEC 

OF 28 JULY  1989 

(Application of a measure derogating  from 

Article  17(2) of  the sixth Directive  77/388/EEC 

on  the harmonization of  the  laws of  the Member  States 

relating  to turnover  taxes) 

Proposal  for a 

COUNCIL DECISION 

authorizing  the French Republic  to extend  the 

application of a measure derogating  from Article  17(2) 

of  the sixth Directive 77/388/EEC on  the harmonization 

of  the  laws of  the Member  States 

relating  to turnover  taxes 

(presented  by  the  Commission) 

-4  -

REPORT FROM THE COMMISSION  TO THE COUNCIL 

PRESENTED  IN ACCORDANCE  WITH ARTICLE 2 

OF THE COUNCIL DECISION 89/488/EEC 

OF 28 JULY  1989 

(Application of a measure derogating  from 

Article  17(2) of the sixth Directive  77/388/EEC 

on the harmonization of  the  laws of the Member  States 

relating  to turnover  taxes) 

~ > l ^o -

!• INTRODUCTION 

By  Council  Decision  89/48Ç/EEC  of  28 July  1989,*  the  French  Republic  was 
authorized  on  the  basis  of  Article 27 of  the  sixth VAT Directive,  still  in 
force, to derogate  from Article  17(2) of the sixth VAT Directive. 

The derogation consists in excluding altogether  from the right to deduct VAT 
previously  charged  expenditure  in  respect  of  goods  and  services  in  cases 
where private use of those goods  and  services accounts  for more than 90% of 
their total use. 

The  Council  Decision  authorizes  application  of  that  derogation  until 
31 December  1992. Article 2 stipulates that  the Commission  is to present to 
the Council, prior to the date of expiry  of the derogation, a report on its 
application,  accompanied,  if  appropriate,  by  a  proposal  for  a  Council 
Decision authorizing  its extension. 

The purpose  of the  present  report  is to give  an  account  of  the  application 
of the derogation  and  to examine  the application  for an extension  submitted 
by  the  French  Republic  by  letter  registered  by  the  Secretariat-General  of 
the Commission on 22 October 1992. 

**• APPLICATION OF THE DEROGATION 

1.  Background 

On 3 February  1989  the French  Council  of  State, in the  "Alitalia" case, 
gave  a  condemnatory  ruling  in  respect  of  Article 230-1  of  Annex  II  to 
the French General Tax Code, which excluded  from the right to deduct VAT 
previously  charged  expenditure  on  goods  and  services  not  used 
exclusively  for the purposes of the taxable person's business. 

By  that  ruling,  and  in  accordance  with  Community  law,  exclusive  use 
ceased to be one of the conditions governing  the right to deduct VAT in 
France.  From  now on, where goods and  services are used partly  for non 
business purposes, tax  is deducted  in  full but, instead, private use of 
goods  or  services  is  taxed  on  the  basis  of  Article 6(2)  of  the  sixth 
Directive. 

OJ No L 239, 16.8.1989. 

- 2 -

In  the  interests  of  simplification,  the  French  Republic  has  requested 
authorization  from  the  Council  to  continue  on  a  temporary  basis  to 
exclude  from  the  right  to  deduct  VAT  previously  charged  on  expenditure 
on  goods  and  services  in  cases  where  private  use  of  those  goods  and 
Such  a 
services  accounts  for  more  than  90%  of  their  total  use. 
provision  is  designed  to  avoid  having  to  tax  self-services,  something 
which  would  raise  difficulties  since the  taxable  amount  would  be based 
on  an  assessment  of  the  value  of  self-supplies  resulting  from  the 
private use of the goods. 

2.  Entry  into force in France 

Articles  1,  3  and  5 of  Decree  No 89-885  of  14 December 1989, published 
in  the  Official  Journal  of  the  French  Republic  of  15 December 1989 
(p.  15578),  transpose  the  Council  Decision  into  national  law. 
The 
Decree  entered  into  force  in  Paris  on  17 December  1989  and  in  the 
provinces,  in principle,  on  18 December  1989.  It  gave  rise  inter  alia 
to  new Article 230-1 of  the General  Tax  Code  and was  the  subject  of  an 
Administrative  Instruction  of  21 February  1990,  published  in  the 
Official  Tax  Gazette  (ref.  3  D-3-90)  and  registered  in  the 
administrative  documentation  under  reference  3-D-1512  (updated  on 
1 May  1990). 

3.  Quantitative assessment of private use  (threshold of 90%) 

The quantitative assessment  is based on the following: 

- 

- 

- 

nature of the goods or services; 
function of the goods or services; 
possible  use  of  the  goods  or  services  in  the  business  under 
consideration; 
apportionment  of  the periods  of  use  of  the  goods or  services  under 
consideration  in terms of the calendar  year or as a fraction of the 
calendar  year  in cases where  possible  total use  can,  in  any event, 
be only  seasonal  (e.g. pleasure  boats). 

4.  Practical  application of the derogation  in France 

The derogation  in question  is applied  in the following circumstances: 

Purchases  by  a  business  of  goods  and  services  that  are  to  be  made 
immediately  available  to,  or  used  in  connection  with  the  main 
activity of the business by, the head of the business, the managers, 
the  staff  or  a  third  party:  in this  case, exclusion  from the  right 
to deduct tax  is automatic. 

Examples 

-  3 -

. Purchase or  leasing  of  a video camera  for the use of the manager, 
with  the  camera  being  used  exceptionally  for  in-house  vocational 
training purposes; 

. Pleasure  vessel  used  essentially  for  private  purposes  but  rented 

out for one week of each year. 

Purchase  of  goods  and  services  that  are  normally  used  for  the 
purposes  of  the business  but which,  after  being  used  for  one year, 
are  found  to  have  been  used  for  private  purposes  to  the  extent  of 
more  than  90% of  their  total  use:  In  this  case,  after  the  first 
year of use, the business will have to make an adjustment  in respect 
of  the  VAT  initially  deducted. 
The  adjustment  will  consist  in 
payment of all the tax deducted. 

Where the  circumstances  referred  to  above  are discovered  during the 
adjustment  period  provided  for  in  Article 20(2)  of  the  sixth 
Directive,  tax  is  paid  in  respect  of  the  years  of  the  adjustment 
It  will,  therefore,  be  equal  to  the 
period  that  have  elapsed. 
amount  of  the  previous  deduction  less  one  fifth  (movable  property) 
or one tenth  (immovable property) for each year that has elapsed. 

5.  Special  case  of  local  authorities  (non-taxable  institutional  persons 

within the meaning of Article 4(5) of the sixth Directive) 

In  this  case,  the  use  of  goods  and  services  for  the  purposes  of  an 
activity  falling  outside  the  scope  of  VAT  is  regarded  by  France  as 
corresponding to private use. 

Example 

Computer  used  simultaneousy  by  a  municipality  for  the  purposes  of 
taxable  transactions  and  for  the  purposes  of  non-taxable  services 
supplied  by  it  in  connection  with  civil  status  and  social 
assistance. 

In addition, the  French  administration  has  informed  its  departments 
that,  in any event,  in the  interests of  simplification, there  is no 
reason  to  call  into  question  the  situation  of  local  authorities 
which,  in  cases  where  a  capital  good  is  used  for  both  non-taxable 
and taxable transactions, consider that use in respect of the former 
accounts for more than 90% of their total use even where this is not 
actually the case. 

- 4 -

6. Position of the French administration on the application of 

the derogation 

The  French  administration  takes  the  view  that  the  derogation  has 
simplified  administration  of  the  tax,  both  for  itself  and  for  the 
businesses  concerned. 
Moreover,  as  far  as  it  is  aware,  no  dispute 
regarding  application  of  the  derogation  has  arisen  between  itself  and 
the  businesses  concerned.  Until  recently,  the  derogation  had,  in  any 
event, been applied only  in a very  few, marginal cases not caught by the 
statistics. 

III.  APPLICATION FOR AN EXTENSION OF THE AUTHORIZATION 

In  this  connection,  the  French  Republic  points  out  that  the  derogation  in 
question  might  be  applied  more  often  in  future  in  view  of  the  fact  that, 
since  1991,  a  number  of  liberal  professions  (lawyers,  solicitors, 
translators,  interpreters, sports people, authors  and  artists) have carried 
out transactions that are taxed and no longer exempt. 

Now,  such  professionals,  given  the  liberal  nature  of  their  activities, 
commonly  use  goods  forming  part  of  their  business  for  their  own  private 
purposes  (e.g. mixed-use  apartment, computer, or even photographic  or hi-fi 
equipment  in  the  case  of  a  performing  artist).  If  the  derogation  did  not 
apply, such private use would  require  supervision  by the tax  authorities of 
such equipment  throughout  its useful  life and,  in any  case, taxation of the 
self-supplies  resulting  from  such  private  use.  Calculation  of  the  taxable 
amount  for  such  supplies  would  not  be  straightforward  and  it  would  be  no 
easy matter  convincing  the person  liable to pay tax that the taxable amount 
had 
circumstances, 
Article  11(A)(1)(c)  of  the  sixth  Directive  stipulates  that  the  taxable 
amount  is  the  full  cost  to  the  taxable  person  of  the  self-supplies 
corresponding  to the private use of the business  asset  (e.g. in the case of 
a car, purchase, fuel, repairs, maintenance,  etc.). 

calculated 

correctly 

since, 

been 

such 

in 

IV.  OPINION OF THE COMMISSION  DEPARTMENTS 

1.  Case for extending the derogation 

Since  the  derogation  in  question  is  designed  to  avoid  "consumption 
without  taxation",  the  Commission  departments  take  the  view  that  it  is 
justified. 

-  5 -

However,  they  are  also  aware  of  the  fact  that,  from  a  financial 
viewpoint  (in  terms  of  a  cash-flow  benefit),  taxation  of  the  use  for 
private purposes of goods or services  is more  favourable  for the person 
liable to pay tax than is automatic exclusion of the right to deduct VAT 
previously  charged.  However,  in  cases  where  private  use  accounts  for 
more than 90% of total use, the cash-flow benefit  is not justified since 
the  business  makes  virtually  no  use  of  the  goods  or  services  in 
question. 

2. Period covered by the derogation 

The  Commission  departments  take  the  view  that  a  definite  expiry  date 
should  be  set  for  the  derogation  so  that  an  assessment  can  be  made 
notably  in the  light  of  the progress  in Community  work  on the proposal 
for a twelfth. VAT  Directive  and  in the  light  of  the  actual  application 
of the derogation.  Bearing  in mind  the observations  set out below, the 
derogation  could,  therefore,  be  extended  on  a  temporary  basis  until 
adoption  of  the  twelfth  VAT  Directive  if  that  takes  place  by 
31 December  1996.  If the twelfth VAT Directive were not adopted by that 
date, the derogation would,  in any event, expire on 31 December 1996. 

3. Application  of the derogation  in France 

1.1 Application  of  the  derogation  to  local  authorities  calls  for  the 

following observations and questions  from the Commission: 

France  has  been  authorized  to  exclude  "expenditure  in 
respect  of goods and  services  in cases where private use of 
those goods and services accounts  for more than 90% of their 
total  use"  from  the  right  to  deduct  value  added  tax 
previously  charged. 

The  Commission  departments  consider  that  partial  use  of 
goods  by  a  local  authority  for  activities; falling  outside 
the  scope  of  VAT  pursuant  to  Article 4(5)  of  the  sixth 
Directive  could  not  be  regarded  as  giving  rise  to  private 
use  within  the  meaning  of  Article 6(2)  of  the  sixth 
Directive.  Nor do such cases involve use for purposes other 
than those of the  local  authority  since the very purpose of 
local  authorities  is  to  carry  out  transactions  as  public 
authorities. 

A  local  authority  should,  in  fact, be regarded  as using the 
goods  in question  partly  for the purposes  of  a  "non-taxable 
transaction". 

- 6 -

The Commission  departments would  note that,  from  a strictly 
legal viewpoint, the  sixth Directive  provides  for  an option 
to  tax  only  in  respect  of  "the  application  of  goods  by  a 
taxable  person  for  the  purposes  of  a  non-taxable 
transaction",  that  is  to  say,  in  the  case  in  point,  where 
self-supplies of goods take place.  Where goods are used for 
the 
the 
sixth Directive  does  not  introduce  on either  an optional or 
a  compulsory  basis  any  arrangement  "parallel"  to  that 
provided  for  in  Article 5(7) (b) with  a  view  to  bringing  a 
self-supply of services within the scope of VAT. 

transaction, 

non-taxable 

purposes 

of 

a 

In  such  cases,  however,  there  is  no  denying  that  local 
authorities must be treated  in the same way as fully taxable 
persons  and  that,  where  they  use  goods  or  services  partly 
for  the  purposes  of  a  non-taxable  transaction,  such  use 
should be taxed  if VAT previously  charged on those goods and 
For  this  to  happen,  the 
services  was  deductible. 
Member States  should  agree  to  treat  such  use  as  use  for 
purposes other than those of the business within the meaning 
of  Article 6(2)  of  the  sixth  Directive. 
Such  treatment 
could be the subject of a decision by the VAT  Committee. 

Accordingly,  the  Commission  departments  propose  that  the 
legal  arrangements  for  the  derogation  granted  to  France 
should  be  adjusted  in  such  a way  as  to  duly  establish  that 
it  applies  to  the  type  of  use  in  question  here.  France 
would  then be  authorized  to  "exclude  expenditure  in respect 
of goods  and  services  in cases where use of those goods and 
services  for  the  purposes  of  a  non-taxable  transaction 
accounts  for more than 90% of their total use from the right 
to deduct value added tax previously  charged". 

1.2 More  generally,  the  Commission  departments  would  note  that  France 
makes extensive  use of the derogation  in that  it applies  it as soon 
as use for non-business purposes accounts for more than 90% of total 
use. 
Now,  Article  1  of  the  Council  Decision  introducing  the 
derogation  is  concerned  solely  with  those  cases  where  private  use 
accounts  for  more  than  90% of  total  use.  As  a  result,  uses  other 
than  those  for  the  private  purposes  of  the  taxable  person  or  his 
staff  are  not  expressly  concerned  by  the  derogation.  Among  other 
things, private use by a third party  is not covered. 

In  this  respect,  the  Commission  departments,  which  would  like  to 
observe the neutrality  of VAT and take the view that any  consumption 
without  taxation  should  be  avoided,  propose  that  the  legal 
arrangements  for the derogation  be  improved  by  restoring  a parallel 
with  Article 6(2) of  the  sixth  Directive,  which,  in the  absence of 
any derogation,  should be applied  in its entirety.  Accordingly, the 
derogation  could  apply  in  all  cases  where  goods  are,  in  any  event, 
used  for purposes other than those of the business. 

3 

Proposal  for a 

COUNCIL DECISION 

authorizing the French Republic to extend  the 

application of a measure derogating  from Article  17(2) 

of  the sixth Directive 77/388/EEC on the harmonization 

of  the laws of  the Member  States 

relating to turnover  taxes 

£ 

EXPLANATORY MEMORANDUM 

1.  By  letter  registered  by  the  Secretariat-General  of  the  Commission  on 
22 October  1992,  the  Government  of  the  French  Republic  submitted  a 
request  for  an extension  of the derogation  previously  granted to it for 
a  limited  period  by  Council  Decision 89/488/EEC  of  28 July  1989,  which 
was  based  on  Article 27  of  the  sixth  VAT  Directive  with  a  view  to 
avoiding tax evasion and avoidance. 

2 

This derogation  from Article  17(2) of  the  sixth VAT Directive  consists 
in excluding  altogether  from  the right  to deduct VAT previously  charged 
expenditure  in respect  of goods and  services  in cases where private use 
of  those  goods  and  services  accounts  for more  than  90% of  their  total 
use. 

2.  The  Council  Decision  authorizes  application  of  that  derogation  until 
31 December  1992. 
Article 2  stipulates  that  the  Commission  is  to 
present to the Council, prior to the date of expiry of the derogation, a 
report  on  the  application  of  the  derogation,  accompanied,  if 
appropriate,  by  a  proposal  for  a  Council  Decision  authorizing  its 
extension. 

3.  In support  of  its request, the Government  of the French Republic  points 
out  that  the  derogation  in  question  will  probably  have  to  be  applied  more 
often  in  future  in  view  of  the  fact  that,  since  1991, a  number  of  liberal 
professions  (lawyers,  solicitors, translators,  interpreters, sports people, 
authors and  artists) have been  carrying  out, on the basis of the  eighteenth 
VAT  Directive,  operations  that  are  taxed  and  no  longer  exempt, with  such 
individuals,  on  account  of  the  liberal  nature  of  their  profession,  using 
goods  forming  part  of  the  assets  of  their  business  for  their  own  private 
use.  If  the  derogation  did  not  exist,  such  private  use  would  necessitate 
surveillance  by  the  tax  authorities  of  such  goods  throughout  their  useful 
life  and,  in  any  case,  the  taxation  of  self-supplies  resulting  from  such 
private use.  Calculation  of the taxable  amount  for such  supplies would not 
be  straightforward  and  it  would  be  no  easy  matter  convincing  the  person 
liable to pay the tax that the taxable amount had been calculated  correctly. 

1  OJ No L 239, 16.8.1989. 
OJ No L 145, 13.6.19^7. 
2 
OJ No L 226, 3.8.1989. 
3 

9 

Under such circumstances, it is advisable to withhold  any entitlement to 
tax  deduction  rather  than  to tax  self-supplies,  notably  with  a view to 
preventing  tax  evasion  and  avoidance, which  have  hitherto  been  so easy 
to perpetrate. 

However, the Commission report on the application of the derogation over 
the period 1990-92 showed that the legal arrangements  for the derogation 
should be adapted  so as to ensure that they  cover  local authorities and 
all possible types of use for purposes other than those of the business. 
The Commission proposal  for a Decision also sets a definite date for the 
expiry of the derogation  so that a new assessment of its application can 
be made in four years' time. 

4.  The  Commission  informed  the  other  Member States  by  letter  dated 

20 November  1992 of the French request  for an extension. 

^o 

Proposal  for a 
COUNCIL DECISION 

authorizing the French Republic to extend the application 
of a measure derogating  from Article  17(2) 
of the sixth Directive  (77/388/EEC) 
on the harmonization of the laws of the Member  States 
relating to turnover taxes 

THE COUNCIL OF THE EUROPEAN COMMUNITIES, 

Having regard to the Treaty establishing  the European Economic Community, 

Having  regard  to  the  sixth  Council  Directive  of  17 May 1977  on  the 
harmonization  of  the  laws of the Member States  relating to turnover taxes -
Common  system  of  value  added  tax:  uniform  basis  of  assessment,  as  last 
amended  by  the  Council  Directive  of  16 December  1991  with  a  view  to  the 

•* 

2 

abolition of  fiscal frontiers, 
Having regard to the proposal  from the Commission consequent upon its report 
on the  application  by  the French  Republic  of Council  Decision 89/488/EEC of 
28 July 1989, 

Whereas,  under  Article 27(1)  of  the  sixth  Directive,  the  Council,  acting 
unanimously  on  a  proposal  from  the  Commission,  may  authorize  any 
Member State  to  introduce  special  measures  for  derogation  from  that 
Directive, in order to simplify  the procedure  for charging tax or to prevent 
certain types of tax evasion or avoidance; 

1 
2 

OJ No L 145, 13.6.1977, p. 1. 
OJ No L 376, 31.12.1991, p. 1. 

11 

Whereas,  by  letter  registered  by  the  Secretariat-General  of  the  Commission 
on  22 October  1992,  the  French  Republic  requested  authorization  to  extend 
application of  the derogation  previously  granted  to  it for a limited period 
by  Council  Decision 89/488/EEC  of  28 July  19893  on  the  basis  of  Article 27 
of the sixth Directive; 

Whereas the  said measure  consists  in excluding  altogether  from the right to 
deduct  VAT previously  charged  expenditure  in  respect  of  goods  and  services 
in cases where private use of such goods and services accounts for more than 
90%  of  their  total  use,  in  order  to  refrain  from  taxing  self-supplies the 
taxable  amount  of  which  is particularly  difficult  to  establish  under  those 
circumstances ; 

Whereas,  moreover,  the  said  measure  makes  it  possible  to  prevent  certain 
types  of  tax  evasion  or  avoidance  and,  in  any  event, combats  certain  forms 
of consumption without taxation while, at the same time, simplifying the VAT 
treatment of certain transactions; 

Whereas the  said measure  constitutes  a derogation  from Article  17(2) of the 
sixth  Directive,  whereby  a  taxable  person  is  entitled  to  deduct  the  tax 
charged  on  goods  and  services  used  by  him  in  so  far  as  those  goods  and 
services are used  for the purposes of his taxable transactions; 

Whereas the said measure also constitutes, as demonstrated  in the Commission 
report  on  its  application  over  the  period  1990-92,  a  derogation  from 
Article 6(2) of  the  sixth  Directive, whereby  the use  of  goods  forming  part 
of the assets of a business  for the private use of the taxable person or of 
his staff  or, more generally,  for purposes other  than those of his business 
where the value  added  tax on such goods  is wholly  or partly  deductible must 
be treated as a supply of services for consideration; 

Whereas  the  request  for  an  extension  of  the  said  measure  can  be  accepted 
subject  to  certain  conditions  and  adjustments  to  its  legal  arrangements  in 
accordance  with  the  observations  made  by  the  Commission  in  respect  of  its 
application over the period 1990-92; 

OJ No L 239, 16.8.1989. 

Whereas,  without  a  new  authorization  from  the  Council  based  on  a  proposal 
from  the  Commission,  the  said  measure  cannot  be  extended  beyond 
31 December  1996, by which time the Commission  is to present a report on its 
application to the Council; 

Whereas  the  temporary  extension  of  the  said  derogation  will  not  a  priori 
affect  the  amount  of  tax  due  at  the  final  consumption  stage,  taking  into 
account  Article  11(A)(1)(b)  of  the  sixth  Directive,  which  defines  the 
taxable amount for self-services caught by Article 6(2) of that Directive; 

Whereas,  moreover,  it  will  not  a  priori  have  a  negative  effect  on  the 
European Communities' own resources accruing  from value added tax; 

Whereas  the  other  Member States  were  informed  on  20 November  1992  of  the 
request  for an extension  of the  said derogation  submitted by the Government 
of the French Republic, 

HAS ADOPTED THIS DECISION: 

Article 1 

By  way  of  derogation  from  Articles 6(2)  and  17(2)  of  the  sixth  Council 
Directive  (77/388/EEC),  as  last  amended  by  Directive 91/680/EEC, the French 
Republic  is hereby  authorized  until  31 December  1996 to exclude  expenditure 
in  respect  of  goods  and  services  in  eases  where  use  of  such  goods  and 
services  for the private use of the taxable person or of his staff or, more 
generally,  for  purposes  other  than  those  of  his  business  account  for  more 
than 90% of their total use from the right to deduct value added tax 

4 3 

previously  charged.  Similarly,  the  French  Republic  is  hereby  authorized 
until  31 December 1996  to  exclude  expenditure  in  respect  of  goods  and 
services in cases where use of those goods and services for the purposes of 
a non-taxable transaction accounts for more than 90% of their total use from 
the right to deduct value added tax previously charged. 

Article 2 

On the basis of a report on the application of the authorizations referred 
to in Article 1, accompanied, if appropriate, by a proposal for a Decision, 
the  Council  shall  determine  on  the  basis  of  that  proposal  before 
31 December 1996 whether the said authorizations are to be extended. 

This Decision is addressed to the French Republic. 

Article 3 

Done at Brussels, 

For the Council 

The President 

ISSN 0254-1475 

COM (92) 591 final 

DOCUMENTS 

EN 

09 

Catalogue number : CB-CO-92-618-EN-C 

ISBN 92-77-51312-8 

Office for Official Publications of the European Communities 
Lr2985 Luxembourg