REPORT FROM THE COMMISSION TO THE COUNCIL presented in accordance with Article 2 of Council Decision 93/109/EEC of 15 February 1993 (application of a measure 77/388/EEC on the harmonization of the laws of the Member States relating to turnover taxes)
Date: 1997-02-27
Institutions: European Commission
Subjects: France, VAT, goods and services, tax harmonisation, tax relief

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

Brussels, 27.02.1997 
COM(97) 74  final 

REPORT FROM THE COMMISSION TO THE COUNCIL 

presented in accordance with Article 2 of 
Council Decision 93/109/EEC of 15 February 1993 
(application of a measure derogating from Article 17 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 
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 

(presented by the Commission) 

REPORT FROM THE COMMISSION TO THE COUNCIL 

presented in accordance with Article 2 of 
Council Decision 93/109/EEC of 15 February 1993 
(application of a measure derogating from Article 17 
of the Sixth Directive 77/388/EEC on the harmonization 
of the laws of the Member States 
relating to turnover taxes) 

I.  INTRODUCTION 

By Decision 89/488/EEC of 28 July  1989,1 the Council authorized France, on the basis of 
Article 27  of the  Sixth Directive,  to  take  special  measures  derogating  from  Article 17(2) 
of that Directive.  The authorization was valid until 31 December  1992. 

The  derogation  consists  in  excluding  altogether  from  the  right  to  deduct  VAT  that 
charged  on expenditure  on goods  and  services in cases where  non-business  use  of those 
goods and services accounts for more than 90% of their total use. 

On  the  basis  of  a  Commission  report  on  the  application  of  this  derogation,  the 
authorization was extended until 31 December  1996 by Council Decision 93/109/EEC2 of 
15 February  1993.  Under the terms of the authorization,  any proposal to extend  it has to 
be accompanied by a report on its application. 

The  purpose  of this report  is to  give an  account  of this  derogation  from  the  time  of  its 
extension to the present date and to examine the application for an extension submitted by 
France by letter registered by the Secretariat-General on 19 November  1996. 

II.  APPLICATION OF THE DEROGATION 

As indicated  above,  the  application  of the  derogation  has  already  been  the  subject  of  a 
Commission  report  drawn  up  at  the  end  of  1992,3  which  described  in  detail  the 
background,  objectives  and  operation  of  the  derogation.  As  these  aspects  have  not 
changed  in the  meantime,  the  present  report  simply  outlines  a  number  of  developments 
which have occurred since the previous report. 

First  of  all,  following  the  Commission's  comments  in  the  previous  report,  France  has 
amended its national legislation  relating to the derogation to make it clear that the special 
measure covers any non-business use that  exceeds 90% of the total use of the goods and 
services (the legislation governing the initial derogation covered only private use). 

France also points out  in its request  for  an extension that  no special difficulty  in applying 
the derogation  has been reported to the French tax authorities over the period from 1993 
to 1996. 

On  the  contrary,  experience  has  confirmed  that  the  arrangements  introduced  have 
simplified  the  administration  of  the  tax  both  for  the  tax  authorities  and  for  taxpayers. 

1  OJ No L 239,  16.8.1989, p. 22. 

2  OJ No L 43, 20.2.1993, p. 42. 

3  COM(92) 591, 22.12.1992. 

3 

France  is therefore  requesting  that  the  authorization  be extended  until  the  new  common 
VAT system is adopted. 

HI.  OPINION OF THE COMMISSION  DEPARTMENTS 

The Court  of Justice has ruled that  a taxable person who uses goods for  the purposes  of 
an economic activity  is entitled  to  deduct  the input  tax paid  in accordance with the rules 
laid down in Article  17, however  small the proportion of business use.  A rule imposing a 
general  restriction  on  the  right  of  deduction  in cases where  there  is limited  business  use 
constitutes a derogation from  Article  17 and is valid only if the requirements of Article 27 
of the Sixth Directive are met (see judgment of 11 July 1991 in Case C-97/90). 

Article 27 permits special  measures derogating from the  Sixth Directive to  be introduced 
either  to  simplify  the  procedure  for  charging  the  tax  or  to  prevent  certain  types  of  tax 
evasion or avoidance. 

As already indicated  in the previous report,  the Commission's  departments  consider  that 
the  introduction  of  the  special  measure  in  question,  which  is  designed  to  prevent 
'consumption  without  taxation",  is justified  under  Article 27  of the  Sixth  VAT Directive 
because it simplifies  administration  of the tax by relieving the tax authority  of the need  to 
oversee  exercise  of the  right  to  deduct  the  VAT  charged  on  expenditure  on  goods  and 
services  in cases where  non-business use  of those  goods and  services  accounts  for  more 
than 90% of their total use. 

As  regards  the  period  of  validity  of  the  authorization,  the  Commission's  departments 
would  point  out  that  on  10 July  1996 the  Commission  adopted  a work  programme4  for 
the  introduction  of  a  common  VAT  system  which  provides  for  step-by-step  progress 
towards the new system. 

As  the  final  package  of  proposals  is  scheduled  for  presentation  in  mid-1999,  the 
Commission's  departments  take the view that  no  derogation  should  be extended  beyond 
31 December 1999. 

It  would  seem  appropriate  to  assess  then whether  the  derogation  is  consistent  with  the 
approach adopted under the new common system of VAT. 

COM(96)328,22.7.1996. 

4-

Proposal for a 

COUNCIL DECISION 

authorizing the French Republic to extend 
the application of a measure derogating from Article 17 
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 

(presented by the Commission) 

s 

EXPLANATORY  MEMORANDUM 

By letter  registered  by the  Commission's  Secretariat-General  on  19 November  1996, the 
French Government  submitted  a  request  for  an  extension  of  the  derogation  initially 
authorized  up  to  31 December  1992  by  Council  Decision 89/488/EEC  of  28 July 19891 
and 
extended  until  31 December  1996  by  Council  Decision 93/109/EEC  of 
15 February  1993.2 

This  derogation  from  Article  17(2)  of  the  Sixth  VAT  Directive  consists  in  excluding 
altogether  from  the  right  to  deduct  VAT  that  charged  on  expenditure  on  goods  and 
services where the use of such goods and  services for the private purposes of the taxable 
person or his staff or more generally for non-business purposes exceeds 90% of their total 
use. 

Article 2  of  the  above-mentioned  Decision 93/109/EEC  states  that,  in  the  light  of  a 
Commission report  on France's application of the Decision, the Council may, on the basis 
of a Commission proposal, authorize the extension of that Decision. 

The Commission's report  on the application of the Decision over the period from 1993 to 
1996 concludes that  it is appropriate  for  the application  of its provisions to  be  extended 
until 31 December  1999. 

On  10 July 1996  the  Commission  adopted  a  work  programme  for  the  introduction  of a 
common VAT system3 which provides for  step-by-step progress towards the new system. 
As  the final package  of  proposals  is  scheduled  for  presentation  in  mid-1999,  it  would 
seem appropriate not to extend  the period  of validity beyond  31 December  1999 so as to 
enable  an  assessment  to  be  made  of the  necessity  of  the  derogation  and  its  consistency 
with the overall approach adopted under the new common system of VAT. 

In  accordance  with  Article 27(3)  of  the  Sixth VAT Directive,  the  other  Member States 
have been informed  by letter of 18 December  1996 of the French request. 

1  OJ No L 239,  16.8.1989, p. 22. 

2  OJNoL43,  20.2.1993, p. 42. 

3  COM(96)328,22.7.1996. 

Proposal for a 
Council Decision 

authorizing the French Republic to extend the application of a measure 
derogating from  Article  17 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 

(presented by the Commission) 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 

Having  regard  to  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  and  in  particular  Article 27 
thereof, 

Having  regard  to  the  previous  Council  Decisions 89/488/EEC  of  28 July  19892  and 
93/109/EEC of 15 February  1993,3 

Having  regard  to  the  Commission  report  on  the  application  of  the  above-mentioned 
Decision over the period from 1993 to  1996, 

Having regard to the Commission proposal arising from that report, 

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

Whereas,  by  letter  registered  by  the  Secretariat-General  of  the  Commission  on 
19 November  1996,  the  French  Government  requested  authorization  to  extend  the 
limited  periods  by 
application  of  the  derogation  previously  granted 
Council Decisions 89/488/EEC and 93/109/EEC; 

it  for 

to 

Whereas the other Member States were informed  on  18 December  1996 of the request  for 
an extension submitted by the French Government; 

1  OJ  No  L  145,  13.6.1977,  p. 1;  Directive  last  amended  by  Directive 96/95/EC  (OJNoL338, 

28.12.1996, p. 89). 

2  OJ No L 239, 16.8.1989, p. 22. 

3  OJNoL43, 20.2.1993, p. 42. 

Whereas  tb.t.  said  measure consists in excluding  altogether  from  the  right  to  deduct  VAT 
that  charged  on expenditure  on goods and  services in cases where the use of such  goods 
and  services for the private purposes  of the taxable person  or  his  staff  or  more  generally 
for non-business purposes exceeds 90% of their total use; 

Whereas  the  special  measure  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 under which  a taxable person is entitled to  deduct the VAT  charged  on goods 
and services used for the purposes of his taxed transactions; 

Whereas the Commission adopted on  10 July 1996 a work programme and a timetable of 
proposals  providing  for  gradual,  step-by-step  progress towards  a common VAT  system 
for the single market; 

Whereas, as the final package of proposals is scheduled for mid-1999, the authorization is 
to be granted until  31 December 1999  so  as to  enable an assessment  to  be made of the 
derogation's consistency with the overall approach of the new common system of VAT; 

Whereas this  derogation  will  not  have a negative  effect  on the  European  Communities' 
own resources accruing from VAT, 

HAS ADOPTED THIS DECISION: 

2 

Article 1 

By way of derogation from  Article  17(2) of Directive 77/388/EEC, the French Republic is 
hereby authorized  to  exclude from  the right to  deduct  VAT that  charge i  on  expenditure 
on goods  and  services  in cases where the use of  such goods  and  services for  the  private 
purposes  of the  taxable  person  or  his  staff  or  more  generally  for  non-business  purposes 
exceeds 90% of their total use. 

This authorization shall be granted until 31 December 1999. 

Article 2 

This Decision is addressed to the French Republic. 

Article 3 

Done at Brussels, 

For the Council 

The President 

ISSN 0254-1475 

COM(97) 74 final 

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