Case C-204/03: Action brought on 14 May 2003 by the Commission of the European Communities against the Kingdom of Spain
Date: 2003-09-20
Institutions: Court of Justice
Subjects: European Commission, Spain, VAT, action for failure to fulfil an obligation, goods and services, purchase, tax exemption

20.9.2003

EN

Official Journal of the European Union

C 226/3

Fernando Messejana Viegas

for a preliminary ruling in the proceedings pending before that
court between Daniel
and
Companhia de Seguros Zurich SA, Mitsubishi Motors de
Portugal SA, participant: CGU International Insurance plc —
Agência Geral em Portugal,
Instituto de Solidariedade e
Segurança Social (ISSS), on the interpretation of the Second
Council Directive 84/5/EEC of 30 December 1983 on the
approximation of the laws of the Member States relating to
insurance against civil liability in respect of the use of motor
vehicles (OJ 1984 L 8, p. 17), the Court (First Chamber),
composed of: M. Wathelet, President of the Chamber, P. Jann
(Rapporteur) and A. Rosas, Judges; S. Alber, Advocate General;
R. Grass, Registrar, has made an order on 24 July 2003, the
operative part of which is as follows:

the Second Council Directive 84/5/EEC of
Article 1(2) of
the
30 December 1983 on the approximation of
Member States relating to insurance against civil liability in respect
of the use of motor vehicles precludes national laws which provide for a
number of types of civil liability applicable to road-traffic accidents
laying down, in respect of one of them, maximum amounts of com-
pensation that are lower than the minimum amounts of cover laid
down by that article.

the laws of

(1) OJ C 156 of 29.6.2002.

Action brought on 14 May 2003 by the Commission of the
European Communities against the Kingdom of Spain

(Case C-204/03)

(2003/C 226/04)

An action against the Kingdom of Spain was brought before the
Court of Justice of the European Communities on 14 May
2003 by the Commission of the European Communities, repre-
sented by Enrico Traversa, Legal Adviser, and Lidia Lozano
Palacios, of its Legal Service, acting as Agents.

The applicant claims that the Court should:

1. Declare that, by maintaining in force provisions which pro-
vide for a deductible proportion for taxable persons who
carry out only taxable transactions, and which lay down a
special rule which limits the right to deduct VAT on the
purchase of goods or services just because they were sub-
sidised, the Kingdom of Spain has failed to fulfil its obliga-
tions under Community law and, in particular, Articles 17
and 19 (2) and (5) of Sixth Council Directive 77/388/EEC (1)
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

2. Order the defendant to pay the costs.

Pleas in law and main arguments

The Commission charges the Kingdom of Spain with having
failed to fulfil its obligations under a number of provisions of
the Sixth Directive on two grounds:

1. Application of a deducible proportion to taxable persons
who carry out only transactions in respect of which value
added tax is deductible (Article 102(1) of the Spanish Law
on VAT).

According to the Commission,
the Spanish provision
broadens unlawfully the scope of the deductible propor-
tion in that it applies not only to taxable persons who
carry out transactions in respect of which value added tax
is deductible and transactions in respect of which value
added tax is not deductible (mixed taxable persons), but
also to those who carry out only taxable transactions (fully
taxable persons), just because they have received subsidies
which are not part of the basis of assessment of their
taxable transactions. According to Article 17(5) of the
the deductible proportion mechanism
Sixth Directive,
applies only where taxable persons carry out both
transactions which are taxable but exempt and taxable
transactions.

Furthermore, the inclusion of subsidies in the deductible
proportion as regards mixed taxable persons is an option
which the Member States have and constitutes an
exception to the general principle of deduction of the
amounts borne by way of VAT in respect of taxable
unexempted transactions. Therefore, that option may not
be exercised in order to treat unfavourably situations other
than those provided for by the directive, contrary to what
has been provided by the Community legislature. The
possible consequences for the neutrality of the tax arising
from the use by the Member States of the option provided
for under Article 19 of the directive cannot justify the
extension by the Spanish authorities of the restriction on
deduction to fully taxable persons, since the necessary
legal basis for it is lacking and it is a measure contrary to
the directive.

The Spanish provision at issue results in double taxation,
since the taxable person who receives a subsidy uses it as
part of the consideration for the purchase of goods or
services. Such purchases are taxed in accordance with the
Sixth Directive, so that the amount of the subsidy is
already subject to the relevant VAT. If that amount is then
included in the denominator for the deductible propor-
tion, resulting in the restriction of the right to deduct of

C 226/4

EN

Official Journal of the European Union

20.9.2003

the taxable person who receives it, the subsidy concerned
will be liable to VAT twice. Although Article 19 provides
expressly that the Member States may include in the
deductible proportions for mixed taxable persons those
subsidies which are not part of the basis of assessment,
that exception to the ‘normal’ method of calculation is a
tool available to the national legislature to prevent a body
which is ‘by its nature’ subsidised obtaining repayment of
VAT for carrying out a merely nominal activity in order to
qualify as a taxable person. However, that provision is to
be interpreted restrictively. On the other hand, it is clear
that, by including subsidies in the deductible proportion,
the right to deduct of mixed taxable persons is reduced,
while that is not possible with regard to fully taxable
persons. Article 19 is an optional provision and the
Member States may determine the procedures
for
implementing it provided they observe, as a whole, the
basic principles and provisions of the Sixth Directive,
which contains other provisions which make it possible to
prevent deductions considered to be abusive.

Court of Justice, inasmuch as it is a special rule which has
no basis in the directive, applies to all taxable persons in
receipt of a subsidy, including fully taxable persons, and,
even it if its applied to mixed taxable persons, it may in
certain circumstances be less advantageous than using the
option provided for by Article 19 of the directive.

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

Reference for a preliminary ruling by the Tribunale
Amministrativo Regionale per la Lombardia — Sezione
staccata di Brescia — by order of
that Court of
8 October 2002, 17 December 2002 and 14 February
2003 in the case of Consorzio Aziende Metano —
CO.NA.ME. against il Comune di Cingia de' Botti; with
the participation of Padania Acque S.p.A.

2.

Laying down of a special rule which limits the right to
deduct VAT owed for the purchase of goods or services
financed in whole or in part by subsidies (second para-
graph of Article 104(2) of the Spanish Law on VAT).

(Case C-231/03)

(2003/C 226/05)

the directive is the inclusion of

That special rule, according to which subsidies to finance
the purchase of certain goods or services do not give rise
to the application of the deductible proportion and are
not included in the denominator but instead limit the right
to deduct the VAT paid on the portion of the price of the
goods or services financed by the subsidy, is incompatible
with the Sixth Directive. Indeed, the Spanish provision
establishes a limit on the right to deduct in respect of fully
taxable persons which is not provided for under the
directive. As for mixed taxable persons, the only limitation
possible under
the
subsidies in the denominator of the deductible proportion.
The VAT which a taxable person has paid for a certain
service or certain goods is always deductible in accordance
with the rules on the right to deduct provided for by the
directive and, to that end, the source of the financing for
the goods or services are of no relevance whatever. The
Member States may take into account only those subsidies
which are not linked to the price of the transaction, and
may choose whether or not
to include them in the
deductible proportion only if the taxable person carries
out, at the same time, taxed and exempt transactions.
Application of the provision is optional and the Member
States may determine the procedures for implementing it
provided they observe the basic principles and provisions
of the Sixth Directive as a whole.

The Spanish provision infringes the fundamental right to
deduct VAT, acknowledged as such in the case-law of the

of

order

Justice of
the

the
Reference has been made to the Court of
Tribunale
European Communities
by
Amministrativo Regionale per la Lombardia — Sezione stac-
cata di Brescia (Lombardy Regional Administrative Court —
Separate Chamber
for Brescia) of 8 October 2002,
17 December 2002 and 14 February 2003, received at the
Court Registry on 28 May 2003, for a preliminary ruling in the
case of Consorzio Aziende Metano — CO.NA.ME. against il
Comune di Cingia de' Botti; with the participation of Padania
Acque S.p.A. on the following question:

Do Articles 43, 49 and 81 EC,
in so far as they prohibit,
respectively, restrictions on the freedom of establishment of
nationals of a Member State in the territory of another Member
State and on the freedom to provide services within the
Community in respect of nationals of Member States and the
commercial practices of undertakings which have as their effect
the prevention, restriction or distortion of competition within
the European Union, preclude provision for the direct award,
without the announcement of a tender, of the management of a
public contract for the distribution of gas to a company in
which a local authority participates, whenever that participa-
tion in the share capital is such as to preclude any direct control
over the management itself and must it therefore be declared
that, as is the case in these proceedings where the shareholding
amounts to 0,97 % of the share capital, the essential precondi-
tions for ‘in-house’ management are not met?