Proposal for a Council Decision authorising the Kingdom of the Netherlands to apply a measure derogating from Article 11 of the Sixth Council Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes
Date: 2005-06-29
Institutions: European Commission
Subjects: Netherlands, VAT, approximation of laws, derogation from EU law, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 29.6.2005 
COM(2005) 285 final 

Proposal for a 

COUNCIL DECISION 

authorising the Kingdom of the Netherlands to apply a measure derogating from  
Article 11 of the Sixth Council Directive 77/388/EEC on the harmonisation of the laws of 
the Member States relating to turnover taxes 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

1)  CONTEXT OF THE PROPOSAL 

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•  Grounds for and objectives of the proposal 

Pursuant to Article 27(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977 
on  the  harmonisation  of  the  laws  of  the  Member  States  relating  to  turnover  taxes  - 
Common system of value added tax: uniform basis of assessment, the Council, acting 
unanimously on a proposal from the Commission, may authorise any Member State to 
apply  special  measures  for  derogation  from  that  Directive  in  order  to  simplify  the 
procedure for charging the tax or to prevent certain types of tax evasion or avoidance. 

By letter registered with the Secretariat-General of the Commission on 4 October 2004, 
the Kingdom of the Netherlands requested authorisation to introduce a special measure 
derogating from Article 11 of the Sixth Directive. In accordance with Article 27(2) of 
the Sixth Directive, the Commission informed the other Member States by letter of 1 
December 2004 of the request made by the Kingdom of the Netherlands and by letter 
dated 2 December 2004, the Commission notified the Kingdom of the Netherlands that 
it had all the information it considered necessary for appraisal of the request. 

120 

•  General context 

As a general rule, Article 11(A)(1)(a) of the Sixth Directive stipulates that the taxable 
amount shall be everything which constitutes the consideration which has been or is to 
be obtained by the supplier from the purchaser. 

The Kingdom of the Netherlands has increasingly been confronted in several economic 
sectors with avoidance schemes as regards the supply of capitals goods and as regards 
the  supply  of  services  in  relation  to  capital  goods.  This  can  take  the  form  of  any 
agreement  or  transfer  of  rights  whereby  these  goods  are  put  at  the  disposal  of  the 
recipient.  These avoidance schemes  are  based on transactions between related parties 
involving payment of a non market value consideration in cases where the recipient is 
not, or is only partly, entitled to deduct VAT. 

For example, the supplier, a taxable person, who is entitled to deduct input VAT in full, 
is  often  established  with  the  sole  purpose  of  acquiring  expensive  capital  goods  for 
onward supply to the (connected) recipient via a lease or let. The lease may be fixed at 
a low level, reflecting the fact that the parties are connected, and later on, the capital 
goods are often sold to the recipient for a price which also bears little relationship to 
the asset's value. The recipient sometimes obtains the goods via a merger or via VAT 
grouping. 

Similar  avoidance  schemes  are  used  for  services,  which  represent  a  substantial  value 
and which are normally amortized for income or company tax purposes. 

These avoidance schemes have led to a considerable revenue loss. The Kingdom of the 
Netherlands has therefore requested to be authorised to provide that in these cases the 
taxable  amount  for  VAT  will  be  based  on  the  open  market  value  and  not  on  the 
consideration. The Commission accepts that this derogation will counter abuse in the 

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VAT system. 

On  16  March  2005,  the  Commission  has  presented  a  proposal  for  a  Directive 
modifying the Sixth Directive as regards certain measures to simplify the procedure for 
charging  VAT  and  to  assist  in  countering  tax  evasion  and  avoidance,  and  repealing 
certain  Decisions  granting  derogations  (the  rationalisation  of  Article  27  derogations 
exercise).  This  proposal  tackles,  amongst  other  things,  the  issue  of  the  valuation  of 
supplies between connected persons. 

Therefore,  the  present  request  should  be  granted  until  the  abovementioned  Directive 
rationalising the  derogations from Article 27 comes into effect, but not later than the 
31st December 2009. 

•  Existing provisions in the area of the proposal 

Similar derogations in relation to Article 11 of the Sixth Directive have been granted to 
other Member States. 

•  Consistency with other policies and objectives of the Union 

Not applicable. 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

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•  Consultation of interested parties 

219 

Not relevant 

•  Collection and use of expertise 

There was no need for external expertise. 

•  Impact assessment 

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The Decision proposal aims at combatting VAT avoidance in the Netherlands and has 
therefore a potential positive economic impact. 

Impact will in any case be limited because of the narrow scope of the derogation. 

3)  LEGAL ELEMENTS OF THE PROPOSAL 

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•  Summary of the proposed action 

The proposal aims at authorising the Kingdom of the Netherlands to apply a measure 
derogating from Article 11 of the Sixth Council Directive 77/388/EEC concerning the 
taxable amount with regard to capital goods and related services. 

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•  Legal basis 

Article  27(1)  of  the  Sixth  Council  Directive  77/388/EEC  of  17  May  1977  on  the 
harmonisation of the laws of the Member States relating to turnover taxes - Common 

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system of value added tax: uniform basis of assessment. 

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•  Subsidiarity principle 

The proposal falls under the exclusive competence of the Community. The subsidiarity 
principle therefore does not apply. 

•  Proportionality principle 

The proposal complies with the proportionality principle for the following reason(s). 

This  Decision  concerns  an  authorisation  granted  to  a  Member  State  upon  its  own 
request and does not constitute any obligation. 

Given the limited scope of the derogation, the special measure is proportionate to the 
aim pursued. 

•  Choice of instruments 

Proposed instruments: other. 

Other means would not be adequate for the following reason(s). 

According  to  Article  27  of  the  Sixth  Council  Directive  77/388/EEC  on  the 
harmonisation  of  the  laws  of  the  Member  States  relating  to  turnover  taxes,  only  a 
Council Decision is possible. 

4)  BUDGETARY IMPLICATION 

The  derogation  has  no  adverse  impact  on  the  Communities'  own  resources  accruing 
from VAT. 

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5)  ADDITIONAL INFORMATION 

•  Review/revision/sunset clause 

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The proposal includes a sunset clause. 

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Proposal for a 

COUNCIL DECISION 

authorising the Kingdom of the Netherlands to apply a measure derogating from  
Article 11 of the Sixth Council Directive 77/388/EEC on the harmonisation of the laws of 
the Member States relating to turnover taxes 

(Only the Dutch version is authentic) 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 

Having regard to Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the 
laws of the Member States relating to turnover taxes – Common system of value added tax: 
uniform basis of assessment1, and in particular Article 27 thereof, 

Having regard to the proposal from the Commission2, 

Whereas: 

(1) 

(2) 

(3) 

By  letter  registered  with  the  Secretariat-General  of  the  Commission  on  4  October 
2004,  the  Kingdom  of  the  Netherlands  sought  authorisation  to  introduce  a  special 
measure derogating from Article 11(A)(1)(a) of Directive 77/388/EEC. 

In accordance with Article 27(2) of Directive 77/388/EEC, the Commission informed 
the other Member States by letter dated 1 December 2004 of the request made by the 
Kingdom  of  the  Netherlands.  By  letter  dated  2  December  2004,  the  Commission 
notified the Kingdom of the Netherlands that it had all the information it considered 
necessary for appraisal of the request. 

The  aim  of  the  derogation  is  to  prevent  the  avoidance  of  value  added  tax  (VAT) 
through  the  undervaluation  of  supplies  between  connected  persons,  whereby  the 
recipient is not, or is only partly, entitled to deduct VAT. It is designed to circumvent 
abuses in the supplies of capital goods or in the supply of services in relation to these 
capital goods, such as leasing or letting or any other arrangement whereby the goods 
are put at the disposal of the recipient. Because of the relationship between the parties, 
the consideration is often fixed at a non market value, resulting in significantly lower 
VAT revenues. 

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2 

OJ L 145, 13.6.1977, p. 1. Directive last amended by Directive 2004/66/EC (OJ L 168, 1.5.2004, p. 35). 
OJ C […], […], p. […]. 

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(4) 

(5) 

(6) 

The  special  measure  should  apply  only  in  cases  where  the  administration  is  able  to 
conclude  that  the  taxable  amount,  as  determined  in  accordance  with  Article 
11(A)(1)(a) of Directive 77/388/EEC, has been influenced by the relationship between 
the  parties.  That  conclusion  should,  in  each  case,  be  based  on  manifest  facts,  not 
presumptions. 

It is therefore appropriate and proportionate to permit the Kingdom of the Netherlands 
to treat the open market value of those supplies as the taxable amount. 

The derogations pursuant to Article 27 of Directive 77/388/EEC which counter VAT 
avoidance  linked  to  the  taxable  amount  of  supplies  between  related  parties  are 
included in a proposal for a Directive rationalising some of the derogations pursuant to 
that Article. It is therefore necessary to limit the application period of this derogation 
until this Directive comes into effect.  

(7) 

The  derogation  has  no  adverse  impact  on  the  Communities'  own  resources  accruing 
from VAT, 

HAS ADOPTED THIS DECISION: 

Article 1 

By way of derogation from Article 11(A)(1)(a) of Directive 77/388/EEC, the Kingdom of the 
Netherlands  is  hereby  authorised  to  take  the  open  market  value,  as  defined  in  Article 
11(A)(1)(d) of Directive 77/388/EEC, as the taxable amount for the supply of capital items or 
any other supply of services whereby the capital item is put at the disposal of the recipient, 
where the following conditions are met: 

(1) 

(2) 

(3) 

the  recipient  is  a  non-taxable  legal  person  or  a  taxable  person  carrying  on  partly  or 
totally exempted activities, which give not rise to a right of deduction; 

the supplier and the recipient are directly or indirectly connected persons according to 
national legislation; 

a number of facts make it possible to conclude from the circumstances of the case that 
the relationship between these connected persons have influenced the taxable amount, 
as determined in accordance with Article 11(A)(1)(a) of Directive 77/388/EEC. 

For  the  purposes  of  this  Article,  capital  item  shall  mean  capital  goods  as  defined  by  the 
Kingdom of the Netherlands in accordance with Article 20(4) of Directive 77/388/EEC and, 
as  far  as  they  are  not  covered  by  this  definition,  services  of  substantial  value  which  can  be 
amortized. 

Article 2 

The  authorisation  granted  under  Article  1  shall  expire  on  the  date  that  the  Directive 
rationalising  the  derogations  pursuant  to  Article  27  of  Directive  77/388/EEC  which  counter 
avoidance  of  value  added  tax  linked  to  the  taxable  amount  comes  into  effect,  or  on  31 
December 2009 whichever is the earlier. 

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Article 3 

This Decision is addressed to the Kingdom of the Netherlands. 

Done at Brussels, 

For the Council 
The President 

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