CELEX: 62008CJ0102
Language: en
Date: 2009-06-04 00:00:00
Title: Judgment of the Court (Third Chamber) of 4 June 2009.#Finanzamt Düsseldorf-Süd v SALIX Grundstücks-Vermietungsgesellschaft mbH & Co. Objekt Offenbach KG.#Reference for a preliminary ruling: Bundesfinanzhof - Germany.#Sixth VAT Directive - Second and fourth subparagraphs of Article 4(5) - Option of Member States to consider activities of bodies governed by public law exempted under Article 13 and Article 28 of the Sixth Directive as activities of public authorities - Rules governing exercise of that option - Right to deduct - Significant distortions of competition.#Case C-102/08.

Case C-102/08
      Finanzamt Düsseldorf-Süd
      v
      SALIX Grundstücks-Vermietungsgesellschaft mbH & Co. Objekt Offenbach KG
      (Reference for a preliminary ruling from the Bundesfinanzhof)
      (Sixth VAT Directive – Second and fourth subparagraphs of Article 4(5) – Option of Member States to consider activities of bodies governed by public law exempted under Article 13 and Article 28
         of the Sixth Directive as activities of public authorities – Rules governing exercise of that option – Right to deduct – Significant distortions of competition)
      
      Summary of the Judgment
      1.        Tax provisions – Harmonisation of laws – Turnover taxes – Common system of value added tax – Taxable persons – Bodies governed
            by public law – Treatment as non-taxable persons in respect of activities in which they engage as public authorities
      (Council Directive 77/388, Art. 4(5), fourth para.)
      2.        Tax provisions – Harmonisation of laws – Turnover taxes – Common system of value added tax – Taxable persons – Bodies governed
            by public law – Treatment as non-taxable persons in respect of activities in which they engage as public authorities
      (Council Directive 77/388, Art. 4(5), second para.)
      1.        The Member States must lay down an express provision in order to be able to rely on the option provided for in the fourth
         subparagraph of Article 4(5) of Sixth Council Directive 77/388 on the harmonisation of the laws of the Member States relating
         to turnover taxes, according to which specific activities of bodies governed by public law exempt under Article 13 or Article
         28 of that directive are considered to be activities of public authorities.
      
      The Member States may choose the legislative technique which they regard as the most appropriate. Thus they may, for example,
         merely incorporate into national law the form of words used in the Sixth Directive or an equivalent expression or they may
         draw up a list of activities of bodies governed by public law exempted under Article 13 or Article 28 of the Sixth Directive
         which are considered to be activities of the public authority. An executive authority may be authorised by a legal provision
         to specify the activities of bodies governed by public law exempted under Article 13 or Article 28 of the Sixth Directive
         which are considered to be activities of public authorities, provided that its decisions of application have an unquestionable
         binding force, comply with the requirements that they be specific, precise and clear so as to guarantee legal certainty and
         may be reviewed by the national courts.
      
      (see paras 56-58, operative part 1)
      2.        The second subparagraph of Article 4(5) of Sixth Directive 77/388 on the harmonisation of the laws of the Member States relating
         to turnover taxes must be interpreted as meaning that bodies governed by public law are to be considered taxable persons in
         respect of activities or transactions in which they engage as public authorities not only where their treatment as non-taxable
         persons under the first or fourth subparagraphs of that provision would lead to significant distortions of competition to
         the detriment of their private competitors, but also where it would lead to such distortions to their own detriment.
      
      (see para. 76, operative part 2)
JUDGMENT OF THE COURT (Third Chamber)
      4 June 2009 (*)
      
      (Sixth VAT Directive – Second and fourth subparagraphs of Article 4(5) – Option of Member States to consider activities of bodies governed by public law exempted under Article 13 and Article 28
         of the Sixth Directive as activities of public authorities – Rules governing exercise of that option – Right to deduct – Significant distortions of competition)
      
      In Case C‑102/08,
      REFERENCE for a preliminary ruling under Article 234 EC from the Bundesfinanzhof (Germany), made by decision of 20 December
         2007, received at the Court on 5 March 2008, in the proceedings
      
      Finanzamt Düsseldorf-Süd
      v
      SALIX Grundstücks-Vermietungsgesellschaft mbH & Co. Objekt Offenbach KG,
      THE COURT (Third Chamber),
      composed of A. Rosas, President of the Chamber, A. Ó Caoimh, J.N. Cunha Rodrigues, J. Klučka and A. Arabadjiev (Rapporteur),
         Judges,
      
      Advocate General: M. Poiares Maduro,
      Registrar: L. Hewlett, Principal Administrator,
      having regard to the written procedure and further to the hearing on 21 January 2009,
      after considering the observations submitted on behalf of:
      –        SALIX Grundstücks-Vermietungsgesellschaft mbH & Co. Objekt Offenbach KG, by U. Prinz, Wirtschaftsprüfer/Steuerberater, and
         A. Cordewener, Rechtsanwalt,
      
      –        the German Government, by M. Lumma and C. Blaschke, acting as Agents,
      –        Ireland, by D. O’Hagan and M. MacGrath, acting as Agents, and N. Travers, BL,
      –        the Commission of the European Communities, by D. Triantafyllou, acting as Agent,
      having decided, after hearing the Advocate General, to proceed to judgment without an Opinion,
      gives the following
      Judgment
      1        This reference for a preliminary ruling concerns the interpretation of the second and fourth subparagraphs of Article 4(5)
         of 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 (OJ 1977 L 145, p. 1) (‘the Sixth Directive’).
      
      2        The reference was made in the course of proceedings between the Finanzamt Düsseldorf-Süd (tax office, Düsseldorf-Süd) (‘the
         Finanzamt’) and SALIX Grundstücks-Vermietungsgesellschaft mbH & Co. Objekt Offenbach KG (‘Salix’), concerning the right to
         deduct input value added tax (‘VAT’) in the context of the construction of a building let, subsequently, to a body governed
         by public law which, in turn, sublet part of it on a long-term basis to third parties liable for VAT.
      
       Legal context
       Community legislation
      3        Under Article 2 of the Sixth Directive ‘the supply of goods or services effected for consideration within the territory of
         the country by a taxable person acting as such’ are subject to VAT.
      
      4        Article 4(5) of the Sixth Directive states:
      
      ‘States, regional and local government authorities and other bodies governed by public law shall not be considered taxable
         persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues,
         fees, contributions or payments in connection with these activities or transactions.
      
      However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these
         activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition.
      
      In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided they
         are not carried out on such a small scale as to be negligible.
      
      Member States may consider activities of these bodies which are exempt under Article 13 or 28 as activities which they engage
         in as public authorities.’
      
      5        Pursuant to the first subparagraph of Article 13B(b) of the Sixth Directive, the Member States are to exempt ‘the leasing
         or letting of immovable property excluding: … the letting of premises and sites for parking vehicles’.
      
      6        Article 13C of that directive permits the Member States to allow taxpayers, during the letting and leasing of immovable property,
         a right of option for taxation and permits them both to restrict the scope of this right of option and to fix the details
         of its use.
      
       National legislation
      7        Paragraph 2(1) and (3) of the 1993 Law on turnover tax (Umsatzsteuergesetz 1993 BGBl. 1993 I, p. 565), as applicable in 1995
         (‘the UStG’), was worded as follows:
      
      ‘1. A trader is any person who independently carries out a commercial or professional activity. An undertaking comprises the
         whole of a trader’s commercial or professional activity. Commercial or professional activity means any sustained activity
         carried out for the purpose of obtaining income, even where there is no intention to make a profit or an association carries
         out its activities only in relation to its members.
      
      … 
      3.      Legal persons governed by public law are commercially or professionally active only in the course of their commercial operations
         (Paragraph 1(1)(6) and Paragraph 4 of the Körperschaftsteuergesetz) and their agricultural or forestry operations …’
      
      8        Paragraph 4(12)(a) of the UStG provided that, among the turnover referred to in Paragraph 1(1)(1) to (3) of the UStG, the
         following are exempted: ‘the leasing and letting of immovable property, rights governed by provisions of civil law relating
         to immovable property and rights relating to a State prerogative in regard to the use of immovable goods and property’.
      
      9        Under Paragraph 9(1) of the UStG, ‘a trader may treat a transaction which is exempt from tax under Paragraph 4(12) … as taxable
         if the transaction is performed for another trader for the purposes of his business’.
      
      10      Under Paragraph 9(2) of the UStG, a waiver of tax exemption was permissible ‘only in so far as the recipient of the service
         uses or intends to use that property exclusively for transactions which do not exclude input tax deduction. It is for the
         trader to prove compliance with these conditions’.
      
      11      Paragraph 1(1)(6) of the Law on corporation tax (Körperschaftsteuergesetz BGBl. 1991 I, p. 637), as applicable in 1995 (‘the
         KStG’), provided that ‘commercial operations’ of legal persons governed by public law whose management or seat is situated
         in Germany are subject to unlimited liability to corporation tax. 
      
      12      Paragraph 4 of the KStG provided:
      
      ‘1.      Subject to subparagraph 5, commercial operations of legal persons governed by public law within the meaning of Paragraph 1(1)(6)
         are all establishments which pursue an economic activity on a continuing basis for the purposes of obtaining income other
         than in agriculture and forestry and which stand out in economic terms from the overall activity of the legal person. There
         is no need for an intention to make a profit and involvement in general business transactions.
      
      2.      A commercial operation shall also be subject to unlimited tax liability if it is itself a legal person governed by public
         law.
      
      … 
      4.      The leasing of a commercial operation shall be regarded as such an operation.
      5.      Commercial operations shall not include operations which serve predominantly to exercise public authority (public service
         operations). The right of coercion or monopoly shall not be sufficient to assume the existence of a public service operation.’
      
      13      It is apparent from the order for reference that, in the corporation tax system, the long-term letting of immovable property
         is considered not to fall within the activities of a ‘commercial operation’. That assessment follows, in the view of some
         commentators, from the legal fiction in Paragraph 4(4) of the KStG and, in that of others, from Paragraph 14 of the 1977 Tax
         Code (Abgabenordnung 1977), as applicable in 1995 (‘the AO’).
      
      14      Paragraph 14 of the AO stated that ‘commercial exploitation is a permanent activity carried on independently, which allows
         profits or other economic advantages to be made and which is outside the framework of property management. The intention to
         make a profit is not necessary. As a rule, property management exists where property is exploited, for example where capital
         assets are invested and produce interest or a property is let or leased.’
      
       The dispute in the main proceedings and the questions referred for a preliminary ruling
      15      On 20 March 1995, Salix, a property letting company, concluded a ‘property leasing agreement’ with the Industrie- und Handelskammer
         Offenbach (Chamber of Industry and Commerce, Offenbach) (‘the IHK’), a body governed by public law. By that agreement, it
         undertook to lease to the IHK, for a term of 27 years, an office building to be constructed with an underground car park.
      
      16      That year, Salix completed the building and leased it to the IHK. The latter allocated part of the offices for its own use
         and sublet the rest of the offices on a long-term basis to third parties that were liable to turnover tax. The IHK also reserved
         some of the spaces in the underground car park for its own use, sublet some on a long-term basis to the lessees of the offices
         and made the rest of the spaces available on a short-term basis for consideration to external customers.
      
      17      In order to be able to deduct the input VAT paid in connection with the construction of the building and relating to the part
         of the building sublet by the IHK, Salix waived, pursuant to Paragraph 9(1) of the UStG, the exemption from turnover tax in
         respect of its letting transactions under Paragraph 4(12)(a) of the UStG. It considered that that waiver would entitle it
         to the deduction, since it let the building to another trader, the IHK, for the purposes of its business, which, in turn,
         used it in part for transactions giving rise to the right to deduct input tax.
      
      18      However, in a tax inspection of Salix, the tax auditor refused that deduction for the part of the property sublet on a long-term
         basis on the ground that, in the context of that subletting, the IHK did not act as a ‘trader’ within the meaning of Paragraph
         9(1) of the UStG.
      
      19      In that regard, the tax auditor stated that it followed from the first sentence of Paragraph 2(3) of the UStG that legal persons
         governed by public law could act as a trader only in the context of a ‘commercial operation’, as defined in Paragraph 1(1)(6)
         and Paragraph 4 of the KStG.
      
      20      According to the tax auditor, only short-term letting could be considered to be an activity carried out in the context of
         a ‘commercial operation’ within the meaning of those provisions, as long-term letting, being mere ‘property management’, does
         not come within that activity.
      
      21      Consequently, on 20 April 2001 the Finanzamt issued an amended notice of VAT assessment for 1995 refusing the deduction of
         the input VAT paid by Salix in connection with the construction of the building and relating to the part of the property sublet
         on a long-term basis by the IHK.
      
      22      The financial authorities responsible for the tax assessment of the IHK did not, however, share that view. They affirmed both
         that the IHK was a trader with respect to the entirety of its subletting activities and that its waiver of tax exemption of
         those activities was lawful.
      
      23      Following the dismissal of its appeal against the amended notice of tax assessment, Salix brought proceedings before the Finanzgericht
         Düsseldorf (Finance Court, Düsseldorf).
      
      24      The Finanzgericht Düsseldorf upheld the action brought by Salix. Whilst holding that the IHK had not carried on its long-term
         subletting transactions as a trader for the purposes of German tax law, the Finanzgericht Düsseldorf concluded that the IHK
         should nevertheless be considered to have acted, in that regard, as a taxable person and, therefore, as a ‘trader’, in accordance
         with an interpretation of the domestic law in conformity with the second and fourth subparagraphs of Article 4(5) of the Sixth
         Directive.
      
      25      The Finanzgericht Düsseldorf was of the opinion that, by depriving the IHK of the possibility to opt for treatment as a taxable
         person and, consequently, to deduct input VAT, the refusal to recognise it as a trader would place it in a disadvantageous
         position compared to its private competitors on the relevant markets. That could create ‘significant distortions of competition’
         that the second subparagraph of Article 4(5) of the Sixth Directive seeks to avoid.
      
      26      Having brought an appeal before the Bundesfinanzhof, the Finanzamt claims that the judgment of the Finanzgericht Düsseldorf
         should be set aside and that Salix’s action be dismissed. In support of its appeal, the Finanzamt claims that it is apparent
         from the case-law of the Court that the concept of ‘significant distortions of competition’ aims exclusively to protect the
         private sector, that is to say taxable private undertakings, against competition from non-taxable bodies governed by public
         law. Consequently, an application of that provision in favour, also, of bodies governed by public law would run counter to
         the objective of that provision.
      
      27      First, the Bundesfinanzhof tends towards the view that the Member States may rely on the option, under the fourth subparagraph
         of Article 4(5) of the Sixth Directive, to treat activities of bodies governed by public law which are exempt under Article
         13 or Article 28 of that directive as activities of public authorities only if express legal provision is made to that effect.
      
      28      In that regard, it is apparent from the order for reference that no express legal provision has been adopted in Germany concerning
         the treatment as taxable persons of bodies governed by public law carrying on activities of letting and leasing of immovable
         property. In the main proceedings, the treatment as taxable persons of those bodies where they carry on such transactions
         depends solely on the interpretation of the concept of ‘property management’. However, that concept does not appear in the
         relevant legislation, that is to say neither in Paragraph 2(3) of the UStG, nor in Paragraph 1(1)(6) of the KStG, nor in Paragraph
         4 of the KStG, nor in a statutory authorisation conferred on the authorities by those provisions.
      
      29      Second, the Bundesfinanzhof is uncertain whether the application of the fourth subparagraph of Article 4(5) of the Sixth Directive
         is precluded in the main proceedings, due to the fact that IHK itself, rather than one of its private competitors, could suffer
         significant distortions of competition within the meaning of the second subparagraph of that provision, if its long-term subletting
         transactions were treated as non-taxable.
      
      30      The Bundesfinanzhof considers that, although the main objective of the second subparagraph of Article 4(5) of the Sixth Directive
         is to protect the private sector against the untaxed activities of bodies governed by public law, that would not, however,
         preclude those bodies from being able also to benefit from the competition exception provided for by that provision. In that
         regard, the Bundesfinanzhof points out that there is no restriction to that competition exception in the wording of that second
         subparagraph, the relevant factor being the occurrence of significant distortions of competition, no matter who is the victim
         of them. However, the Bundesfinanzhof considers that both of the two conflicting interpretations could find support in the
         case-law of the Court.
      
      31      In those circumstances, the Bundesfinanzhof decided to stay the proceedings and to refer the following questions to the Court
         for a preliminary ruling:
      
      ‘1.      May the Member States “treat” activities of States, regional and local government authorities and other bodies governed by
         public law which are exempt from tax under Article 13 of the Sixth … Directive … as activities in which they engage as public
         authorities within the meaning of the fourth subparagraph of Article 4(5) of the Sixth … Directive … only where the Member
         States make express legal provision to that effect?
      
      2.      Can “significant distortions of competition” within the meaning of the fourth subparagraph in conjunction with the second
         subparagraph of Article 4(5) of the Sixth … Directive … exist only where treatment of a body governed by public law as a non-taxable
         person would lead to significant distortions of competition to the detriment of competing private taxable persons or also
         where treatment of a body governed by public law as a non-taxable person would lead to significant distortions of competition
         to its detriment?’
      
       The questions referred for a preliminary ruling
       The first question
      32      By its first question, the Bundesfinanzhof asks whether the Member States may rely on the option, under the fourth subparagraph
         of Article 4(5) of the Sixth Directive, to consider the activities of bodies governed by public law which are exempt from
         tax under Article 13 or Article 28 of that directive as ‘activities engaged in as public authorities’ only where an express
         legal provision is adopted to that effect.
      
       Observations submitted to the Court
      33      Salix claims that it is apparent from the case-law of the Court that, in order to rely on the option under the fourth subparagraph
         of Article 4(5) of the Sixth Directive, the Member States must adopt legal provisions referring expressly to that option.
         The Member States are obliged, when transposing Community directives, to choose binding legislative provisions under domestic
         law in order to establish a clear legal framework, without ambiguity and clearly recognisable for the economic operators.
         It adds that those provisions could, nevertheless, include the delegation to the authorities of implementing powers.
      
      34      The German Government considers that the transposition of the fourth subparagraph of Article 4(5) of the Sixth Directive requires
         the adoption of a legal provision, but that it need not necessarily be express. With regard to the transposition of the option
         provided for by that provision, it suffices that the legislature’s intention can be clearly deduced from the legal provisions
         applicable by means of recognised methods of judicial interpretation. However, contrary to the information provided by the
         referring court, legal provisions were adopted for the transposition of that provision.
      
      35      Ireland submits that it follows from the settled case-law of the Court that the Member States, when transposing a directive
         into their domestic law, must achieve the objectives of that directive whilst being free to choose the appropriate form and
         method to attain that result. In the main proceedings, Ireland is of the view that the German rules, clearly distinguishing
         between property management and commercial transactions, provide a sufficiently certain legal basis for the application of
         the fourth subparagraph of Article 4(5) of the Sixth Directive, such that the absence of express provisions is irrelevant.
      
      36      The Commission of the European Communities is of the view that compliance with the general principles of Community law requires
         that the transposition of Community directives be effected by means of clear and formal rules of domestic law which have direct
         effect vis-à-vis the citizens, are officially published and are not subject to amendment at the will of the authorities. Consequently,
         the Member States must lay down provisions of a legislative or regulatory nature. In the main proceedings, an express and
         precisely defined provision is all the more necessary since at issue is the determination of the scope of application of an
         exception to the principle that all persons carrying on, independently, one of the economic activities referred to in Article
         4(2) of the Sixth Directive are liable to tax.
      
       Findings of the Court
      37      First of all, it is apparent from the first subparagraph of Article 13B(b) of the Sixth Directive that the letting of premises
         and sites for parking vehicles is not included amongst the exempted activities. Consequently, such an activity cannot be treated
         under the fourth subparagraph of Article 4(5) of the Sixth Directive as an activity engaged in as a public authority within
         the meaning of the first subparagraph of that provision, if it does not in itself satisfy that condition (see, to that effect,
         Case C-446/98 Fazenda Pública [2000] ECR I-11435, paragraph 44).
      
      38      However, the concept of ‘letting of immovable property’, which is the subject of the exemption laid down in Article 13B(b)
         of the Sixth Directive, necessarily also encompasses, in addition to the letting of the property which is the principal subject
         of the transaction, the letting of all property which is accessory to it. Thus, the letting of premises and sites for parking
         vehicles cannot be excluded from the exemption where the letting thereof is closely linked to the letting of immovable property
         to be used for another purpose, so that the two lettings constitute a single economic transaction (Case 173/88 Henriksen [1989] ECR 2763, paragraphs 14 and 15).
      
      39      In the main proceedings, it would, where relevant, be for the referring court to determine, taking account of all the relevant
         facts, whether the subletting on a long-term basis, by the IHK, of some of the underground premises and sites for parking
         vehicles to long-term lessees of the offices in the same building constitutes a single economic transaction for the purposes
         of the case-law mentioned in paragraph 38 above. If that were not the case, the subletting by the IHK of those parking premises
         and sites could not, in any event, be treated, under the fourth subparagraph of Article 4(5) of the Sixth Directive, in the
         same way as an activity in which it engages as a public authority, within the meaning of the first subparagraph of that provision.
      
      40      As regards the question whether the Member States can rely on the option provided for by the fourth subparagraph of Article
         4(5) of the Sixth Directive only if they have previously adopted an express legal provision to that effect, it should be pointed
         out that, according to the settled case-law of the Court, the transposition of a directive into domestic law does not necessarily
         require that its provisions be incorporated formally and verbatim in express, specific legislation; a general legal context
         may be adequate for the purpose provided that it does indeed guarantee the full application of the directive in a sufficiently
         clear and precise manner (Case C-131/88 Commission v Germany [1991] ECR I-825, paragraph 6; Case C-49/00 Commission v Italy [2001] ECR I-8575, paragraph 21; and Case C-410/03 Commission v Italy [2005] ECR I-3507, paragraph 60).
      
      41      It is particularly important, so as to conform with the requirement of legal certainty, that, where that directive is intended
         to create rights for individuals, the persons concerned can ascertain the full extent of their rights and rely on them, if
         necessary, before the national courts (see Case Commission v Germany, paragraph 6; Case C‑49/00 Commission v Italy, paragraphs 21 and 22; and Case C‑410/03 Commission v Italy, paragraph 60).
      
      42      Each Member State is bound to implement the provisions of directives in a manner that fully meets the requirements of clarity
         and certainty in legal situations imposed by the Community legislature, in the interests of the persons concerned established
         in the Member States. To that end, the provisions of a directive must be implemented with unquestionable legal certainty and
         with the requisite specificity, precision and clarity (Case C-354/99 Commission v Ireland [2001] ECR I-7657, paragraph 27 and the case-law cited).
      
      43      In particular, mere administrative practices, which by their nature are alterable at will by the authorities and are not given
         the appropriate publicity, cannot be regarded as constituting the proper fulfilment of obligations under the EC Treaty (see
         Case C-334/94 Commission v France [1996] ECR I-1307, paragraph 30, and Case C-197/96 Commission v France [1997] ECR I-1489, paragraph 14).
      
      44      While it is for the referring court to assess whether the conditions of transposition, set out in paragraphs 40 to 43 of the
         present judgment, have been fulfilled in the main proceedings, the Court may nevertheless, in order to give the national court
         a useful answer, provide it with all the guidance that it deems necessary (see, in particular, Case C-49/07 MOTOE [2008] ECR I-0000, paragraph 30, and Case C‑414/07 Magoora [2008] ECR I-0000, paragraph 33).
      
      45      In the present case, it is apparent from the order for reference that, under German tax law, the possibility for the IHK to
         opt for liability to tax depends solely on the question whether the letting of properties by bodies governed by public law
         is treated as being a business activity performed in the context of a commercial operation or as coming within simple property
         management.
      
      46      In that regard, it is apparent from the order for reference, as has been pointed out in paragraph 28 of this judgment, that
         the decisive concept of property management does not appear in the relevant legislation, that is to say neither in the UStG,
         nor in the KStG, nor in a statutory authorisation conferred on the authorities by their provisions.
      
      47      To the extent that the German Government states that Paragraph 14 of the AO provides for the concept of property management
         and distinguishes it from business activities, it is however necessary to point out that it is apparent from the order for
         reference that situations such as that in the main proceedings do not fall directly within the scope of application of Paragraph
         14 of the AO.
      
      48      Indeed, the referring court stated, first, that there is no distinction between property management and business activities
         in the relevant legislation. Second, it expressly stated that, to the extent that that distinction is nevertheless considered
         to apply to the area of corporation tax, that finding follows only from a deduction based, for some commentators, on Paragraph
         14 of the AO, and, for others, on Paragraph 4(4) of the KStG.
      
      49      Finally, it is apparent from the order for reference that, unlike the Finanzamt, the tax authority with jurisdiction in respect
         of IHK’s application for deduction of input VAT considered that letting on a long-term basis is also a business activity ultimately
         giving rise to the right of deduction. There are thus differing administrative practices.
      
      50      It is also apparent from the order for reference that no express legal provision has been adopted in Germany concerning the
         treatment as taxable persons of bodies governed by public law carrying on the leasing and letting of immovable property.
      
      51      In that connection, it must be pointed out that the fourth subparagraph of Article 4(5) of the Sixth Directive provides that
         the Member States have the option, and not the obligation, to consider the activities of bodies governed by public law exempted
         under Article 13 or Article 28 of the Sixth Directive as activities which they engage in as public authorities. Consequently,
         the transposition of that provision into domestic law is not obligatory.
      
      52      It follows that, in order to use the option provided for by that provision, the Member States are required to make a choice
         to rely on it.
      
      53      It must also be observed that that option permits the Member States to rely, for those activities, on the derogation, provided
         for in the first subparagraph of Article 4(5) of the Sixth Directive, from the general rule set out in Article 2(1) and Article
         4(1) and (2) of that directive, according to which any economic activity is, in principle, subject to VAT.
      
      54      However, since the fourth subparagraph of Article 4(5) of the Sixth Directive provides for a derogation from one of the general
         rules laid down by that directive, that provision must be strictly construed.
      
      55      Accordingly, it must be held that, in order to rely on the option provided for in the fourth subparagraph of Article 4(5)
         of the Sixth Directive, the Member States must make a specific choice to that effect. They must therefore provide that the
         specified activities of the bodies governed by public law which are exempt under Article 13 or Article 28 of the Sixth Directive
         are considered to be activities which they engage in as public authorities.
      
      56      It should be pointed out that the Member States may choose the legislative technique which they regard as the most appropriate.
         Thus they may, for example, merely incorporate into national law the form of words used in the Sixth Directive or an equivalent
         expression or they may draw up a list of activities of bodies governed by public law exempted under Article 13 or Article
         28 of the Sixth Directive which are considered to be activities of the public authority (see, to that effect, Joined Cases
         231/87 and 129/88 Comune di Carpaneto Piacentino and Others [1989] ECR 3233, paragraph 18).
      
      57      An executive authority may be authorised by a legal provision to specify the activities of bodies governed by public law exempted
         under Article 13 or Article 28 of the Sixth Directive which are considered to be activities of public authorities, provided
         that its decisions of application have an unquestionable binding force, comply with the requirements that they be specific,
         precise and clear so as to guarantee legal certainty and may be reviewed by the national courts (see, by analogy, Fazenda Pública, paragraph 35).
      
      58      In light of the foregoing, the answer to the first question is that the Member States must lay down an express provision in
         order to be able to rely on the option provided for in the fourth subparagraph of Article 4(5) of the Sixth Directive, according
         to which specific activities of bodies governed by public law that are exempt under Article 13 or Article 28 of that directive
         are considered as activities of public authorities.
      
       The second question
      59      By its second question, the Bundesfinanzhof asks, in essence, whether the second subparagraph of Article 4(5) of the Sixth
         Directive must be interpreted as meaning that bodies governed by public law must be considered taxable persons in respect
         of activities or transactions in which they engage as public authorities, not only where their treatment as non-taxable persons
         under the first or fourth subparagraphs of that provision would lead to significant distortions of competition to the detriment
         of their private competitors, but also where it would lead to such distortions to their own detriment.
      
       Observations submitted to the Court
      60      Salix, the German Government and the Commission observe that the wording of the second subparagraph of Article 4(5) of the
         Sixth Directive refers without distinction to all ‘significant distortions of competition’, no matter who is the victim of
         them. However, the treatment of those bodies as non-taxable persons, which excludes them from the right to deduct input VAT,
         could also lead to distortions of competition to the detriment of the non-taxable person. Since competition is distorted,
         whether that be to the advantage of the bodies governed by public law or that of their private competitors, it should be held
         that the principle of fiscal neutrality, the expression in the area of VAT of the principle of equal treatment, is infringed.
         Such an interpretation would be compatible with the protection of competition per se, without regard to the particular characteristics of the relevant individual operator.
      
      61      By contrast, Ireland observes that, even if the wording of the second subparagraph of Article 4(5) of the Sixth Directive
         does not further define the concept of ‘significant distortions of competition’, Article 4(5) seeks to exclude bodies governed
         by public law from the scope of the Sixth Directive. It was never the intention of the Community legislature to permit bodies
         governed by public law themselves to invoke that exception in order to obtain taxable status for their activities. Furthermore,
         such an interpretation would deprive the discretion granted to the Member States by the fourth subparagraph of that provision
         of its substance and would contradict the objective of the second subparagraph of that provision, which is, in accordance
         with the case-law of the Court, to protect private competitors from the activity of bodies governed by public law.
      
       Findings of the Court
      62      As a preliminary point, it should be noted that, under the first subparagraph of Article 4(5) of the Sixth Directive, bodies
         governed by public law are not considered liable for VAT in respect of the activities or transactions of an economic nature
         in which they engage as public authorities, and that, under the fourth subparagraph of that provision, Member States may consider
         activities of those bodies that are exempt under Article 13 or Article 28 of that directive as activities of public authorities.
      
      63      However, even where those bodies carry out such activities as public authorities, they must be considered taxable persons,
         in accordance with the second subparagraph of Article 4(5), where their treatment as non-taxable persons would lead to significant
         distortions of competition.
      
      64      It is, therefore, for the referring court to ascertain, as a preliminary point, whether the letting activity of the IHK constitutes
         an activity engaged in by a body governed by public law acting as a public authority within the meaning of the first or fourth
         subparagraphs of Article 4(5) of the Sixth Directive. It is only if such is the case that the second subparagraph of Article
         4(5) is applicable (see, to that effect, Fazenda Pública, paragraph 43, and Case C-288/07 Isle of Wight Council and Others [2008] ECR I‑0000, paragraphs 30 to 32).
      
      65      First, it should be recalled that, under the second subparagraph of Article 4(5) of the Sixth Directive, bodies governed by
         public law must be considered, when they engage in activities or transactions as public authorities, to be taxable persons
         in respect of those activities or transactions ‘where treatment as non-taxable persons would lead to significant distortions
         of competition’.
      
      66      Accordingly, the wording of the second subparagraph of Article 4(5) of the Sixth Directive does not specify the persons it
         seeks to protect from those significant distortions of competition caused by the treatment as non-taxable persons of bodies
         governed by public law.
      
      67      Second, it should be recalled that, by providing for a derogation from treatment as non-taxable persons for bodies governed
         by public law in respect of the activities or transactions in which they engage as public authorities, the second subparagraph
         of Article 4(5) of the Sixth Directive aims to restore the general rule set out in Articles 2(1) and 4(1) and (2) of that
         directive, according to which any activity of an economic nature is, in principle, to be subject to VAT (see Isle of Wight Council andOthers, paragraph 38).
      
      68      Consequently, the second subparagraph of Article 4(5) of the Sixth Directive cannot be construed narrowly (see Isle of Wight Council and Others, paragraph 60).
      
      69      Third, with regard to the objectives of the second subparagraph of Article 4(5) of the Sixth Directive, referred to in particular
         by Ireland, there is nothing to suggest that that provision seeks to ensure that bodies governed by public law suffer the
         consequences of significant distortions of competition that could be caused by their treatment as non-taxable persons under
         the first and fourth subparagraphs thereof. 
      
      70      Fourth, it should be recalled that the right of deduction provided for in Article 17 et seq. of the Sixth Directive is an
         integral part of the VAT scheme and in principle may not be limited. The right to deduct is exercisable immediately in respect
         of all the taxes charged on transactions relating to inputs (see, in particular, Case C-62/93 BP Supergas [1995] ECR I‑1883, paragraph 18; Joined Cases C-110/98 to C-147/98 Gabalfrisa and Others [2000] ECR I-1577, paragraph 43; and Joined Cases C-439/04 and C-440/04 Kittel and Recolta Recycling [2006] ECR I-6161, paragraph 47).
      
      71      The deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all
         his economic activities. The common system of VAT consequently ensures neutrality of taxation of all economic activities,
         whatever their purpose or results, provided that they are themselves subject in principle to VAT (see, in particular, Case
         C-408/98 Abbey National [2001] ECR I-1361, paragraph 24; Case C-25/03 HE [2005] ECR I-3123, paragraph 70; and Kittel and Recolta Recycling, paragraph 48).
      
      72      It follows that the right to deduct is, in principle, applicable to the entire chain of supply of goods and services performed
         by taxable persons acting as such for the purpose of the economic activities of other taxable persons (see Joined Cases C‑354/03,
         C-355/03 and C-484/03 Optigen and Others [2006] ECR I‑483, paragraph 52, and Kittel and Recolta Recycling, paragraph 45).
      
      73      However, it cannot be ruled out that the treatment as a non-taxable person of a body governed by public law carrying on certain
         activities and transactions which precludes that the right to deduct VAT could affect the supply chain of goods and services
         to the detriment of taxable persons operating in the private sector.
      
      74      In the main proceedings, as was pointed out in paragraphs 17 to 21 of this judgment, the treatment of the IHK as a non-taxable
         person prevented Salix, a legal person governed by private law, from benefiting from the right to deduct input VAT.
      
      75      It follows from the foregoing that the second subparagraph of Article 4(5) of the Sixth Directive covers also distortions
         of competition to the detriment of bodies governed by public law.
      
      76      In those circumstances, the answer to the second question is that the second subparagraph of Article 4(5) of the Sixth Directive
         must be interpreted as meaning that bodies governed by public law are to be considered taxable persons in respect of activities
         or transactions in which they engage as public authorities not only where their treatment as non-taxable persons under the
         first or fourth subparagraphs of that provision would lead to significant distortions of competition to the detriment of their
         private competitors, but also where it would lead to such distortions to their own detriment.
      
       Costs
      77      Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court,
         the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs
         of those parties, are not recoverable.
      
      On those grounds, the Court (Third Chamber) hereby rules:
      1.      The Member States must lay down an express provision in order to be able to rely on the option provided for in the fourth
            subparagraph of Article 4(5) of 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, according to which
            specific activities of bodies governed by public law that are exempt under Article 13 or Article 28 of that directive are
            considered as activities of public authorities.
      2.      The second subparagraph of Article 4(5) of Sixth Directive 77/388 must be interpreted as meaning that bodies governed by public
            law are to be considered taxable persons in respect of activities or transactions in which they engage as public authorities
            not only where their treatment as non-taxable persons under the first or fourth subparagraphs of that provision would lead
            to significant distortions of competition to the detriment of their private competitors, but also where it would lead to such
            distortions to their own detriment.
      [Signatures]
      * Language of the case: German.