Ampafrance SA v Directeur des services fiscaux de Maine-et-Loire (C-177/99) and Sanofi Synthelabo v Directeur des services fiscaux du Val-de-Marne (C-181/99).
Date: 2000-09-19
5 Article 17(6) of the Sixth Directive contains a freezing (or standstill) clause, which provides for the retention of national exclusions from the right to deduct VAT which were applicable before the Sixth Directive entered into force, that is before 1 January 1979. That provision is worded as follows:
Before a period of four years at the latest has elapsed from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of value added tax. Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.
Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive comes into force.
9 The provisions excluding the right to deduct VAT charged on certain goods and services which were applicable before 1 January 1979, the date on which the Sixth Directive entered into force, were set out in Articles 7 and 11 of Decree No 67-604 of 27 July 1967 (JORF, 28 July 1967, p. 7541, hereinafter Decree No 67-604).
34 It should be pointed out that, according to the fundamental principle which underlies the VAT system, and which follows from Article 2 of the First and Sixth Directives, VAT applies to each transaction by way of production or distribution after deduction has been made of the VAT which has been levied directly on transactions relating to inputs (Case C-62/93 BP Soupergaz v Greek State [1995] ECR I-1883, paragraph 16). It is settled case-law 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. That right must be exercised immediately in respect of all the taxes charged on transactions relating to inputs (see, in particular, the judgment in BP Soupergaz, cited above, paragraph 18, and Joined Cases C-110/98 to C-147/98 Gabalfrisa and Others v AEAT [2000] ECR I-1577, paragraph 43). Any limitation on the right of deduction affects the level of the tax burden and must be applied in a similar manner in all the Member States. Consequently, derogations are permitted only in the cases expressly provided for in the directive (judgment in BP Soupergaz, cited above, paragraph 18).
42 It should be pointed out at the outset that since the principle of proportionality has been consistently recognised by the Court as forming part of the general principles of Community law (see, in particular, Case 265/87 Schräder v Hauptzollamt Gronau [1989] ECR 2237, paragraph 21), the validity of acts of the Community institutions may be reviewed on the basis of that general principle of law (Case C-27/95 Bakers of Nailsea [1997] ECR I-1847, paragraph 17).
43 In order to do so, it is necessary to consider whether the provisions of Decision 89/487 are necessary and appropriate for the attainment of the specific objective which they pursue and whether they have the least possible effect on the objectives and principles of the Sixth Directive.
56 As regards the argument that the exclusion of the right of deduction is justified by the fact that it is impossible to control effectively the business or other nature of the expenditure at issue and that it is therefore designed to combat tax evasion and avoidance, it should be pointed out that it may prove difficult to distinguish between the private element and the business element of expenditure such as that relating to accommodation, food, hospitality and entertainment, even where it is incurred in connection with the normal operation of the undertaking. It cannot be disputed that there may be a risk of tax evasion or avoidance justifying special measures of the type which Member States may be authorised to introduce pursuant to Article 27 of the Sixth Directive. However, that risk does not exist where it follows from objective evidence that the expenditure was incurred for strictly business purposes.
60 Second, it should be observed that in order for a Community measure concerning the VAT system to be compatible with the principle of proportionality, the provisions which it embodies must be necessary for the attainment of the specific objective which it pursues and have the least possible effect on the objectives and principles of the Sixth Directive.
61 A measure which consists in excluding as a matter of principle all expenditure in respect of accommodation, hospitality, food and entertainment from the right to deduct VAT, which is a fundamental principle of the VAT system established by the Sixth Directive, although appropriate means less detrimental to that principle than the exclusion of the right of deduction in the case of certain expenditure can be contemplated or already exist in the national legal order, does not appear to be necessary in order to combat tax evasion and avoidance.
62 Although it is not for the Court to comment on the appropriateness of other means of combating tax evasion and avoidance which might be contemplated, including limiting authorised deductions to a fixed amount or introducing a control modelled on that employed in connection with income tax or corporation tax, it must be pointed out that, as Community law now stands, national legislation which excludes from the right to deduct VAT expenditure in respect of accommodation, hospitality, food and entertainment without making any provision for the taxable person to demonstrate the absence of tax evasion or avoidance in order to take advantage of the right of deduction is not a means proportionate to the objective of combating tax evasion and avoidance and has a disproportionate effect on the objectives and principles of the Sixth Directive.
66 It should be observed that it is only exceptionally that the Court may, in application of the general principle of legal certainty inherent in the Community legal order, be moved to restrict for any person concerned the opportunity of relying upon the provisions thus interpreted with a view to calling in question legal relationships established in good faith. As the Court has consistently held, such a restriction may be allowed only in the actual judgment ruling upon the interpretation sought. In determining whether or not to limit the temporal effect of a judgment it is necessary to bear in mind that although the practical consequences of any judicial decision must be weighed carefully, the Court cannot go so far as to diminish the objectivity of the law and compromise its future application on the ground of the possible repercussions which might result, as regards the past, from a judicial decision (judgments in Case 24/86 Blaizot v University of Liège and Others [1988] ECR 379, paragraphs 28 and 30, and Case C-163/90 Administration des Douanes et Droits Indirects v Legros and Others [1992] ECR I-4625, paragraph 30).
67 As regards the present references for a preliminary ruling, it should be observed that this is the first time that the principle of legitimate expectations has been invoked by a Government in support of a request to limit the temporal effects of a judgment. That principle, which is the corollary of the principle of legal certainty (judgments in Case C-63/93 Duff and Others v Minister for Agriculture and Food, Ireland, and the Attorney General [1996] ECR I-569, paragraph 20, and Case C-107/97 Rombi and Arkopharma [2000] ECR I-3367, paragraph 66), is generally relied upon by individuals (traders) in a situation where they have legitimate expectations created by the public authorities (see, for example, the judgment in Duff and Others, cited above, paragraph 22, and the case-law cited there). As the Advocate General observes in point 83 of his Opinion, the principle of legitimate expectations cannot be relied on by a Government in order to avoid the consequences of a decision of the Court declaring a Community provision invalid, since it would jeopardise the possibility for individuals to be protected against conduct of the public authorities based on unlawful rules.
68 In any event, even though in the present case the Commission and the Council endorsed the French authorities' request to derogate from the rules of Article 17 of the Sixth Directive for reasons associated with the fight against tax evasion and avoidance, the case-law of the Court clearly requires that secondary law must comply with the general principles of law, and in particular the principle of proportionality (see, in that regard, the judgments in Case 114/76 Bela-Mühle v Grows-Farm [1977] ECR 1211, paragraphs 5 to 7, and Case C-361/96 Grandes Sources d'Eaux Minérales Françaises v Bundesamt für Finanzen [1998] ECR I-3495, paragraph 30). In particular, the Court has already held that a measure based on Article 27 of the Sixth Directive and designed to prevent tax evasion or avoidance could not derogate from a principle laid down in the Sixth Directive, except within the limits strictly necessary for attaining that objective (see, in that regard, Case 324/82 Commission v Belgium [1984] ECR 1861, paragraph 29), and was therefore required to observe the principle of proportionality.