Court of Justice of the European Communities (including Court of First Instance Decisions)

Legal background

Community legislation

'On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.

'In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person.

'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.

'1. The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the amount of tax due at the final consumption stage.

2. A Member State wishing to introduce the measures referred to in paragraph 1 shall inform the Commission of them and shall provide the Commission with all relevant information.

3. The Commission shall inform the other Member States of the proposed measures within one month.

4. The Council's decision shall be deemed to have been adopted if, within two months of the other Member States being informed as laid down in the previous paragraph, neither the Commission nor any Member State has requested that the matter be raised by the Council.

5. ....

National legislation

'The tax on expenditure incurred in order to provide accommodation or lodging for the management and staff of undertakings shall not be deductible.

However, that exclusion shall not apply to the tax on expenditure incurred in order to provide free accommodation at the place of work for employees responsible for the security or supervision of an industrial or commercial complex or a works site.

'The tax on expenditure incurred in order to satisfy the personal needs of the management and staff of undertakings, and in particular the tax on the cost of providing hospitality, food and entertainment, shall not be deductible.

However, that exclusion shall not apply to expenditure in respect of:

Goods which constitute fixed assets and are specially allocated at the actual places of work for the collective satisfaction of the needs of the staff;

Work clothes or protective clothing which an undertaking provides for its staff.

'Tax on goods or services used by persons not employed by the undertaking, or by the management or staff of the undertaking, such as accommodation or lodging, the cost of hospitality, food or entertainment or any expenditure directly or indirectly connected with travel or residence shall not be deductible.

However, that exclusion shall not apply to work clothes or protective clothing, premises and equipment provided to staff at the workplace, or to accommodation provided free of charge for security or supervisory staff at the workplace.

'That special measure is intended to prevent tax evasion and avoidance resulting from the failure to charge [VAT] on expenditure in respect of what by nature constitutes final consumption. The risks of tax evasion and avoidance are significant, since undertakings will be tempted to make supplies, in the form of benefits in kind or gifts, in circumstances which constitute final consumption without charging [VAT], and not to distinguish properly between expenditure incurred for the benefit of management and staff and that incurred for the benefit of persons other than employees.

However, the exclusion would not apply to:

- expenditure incurred by a taxable person in respect of the supply by him of accommodation, meals, food or drink for consideration;

- expenditure on accommodation provided free of charge for security, caretaking or supervisory staff on works, sites or business premises;

- expenditure incurred by a taxable person in carrying out his contractual or legal responsibility towards his customers (for example: expenditure incurred by an airline on accommodation and food for passengers owing to a prolonged stop at an airport).

'... by letter, receipt of which was recorded by the Commission on 17 April 1989, the French Republic requested authorisation to introduce a special measure derogating from the second subparagraph of Article 17(6) of the Sixth Directive;

... certain supplies made to a taxable person concerning in particular his representational expenditure are excluded in France from the right of deduction, in accordance with Article 17(6), second subparagraph, of the Sixth Directive; ... this measure is aimed at excluding other expenditure in respect of accommodation, restaurants, hospitality and entertainment from the right to deduct VAT previously charged, in order to prevent tax evasion and avoidance; ... the exclusion does not concern expenditure incurred by a taxable person in respect of the supply by him of accommodation, meals, food or drink for consideration, expenditure on accommodation provided free of charge for security, caretaking or supervisory staff on works, sites or business premises, or expenditure incurred by a taxable person in carrying out his contractual or legal responsibility towards his customers.

'1. By way of derogation from the second subparagraph of Article 17(6) of the Sixth Directive, the French Republic is hereby authorised, on a temporary basis and until such time as Community rules determining the treatment of expenditure referred to in the first subparagraph of that paragraph come into force, to exclude expenditure in respect of accommodation, food, hospitality and entertainment from the right to deduct value added tax previously charged.

2. The exclusion referred to in paragraph 1 shall not apply to:

- expenditure incurred by a taxable person in respect of the supply by him of accommodation, meals, food or drink for consideration,

- expenditure on accommodation provided free of charge for security caretaking or supervisory staff on works, sites or business premises,

- expenditure incurred by a taxable person in carrying out his contractual or legal responsibility towards customers.

'... As a temporary measure, the value added tax charged on expenditure in respect of accommodation, food, hospitality and entertainment shall be excluded from the right of deduction.

However, that exclusion shall not apply to:

- expenditure incurred by a taxable person in respect of the supply by him of accommodation, meals, food or drink for consideration;

- expenditure on accommodation provided free of charge for security caretaking or supervisory staff on works, sites or business premises;

- expenditure incurred by a taxable person in carrying out his contractual or legal responsibility towards customers.

The main proceedings

Case C-177/99

Case C-181/99

The questions referred to the Court

'Since the resolution of this dispute depends on whether the provisions of the decision of the Council of the European Communities of 28 July 1989 authorising the French Government to derogate from the standstill introduced by Sixth Directive 77/388/EEC of the Council of the European Communities of 17 May 1977 and to extend to third parties exclusions of expenditure on accommodation, food, hospitality and entertainment from the right to deduct tax is compatible, first, with the objectives of the Sixth Directive and in particular Article 27 thereof, which states that the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion and avoidance, and, second, with the principle of proportionality between the tax objective pursued and the means employed; only the answer to that question, the solution of which is not obvious, will enable an assessment to be made of whether the pleas in this application are well founded.

'It is common ground that the temporary authorisation to exclude from the right to deduct tax charged on all expenditure in respect of accommodation, food, hospitality and entertainment borne by a taxable person was not based on a finding of systematic tax evasion or avoidance resulting from such expenditure, but on the presumption arising from the mixed nature of the expenditure which makes it easily open to such abuse. Although the administrative authorities none the less cite as justification for that measure of systematic exclusion [of the right to deduct the VAT charged on such expenditure] the difficulty of putting in place an effective system for verifying the business nature of that expenditure, the deduction of the expenditure from profits subject to corporation tax or income tax, which is allowed under Article 39(5)(b) and(f) of the General Tax Code, is subject to such verification, by checks on the documents or on the premises, by the tax authorities subject to review by the court with jurisdiction in tax matters, the arrangements for which can clearly be transposed, notwithstanding the difference in the conditions of declaration and collection of the taxes in question. The objective pursued could also be achieved by a fixed limit on the amount of deductions authorised. Thus, having regard to the fact that that measure of derogation, which is general and absolute, precludes deduction of the tax charged on expenditure whose strictly business nature is not challenged, there is serious doubt as to whether the derogation granted to the French Republic by [Decision 89/487] is strictly necessary and proportionate to the objectives pursued.

'stay proceedings in the application for a refund of the taxes at issue pending a preliminary ruling by the Court of Justice of the European Communities on the validity, in the light of the principle of proportionality, of ... Decision [89/487].

The questions for the Court

The scope of Decision 89/487

The validity of Decision 89/487

Limitation of the temporal effects of the judgment

Costs