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OPINION OF ADVOCATE GENERAL

Sharpston

delivered on 23 October 2008 (1)

Case C-371/07

Danfoss A/S

AstraZeneca A/S

v

Skatteministeriet

(Reference for a preliminary ruling from the Vestre Landsret (Denmark))

(VAT – Deduction of input tax – Application for private use – Canteen meals provided free of charge to business contacts and staff in the context of business meetings – Exclusions from the right to deduct)





1.        There may be no such thing as a free lunch, but can there be a VAT-free lunch? This reference for a preliminary ruling from the Vestre Landsret (Western Regional Court), Denmark, concerns the VAT treatment of company canteen meals provided to business contacts and staff in the context of business meetings. Is such provision, when free of charge, to be regarded as an application for private use on which output VAT is chargeable if input VAT is deductible? And, against the background of a rather complex sequence of national administrative and legislative measures, could Denmark legitimately retain an exclusion of such transactions from the right to deduct input tax on the basis of a standstill clause in the Community legislation?


 Relevant Community VAT legislation

2.        The cases before the national court concern meals provided between 1994 and 2001, so that the relevant Community legislation is the Sixth VAT Directive. (2)

3.         Under Article 2(1) of that directive, (3) any ‘supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such’ is subject to VAT. Pursuant to Article 11A(1)(a), (4) the taxable amount is, as a general rule, essentially the whole amount of the consideration received.

4.        However, pursuant to Article 17(2), (5) the taxable person is entitled to deduct from the tax which he is liable to pay (‘output tax’) any VAT due or paid in respect of goods or services supplied or to be supplied to him by another taxable person (‘input tax’), in so far as those goods or services are used for the purposes of his taxable (output) transactions. Under Article 17(1), (6) the right to deduct input tax arises at the time when the deductible tax becomes chargeable (that is to say, essentially, when the inputs are acquired rather than when the outputs are supplied).

5.        Exceptions to the general rule include those provided for in Articles 5(6) and 6(2), which govern application for private use – where the taxable person uses goods or services (in respect of which he is entitled to deduct input tax) himself or provides them free of charge. Such supplies are treated as supplies for consideration, and are thus subject to VAT, even though no consideration is actually received.

6.        In respect of goods, Article 5(6) (7) provides:

‘The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration. However, applications for the giving of samples or the making of gifts of small value for the purposes of the taxable person’s business shall not be so treated.’

7.        With regard to services, Article 6(2) (8) provides:

‘The following shall be treated as supplies of services for consideration:

(a)      the use of goods forming part of the assets of a business for the private use of the taxable person or of his staff or more generally for purposes other than those of his business where the value added tax on such goods is wholly or partly deductible;

(b)      supplies of services carried out free of charge by the taxable person for his own private use or that of his staff or more generally for purposes other than those of his business.

…’

8.        In the absence of any actual consideration, the taxable amount in such cases is calculated in accordance with Article 11A(1)(b) and (c) (9) as being:

‘(b)      in respect of supplies referred to in Article 5(6) …, the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined as the time of supply;

(c)      in respect of supplies referred to in Article 6(2), the full cost to the taxable person of providing the services’.

9.        A further provision relevant to the present case is Article 17(6), (10) which concerns exclusions from the right to deduct. It reads 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.’

10.      Despite the first subparagraph of that provision, the Council has never decided what types of expenditure should not be eligible for deduction of input tax. Consequently, the standstill clause in the second subparagraph remains valid.


 Relevant Danish VAT rules

11.      On the basis of the information given by the national court in the order for reference, the sequence of relevant legislation, administrative measures and judicial decisions in Denmark may be summarised as follows.

12.      VAT was introduced in Denmark by the 1967 Momslov (VAT Law). Under that law, supplies of goods were subject to VAT as a general rule, whereas supplies of services were subject to VAT only where specifically provided for. Supplies of services by company canteens were not subject to VAT, so related input tax could not be deducted. (11) In addition, Paragraph 16(3)(a) and (e) of the Law specified that there was no entitlement to deduction in respect of expenditure for food for staff or for hospitality. The latter exclusions were based on the reasoning that food purchased by a company to provide meals for its staff should be regarded as being for end-use (if the company paid a higher salary instead of paying staff in kind, the staff would have to pay tax on the purchase), and that deduction of input tax relating to hospitality and gifts, including business lunches, could give rise to abuse. Paragraph 11(1) provided that the taxable amount included goods and taxable supplies used for the purposes referred to in Paragraph 16(3).

13.      The 1967 Law was amended with effect from 1 October 1978, with a view to implementing the Sixth VAT Directive. In particular, supplies of services were made subject to VAT as a general rule. That, it was stated at the time, would mean that a number of previously VAT-exempt supplies effected by VAT-registered businesses would become taxable, in particular ‘certain supplies effected by … canteens (serving of food and drinks)’. The limitations on deductions for food and hospitality in Paragraph 16(3) of the Momslov, and the rules on applications in Paragraph 11(1), remained unchanged.

14.      Company-run canteens’ sales of food and drinks thus became subject to VAT. In November 1978, however, the Momsnævn (VAT Board, the highest administrative authority in VAT matters) decided that the taxable amount for such sales was to be no less than the cost price of the raw materials plus the cost of wages for preparation, sale and administration. Consequently, supplies of food and drink free of charge were deemed to be made for consideration, calculated at that cost price.

15.      In 1983 that decision was embodied in specific guidelines for company canteens, which further specified that input tax on goods, materials and any taxable labour services acquired in connection with preparation, sale and administration was to be fully deductible.

16.      The Momslov was again amended in 1994. The limitation on deductions in Paragraph 16(3) remained, substantively unchanged, in Paragraph 42(1)(1) and (5) of the 1994 law. At the same time, the new Paragraph 5(2) and (3) provided:

‘2.   Applications of goods and services for the purposes referred to in Paragraph 42(1) and (2) shall be treated as supplies for consideration, provided that there is full or partial entitlement to deduct in the event of purchase, production, etc., of the goods or services in question.

3.     Applications of services for private use of the business’s owner or staff or otherwise for purposes other than those of the business shall be treated as supplies for consideration.’

17.      Because of the way canteens’ VAT liability was calculated, those rules were not applied to the provision of meals free of charge for business contacts and staff in connection with meetings. Since such meals were already regarded as being provided for consideration (fictionally assessed at cost price), the goods or services concerned could not be regarded as having been applied for private use, which presupposes that no consideration is given. (12)

18.      The current wording of Paragraph 42(1)(5) of the Momslov was introduced on 14 June 1995. It clarified the scope of the exclusion from the right to deduction of input tax as covering ‘entertainment, restaurants, hospitality and gifts’, and allowed businesses to deduct 25% of input VAT on expenditure for hotel and restaurant services, in so far as it was strictly business expenditure. According to the explanatory memorandum, that was not intended to cover expenditure for business lunches in the business’s own canteen.

19.      In 1999, the Landsskatteret (National Tax Tribunal) found the administrative practice by which company-run canteens’ VAT on sales was to be assessed according to a calculated cost price to be contrary to the Sixth Directive. It held that output VAT was to be charged on the actual consideration received and that the application rule in Paragraph 5 of the Momslov could not be applied to sales at a price below the calculated cost price. In addition, it held that tea and coffee were not ‘hospitality’ when served to business contacts during meetings but constituted ‘food’ when served to staff, so that they were covered by the limitation on deductions and could be taxed under the application rule in Paragraph 5(2) of the Momslov.


 Facts, procedure and questions

20.      The national court’s questions are posed in the context of two cases involving, respectively, the companies Danfoss A/S (‘Danfoss’) and AstraZeneca A/S (‘AstraZeneca’).

21.      Danfoss, which produces and markets industrial automation systems, has staff canteens at various branches. Those canteens are also used to provide meals free of charge to both business contacts and staff in the context of business meetings on company premises.

22.      AstraZeneca distributes pharmaceutical products in Denmark. As part of its activities, it invites health professionals to information meetings concerning various pathologies and the positioning and use of products in relation to them. Depending on the duration of the meetings, participants (only business contacts) may be offered meals free of charge in the company’s canteen, which is otherwise used for the sale of food and beverages to staff.

23.      For Danfoss the case relates to the period from 1 October 1996 to 30 September 2001, and for AstraZeneca to the period from 1 October 1994 to 31 December 1999.

24.      Following the Landsskatteret’s ruling in 1999 (see point 19 above), both companies applied for a refund of the output VAT which had been assessed on the basis of the calculated cost price of the meals provided free of charge to business contacts and staff.

25.      The tax authority refused to repay the sums claimed (DKK 5 920 848.19 for Danfoss and DKK 825 275.00 for AstraZeneca), on the ground that the provision of meals and refreshments to staff is ‘food’ covered by the deduction exclusion in Paragraph 42(1)(1) of the Momslov, and the provision of meals to business contacts is ‘hospitality’ covered by Paragraph 42(1)(5). However, since the companies had deducted in full the VAT on their canteen inputs in accordance with the administrative practice previously applied, VAT should be assessed on application for private use in accordance with Paragraph 5(2) of the Momslov.

26.      The claim consequently went to the Landsskatteret, and the proceedings now before the Vestre Landsret challenge decisions of that body holding that, in addition to tea and coffee, other drinks and food served in meetings at the company constitute ‘hospitality’ when served to business contacts and ‘food’ when served to staff, and that it was therefore justifiable to calculate VAT on the basis of application for private purposes.

27.      The companies submit that the deduction exclusions for ‘hospitality’ and ‘food’ under the Momslov are contrary to the Sixth Directive. The tax authority, while accepting that the exclusions are not covered by the first subparagraph of Article 17(6) of the Sixth Directive, maintains that they arose from the Momslov as applied before the entry into force of that directive, and can therefore be lawfully retained pursuant to the standstill clause in the second subparagraph of Article 17(6). The companies disagree, on the ground that the exclusions were not applied to the provision of meals in question until the administrative practice described was overruled in 1999, before which there had been full VAT deduction in accordance with that practice.

28.      In any event, the companies also claim, taxation as applications for private use under Paragraph 5(2) of the Momslov is contrary to Article 6(2) of the Sixth Directive, since under that provision such taxation is only permissible if the application is for purposes unrelated to the company’s business, which is not the case with the provision of the meals in question.

29.      In those circumstances, the national court seeks a preliminary ruling on the following questions:

‘(1)      Is the second subparagraph of Article 17(6) of the Sixth VAT Directive to be interpreted in such a way that it is a condition for the refusal by a Member State of a right to deduct value added tax on supplies used for the provision of meals to business contacts and staff in a company’s canteen in connection with meetings that there was, prior to the entry into force of the directive, authority under national legislation for the deduction refusal in question and that this authority was applied in practice by the tax authorities in such a way that the right to deduct value added tax on these supplies was refused?

(2)      Does it have any significance in answering Question 1 that company-operated canteens were not subject to VAT under the national VAT rules in force in the Member State in question before the implementation of the Sixth VAT Directive in 1978, that the national deduction exclusion rules were not changed by the implementation of the Sixth VAT Directive, and that it was exclusively as a result of the fact that company-operated canteens became subject to VAT on the implementation of the Sixth VAT Directive that the deduction exclusion rule could become relevant to that type of business?

(3)      Is an exclusion from the right to deduct “retained” within the meaning of the second subparagraph of Article 17(6) of the Sixth VAT Directive if, from the implementation of the Sixth VAT Directive in 1978 until 1999, as a result of an administrative practice such as that described in the main proceedings there was a right to deduct VAT on the expenditure in question?

(4)      Are subparagraphs (a) and (b) of Article 6(2) of the Sixth VAT Directive to be interpreted in such a way that the provision covers the supply of meals by the company free of charge to business contacts in its own canteen in connection with meetings at the company?

(5)      Are subparagraphs (a) and (b) of Article 6(2) of the Sixth VAT Directive to be interpreted in such a way that the provision covers the supply of meals by the company free of charge to its staff in its own canteen in connection with meetings at the company?’

30.      Written observations have been submitted by Danfoss, Denmark and the Commission, all of which, together with AstraZeneca, also presented oral argument at the hearing.


 Assessment

31.      The national court’s first three questions all concern aspects of the overarching issue: ‘In the circumstances set out, can Denmark legitimately refuse deduction of input VAT on canteen meals provided free of charge to business contacts and/or staff in connection with business meetings?’ The central concern is therefore whether input tax can be deducted.

32.      Similarly, the last two questions are aspects of the major issue: ‘Does the provision of such meals constitute an application for private use?’ The central concern is therefore whether output tax can be charged.

33.      I find it more helpful to address those two main concerns as such (and in reverse order), while paying due attention to the terms of the specific questions posed. First, however, it seems to me essential to consider the framework in which the provisions concerned operate, which will cast some light on the relationship between them.


 The framework in which the provisions operate

34.      A fundamental principle underlying the VAT system is that the burden of the tax is borne at, and only at, the stage of final consumption. Until then, although tax is levied at each stage, the deduction system means that its effect is neutral for all the taxable persons involved in the production and distribution process. Each of them merely passes on to the tax authority the amounts of VAT which he has charged his customers, after deduction of the amounts he has paid to his suppliers. (13)

35.      In so far, therefore, as VAT is paid to suppliers on goods or services acquired by a taxable person for the purposes of his taxable output supplies, the right to deduct is fundamental and general. To levy output tax without allowing deduction of input tax would amount to imposing a cumulative multistage tax, the replacement of which is one of the essential aims of the common VAT system. (14) Any departure from that basic system of taxation and deduction must, as a derogation from a general principle, be interpreted strictly. (15)

36.      No doubt the most frequent example is that of output supplies exempt from VAT pursuant to Article 13 of the Sixth Directive. No VAT on inputs acquired for the purposes of such supplies can be deducted. That is quite simply because there is no output tax, even potential, theoretical or virtual, (16) from which input tax can be deducted. It was for just such a reason – absence of output tax – that it was not possible to deduct input tax on supplies acquired by company canteens in Denmark before the services they provided became subject to VAT in 1978.

37.      However, the present case concerns two other types of divergence from the general rule – application for private use (Articles 5(6) and 6(2)) and expenditure on luxuries and the like (Article 17(6)). The two sets of provisions use different mechanisms to deal with different situations. In my view, they are mutually exclusive.

38.      First, as regards the types of situation covered, Articles 5(6) and 6(2) concern applications of business goods or services by a taxable person ‘generally … for purposes other than those of his business’ whereas Article 17(6) concerns expenditure ‘which is not strictly business expenditure, such as that on luxuries, amusements or entertainment’. It is true that the wording is not so unequivocal as to leave no scope for disagreement, and that the second subparagraph of Article 17(6) is not explicitly subject to the same limitation of scope as the first subparagraph. Nevertheless, it is not unreasonable to construe Articles 5(6) and 6(2) as intended to cover purposes which are wholly extraneous to those of the taxable business and Article 17(6) as intended to cover purposes which, although serving the interests of the business, are not strictly business purposes. It may also be noted that Articles 5(6) and 6(2) concentrate on the actual use to which goods or services are put, whereas Article 17(6) allows certain categories of expenditure to be deemed to be made for certain purposes.

39.      An illustration may make the distinction clearer. If a building contractor instructs some of his employees to build an extension to his own home, using materials from his stockyard, that is objectively a use of business resources for purposes quite unrelated to those of the business, and is covered by Articles 5(6) and 6(2). If the same contractor treats a potential client to a gastronomic meal with fine wines and rare liqueurs in a three-star restaurant, that may well generate considerable turnover and thus serve his business purposes, but an element of pleasure is also deemed to be present and it falls within the scope of Article 17(6) – whether any contracts are in fact signed or not, and even whether either party actually enjoys the meal or not.

40.      Second, and crucially, there is a clear distinction between the mechanisms used. Article 17(6) allows exclusion from the right to deduct input tax, whereas Articles 5(6) and 6(2) provide for the levying of output taxwhen input tax is deductible.

41.      In the latter regard, it is true that deductibility of input tax is an explicit condition only for the application of Article 5(6) or 6(2)(a), but I consider that it is necessarily implicit in Article 6(2)(b). It is not explicit there, essentially, because that provision refers principally to services supplied by staff, and staff costs (in the form of salary) do not bear VAT. However, where a complex supply falls to be classified as a supply of services, (17) the goods used will normally have been subject to VAT. And the taxable amount, for all supplies referred to in Article 6(2), is ‘the full cost to the taxable person of providing those services’ (Article 11A(1)(c)). To include in that taxable amount the cost of supplies on which input tax was not deductible would run counter not only to the scheme of Articles 5(6) and 6(2) as a whole but also to the fundamental principle of neutrality of VAT for taxable persons.

42.      Consequently, taxation under Article 5(6) or 6(2) of the Sixth Directive is conditional not only on classifying the supply as an application for private use, but also on the deductibility of any VAT borne by cost components. It is therefore incompatible with any exclusion from the right to deduct which may be authorised by Article 17(6).

43.      To return to my example of the building contractor’s home extension, input tax will already have been deducted on the materials used, but output tax must now be levied on that same cost, together with the cost of providing the labour, in order to place the contractor in (almost) the same position, vis-à-vis VAT, as a private individual obtaining the same goods and services. When he treats his potential customer to a lavish meal, however, he will simply not be entitled to deduct the VAT on the restaurant bill. Again, he is in the position of a private consumer, but by a different mechanism. In both cases, VAT is definitively levied at the stage of final consumption. However, it would be clearly unacceptable if the contractor were refused the right to deduct VAT, whether on his building materials or on his restaurant bill, only to be required to pay VAT again on the same amount as an application for private use.

44.      I consider it essential to stress the mutually exclusive nature of the two mechanisms because there are certain indications that the Danish authorities consider that they may be applied concurrently. Whether that is authorised by the Danish legislation is a matter for the national court, but it seems to me that it would be totally incompatible with the Sixth Directive.

45.      Finally, I would point out that not all expenditure which is partly, but not wholly, for business purposes will necessarily be excluded from the right to deduct. Only expenditure on luxuries, amusements or entertainment, or categories provided for under national law when the Sixth Directive came into force, (18) may be excluded. Other expenditure serving purposes which are partly, but not wholly, those of the taxable business will entail the right to deduct and must be categorised, depending on its preponderant features, as being attributable either to an application for private purposes or to the taxable outputs of the business. (19) It is to that aspect which I now turn, in the context of the national court’s fourth and fifth questions.


 Questions 4 and 5: does the provision of canteen meals free of charge to business contacts and/or staff in connection with business meetings constitute an application for private use?

46.      A preliminary point is that, although the national court refers only to Article 6(2), and thus presupposes that the provision of canteen meals is a supply of services rather than of goods, such a classification will depend in each case on all the circumstances in which the transaction takes place. If the predominant feature of the supply is simply the provision of food (at the hearing, for example, counsel for Danfoss indicated that at least some of the meals in issue comprised sandwiches prepared in the canteen and served in the meeting room), (20) Article 5(6) will be relevant. And it may be possible to distinguish between Article 6(2)(a) and (b) depending on whether such services as are provided comprise essentially the making available of goods (such as microwave ovens) or rather ‘true’ services such as the serving of food. Such matters are of course for the national court to decide on the facts, in so far as they may be relevant to the legal analysis – I mention them here only for the sake of completeness.

47.      Fortunately, the distinction is of limited practical relevance as regards this aspect of the case. As the Commission has pointed out, the interpretation requested concerns specifically the concepts of ‘private use of the taxable person or of his staff’ and ‘purposes other than those of his business’, which appear in all three provisions. (21) In what follows, therefore, I shall consider Articles 5(6) and 6(2) as a whole.

48.      As the Court noted in Hotel Scandic Gåsabäck, (22) those provisions treat certain transactions for which no consideration is actually received by the taxable person as supplies of goods or services effected for consideration. Their purpose is to ensure equal treatment as between a taxable person who applies goods or services for his own private use or for that of his staff and a final consumer who acquires goods or services of the same type. Articles 5(6) and 6(2)(a) prevent a taxable person who has been able to deduct VAT on the purchase of goods for his business from escaping payment of that tax when he applies those goods for his own private use or that of his staff, thereby enjoying an unjustified advantage over the ordinary consumer who buys goods and pays VAT on them. Similarly, Article 6(2)(b) prevents a taxable person or members of his staff from obtaining, free of tax, services provided by the taxable person for which a private individual would have had to pay VAT.

49.      However, the Court has accepted that expenditure on accommodation, food, hospitality and entertainment is capable of serving strictly business purposes and that, where that can be demonstrated to be the case and where it is a cost component of taxable output supplies, it should give rise to a right to deduct input tax in accordance with the principle of neutrality of VAT. (23)

50.      In that light, the cost of providing a canteen lunch, or a tray of sandwiches, free of charge to business contacts during a short break (or even without a break) in the course of a day-long business meeting seems likely to be incurred for business purposes – to avoid the discomfort of hunger or the inconvenience and wasted time entailed by seeking other possibilities for lunch, with a resulting loss of efficiency for the meeting – whereas the cost of offering a free lunch, as an alternative to a meal at the participant’s own expense in a nearby restaurant, once the meeting is over, is less likely to be so. The former should therefore give rise to a right to deduct input tax as a cost component of the business’s taxable output supplies, whereas the latter should, if input tax is deducted, be treated as an application for private use in accordance with Article 6(2) of the Sixth Directive.

51.      The Court has also accepted that services provided free of charge for employees by an employer may in some circumstances fall outwith Article 6(2) of the Sixth Directive, even though in principle they serve the employees’ private purposes, rather than those of the employer’s business. That was in the context of transport in a company vehicle between the employees’ homes and place of work. The Court pointed out that if, for example, the place of work varies and other suitable means of transport are difficult to find, the employer may find it necessary to provide transport himself. In that case the transport is not provided ‘for purposes other than those of his business’. (24)

52.      Analogous reasoning may apply to other supplies of goods or services. Most employees are free to choose (within limits) the clothing they wear to work. Its purchase serves their private purposes. If their employer provides them with clothes acquired in the context of his business, that will be an application for private purposes of goods forming part of his business assets, and should be treated for VAT purposes in accordance with Article 5(6) of the Sixth Directive. However, some employees must, by the nature of their job, wear specific uniform or protective clothing. Where the employer provides clothing of that kind, he does so for the purposes of the business.

53.      Likewise, it is not normally part of an employer’s business activity to provide employees with free food and drink. Food and drink normally serve the employees’ private purposes. In eating and drinking, they will usually be able to exercise a degree of choice comparable to that as to the clothing they wear or the means by which they travel between home and work. Again, however, there may be circumstances in which the requirements of the job deprive the employee of that choice and indeed oblige him, for example, to eat a set meal, which may not be entirely to his taste, at his place of work in the company of business contacts with whom he is meeting or other employees with whom he is undergoing training. In such circumstances, the employee will be complying with specific requirements which serve principally the purposes of his employer’s business rather than his own private purposes. The provision of the meal free of charge by the employer should therefore not be treated as an application for private use.

54.      It is, of course, for the national court to determine in the main proceedings whether, both as regards business contacts and as regards staff, the provision of canteen meals, or trays of sandwiches, free of charge does in fact serve principally the purposes of the business or the private purposes of the recipients but, as the Commission points out, the indications in the order for reference all suggest that the former is the case.


 Questions 1 to 3: Can Denmark legitimately apply an exclusion from the right to deduct on the basis of the second subparagraph of Article 17(6) of the Sixth Directive?

55.      The second subparagraph of Article 17(6) of the Sixth Directive allows Member States to retain any exclusions from the right to deduct ‘provided for under their national laws when this Directive comes into force’.

56.      The essential issue addressed by the national court’s first three questions is thus whether the exclusion from the right to deduct was (a) provided for under Denmark’s national law (b) when the Sixth Directive came into force. Logically, however, those two points should be considered in reverse order.


 When did the Sixth Directive come into force?

57.      The phrase ‘when this Directive comes into force’ is unexpectedly imprecise. Unlike more recent directives, the Sixth VAT Directive does not contain a provision specifying the date of its entry into force. Nor can a date of ‘entry into force’ be determined with absolute certainty from the wording of the relevant Treaty provision. At the time, the second paragraph of Article 191 of the EEC Treaty stated: ‘Directives and decisions shall be notified to those to whom they are addressed and shall take effect upon such notification’. But is the date on which a directive takes effect the same as that on which it enters into force? Article 254 EC now specifies a date on which two categories of directive ‘enter into force’ but for other directives maintains the rule that they ‘take effect’ upon notification. That might indicate an intended semantic distinction, although the Treaty provides no clue as to what that distinction could be.

58.      Two factors suggest that the relevant date is in fact the deadline for implementation by the Member States (originally 1 January 1978, then, for all Member States except Belgium and the United Kingdom, 1 January 1979 (25)), rather than any distinct date of entry into force.

59.      First, the Court has itself stated that the date in question was, at least as regards France (which, like Denmark, benefited from the extension of the time-limit for implementation), 1 January 1979. (26)

60.      Second, the second paragraph of Article 176 of Directive 2006/112, the recast version of the second paragraph of Article 17(6) of the Sixth Directive, replaces the phrase ‘when this Directive comes into force’ by ‘at 1 January 1979 or, in the case of Member States which acceded to the Community after that date, on the date of their accession’.

61.      However, I find that approach difficult to accept.

62.      It follows from the very nature of a directive that the date of its entry into force will not normally be the same as the date by which it has to be implemented. A directive is binding, as to the result to be achieved, upon each Member State to which it is addressed, but leaves to the national authorities the choice of form and methods. In the overwhelming majority of cases, including that of the Sixth Directive, that requires Member States to review and adapt their legislation and administrative practices. (27) Because such a process takes time, it necessarily implies a period during which the Member State is under an obligation to move towards the result in question but is not yet required to have achieved it. Member States cannot be under the obligation to move towards the result – and not away from it (28) – until, by virtue of a starting date (whether it is called taking effect or entering into force), the directive has begun to apply. And it is only once the deadline for implementation has passed that the Member State can be taxed with having failed to fulfil its obligation to have achieved the result.  (29)

63.      It cannot be disputed that, as from the date on which it was notified to them, the Member States were under an obligation to take steps to achieve in their legislation and administrative practice the harmonisation required by the Sixth Directive. Nor could they, from that point on, take any measures liable seriously to compromise the result prescribed. (30) In the light of the fundamental principle of deductibility of input tax enshrined in Article 17(2), and of the limited derogation (which must, as such, be interpreted strictly) in the standstill clause in Article 17(6), it seems to me that the introduction of any new exclusion from the right to deduct, after the date on which the directive took effect but before the deadline for full implementation, was necessarily precluded.

64.      Consequently, I am of the view that the date on which the Sixth Directive came into force, for the purposes of Article 17(6), was that on which it was notified to the Member States, namely 23 May 1977, (31) and that only exclusions from the right to deduct provided for on that date can be covered by the standstill clause.

65.      That implies, I am aware, that the Court was mistaken in stating that the relevant date for France was 1 January 1979, and that Directive 2006/112 in fact introduced an amendment to the standstill clause.

66.      In the former regard, I note that, in the judgments of which I am aware, (32) the Court has not given any reason for stating the operative date to be 1 January 1979. Nor, moreover, does it appear that the outcome or analysis could have been affected in any of those cases if it had taken the operative date to be 23 May 1977. However, since the present case concerns, to some degree, changes made to the Danish VAT legislation between those two dates, it may be appropriate now for the Court to articulate its position more clearly – whether my analysis is correct or not.

67.      As for the second point, it seems to me that the maintenance of an exclusion which was not covered by the standstill clause, and was thus unlawful, until 2006 could not be rendered lawful retrospectively by an amendment entering into force in 2007. And, if it had been unlawful between 1977 and 2006, I do not think that lawful retention (from a period before 1977) could be said to have commenced in 2007. However, if my analysis is correct, a clarifying amendment to Article 176 of Directive 2006/112 may be called for.


 Was the national exclusion from deduction provided for at the relevant time, so that it can be regarded as having been retained thereafter?

68.      First of all, it is important to bear in mind that the second subparagraph of Article 17(6) of the Sixth Directive authorises Member States only to retain existing exclusions from the right to deduct, and that it is a provision which must be interpreted strictly. (33)

69.      The concept of retaining an existing exclusion implies maintaining whatever was the status quo at the material date. However, the Court has stated that where, after the entry into force of the Sixth Directive, a Member State amends its legislation so as to reduce the scope of existing exclusions, thereby bringing it more closely into line with the general regime of deduction set out in Article 17(2) of the Sixth Directive, that legislation must be considered to be covered by the derogation in the second subparagraph of Article 17(6). (34) By contrast, if an amendment has the effect of increasing the extent of existing exclusions, thus diverging from the objective of the directive, it is not covered by the second subparagraph of Article 17(6) and thus breaches Article 17(2). (35)

70.      From those two propositions, read together in the light of the need for a strict interpretation of the second subparagraph of Article 17(6), it follows that, once a Member State has reduced the scope of an exclusion which was in existence when the Sixth Directive came into force, it may not thereafter revert to the status quo ante. In other words, having once brought its legislation more closely into line with the general deduction regime of the directive, it may not then move back, further away from that regime.

71.      If, as I consider, the Sixth Directive came into force on 23 May 1977, the question arises whether the exclusion which it is now sought to apply was truly in existence on that date, given that – according to the account of national law given by the referring court and uncontested by the parties – on the one hand, it was explicitly provided for in the legislation but that, on the other hand, with regard to the types of supply in issue, it was incapable of producing any effect, since those supplies bore no VAT from which deduction could have been possible.

72.      However, it seems to me unnecessary to resolve that conundrum for the purposes of the present case. It would have been necessary if the reference for a preliminary ruling had concerned supplies which were exempt when the Sixth Directive came into force but were later simply made taxable, so that the hitherto dormant exclusion from exemption became active. But it does not. It concerns supplies which became taxable after 23 May 1977 but in respect of which a right to deduct then immediately became exercisable.

73.      Consequently, either the exclusion did not exist when the Sixth Directive came into force, because it was devoid of any possible effect, and could not be introduced thereafter; or it did exist at that time but company canteen meals were subsequently excluded from its scope by the administrative practice introduced in November 1978, in which case it could not later be broadened to include such supplies again.

74.      In that regard, the fact that deduction was authorised by an administrative practice rather than a legislative provision is not significant. As the Court has noted, ‘the term “national laws” within the meaning of the second subparagraph of Article 17(6) of the Sixth Directive does not refer only to legislative acts in the strict sense, but also to administrative measures and practices of the public authorities of the Member State concerned’. (36)

75.      If, contrary to my view, the Sixth Directive is considered to have come into force on 1 January 1979, the matter is even simpler. On that date, the provision of canteen meals already gave rise, by virtue of the administrative practice mentioned, to a full entitlement to deduct input tax. Pursuant to the second subparagraph of Article 17(6) of the Sixth Directive, no subsequent exclusion from that right could be introduced in national law.

 Conclusion

76.      In the light of all the above considerations, I am of the opinion that the Court should rule to the following effect in answer to the Vestre Landsret’s questions:

–        In answer to question 4: Articles 5(6) and/or 6(2) of the Sixth VAT Directive cover the supply of meals by a taxable business free of charge to business contacts in its own canteen when the meal serves principally purposes other than those of the business. However, such supplies are also capable of serving principally the purposes of the business, in particular if they are intended to enhance the efficiency of meetings in which the recipients are participating, and in such cases are not covered by those provisions.

–        In answer to question 5: Those same provisions cover the supply of meals by a taxable business free of charge to an employee in its own canteen when the meal serves principally the employee’s own private purposes. However, such supplies are also capable of serving principally the purposes of his employer’s business, in particular if the employee is required by the constraints of the business to forgo any choice he would otherwise have enjoyed and to consume such a meal, and in such cases are not covered by those provisions.

–        However, supplies may not in any event be treated as effected for consideration under Articles 5(6) and/or 6(2) of the Sixth VAT Directive unless any VAT paid on goods or services forming part of the taxable amount in the event of such treatment is wholly or partly deductible.

–        In answer to questions 1 to 3: Under the second subparagraph of Article 17(6) of the Sixth VAT Directive, a Member State may not ‘retain’ an exclusion from deduction with respect to expenditure for which a right to deduct was recognised by administrative practice on the date when the directive came into force, even if the exclusion was provided for in theory under national legislation. Nor may a Member State, having once allowed deduction of VAT on certain expenditure after the directive came into force, subsequently revert to excluding the same expenditure from the right to deduct, even if such an exclusion had been provided for when the directive came into force.

1 – Original language: English.

2 – 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, amended on numerous occasions; hereinafter ‘the Sixth Directive’). It has been replaced, with effect from 1 January 2007, by Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1), the aim of which is to present the applicable provisions clearly and rationally in a recast structure and wording without, in principle, bringing about material changes in the existing legislation (see recital 3 in the preamble). Cross-references below to provisions of Directive 2006/112 do not therefore imply identity of wording with the equivalent provisions of the Sixth Directive.

3 – See Article 2(1)(a) and (c) of Directive 2006/112.

4 – See Article 73 of Directive 2006/112.

5 – See Article 168(a) of Directive 2006/112.

6 – See Article 167 of Directive 2006/112.

7 – See Article 16 of Directive 2006/112.

8 – See Article 26 of Directive 2006/112.

9 – See Articles 74 and 75 of Directive 2006/112.

10 – See Article 176 of Directive 2006/112.

11 – Danfoss, one of the applicants in the main proceedings, has stated without contradiction that supplies of services by restaurants were subject to VAT, so that input tax could in principle be deducted.

12 – I note, however, that the VAT treatment accorded to such supplies seems to have been rigorously identical in practice to that to which they would have been subjected if they had been regarded as applications for private use.

13 – The principle is set out as such in Article 2 of First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (OJ, English Special Edition 1967, p. 14) and now in Article 1(2) of Directive 2006/112.

14 – See the eighth recital in the preamble to the First Directive, cited in footnote 13.

15 – See, for example, Case C-409/99 Metropol and Stadler [2002] ECR I-81, paragraphs 58 and 59.

16 – In contrast to such situations as, for example, exports, cross-border supplies, zero-rated supplies or acquisitions for the purposes of planned taxable supplies which do not in fact materialise, all of which may give rise to a right to deduct even when there is no actual output tax from which to do so.

17 – Complex supplies of goods and services fall to be classified in accordance with their predominant elements; see, for example, Case C-41/04 Levob Verzekeringen [2005] ECR I-9433, paragraph 27.

18 – Categories not originally intended to be relevant beyond 1981 – see points 9 and 10 above, and point 62 et seq. below.

19 – If it is attributable wholly to exempt outputs, there will be no right to deduct (see point 36 above) or, if attributable in part to exempt and in part to taxable outputs, the pro rata system in Article 17(5) of the Sixth Directive will determine the deductible proportion.

20 – In Case C-231/94 Faaborg-Gelting Linien [1996] ECR I-2395, paragraphs 12 to 14, the Court distinguished between take-away food and meals ‘coupled with services designed to enhance consumption on the spot in an appropriate setting’; see also Case C-491/03 Hermann [2005] ECR I-2025, paragraphs 18 to 28.

21 – See, for an analogous situation, Case C-258/95 Fillibeck [1997] ECR I-5577, paragraph 20.

22 – Case C-412/03 [2005] ECR I-743, paragraph 23, citing Case C-20/91 De Jong [1992] ECR I-2847, paragraph 15; Case C-230/94 Enkler [1996] ECR I-4517, paragraphs 33 and 35; Fillibeck, paragraph 25; Case C-415/98 Bakcsi [2001] ECR I-1831, paragraph 42; and Joined Cases C-322/99 and C-323/99 Fischer and Brandenstein [2001] ECR I-4049, paragraph 56.

23 – See Joined Cases C-177/99 and C-181/99 Ampafrance and Sanofi [2000] ECR I-7013, especially at paragraphs 56 to 58.

24 – Fillibeck, cited in footnote 21, paragraphs 19 to 34.

25 – See Article 1 of, respectively, the Sixth Directive and Ninth Council Directive 78/583/EEC of 26 June 1978 on the harmonisation of the laws of the Member States relating to turnover taxes (OJ 1978 L 194, p. 16).

26 – See Ampafrance and Sanofi, cited in footnote 23, paragraphs 5 and 9; Case C-345/99 Commission v France [2001] ECR I-4493, paragraph 6; Case C-40/00 Commission v France [2001] ECR I-4539, paragraphs 5 and 9.

27 – A notable exception is Directive 98/34/EC of the European Parliament and of the Council of 22 June 1998 laying down a procedure for the provision of information in the field of technical standards and regulations (OJ 1998 L 204, p. 37) which specifies a date of entry into force but no deadline for implementation – since it simply laid down a notification procedure to be followed by Member States, there was in principle no need for them to adapt their domestic legislation.

28 – Case C-129/96 Inter-Environnement Wallonie [1997] ECR I-7411 and the subsequent case-law based on it.

29 – See also Sacha Prechal, Directives in EC Law, Oxford EC Law Library, 2nd edition 2004, p. 18 et seq.

30 – Inter-Environnement Wallonie, cited in footnote 28, paragraph 45.

31 – As indicated on the Commission’s EUR-Lex database.

32 – Cited in footnote 26.

33 – See point 35 and footnote 15 above.

34 – Case C-345/99 Commission v France, cited in footnote 26, paragraphs 22 to 24; Metropol and Stadler, cited in footnote 15, paragraph 45.

35 – Case C-40/00 Commission v France, cited in footnote 26, paragraphs 17 to 20; Metropol and Stadler, paragraph 46.

36 – Metropol and Stadler, cited in footnote 15, paragraph 49.