Report for the Hearing in Case C-186/89

I — Facts and written procedure

1. Factual and legal background to the main proceedings

1. On 29 September 1980 Mr van Tiem bought a building plot in a private transaction. In respect of that acquisition an amount of HFL 10677.91 was invoiced to him by way of turnover tax.

2. On the same date Mr van Tiem granted to Tiem's Electro Technisch Installatiebureau BV building rights over a part of the building plot for a period of 18 years with the possibility of extension, subject to an annual payment of HFL 3000, inclusive of turnover tax.

3. On 20 October Mr van Tiem requested the national tax authorities to exclude him with effect from 29 September 1980 from the exemption from turnover tax under Article 11 of the 1968 Wet op de Omzetbelasting, (Netherlands Law on turnover tax (Staatsblad 1968, p. 329)), in respect of the grant of the building rights over that plot.

4. Article 11 of the Wet op de Omzetbelasting, as amended by the Law of 28 December 1978 (Stbl. 1978, p. 677), is worded as follows:

5. On 18 December 1980 the tax authorities granted the request on the basis that it concerned the letting of the immovable property in question.

6. On his tax declaration for the first quarter of 1981 Mr van Tiem set off the turnover tax invoiced to him on the purchase of the plot, taking the view that by granting the building rights he was to be regarded as an undertaking within the meaning of Article 7 of the Wet op de Omzetbelasting 1968. Article 7(2) of that law, in its 1978 version, provides:

7. The tax authority cancelled that deduction by means of a turnover tax assessment in the amount of HFL 10678, that is to say the amount of the tax paid by Mr van Tiem on the purchase of the plot.

8. After his request for a review of that assessment had been refused, Mr van Tiem appealed to the Gerechtshof (District Court), Arnhem. That appeal was dismissed on the ground that he had not acted as an undertaking within the meaning of Article 7 of the 1968 Wet op de Omzetbelasting on the grant of the building rights, with the result that he was not entitled to set off the turnover tax invoiced to him on the purchase of the immovable property.

9. Mr van Tiem lodged an appeal against the Gerechtshofs judgment, arguing that when the owner of immovable property relinquishes the use thereof to another person for a specified period in return for consideration to be paid periodically, by granting to that person a right in rem to build on it, that constitutes an exploitation by the owner of his immovable property for the purpose of obtaining income therefrom on a continuing basis, in such a way that it is appropriate to regard the owner as an undertaking.

10. The Hoge Raad (Supreme Court) refers to Articles 4 and 5 of the Sixth Council Directive on VAT.

11. Article 4(1) of the Sixth Directive provides that taxable person shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity. Article 4(2) states that those economic activities comprise all activities of producers, traders and persons supplying services... . Under the terms of the last sentence of that article, the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.

12. Under the terms of Article 5(1) of the Sixth Directive supply of goods shall mean the transfer of the right to dispose of tangible property as owner. Paragraph 3 of that article provides that Member States may consider the following to be tangible property:

13. It is apparent from Article 3(2) of the 1968 Wet op de Omzetbelasting 1968, in its 1978 version, that the Netherlands legislature availed itself of that possibility. Article 3(2) of that legislation deems the following to constitute a supply of goods: the creation, transfer, alteration and abandonment of rights in rem, with the exception of mortgages and annuities, in respect of immovable property.

14. In the light of those arguments and the fact that the expression exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis is taken from the last sentence of Article 4(2) of the Sixth Directive, the Hoge Raad (Supreme Court), in the Netherlands, stayed the proceedings and referred to the Court of Justice the following questions for a preliminary ruling under Article 177 of the EEC Treaty:

2. Procedure before the Court

15. The judgment making the reference was registered at the Court Registry on 8 September 1989.

16. In accordance with Article 20 of the Protocol on the Statute of the Court of Justice of the European Communities, written observations were submitted by the Netherlands Government, represented by J. J. Heinemann, Secretary-General in the Ministry of Foreign Affairs, by the United Kingdom, represented by J. A. Gensmantel, acting as Agent, and by the Commission of the European Communities, represented by the members of its Legal Department, D. Calleja and B. J. Drijber, acting as Agents.

17. Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to assign the case to the Third Chamber, in accordance with Article 95 of the Rules of Procedure, and to open the oral procedure without any preparatory inquiry.

II — Written observations submitted to the Court

1. The first question

18. All the parties to the proceedings which submitted written observations are at one in arguing that the concept of taxable person as defined in Article 4 of the Sixth Directive must be interpreted broadly, and they consider in particular that the exploitation of immovable property by the grant of building rights falls within the sphere of economic activity as referred to in the last sentence of Article 4(2) of the Sixth Directive.

19. (a) The Netherknds Government states at the outset that its observations on the preliminary question are based on the judgments of the Court in Case 235/85 Commission w Netherlands [1987] ECR 1487 and in Case 348/87 SUFA v Staatssecretaris van Financiën [1989] ECR 1737, which were delivered some time after the appeal in cassation was lodged in the main proceedings.

20. In the opinion of the Netherlands Government the determination of the scope of the concept taxable person, as defined in Article 4 of the Sixth Directive on VAT, must be based on the following principles.

21. First it must be borne in mind that the Court's abovementioned case-law has recognized, in particular, at paragraph 6 of the judgment in Case 235/85 and at paragraph 10 of the judgment in Case 348/87, that the Sixth Directive has a very wide scope. That is also evident from the drafting and structure of Article 4 of the Sixth Directive, which includes within the scope of the concept of taxable person not only all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions, but also the exploitation of tangible property for the purpose of obtaining income therefrom on a continuing basis, as laid down in the last sentence of Article 4(2) of the Sixth Directive.

22. Moreover, the Netherlands Government considers that the interpretation of the concept of taxable person should not jeopardize one of the principal objectives of the Sixth Directive, namely that the neutrality of the tax would be ensured. That would happen if the status of taxable person were withheld from persons carrying on activities which must be assimilated to the types of exploitation of tangible property in issue.

23. Moreover, the Netherlands Government states that double charges to tax must be avoided in situations where the asset to be exploited was acquired together with payment of turnover tax. Such a double charge to tax occurs when right in rem to use a tangible asset is granted to a taxable person, and the grantor claims the status of a taxable person.

24. On that basis and having regard to objective factors, the Netherlands Government considers that where an asset or a right is being used by its owner or holder specifically in order to obtain income therefrom for a given period by means of economic transactions, it is appropriate to speak of the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis within the meaning of the last sentence of Article 4(2) of the Sixth Directive. That applies where an asset is made available to a third party against payment, on the basis that the asset is not thereby definitively removed from the control of the person making it available.

25. According to the Netherlands Government the grant to third parties, for a specified period and for consideration, of rights of user over an asset by means of the creation of a right in rem over that asset falls within that definition of the concept of exploitation. The fact that the creation of that right in rem is a once-for-all transaction is irrelevant, as is the fact that the parties agree on future remuneration at the beginning of the period in the form of a provision for redemption.

26. According to the Netherlands Government, that interpretation is corroborated by the judgment of the Court in Case 268/83 Rompelman v Minister van Financiën [1985] ECR 655, in which the Court held that the acquisition of a right to the future transfer of property rights in part of a building yet to be constructed with a view to letting such premises in due course may be regarded as an economic activity within the meaning of Article 4(1) of the Sixth Directive. It follows that the letting of immovable property in all cases constitutes an exploitation and as such is subject to tax. The Netherlands Government observes that there is no difference between the grant of the use of an asset such as the property in the present case and the letting of such property.

27. Accordingly, in the view of the Netherlands Government, the reply to the first question must be in the affirmative.

28. (b) The United Kingdom considers that the term exploitation must include all possible uses of land for the purpose mentioned in the second sentence of Article 4(2) of the Sixth Directive, that is to say in order to obtain income therefrom. That interpretation of the term exploitation in the sense of utilization, use or employment appears to it to be corroborated by the French and German linguistic versions of the provision, which use respectively the words exploitation and Nutzung.

29. In the United Kingdom's view it is clear therefrom that the term exploitation is not limited to building rights but includes inter alia also the grant of such rights over land.

30. The United Kingdom submits that, if the term exploitation were to be interpreted so as to exclude the grant of such a right in rem, distortion would occur so as to affect the neutral basis of taxation. If the tax paid on the purchase of a building plot, acquired for the purpose of deriving income therefrom by granting a right in rem over it, were not deductible, it would have the effect of increasing the total amount of tax charged, and upsetting the neutral basis of taxation.

31. In conclusion the United Kingdom considers that the first question submitted should be answered in the affirmative.

32. (c) The Commission points out that under the common system of value-added tax the concept of taxable person is directly linked to the carrying on of economic activities. Only persons carrying out transactions in the nature of economic activities have the status of taxable person, which is a condition for the exercise of the right to deduct provided for in Articles 17 et seq. of the Sixth Directive.

33. In that context, the Commission distinguishes between two aspects: on the one hand, the concept of economic activities and, on the other hand, the carrying on of economic activities on a habitual basis.

34. As regards the concept of economic activities, the Commission refers to the judgments of the Court in Commission v Netherhnds, cited above, and Rompelman v Minister van Financiën, also cited above, in which the Court emphasized that the concept of economic activities must be interpreted broadly and objectively and that preparatory activities, such as the acquisition of real estate, also fall within that concept.

35. In the light of that case-law, the Commission considers that the exploitation of real property by the grant of building rights over it constitutes an economic activity. There is an element of exploitation where the proprietor purchases the real property and grants building rights over it to another person in return for periodical remuneration. There is also the element of permanence, given that such a right is normally granted for a certain period, in this case, for a period of 18 years with a possibility of extension.

36. As regards the second aspect, namely the carrying on of an economic activity on a regular basis, the Commission first points out that that condition continues to be applicable, even if Article 4(1) of the Sixth Directive no longer expressly mentions it, unlike Article 4 of the Second VAT Directive. In that respect the Commission refers to Article 4(3) of the Sixth Directive, which permits Member States to treat as taxable persons those who carry out, on an occasional basis, a transaction relating to economic activities, an option which, according to the Commission, would be meaningless if the mandatory terms of Article 4(1) of the Sixth Directive were applicable to persons carrying on such activities.

37. The Commission considers that, in a case such as this where the economic activity is the exploitation of a tangible asset for the purpose of obtaining income therefrom on a continuing basis, the regularity of the economic activity stems from the fact that it is an activity carried on on a continuing basis, and it is clear from the very fact of its continuance that the person in question is a taxable person within the meaning of Article 4(1) of the Sixth Directive.

38. In conclusion the Commission suggests that the reply to the first question should be as follows:

2. The second question

39. The Netherlands Government and the Commission are at one in maintaining that the creation of a right in rem is to be deemed to be a supply of goods within the meaning of Article 5(1) of the Sixth Directive. The United Kingdom did not express a view on that question.

40. (a) The Netherlands Government recalls that paragraph 3(b) of Article 5 of the Sixth Directive enables Member States to deem rights in rem giving the holder thereof a right of user over immovable property to be tangible property. That option is intended to enable such activities to be termed supplies of goods within the meaning of Article 5(1) of the Sixth Directive.

41. Under Article 5(1) of the Sixth Directive the supply of goods is to mean the transfer of the right to dispose of tangible property as owner. In the case of rights in rem such as are at issue in this case, the Netherlands Government observes that both the grantor of the right over a tangible asset and the holder thereof have a right of disposition as owner. As regards the condition relating to the transfer of that right, the Netherlands Government considers a certain margin of assessment must be allowed in the interpretation of the term transfer, in view of the different concepts and definitions of property in the legislation of the Member States. Netherlands law provides that the grant of a right in rem within the meaning of Article 5(3)(b) of the Sixth Directive entails the transfer of the right to dispose of that tangible asset as an owner. The transfer condition is therefore satisfied.

42. In conclusion, the Netherlands Government suggests that the Court should reply in the affirmative to the second question.

43. (b) The Commission also refers to the Member States' right contained in Article 5(3)(b) of the Sixth Directive to regard a right in rem conferring a right of user over immovable property as tangible property.

44. It notes that the Netherlands legislature has availed itself of that right by providing in Article 3(2) of the 1968 Wet op de Omzetbelasting, in its 1978 version, that the creation of a right in rem over immovable property is to be deemed to be a supply of goods.

45. In the Commission's view, building rights fall within the concept of rights in rem under the meaning assigned to them by Netherlands law, and the holder of such rights has a power of disposition over the immovable property.

46. Consequently, the Commission suggests that the Court should reply as follows to the second question:

3. The third question

47. The Netherlands Government and the Commission are at one, finally, in maintaining that the replies to Questions 1 and 2 must be considered separately. The United Kingdom did not express a view on this question.

48. (a) According to the Netherlands Government the mere fact that a Member State avails itself of a fiscal option offered by Article 5(3) of the Sixth Directive cannot in itself alter the scope of the concept of taxable person, as defined in Article 4 of the Sixth Directive.

49. The fact that a right in rem, as in the present case, is deemed to be tangible property is relevant only in regard to the fiscal consequences on the turnover tax which stem from the classification of the transaction as a supply of goods or services. If there is a supply of tangible property within the meaning of the Sixth Directive, according to the Netherlands Government, that neither restricts nor precludes the fact that there is exploitation of tangible property for the purpose of obtaining income therefrom on a continuing basis, that is to say the taxable event mentioned in the last sentence of Article 4(2).

50. It is appropriate, the Netherlands Government considers, to regard the creation, the transfer, the alteration and the assignment of rights in rem as a supply of services within the meaning of the provisions of Article 6 of the Sixth Directive, even where the Member State concerned had not availed itself of the possibility afforded by Article 5(3)(b) of the Sixth Directive to deem tangible property to be rights in rem giving the holder thereof a right of user over immovable property. That transaction, in the Netherlands' Government's view, so closely resembles the letting of immovable property that, for the purpose of collecting turnover tax, the person who relinquishes the use of the property for consideration must also be included within the scope of the concept of taxable person, as defined in Article 4 of the Sixth Directive.

51. The Netherlands Government observes that, were the option contained in Article 5(3)(b) of the Sixth Directive to be interpreted differently, the Member States would be able to shape the scope of the turnover tax as they wished, which is scarcely desirable in the context of a system of taxation harmonized between the Member States.

52. Accordingly, in the opinion of the Netherlands Government, the reply to the third question must be in the negative.

53. (b) The Commission states that the reply to the first question would be the same, even if the reply to the second question were different, inasmuch as the Member State in question had not availed itself of the option to deem the creation of building rights to be a supply of goods.

54. The Commission suggests that the Court should reply as follows to the third question:

1 Language of the case: Dutch.