Report for the Hearing in Case C-101/91

I — Law

1. Community law

Article 2 of the Sixth Council Directive of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (77/388/EEC) states:

On 3 November 1981 the Council adopted, at the request of the Italian Government, Decision 81/890/EEC authorizing the Italian Republic to derogate temporarily from the value added tax arrangements in the context of aid to earthquake victims in southern Italy.

The decision authorized the Italian Republic, until 31 December 1981, to exempt, with refund of the tax paid at the preceding stage, certain transactions listed in the annex to the decision, corresponding to the transactions referred to in the Italian laws and decree-laws adopted in the wake of the earthquake.

By Decisions 82/424/EEC of 21 June 1982 and 84/87/EEC of 6 February 1984, the Council extended the authorization until 31 December 1983.

However, by annual decree-laws and by Law No 12 of 21 January 1988, the Italian Republic maintained the exemption until 31 December 1988.

In proceedings for declaration of a failure to fulfil an obligation under the Treaty, the Court of Justice, in a judgment of 21 February 1989, ruled as follows:

2. Italian law

By Law No 48 of 10 February 1989 the Italian Parliament prolonged the exemption until 31 December 1989.

Article 3(7) of Decree-law No 40, of 1 March 1990, subsequently extended the exemption to 31 December 1992.

That decree-law was replaced by Decree-law No 90 of 27 April 1990, Article 3(8) of which maintained the exemption.

The latter decree-law was itself converted into a law by Law No 165 of 26 June 1990, Article 3(8) of which is worded as follows:

II — Facts and procedure

By letter of 30 May 1989, the Commission drew the attention of the Italian Republic to the failure to comply with the judgment in Case 203/87, which it considered to be contrary to Article 171 of the Treaty.

The Commission established that the Italian Government had not communicated to it any provision adopted in order to bring its domestic legislation into conformity with Community law and, by letter of formal notice of 4 December 1989, it invited Italy, pursuant to Article 169 of the EEC Treaty, to communicate its observations on the Commission's view.

By telex of 5 March 1990, the Member of the Commission responsible for taxation requested the repeal of the provision in question.

By letter of 7 June 1990, Italy confirmed to the Commission that it was maintaining the exemption at issue, relying on arguments which were not sufficient to persuade the Commission to change its view.

After Italy extended the exemption arrangements by Law No 165, the Commission communicated to the Italian Republic on 2 July 1990 a reasoned opinion under Article 169 of the Treaty concluding that the Italian Republic had failed to fulfil its obligations under Article 171 of the Treaty and requesting the Member State to take the necessary measures within one month from the date of notification of the reasoned opinion.

By application lodged at the Court Registry on 27 March 1991, the Commission brought the present action.

Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry.

III — Forms of order sought by the parties

The Commission claims that the Court of Justice should:

The Italian Republic contends that the Commission's application should be dismissed.

IV — Pleas in law and arguments of the parties

1. The effects of the judgment in Case 203/87

The Commission notes that, although Article 171 does not state the period within which a judgment must be complied with, the Court has consistently held that the process of complying with a judgment must be initiated at once and must be completed as soon as possible.

The Court has also stated that by reason solely of the judgment declaring the Member State to be in default, the State concerned is required to take the necessary measures to remedy its default and may not create any impediment whatsoever.

The finding in a judgment having the force of res judicata that the Member State has failed to fulfil its obligations under Community law amounts to a prohibition having the full force of law on the competent national authorities against applying a national rule recognized as incompatible with the Treaty and an obligation on them to take all appropriate measures to enable Community law to be fully applied.

In the present case, following the judgment in Case 203/87, not only have the time-limits for compliance long since expired but the Italian Republic has adopted specific measures to extend the duration of the infringement, instead of eliminating it in accordance with the Court's judgment. Such an action on the part of a Member State is contrary to the provisions of Article 171 of the Treaty and at the same time constitutes a serious breach of the general duty to cooperate under Article 5 of the Treaty.

The Italian Republic cannot plead circumstances within its internal order for refusing to comply with a judgment of the Court nor can it invoke an alleged restriction in time of the effects of the Court's judgment in Case 203/87, as is shown by the Court's recent judgment of 8 May 1991 which rejected such an argument.

According to the Commission, compliance with a judgment declaring that a Member State is in breach of an obligation placed on it by a directive which requires it to act in a particular manner entails bringing the breach to a definite end by adopting all the necessary measures to achieve the result required of it. So long as the breach of the obligations established by the Court's judgment persists, the State has not complied with the judgment.

No break between the period taken into consideration by the Court's judgment and the period which followed thereon and still continues can justify the plea put forward by the Italian Government. Far from having expired, the effects of the judgment necessarily apply to the Italian Republic's subsequent attitude which amounts to a continuing breach of the same obligation.

The Italian Government contends that the justification for maintaining the VAT exemption until 1992 is based on the fact that reconstruction of the zones hit by the earthquake has not yet been completed, and that on the whole the delay cannot be attributed to the individuals receiving favourable treatment. Consequently, if the exemption had ceased to apply when reconstruction was still incomplete, some of the people affected would in fact have been objectively discriminated against compared with those who had been able to benefit from the favourable treatment. The reasons are therefore social policy reasons which, at least in the internal legal order, have legal significance inasmuch as they are covered by the principle of equality, a fundamental principle of the Italian constitution.

The Italian Government accepts that the VAT exemption arrangements which continued until 1992 are the same as those on which the Court of Justice ruled in the abovementioned judgment. However, it follows from the wording of the operative part of the judgment that its declaratory effects and mandatory scope are limited to the application of the VAT exemption arrangements during the period between 1 January 1984 and 31 December 1988.

Consequently, the application of the VAT exemption for a time after the period in respect of which the Court of Justice declared that the defendant had failed to fulfil its obligations under the Treaty cannot be regarded as behaviour amounting to a breach of the obligation to comply with a judgment, laid down by Article 171 of the Treaty.

In the opinion of the Italian Government, the Commission therefore cannot rely on a judicial ruling on the application of the exemption between 1 January 1989 and 31 December 1992. It can rely on the decision in Case 203/87 to obtain a ruling from the Court that there has been a failure to comply with the judgment in respect of the same period as is the subject of the present proceedings, by referring for that purpose to the principles of law set forth in the judgment itself.

Contrary to the argument put forward by the Commission, the judgment in Case 286/89 and the principles which it upholds cannot be referred to for any useful purpose in the present case, because there is a fundamental difference between the two cases as regards the nature of the obligation which has not been complied with.

Case 266/89, referred to by the Commission, concerned the failure to comply with the judgment in Case 101/84, in which it was held that there had been a failure to comply with an obligation which was continuing and not subject to a time-limit, and the operative part of the judgment declared the failure without limiting it in time. The present case, however, concerns measures adopted by the Italian Republic which contain provisions on VAT exemption for different and clearly defined periods of time.

That particular feature of the subject-matter of the proceedings is confirmed by the judgment in Case 203/87 where, in the operative part, it was considered necessary to specify the fact which gave rise to the failure to comply by referring to the period between 1 January 1984 and 31 December 1988.

2. Assessment of the tax exemption at issue with respect to Article 92(2)(b) of the Treaty

The Commission also rejects the Italian Republic's argument that the tax relief in question constitutes State aid. That argument is an unacceptable attempt to re-open a debate which has already been settled by the judgment in Case 203/87, which has the force of res judicata.

The Commission considers that any interpretation which seeks to make the present procedure under Article 171 of the Treaty into an informal appeal is in complete contradiction with the terms of the provision and with the Court's case-law on the matter.

As an alternative the Commission observes that such submissions have already been made by Italy in the abovementioned case and were completely disregarded in the judgment concluding the proceedings. The Commission considers that such an approach must be maintained a fortiori in the present case which is no longer concerned with the merits of the prior proceedings but with the implementation of a judgment of the Court.

The Italian Government contends that it is entitled to avail itself, to demonstrate the lawfulness in Community law of its action, of valid legal considerations which could not be assessed in the judgment in Case 203/87.

In that case, the Italian Government alleged that the provisions of Directive 77/388/EEC, in particular those of the title relating to exemptions, were not mandatory and exclusive so as to preclude national legislation permitting exemption from VAT for reasons other than fiscal ones which did not conflict with the aims of the directive. Although the Court did not take those arguments into account when it ruled that the VAT exemption granted by Italy infringed Directive 77/388/EEC, the Italian Government considers that the question of the lawfulness in Community law of the exemption cannot be regarded as resolved, inasmuch as its lawfulness may be confirmed in the light of rules of the EEC Treaty which rank higher than the directive.

The VAT exemption for reconstruction work in the disaster zones may be regarded objectively as a measure covered by Article 92(2)(b) of the Treaty, which declares State intervention to make good the damage caused by natural disasters to be compatible with the common market.

Whereas the aid referred to in Article 92(3) must be assessed for compatibility in detail and is subject to the discretionary appraisal of the Commission, the kind of aid contemplated in Article 92(2)(b) is declared by that provision to be compatible.

Consequently, the kind of aid at issue in this case is subject only to investigation by the Commission as to whether the State measure effectively conforms to the model set out in Article 92(2)(b). The Treaty leaves Member States entirely free to ensure, by means of economic support measures, that their essential interests are satisfied. That freedom can be neither reduced nor limited by a directive. There would without doubt be a restriction if the directive excluded an intervention measure such as tax relief used in the ordinary and rational way to achieve the objectives referred to in Article 92(2)(b).

In the light of those considerations, which were neither examined nor assessed in the judgment in Case 203/87, the exemption from VAT which is the subject-matter of the present case cannot infringe Community law because it is capable of coming within the scope of the declaration of compatibility with the Treaty referred to in Article 92(2)(b) and because it is not in contradiction with other Treaty rules.

According to the Italian Government, the fact that the Commission refrains from taking a position on the lawfulness in Community law of the VAT exemption which is the subject-matter of the present case with respect to Article 92 of the Treaty is attributable to the difficulty of disputing that the VAT exemption in question falls within the system of aid. The Italian Government states in this connection that in a decision of 25 July 1990 the Commission considered a legislative provision by the Italian Republic establishing a VAT exemption to be aid.

1 Language of the case: Italian.

2 OJ 1977 L 145, p. 1.

3 OJ 1981 L 322, p. 40.

4 OJ 1982 L 184, p. 26.

5 OJ 1984 L 40, p. 30.

6 Case 203/87 Commission v Italy [1989] ECR 371.

7 Gazzetta Ufficiale della Repubblica Italiana No 50, 1 March 1990.

8 See in particular the judgment in Case 169/87 Commission v France [1988] ECR 4093.

9 Sec order in Joined Cases 24 and 97/80 R Commission v France [1980] ECR 1319.

10 See judgment in Case 48/71 Commission v Italy [1972] ECR 527.

11 See most recently the judgment in Case C-375/89 Commission v Belgium [1991] ECR I-383.

12 Case C-266/89 Commission v Italy [1991] ECR I-2411.

13 Case 101/84 Commission v Italy [1985] ECR 2629.

14 Decision No 91/175/EEC, OJ 1990 L 86, p. 23.