Report for the Hearing In Case C-333/91

I — Facts

A — The relevant provisions

1. According to Article 2 of the Sixth Council Directive 77/388/EEC 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 (hereinafter the Sixth Directive, OJ 1977 L 145, p. 1) the scope of that directive is as follows:

2. Article 17 of the Sixth Directive lays down rules on the origin and scope of the right to deduct. The first and second subparagraphs of Article 17(5) state as follows:

3. Article 19(1) and (2) states as follows:

4. Those provisions of the Sixth Directive are reflected in French law by Articles 212, 213, 214 and 219 of Annex II to the General Tax Code (Code Général des Impôts) of the French Republic in the version applicable at the material time.

B — Background to the dispute

5. SATAM SA (SATAM), established in Asnières (France), is the holding company of a group of companies manufacturing and selling petrol pumps. SATAM receives dividends from its holdings in the capital of its subsidiary companies. Moreover, SATAM provides various services to the companies in the group, in respect of which it receives commission and fees.

6. SATAM, which manages movable and immovable property, deducted from the value added tax for which it was liable in respect of the period from 1 January 1976 to 31 December 1979 all the value added tax which had been charged, in the same period, on its acquisition of goods and services. The French tax authority inspected the company's accounts in respect of the same period and established that SATAM's receipts comprised, on the one hand, rents from immovable property and other income subject to value added tax and, on the other hand, dividends not regarded as subject to value added tax which arose out of its holdings in the capital of other companies in the group of which it was the holding company. The tax authority took the view that SATAM's right to deduct had to be calculated in accordance with the rules laid down by Articles 212, 214 and 219 of Annex II to the General Tax Code for undertakings not subject to value added tax in respect of all their activities and, consequently, that the company should have deducted the tax on goods and services which it acquired only within the limit of the percentages resulting from the ratio between the annual amount of all its receipts subject to value added tax and the annual amount of all its receipts, including the dividends which it had received. The tax authority determined those percentages as 50% for 1976, 68% for 1977 and 1978, and 69% for 1979. Accordingly, it claimed from the company the additional value added tax resulting from those reductions in its deduction entitlement.

7. In support of its claim for discharge from payment of the tax claimed, SATAM maintained that, even where share dividends were received by an undertaking which, like itself, was not subject to value added tax in respect of all its activities, such dividends were not to be included in the deductible proportion provided for by Article 212 of Annex II to the General Tax Code, as applicable at the material time, and that, if they were to be so included, that article was incompatible with Article 19 of the Sixth Directive and hence unlawful as from 1 January 1979.

8. The application for discharge from payment of the additional VAT was dismissed by the Tribunal Administratif de Paris (Administrative Tribunal, Paris).

9. Taking the view that the dispute raised questions of the interpretation of provisions of Community law, the Conseil d'État, by order of 13 December 1991, stayed the proceedings and referred to the Court of Justice under Article 177 of the EEC Treaty the question:

10. It is clear from the grounds of the decision of the Conseil d'État that SATAM's involvement in the management of the companies in which it held shares, was limited to the exercise of its rights as shareholder. In so far as its function was to hold such shares, it was not therefore a taxable person, and, accordingly, the dividends paid to it by companies in which it held shares were outside the scope of value added tax.

II — Procedure before the Court

11. The order for reference was received at the Court Registry on 20 December 1991.

12. Pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the EEC, written observations were submitted on behalf of:

13. 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 enquiry.

III — Summary of written observations submitted to the Court

14. SATAM considers that the question from the Conseil d'État can be answered only when the extent of the deduction entitlement has been clarified, which depends on the interpretation of the provisions of Article 17(5) of the Sixth Directive.

15. SATAM considers that a dividend does not constitute a transaction within the meaning of the Sixth Directive and, more especially, of Article 17(5) of that directive. Only the performance of an obligation to give something, do something or refrain from doing something constitutes such a transaction. Under Article 2 of the Sixth Directive, transactions subject to value added tax are the supply of goods, defined as the transfer of the right to dispose of tangible property as owner, or the supply of services, which means any transaction which does not constitute a supply of goods. It is therefore clear that the supply of a service is the result of an obligation to do or to refrain from doing something and that the supply of goods is the result of an obligation to give something.

16. SATAM also considers that by taking into account turnover relating to transactions in respect of which there is a right to deduct and that relating to transactions in respect of which there is no right to deduct, the Sixth Directive refers to the total amount of considerations received by the taxable person solely on account of the transactions performed. That is confirmed by Article 28 of Directive 78/660 of 25 July 1978 on the annual accounts of certain types of companies (OJ 1978 L 222, p. 11). That is why a specific provision was needed in the Sixth Directive in order to enable Member States to include also in the denominator the amount of subsidies other than those referred to in Article 11 A(1)(a), that is to say subsidies other than those directly linked to the price of the transactions. That option of the Member States necessarily means that turnover includes only subsidies directly linked to the price of the transactions. It includes only the direct consideration for the deliveries of goods and the supplies of services. However, dividends received by a shareholder do not constitute such direct consideration.

17. SATAM illustrates its claim by means of examples:

18. Finally, SATAM observes that if its thesis is rejected, the structure of value added tax could be maintained with absolute rigour if, as authorized under Community legislation, the Member States took the view that the management of shareholdings gives rise to a supply of services to oneself, so that tax is levied exactly in proportion to the actual use of goods and services charged to tax on inputs. If the view were taken that the holding of dividend-producing shares is not an economic activity within the meaning of Article 4(1) and (2) of the Sixth Directive, it would merely be necessary to take the view that the use for that purpose of goods or services acquired by the undertaking which gave rise to deduction of value added tax on inputs constitutes a delivery to oneself or a supply of services to oneself, which the Sixth Directive treats, or permits Member States to treat, in the same way as supplies of goods or services made for consideration (Article 5(6) and (7), and Article 6(2) and (3) of the Sixth Directive). In such a situation, value added tax would be levied, without any possibility of deduction, as a nontaxable portfolio activity, on the part of the purchase or cost price of the goods or expenses incurred which corresponds to the actual use of those goods or services (applying Article 11A(1)(b) of the Sixth Directive). The risk of tax avoidance could be averted while complying with the provisions of the common system of value added tax, and the economic neutrality of value added tax would have been maintained.

19. In conclusion, SATAM proposes that the Court should reply as follows to the national court's question:

20. The French Government considers that Article 17 in conjunction with Article 19(1) of the Sixth Directive must be interpreted as meaning that, in the case of a holding company, value added tax may be deducted only in the ratio determined by the proportion between the amount of transactions subject to value added tax and the total amount of its transactions, which includes both exempt transactions and transactions outside the scope of value added tax in respect of which there is no right to deduct.

21. The French Government claims that its interpretation of Article 19 of the Sixth Directive is in accordance with the spirit and purpose of the common system of value added tax. It follows from paragraph 19 of the Court's judgment in Case 268/83 Rompelman, cited above, that it is not possible to deduct the tax charged on the goods and services used for the purposes of transactions which are not subject to value added tax, either because those transactions are exempt from value added tax (Case C-8/81 Becker [1982] ECR p. 53) or because they fall outside the scope of value added tax (Case C-60/90 Polysar, cited above). In the French Government's view, a holding company which receives both dividends and other income and which does not perform any activities other than those linked to the holding of shares in its subsidiaries is, first, not a taxable person within the meaning of Articles 4 and 17 of the Sixth Directive and, secondly, is an exempt taxable person in respect of the receipt of income from the transactions referred to in Article 13B(d) of the Sixth Directive. In those two cases, the holding company does not enjoy a right of deduction and no significance is to be attached in that regard to the fact that some of the transactions concerned may not be taxable because they fall outside the scope of value added tax and the others not taxable because they are exempt from value added tax.

22. The French Government then points to the increasing degree of difficulty in distinguishing transactions that are not taxable, because they fall outside the scope of value added tax, from transactions that are not taxable because they are exempt.

23. In conclusion, the French Government proposes that, in reply to the question put by the Conseil d'État, the Court should state that Article 17 in conjunction with 19(1) of the Sixth Directive must be interpreted as meaning that share dividends received by an undertaking which is not subject to value added tax in respect of all its transactions must be included in the denominator of the fraction used to calculate the deductible proportion in the same way as income that is subject to, but exempt from, value added tax.

24. The Greek Government states, first of all, that one of the objects of the Sixth Directive is to harmonize the system of deductions in so far as those deductions affect the actual amount of value added tax collected. In addition, in certain circumstances, the Member States may take or retain special measures derogating from the Sixth Directive in order to simplify the collection of the tax or to avoid fraud or tax avoidance.

25. The attainment of those aims is possible only if turnover attributable to transactions in respect of which value added tax is deductible is taken in its economic and accounting sense as concerning all the economic activities of an undertaking from which it derives a benefit and which provide it with revenue. Consequently, Article 19(1) of the Sixth Directive is clearly directed at the total turnover, that is to say, the commercial activity of an undertaking. Otherwise it would be necessary to perform a multiplicity of calculations in each case, the effect of which would be both to render more difficult the collection of value added tax and to prevent deduction from corresponding to the actual level of collection of that tax, but also to encourage and facilitate fraud and tax avoidance by the tax payer.

26. Secondly, the Greek Government considers that SATAM actually performs economic-financial transactions which in no way can be considered as not being included in the total amount of turnover per year referred to in Article 19(1) of the Sixth Directive.

27. In conclusion, the Greek Government proposes that the answer to be given to the Conseil d'Etat should be that Article 19 of the Sixth Directive must be interpreted to the effect that the share dividends received by an undertaking which is not subject to value added tax in respect of all its transactions must be included in the denominator in the same way as income which is exempt from value added tax.

28. According to the Netherlands Government, the Conseil d'État wishes to ascertain whether and, if so, to what extent, a taxable person's status as economic operator also extends to its status as shareholder.

29. The Netherlands Government considers that the judgment of the Court in Case C-60/90 Polysar, cited above, does not lay down that a holding company which, alongside its activities as shareholder, also pursues activities proper to an undertaking and which is already a taxable person in that respect does not lose its status as taxable person in all those cases in which it holds shares in other companies. It is possible that the activity of holding shares may be so closely connected to the totality of the activities which the company pursues as a business that it could be said that the holding of shares takes place in the framework of the relevant taxable person's business. Where the holding of shares is closely connected with a taxable person's business or is inseparably linked to it, the Netherlands Government considers that the holding of shares is performed in the course of that person's business and therefore is of no consequence as regards its deduction entitlement. If the dividends themselves are not subject to value added tax, they should not therefore be included in the denominator of the fraction used to calculate the deductible proportion referred to in Article 19 of the Sixth Directive. The national court must determine whether, on the basis of the facts and circumstances of the case, there is a holding of shares in the abovementioned sense.

30. It follows from the judgment in Case C-60/90 Polysar, cited above, that the criterion of involvement set out in paragraph 14 of that judgment refers to a particular form of holding falling within the scope of value added tax. If that criterion was satisfied, the company in question was a taxable person and, consequently, everything acquired in the course of its shareholding, including dividends, would form part of the taxable amount within the meaning of Article 11A(1)(a) of the Sixth Directive. In such a case, the purpose of the holding of shares was not a mere investment but rather a direct or indirect involvement in the management of the companies in which the holdings had been acquired.

31. Where the holding of shares does not take place in the context of a taxable person's business, the Netherlands Government considers that a reasonable interpretation of the deduction rules in Articles 17 and 19 of the Sixth Directive requires that the dividends received be included in the denominator of the fraction used to calculate the deductible proportion in Article 19 of the Sixth Directive, since the receipts in question are from activities which are exempt from value added tax. It assumes that the purchases/expenses will be used partly in, and partly outside, the course of business.

32. The Netherlands Government proposes that in reply to the question referred by the national court the Court should state that, as is the case with receipts which are exempt from value added tax, the dividends received by a taxable person referred to in the question must be included in the denominator of the fraction used to calculate the deductible proportion provided for in Article 19 of the Sixth Directive, except where the holding of shares has taken place in the course of the taxable person's business. The latter situation occurs where the holding of shares is inextricably linked to the activities pursued as a business in itself constitutes a taxable business because it satisfies the criteria of involvement within the meaning of the judgment in Case C-60/90 Polysar, cited above.

33. According to the Commission, three types of holding must be distinguished:

34. In the Commission's opinion, Article 19 of the Sixth Directive cannot be interpreted as meaning that the income from activities falling outside the scope of the Community value added tax scheme are to be included when calculating the deductible proportion.

35. The Commission then states that pursuant to the case-law of the Court of Justice (Case 70/83 Kloppenburg [1984] ECR 1075) a person subject to value added tax may rely on the provision concerning exemption from the tax laid down in Article 13B(d)(1) of the Sixth Directive in respect of transactions performed between 1 January and 30 June 1978, where he has refrained from passing that tax on to persons following him in the chain of supply.

36. In conclusion, the Commission proposes that the Court should reply as follows to the Conseil d'État:

1 Language of the case: French.