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:
The following shall be subject to value added tax:
1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;
2. the importation of goods.’
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:
‘As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.
This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person.’
3. Article 19(1) and (2) states as follows:
‘(1). The proportion deductible under the first subparagraph of Article 17(5) shall be made up of a fraction having: as numerator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions in respect of which value added tax is deductible under Article 17(2) and (3), as denominator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which value added tax is not deductible. The Member States may also include in the denominator the amount of subsidies, other than those specified in Article 11 A(1)(a). The proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next unit.
(2). By way of derogation from the provisions of paragraph 1, there shall be excluded from the calculation of the deductible proportion, amounts of turnover attributable to the supplies of capital goods used by the taxable person for the purposes of his business. Amounts of turnover attributable to transactions specified in Article 13 B(d), in so far as these are incidental transactions, and to incidental real estate and financial transactions shall also be excluded. Where Member States exercise the option provided under Article 20(5) not to require adjustment in respect of capital goods, they may include disposals of capital goods in the calculation of the deductible proportion.’
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). Before the Conseil d'État, which heard the appeal against the judgment of the Tribunal Administratif de Paris, SATAM claimed that dividends accruing from its holdings in the capital of companies within the group of which it was holding company were outside the scope of value added tax and did not constitute ‘receipts’ for the purposes of Article 212 of Annex II to the General Tax Code, since such dividends constituted proceeds which resulted not from an activity consisting in production or in the supply of services of an industrial or commercial nature but from capital transactions, which did not involve the shareholder in performing any activity giving rise to ‘turnover’. For the purpose of calculating the deductible proportion of value added tax, Article 19 of the Sixth Directive merely required that account be taken of the annual amount of ‘turnover’ relating to transactions in respect of which VAT is, or was not, deductible. It argued that, in pursuance of Article 212 of Annex II to the General Tax Code, interpreted in a manner not in conformity with Article 19, the tax authority therefore wrongly considered that it was necessary to include the dividends received by the company in the calculation of the deductible proportion.
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:
‘Whether, in the light of its terms, Article 19 of the Sixth Directive must be interpreted to the effect that share dividends received by an undertaking which is not subject to value added tax in respect of all its transactions must be excluded from the denominator of the fraction used to calculate the deductible proportion or whether, in the light of the purpose and scheme of the system of deduction established by the directive and in particular by the combined provisions of Articles 17 and 19, the latter article is, on the contrary, to be interpreted to the effect that the dividends in question must, as income which is exempt from value added tax, be included in the denominator.’
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: SATAM SA (now SOFITAM SA), by Philippe Derouin, of the Paris Bar, the French Government, by Philippe Pouzoulet, Deputy Director for Legal Affairs, acting as Agent, assisted by Géraud de Bergues, Principal Deputy Secretary for Foreign Affairs, acting as Deputy Agent, the Netherlands Government, by T. P. Hofstre, Deputy Secretary-General at the Ministry of Foreign Affairs, the Greek Government, by Vasileios Kontolaimos, Deputy Legal Adviser at the Legal Council of State, the Commission of the European Communities, by Henri Étienne, Principal Legal Adviser, and Johannes F. Bull, Legal Adviser, acting as Agents.
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. The right of deduction constitutes the cornerstone of the common system of value added tax. Citing the judgments in Case 15/81 Schul [1982] ECR 1409, Case 268/83 Rompelman [1985] ECR 660, Case 165/86 Leesporteuille ‘Intiem’ v Staatsecretars van Financiers [1988] ECR 1488 and Case 50/87 Commission v French Republic [1988] ECR 4797, SATAM observes that the exercise of the right to deduct is meant to relieve the taxable person of tax paid on transactions relating to inputs and must be applied in such a way that its scope corresponds to the area of the taxable person's professional or business activities. An economic operator without such status has no right to deduct tax charged on its purchases (Case C-60/90 Polysar Investments Netherlands [1991] ECR I-3111). The only activities subject to that tax are economic activities, which are defined by Article 4(2) of the Sixth Directive as comprising all activities of producers, traders and persons supplying services and, in particular, the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis (Case C-186/89 Van Tiem [1990] ECR I-4363). As the Court of Justice held in its judgment in the Polysar case, the mere acquisition and holding of shares in a company is not to be regarded as an economic activity conferring on the holder the status of taxable person. Consequently, SATAM claims that the receipt of dividends does not fall within the scope of value added tax and that the dividends therefore fall outside the scheme of the right to deduct.
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. That ‘transaction’, as the performance of an obligation to give, to do or to refrain from doing something, corresponds to the economic concept of trade between economic units. Value added tax, levied on the price of ‘transactions’, is applied to the activity of producing goods and services, as understood in economic accounting terms, that is to say, the production of goods and services which are commonly exchanged on a market, either as a result of an actual exchange — which gives rise to a supply of goods or of services properly so-called — or as performed by the undertaking itself, in which case they are the subject of supplies to itself, which the common system of value added tax classes, in some circumstances, as ‘transactions’. On the other hand, ‘transaction’ does not extend to all transfers of value. It does not include distribution of net income resulting from transactions producing goods and services, since that net income does not, by definition, form part of the cost price of the goods or services. The distribution of the net income of undertakings lies outside the common system of value added tax: it constitutes neither a supply of goods nor of services capable of falling within the scope of value added tax. Nor does it affect the cost price of the goods or services or, consequently, the right to deduct value added tax charged on that price either as regards the undertaking itself or as regards a person receiving his share of that income. That is particularly true in the case of distributions of dividends to shareholders in a company. A dividend is the fruit of the financial holding in the capital of a company (judgment in Case C-60/90 Polysar). The dividend is the result of a decision taken by the competent bodies of the issuing company and is paid to a shareholder purely by virtue of the unilateral decision of that company. It constitutes neither the performance of an obligation of the company towards its shareholders nor consideration for an obligation of the shareholder towards the company. That legal analysis corresponds to an economic analysis of a dividend. Dividends are income which, having regard to the result of their activities, companies decide to distribute to their shareholders. The receipt of dividends therefore displays two essential characteristics which distinguish it from an economic activity within the meaning of the Sixth Directive. It does not constitute the exploitation of property in order to produce income on a continuing basis, since any dividend is the result merely of the ownership of property and not of its exploitation. The amount of the dividend is also unconnected with the activity of the person receiving it: In no way does it constitute consideration for his activity but it depends solely on the results of the operation of the issuing undertaking. The dividend is not remuneration for any activity and, unlike a price, is not paid in consideration for the delivery of goods or the performance of a service. Furthermore, it does not have to be paid, even if the activity which has generated it has produced a positive balance in the accounts. A dividend is therefore distinguishable from other products of capital, such as the payment of interest, royalties or rents, which are the consideration for a contractual obligation remunerating the making available of capital and which are capable of being incorporated in the cost price of goods or services. Since it is not the ‘consideration’ for any service, a dividend is outside the scope of the common system of value added tax. Moreover, most Member States consider that dividends do not fall within the scope of value added tax. That is, inter alia, the case in Great Britain (London VAT Tribunal in CH Beazer (Holdings) PLC v Commissioners of Custotns and Excise [1987] STC, confirmed by the Queen's Bench Division [1989] STC 549), in the Netherlands, where the administration has stated that dividends are excluded from the turnover to be taken into consideration when calculating the deductible proportion (Wet Omzet Belasting 1968, Suppl 159, April 1990, Ad Art 15), the Federal Republic of Germany (Article 15(4) of the Umsatzsteuergesetz), and Spain (Resolution of the Directorate-General for Taxation of 31 July 1987, BOE 14 August 1987, No 1006, p. 1118). SATAM therefore considers that, when analysed in the light of economic accounting principles and the principles of company law and their application by the Member States, ‘transactions’ within the meaning of the Sixth Directive do not include the payment of a dividend. Consequently, the Court should rule that the first subparagraph of Article 17(5) of the Sixth Directive must be interpreted as meaning that the receipt of dividends is not to be taken into consideration in order to establish whether a taxable person carries out transactions in respect of which value added tax is deductible or transactions in respect of which it is not deductible, because dividends are not within the scope of either of them, their receipt not being a ‘transaction’ for the purposes of the common system of value added tax.
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: Example A: a taxable company with a turnover (T) (before tax) of 10000, whose purchases (P) amount to 4000. Assuming the applicable rates of value added tax to be: 15% on sales, i. e. VAT collected amounting to 10000 x 15% = 1500 15% on purchases, i. e. deductible VAT of 4000 x 15% = 600 The net value added tax owed by the undertaking amounts to: 1500 -600 = 900. Example B: In this example, all other matters are the same, but the company has two branches of activity (1 and 2) and decides to separate one branch (branch no 2) by transferring it to a subsidiary company. T: 10000 T1 = 4000 T2 = 6000 Purchases: 4000 P1 = 1600 P2 = 2400 Value added tax due will be calculated as follows: For branch no 1, operated by the parent company Value added tax1 = (4000 x 0.15)-(1600 x 0.15) = 360 For branch no 2, operated by the subsidiary company Value added tax2 = (6000 x 0.15)-(2400 x 0.15) = 540 Value added tax1 + value added tax2 = 900 The fact that a subsidiary has been formed has no effect on the amount of value added tax due, which is in keeping with an essential objective of value added tax, namely that the tax yield should not depend upon the legal structure adopted in the course of the production process. Example C: It is assumed that the subsidiary distributes from its business profits a dividend of 500 to the parent company. The total value added tax burden should not change as a result. But, if it were to be accepted that that dividend must be taken into account when calculating the parent company's deduction entitlement, that would amount to establishing a deductible proportion of: 4000 4000 + 500= 89% The value added tax payable by the parent company would then be: (4000 x 0.15) - (1600 x 0.15) 0.89 = 386 instead of 360, namely additional tax of 26, as a consequence of establishing a subsidiary and the receipt of dividends. The direct effect of the mere change in the undertaking's legal structure would therefore be to modify the amount of value added tax payable because of the reduction in the deduction entitlement caused by the tailing into account of the dividend paid by the subsidiary to the parent company when calculating the latter's deduction entitlement. That is manifestly incompatible with the purpose of the common system of value added tax, which is to ensure the nondiscriminatory nature of the tax.
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:
‘(1) Article 19(1) of the Sixth Directive must be interpreted — in the light of both its terms and the other relevant provisions of the directive, in particular Article 17(5), and of the purpose of the common system of value added tax established by the first Directive 67/227/EEC and the second Directive 67/228/EEC of 11 April 1967 — to the effect that the turnover to be taken into consideration in the denominator of the deductible proportion includes sums received or acquired by a taxable person as consideration for supplies of goods or services by that taxable person and does not include receipts of a different kind, and particularly not dividends received by that taxable person as a result of stocks or shares which it holds, since the distribution and receipt of dividends constitute neither a transaction nor the consideration for a transaction for the purposes of the common system of value added tax.
2) The Member States must ensure the normal working of the right to deduct in accordance with the common system of value added tax by applying, where necessary, the principle of taxation of supplies of goods and services to oneself to the actual use of goods and services which have given rise to deduction of value added tax for the purposes of any activity pursued by taxable persons falling outside the scope of that tax.’
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. ‘Turnover’ within the meaning of the second indent of Article 19(1) of the Sixth Directive corresponds to the ‘total income of an undertaking’ within the meaning of the French legislation and, consequently, the denominator should consist of the undertaking's total turnover. Moreover, the Sixth Directive uses the terms ‘income’ and ‘turnover’ indiscriminately. Thus, for example, Article 4(2) of the Sixth Directive refers to ‘income’ obtained from the exploitation of property. Moreover, the conformity of national laws with Community law depends on the characteristics of those laws and their observance of the directive's aims. Finally, the French Government claims that the wording of Article 19 of the directive indicates that the turnover in the denominator is that which is attributable ‘to transactions in respect of which value added tax is not deductible’, but does not indicate that they are transactions exempt from value added tax or transactions falling outside the scope of application of that tax.
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. Where goods and services are used in order to carry out both transactions in respect of which value added tax is deductible and transactions in respect of which value added tax is not deductible, deduction should be permitted only for the part of the value added tax proportionate to the amount relating to the former transactions. Accordingly, if it was not possible to make an allocation, in accordance with the principle adopted in Article 17(2), between the company's taxable and its nontaxable transactions, and if it was not possible to separate its activities into sectors, the Sixth Directive required the exercise of the rights to deduction to be restricted proportionately. It is therefore necessary to take into account, on the one hand, the taxable revenue and, on the other hand, all the other revenue which is exempt or outside the scope of value added tax. Any other interpretation of Article 19 of the Sixth Directive would emasculate that principle of proportionality. To illustrate its premise, the French Government adds that a holding company whose sole annual revenue consists of dividends of FF 100000 would continue to be denied any right to deduct. The position would be the same if the FF 100000 were made up of FF 50000 by way of share dividends (receipts falling outside the scope of VAT) and FF 50000 by way of income from debentures (exempt receipts). On the other hand, a holding company which received annual income of FF 100000 from dividends and FF 12000 from the supply of taxable services (which is frequently the case with holding companies which provide services to their subsidiaries) would now have a 100% deduction entitlement if the amount of dividends had not to be included in the pro rata figure. The position would be different yet again if, alongside the FF 12000 for the supply of taxable services, the company's receipts were divided into FF 50000 by way of share dividends, which SATAM claims are not to be included in the pro rata figure, and FF 50000 by way of debenture income, which would continue to be included. In such a case, the holding company would benefit from a deductible proportion of slightly less than 20%. Such differences in deduction entitlements are incompatible with the aims and principles of the Sixth Directive.
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: (a) a holding company whose sole task is to collect dividends from its subsidiaries and to pay them to its own shareholders, without performing any other activities. That constitutes a conduit company and, in such a case, it manages its own assets; (b) a holding company which also performs financial activities: it invests in other companies, finances subsidiaries through loans or, for example, by issuing shares, or by protecting the group against untimely claims, all those activities being linked to the holding of shares in other companies; (c) a holding company, which provides other services to its subsidiaries, as well as the financial activities referred to in (b) above. These are domestic services provided for consideration, for example, accounting services on a centralized computer, market studies, legal advice, etc. Remuneration for those services is generally in the form of a charge to the subsidiaries of the cost of those services. The Commission considers that, in the first case, the company is not a taxable person within the meaning of Article 4 of the Sixth Directive. In the second case, the holding company is a taxable person, but exclusively in respect of the services which are exempt under Article 13B(d)(5). The third case concerns a taxable person providing services which are sometimes exempt, and sometimes nonexempt. In the first and second cases, the value added tax which the holding company has paid to third persons is not deductible; in the third case, the deduction is partially permissible, in so far as it concerns non-financial services, by virtue of the principle of the deductible proportion laid down in Article 17(5), and supplemented by Article 19, of the Sixth Directive.
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. In that regard the Commission refers to the second indent of Article 19(1) of the Sixth Directive. The exclusion of the deduction in respect of expenses not relating to taxable activities must find its basis within the general principle in Article 17 and not on the basis of the method of calculation in Article 19 of the Sixth Directive. It follows that the income of an undertaking, such as dividends, attendance fees, capital gains on share transfers, constitute consideration for neither a taxable activity nor an exempt activity. As remuneration for a capital investment, that transaction falls outside the scope of value added tax. Consequently, the income from financial transactions cannot be included either in the numerator or in the denominator of the proportion applicable for calculating the deduction entitlement, as provided for in Article 19 of the Sixth Directive, since it is not ‘turnover’ of the undertaking. The holding company therefore has no right to deduct in respect of the part of its activity outside the scope of the Sixth Directive, by virtue of Article 17(2) of that directive. The holding company will ultimately bear the value added tax on that part of its activity, as final consumer.
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. That decision of the Court concerns traders established in a Member State which had failed to fulfil its obligation to adapt its legislation to the provisions of the Sixth Directive before 1 January 1978. The Commission states that in the present case SATAM objected to the Minister for the Budget that the French tax authority had wrongly included the dividends received by SATAM in calculating its deductible proportion for the years 1976, 1977, 1978 and 1979. The Commission adds that in its judgment of 13 December 1991 the Conseil d'État took the decision to dismiss the application by the applicant in the main proceedings as regards the part of the tax period falling between 1 January 1976 and 31 December 1978. The Commission concludes that since, in its request for a preliminary ruling, the Conseil d'État has not submitted any question concerning the possible applicability of Article 17 and Article 19 of the Sixth Directive during the period from 1 January to 30 June 1978 it is not necessary to consider that problem area.
36. In conclusion, the Commission proposes that the Court should reply as follows to the Conseil d'État:
‘Share dividends received by an undertaking constitute the income from an activity which falls outside the scope of the provisions of Community law on value added tax and they are not to be taken into account when calculating the deductible proportion as laid down by Article 19 of the Sixth Council Directive of 17 May 1977 (77/388/EEC), which takes into account only the taxable activities or exempt activities of a taxable person.’
G. F. Mancini
Judge-Rapporteur
1 Language of the case: French.