Commissioners of Her Majesty’s Revenue & Customs v Isle of Wight Council and Others.

• Jurisdiction: European Union
• Celex Number: 62007CJ0288
• ECLI: ECLI:EU:C:2008:505
• Docket Number: C-288/07
• Court: Court of Justice (European Union)
• Procedure Type: Reference for a preliminary ruling
• Date: 16 September 2008

Case C-288/07

Commissioners of Her Majesty’s Revenue and Customs

v

Isle of Wight Council and Others

(Reference for a preliminary ruling from the High Court of Justice of England and Wales (Chancery Division))

(Sixth VAT Directive – Article 4(5) – Activities engaged in by bodies governed by public law – Provision of off-street car-parking facilities for which a charge is made – Distortions of competition – Meaning of ‘would lead to’ and ‘significant’)

Summary of the Judgment

1. Tax provisions – Harmonisation of laws – Turnover taxes – Common system of value added tax – Taxable persons – Bodies governed by public law

(Council Directive 77/388, Art. 4(5), second subpara.)

2. Tax provisions – Harmonisation of laws – Turnover taxes – Common system of value added tax – Taxable persons – Bodies governed by public law

(Council Directive 77/388, Art. 4(5), second subpara.)

3. Tax provisions – Harmonisation of laws – Turnover taxes – Common system of value added tax – Taxable persons – Bodies governed by public law

(Council Directive 77/388, Art. 4(5), second subpara.)

1. The second subparagraph of Article 4(5) of Sixth Directive 77/388 on the harmonisation of the laws of the Member States relating to turnover taxes is to be interpreted as meaning that the significant distortions of competition, to which the treatment as non-taxable persons of bodies governed by public law acting as public authorities would lead, must be evaluated by reference to the activity in question, as such, without such evaluation relating to any local market in particular.

A body governed by public law may be responsible, under national law, for carrying on certain activities of an essentially economic nature under the special legal regime applicable to them where those same activities can also be carried on in parallel by private operators, with the result that the treatment of that body as a non-taxable person in respect of value added tax may give rise to certain distortions of competition.

The third subparagraph of Article 4(5) of the Sixth Directive is intended to avoid that undesirable result by providing that the activities specifically listed in Annex D to that directive are, ‘in any event’, unless they are negligible, to be subject to valued added tax, even when they are carried on by bodies governed by public law acting as public authorities. In other words, the treatment of bodies governed by public law as non-taxable persons in respect of value added tax and those activities is, unless such activities are negligible, presumed to lead to distortions of competition. It is thus clear from the third subparagraph of Article 4(5) of the Sixth Directive that the treatment of those bodies as taxable persons in respect of that tax results from the carrying-on, as such, of the activities listed in Annex D to that directive, irrespective of the question whether or not a particular body governed by public law faces competition at the level of the local market on which it carries on those same activities.

Furthermore, there may exist, on the national level, other activities of an essentially economic nature, not listed in Annex D to the Sixth Directive, the list of which may vary from one Member State to another or from one economic sector to another, which are carried on in parallel both by bodies governed by public law in their capacity as public authorities and by private operators. It is precisely to those activities that the second subparagraph of Article 4(5) of the Sixth Directive applies, in providing that bodies governed by public law, even when they act as public authorities, are to be considered taxable persons where their treatment as non-taxable persons would lead to significant distortions of competition.

The second and the third subparagraphs of Article 4(5) of the Sixth Directive are, consequently, closely linked since they pursue the same objective, namely the treatment of bodies governed by public law as taxable persons in respect of value added tax, even when they are acting as public authorities. Those subparagraphs are thus subject to the same logic, by which the Community legislature intended to limit the scope of the treatment of bodies governed by public law as non-taxable persons, so that the general rule stated in Articles 2(1) and 4(1) and (2) of that directive, under which any activity of an economic nature is, in principle, to be subject to value added tax, is observed. Consequently, the second and third subparagraphs of Article 4(5) of the Sixth Directive are to be interpreted as a whole. It follows that the treatment of bodies governed by public law as taxable persons in respect of value added tax, either on the basis of the second subparagraph of Article 4(5) of the Sixth Directive, or on that of the third subparagraph of that provision, results from the carrying-on, as such, of a given activity, irrespective of whether or not those bodies face competition at the level of the local market on which they engage in that activity.

Compliance with the principle of fiscal neutrality is thus ensured, given that all bodies governed by public law are, for the purposes of value added tax, either taxable or non-taxable persons, the sole strain on that principle concerning only relations between those bodies and private operators, and that to the extent that the distortions of competition remain insignificant. The evaluation of the existence of distortions of competition having regard to each of the local markets on which the local authorities offer off-street parking assumes a systematic re-evaluation, on the basis of often complex economic analyses, of the conditions of competition on a multitude of local markets, the determination of which may prove particularly difficult since the markets’ demarcation does not necessarily coincide with the areas over which the local authorities exercise their powers. In that case, neither the local authorities nor the private operators would be in a position to provide, with the required certainty, for the conduct of their affairs if, on a given local market, the activity carried on by the local authorities will or will not be subject to value added tax, which would be likely to jeopardise the principles of fiscal neutrality and legal certainty.

(see paras 33-41, 46, 49, 51-53, operative part 1)

2. The expression ‘would lead to’ is, for the purposes of the second subparagraph of Article 4(5) of Sixth Directive 77/388 on the harmonisation of the laws of the Member States relating to turnover taxes, to be interpreted as encompassing not only actual competition, but also potential competition, provided that the possibility of a private operator entering the relevant market is real, and not purely hypothetical.

Indeed, the treatment of bodies governed by public law as non-taxable persons in respect of value added tax under the first subparagraph of Article 4(5) of the Sixth Directive constitutes a derogation from the general rule that any activity of an economic nature be subjected to value added tax. That provision must, therefore, be interpreted strictly. But the second subparagraph of Article 4(5) restores that general rule in order to avoid such treatment of those bodies leading to significant distortions of competition. The latter provision cannot therefore be construed narrowly.

However, the purely theoretical possibility of a private operator entering the relevant market, which is not borne out by any matter of fact, or by any objective evidence or by any analysis of the market, cannot be assimilated to the existence of potential competition. To make such an assimilation, that possibility must be real, and not purely hypothetical.

(see paras 60, 64-65, operative part 2)

3. The word ‘significant’ is, for the purposes of the second subparagraph of Article 4(5) of Sixth Directive 77/388 on the harmonisation of the laws of the Member States relating to turnover taxes, to be understood as meaning that the actual or potential distortions of competition must be more than negligible.

Indeed, that word is to be understood as intended to restrict the scope of the treatment, under the first subparagraph of Article 4(5) of the Sixth Directive, of bodies governed by public law as non-taxable persons for those activities. If that word had to be understood as meaning ‘material’, or even ‘exceptional’, the scope of the treatment of bodies governed by public law as non-taxable persons would be unduly enlarged. On the other hand, if their treatment as such were allowed only in cases where it would lead only to negligible competition, that scope would be circumscribed effectively.

Also, it is clear from the third subparagraph of Article 4(5) of the Sixth Directive that the treatment of bodies governed by public law as non‑taxable persons in respect of value added tax for the activities listed in Annex D thereto is permitted provided that those activities are negligible, assuming thus that the distortions of competition which would result would also be negligible. Since the second and third subparagraphs of Article 4(5) of the Sixth Directive are closely linked, as they pursue the same objective and are subject to the same logic, the word ‘significant’ is to be understood as meaning that the treatment of public bodies as non-taxable persons can be permitted only in cases where it would lead only to negligible distortions of competition.

Finally, the treatment of those bodies as non-taxable persons in circumstances where it would not lead to any distortion of competition or lead only to negligible distortions would bring about the least possible damage to the principle of fiscal neutrality.

(see paras 72-76, 78-79, operative part 3)

JUDGMENT OF THE COURT (Grand Chamber)

16 September 2008 (*)

(Sixth VAT Directive – Article 4(5) – Activities engaged in by bodies governed by public law – Provision of off-street car-parking facilities for...