VATupdate

Flashback on ECJ Cases – C-581/08 (EMI Group Ltd) – Definition of a ”Sample”

On September 30, 2021, the ECJ issued its decision in the case C-581/08 (EMI Group Ltd) which is clarifying the definition of a ”sample”.

Context: Sixth VAT Directive – Second sentence of Article 5(6) – Concept of ‘samples’ – Concept of ‘gifts of small value’ – Recorded music – Distribution free of charge for promotional purposes


Article in the EU VAT Directive

Article 16 of the EU VAT Directive 2006/112/EC.

Article 16 (Taxable transaction – Supply of goods – Deemed taxable transactions)
The application by a taxable person of goods forming part of his business assets for his private use or for that of his staff, or their disposal free of charge or, more generally, their application for purposes other than those of his business, shall be treated as a supply of goods for consideration, where the VAT on those goods or the component parts thereof was wholly or partly deductible.
However, the application of goods for business use as samples or as gifts of small value shall not be treated as a supply of goods for consideration.


Facts

  • EMI is a company governed by English law and is engaged in the production and sale of recorded music and in music publishing. Since 1987, with a view to promoting its new recordings, EMI has been distributing free copies of those recordings on vinyl records, cassette tapes and compact discs (‘CDs’) to various persons capable of assessing the commercial quality of the recording and of influencing the level of exposure which an artist receives.
  • In the context of that promotional strategy, such free copies are, inter alia, distributed to individuals working in the press, radio stations, television programmes, advertising agencies, retail outlets and cinemas. EMI also uses promoters, known as ‘pluggers’, who are persons in a position to promote recordings in the audiovisual media and in the press, and who distribute those recordings, also free of charge, to their own contacts, targeted and detailed on lists specially compiled for the release of each new CD.
  • For that purpose, EMI supplies recorded music in a variety of forms, namely, recordable CDs protected by a digital watermark, which identifies the name of the recipient and enables any possible copies to be traced, for distribution prior to the release of the album; un‑watermarked recordable CDs distributed in a white cardboard sleeve prior to the release of the album; conventional un‑watermarked CDs distributed in a white cardboard sleeve detailing the same artwork as that which appears on the final album intended for sale to the public; and CDs in their final form intended for sale. The latter bear a sticker with the wording ‘Promotional Copy Not For Resale’. The other types of recording distributed for promotional purposes have an inscription which states that the property rights remain vested in EMI.
  • According to the order for reference, approximately 90% of promotional CDs are sent to named individuals, the main exception being CDs sent to persons identified by their official position at a university or college. The number of potential recipients of free copies of recorded music, who are considered by EMI to be influential in the music industry, is approximately 7 000. For the promotion of a given recording, a specific list of 200 to 500 recipients is compiled. This list will include the names of individuals thought to be most influential for the promotion of sales of recordings of the particular type of music in question. When a new recording is about to be released, EMI distributes, in general, between 2 500 and 3 750 copies free of charge. In the case of ‘pluggers’, a single ‘plugger’ may receive up to 600 free copies for redistribution. Conversely, copies may be sent separately to a number of persons working for the same organisation, such as the BBC.
  • From April 1987 to June 2003, EMI accounted for VAT on the copies of recordings distributed in the circumstances described above. Subsequently, as it took the view that the national legislation was incompatible with the second sentence of Article 5(6) of the Sixth Directive, according to which, in its opinion, no VAT is payable in respect of such distributions, EMI submitted a claim to the Commissioners for reimbursement of the amounts of VAT paid in connection with those distributions. As the Commissioners rejected that claim for reimbursement, EMI brought an action before the referring tribunal.
  • In addition, as EMI ceased accounting for VAT on promotional distributions of free CDs from July 2003, the Commissioners sent it a tax assessment relating to those distributions for the period from July 2003 to December 2004, against which EMI also brought an action before the referring tribunal, which was subsequently joined to the first action.

Questions

How is the last sentence of Article 5.6 of the Sixth Directive1 to be interpreted in the context of the circumstances of the present case?
In particular, what are the essential characteristics of a “sample” within the meaning of the last sentence of Article 5.6 of the Sixth Directive?
(c)    Is a Member State permitted to limit the interpretation of “sample” in the last sentence of Article 5.6 of the Sixth Directive to-
(i)    an industrial sample in a form not ordinarily available for sale to the public given to an actual or potential customer of the business (until 1993),
(ii)    only one, or only the first of a number of samples given by the same person to the same recipient where those samples are identical or do not differ in any material respect from each other (from 1993)?
(d)    Is a Member State permitted to limit the interpretation of “gifts of small value” in the last sentence of Article 5.6 of the Sixth Directive in such a way as to exclude-
(i)    a gift of goods forming part of a series or succession of gifts made to the same person from time to time (to October 2003),
(ii)    any business gifts made to the same person in any 12-month period where the total cost exceeds £50 (October 2003 onwards)?
(e)    If the answer to question (c)(ii) above or any part of question (d) above is “yes”, where a taxable person gives a similar or identical gift of recorded music to two or more different individuals because of their personal qualities in being able to influence the level of exposure the artist in question receives, is the Member Stale permitted to treat those items as given to the same person solely because those individuals are employed by the same person?
(f)    Would the answers to questions (a) to (e) above be affected by the recipient being, or being employed by, a fully taxable person, who would be (or would have been) able to deduct any input tax payable on the provision of the goods consisting of the sample?

AG Opinion

(1)      ‘Applications for the giving of samples’ in the second sentence of Article 5(6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment means:

–      any supply by a taxable person;

–      for the purpose of promoting future sales of a product (being goods for VAT purposes);

–      to an actual or potential customer or a person who, owing to his particular position, is able to influence the exposure to market of that product;

–      of one or several items of goods that serve as examples of that product by retaining all the essential properties of the product as to its quality and characteristics, and thus enabling the recipient, his customers, or others receiving communications from the recipient to assess or test the nature, properties, and quality of the product.

(2)      Member States may fix a ceiling for the monetary value of a ‘gift of small value’ referred to in the second sentence of Article 5(6) of Sixth Council Directive 77/388, taking into account the general price and income level and other economic circumstances of that Member State, provided that the ceiling is not so low as to make Article 5(6) meaningless or inapplicable, or so high as to deviate from what ‘small value’ might be understood to mean in common language, and if individual exceptions to the ceiling may be allowed in circumstances where that is justified by objective reasons. Applications for the making of gifts of small value in that provision means individual supplies by a taxable person. The Member States may not apply the ceilings referred to above cumulatively to several gifts made during a defined period of time.

(3)      It is for the national court to determine who the recipient of an application within the meaning of the second sentence of Article 5(6) of the Sixth Council Directive 77/388 is, having regard to all the circumstances of the specific case. With regard to the VAT treatment of an application under the second sentence of Article 5(6) of this directive it is irrelevant whether or not the recipient of the application is entitled to deduct input tax.


Decision

1.      A ‘sample’, within the meaning of the second sentence of Article 5(6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, is a specimen of a product which is intended to promote the sales of that product and which allows the characteristics and qualities of that product to be assessed without resulting in final consumption, other than where final consumption is inherent in such promotional transactions. That term cannot be limited, in a general way, by national legislation to specimens presented in a form which is not available for sale or to the first of a series of identical specimens given by a taxable person to the same recipient, unless that legislation allows account to be taken of the nature of the product represented and of the specific business context of each transaction in which those specimens are distributed.

2.      The concept of ‘gifts of small value’, within the meaning of the second sentence of Article 5(6) of Sixth Directive 77/388, must be interpreted as not precluding national legislation which fixes a monetary ceiling of the order of that established by the legislation at issue in the main proceedings, namely GBP 50, for gifts made to the same person in the course of a 12‑month period or forming part of a series or succession of gifts.

3.      The second sentence of Article 5(6) of Sixth Directive 77/388 precludes national legislation which establishes a presumption that goods constituting ‘gifts of small value’ within the meaning that provision, distributed by a taxable person to different individuals having the same employer, are to be treated as having been made to the same person.

4.      The tax status of the recipient of samples has no bearing on the answers given to the other questions.


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