Flashback on ECJ Cases C-177/99 and C-181/99 (Ampafrance and Sanofi) – Broad entertainment-expense deduction exclusion was disproportionate

On 19 September 2000, the ECJ issued its judgment in Joined Cases C-177/99 and C-181/99, Ampafrance and Sanofi Synthelabo.

Summary

Facts: Two French businesses were denied input VAT deduction on accommodation, restaurant, entertainment and hospitality expenditure under a French derogation authorised by Council Decision 89/487/EEC.
Issue: The national courts questioned whether the Council Decision was valid where the deduction exclusion applied generally, including where expenditure was demonstrably incurred for strictly business purposes and no tax evasion or avoidance existed.
Question to the Court: The referring courts asked whether the Council Decision authorising France’s derogating measure was valid, particularly with regard to proportionality and the protection of legitimate expectations.
Decision: The Court declared the Council Decision invalid because the exclusion was not confined to situations presenting a risk of tax evasion or avoidance and prevented deduction of demonstrably business-related expenditure.
Argumentation: A derogation from the fundamental right to deduct had to be necessary and proportionate to the anti-avoidance objective. A general, irrebuttable exclusion went beyond what was necessary.

Facts

Ampafrance SA and Sanofi Synthelabo incurred expenditure relating to accommodation, restaurant services, receptions and entertainment in the course of their businesses.
French rules excluded the deduction of VAT on those categories of expenditure. Council Decision 89/487/EEC had authorised France to apply a measure derogating from Article 17(6) of the Sixth VAT Directive.
The national tax authorities refused the deductions. The businesses challenged those refusals before the Tribunal administratif de Nantes and the Tribunal administratif de Melun.
The national courts referred questions concerning the validity of the Council Decision.

Issue

The right to deduct input VAT was a fundamental component of the common VAT system. Derogations therefore had to be interpreted strictly.
The Council Decision was intended to address tax evasion or avoidance linked to expenditure that could have both private and business characteristics.
The issue was whether a blanket exclusion remained proportionate where the taxable person could demonstrate that the expenditure was incurred exclusively for business purposes and presented no risk of fraud or private consumption.

Questions

In Case C-177/99 the Tribunal Administratif, Nantes, decided to stay the proceedings and to refer the following question to the Court:

Since the resolution of this dispute depends on whether the provisions of the decision of the Council of the European Communities of 28 July 1989 authorising the French Government to derogate from the standstill introduced by Sixth Directive 77/388/EEC of the Council of the European Communities of 17 May 1977 and to extend to third parties exclusions of expenditure on accommodation, food, hospitality and entertainment from the right to deduct tax is compatible, first, with the objectives of the Sixth Directive and in particular Article 27 thereof, which states that the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion and avoidance, and, second, with the principle of proportionality between the tax objective pursued and the means employed; only the answer to that question, the solution of which is not obvious, will enable an assessment to be made of whether the pleas in this application are well founded.

In Case C-181/99 the Tribunal Administratif, Melun, held that:

It is common ground that the temporary authorisation to exclude from the right to deduct tax charged on all expenditure in respect of accommodation, food, hospitality and entertainment borne by a taxable person was not based on a finding of systematic tax evasion or avoidance resulting from such expenditure, but on the presumption arising from the mixed nature of the expenditure which makes it easily open to such abuse. Although the administrative authorities none the less cite as justification for that measure of systematic exclusion [of the right to deduct the VAT charged on such expenditure] the difficulty of putting in place an effective system for verifying the business nature of that expenditure, the deduction of the expenditure from profits subject to corporation tax or income tax, which is allowed under Article 39(5)(b) and(f) of the General Tax Code, is subject to such verification, by checks on the documents or on the premises, by the tax authorities subject to review by the court with jurisdiction in tax matters, the arrangements for which can clearly be transposed, notwithstanding the difference in the conditions of declaration and collection of the taxes in question. The objective pursued could also be achieved by a fixed limit on the amount of deductions authorised. Thus, having regard to the fact that that measure of derogation, which is general and absolute, precludes deduction of the tax charged on expenditure whose strictly business nature is not challenged, there is serious doubt as to whether the derogation granted to the French Republic by [Decision 89/487] is strictly necessary and proportionate to the objectives pursued.

Advocate General’s Opinion

Advocate General Georges Cosmas delivered an Opinion on 23 March 2000.
The Advocate General examined whether the general deduction exclusion was sufficiently connected with the prevention of tax evasion or avoidance and whether less restrictive measures were available.
The Advocate General proposed that the derogation should be found invalid to the extent that it prevented deduction without allowing taxable persons to establish the exclusively business character of the expenditure.
AG Opinion: Council Decision 89/487/EEC of 28 July 1989 authorising the French Republic to apply a measure derogating from the second subparagraph of Article 17(6) of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes, is unlawful.

Decision

Council Decision 89/487/EEC of 28 July 1989 authorising the French Republic to apply a measure derogating from the second subparagraph of Article 17(6) of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes is invalid.

The ruling establishes that a broadly framed deduction exclusion cannot be justified merely by administrative convenience where it automatically captures expenditure demonstrated to be exclusively business-related.

Argumentation

The Court recognised that combating tax evasion and avoidance was a legitimate objective capable of justifying a derogation from the ordinary deduction rules.
However, proportionality required the derogating measure to be appropriate and necessary. The measure could not go beyond what was required to achieve the stated objective.
The French exclusion operated irrespective of the actual use of the goods or services. It did not permit a taxable person to demonstrate that expenditure was incurred exclusively for business purposes and contained no element of private consumption.
The exclusion therefore functioned as an irrebuttable presumption. The Court considered that this went beyond what was necessary to prevent tax evasion or avoidance.

Source

Curia

Similar ECJ Cases

C-305/97 Royscot: Considered historic national input VAT deduction exclusions.
C-409/99 Metropol and Stadler: Restricted Member States’ ability to widen pre-existing exclusions.
C-414/07 Magoora: Applied the standstill principle to vehicle-related deduction restrictions.