HvJ EG, 19-09-2000, nr. C-177/99, nr. C-181/99

In the course of its business activities Ampafrance SA (hereinafter ‘Ampafrance) incurs sundry expenditure on accommodation, food, hospitality and entertainment both for its staff and for third parties. It therefore attempted to deduct the full amount of the value added tax (VAT) on expenditure of this kind for June 1993. The tax authorities did not approve this deduction and invoked Article 236 of Annex II to the French General Tax Code (Code Général des Impôts, hereinafter ‘the CGI), which transposes into national law Council Decision 89/487 at issue in this case. Ampafrance brought an action before the Tribunal Administratif de Nantes, seeking a refund of the sum it had been required to pay in respect of VAT to the tax authorities, because it had not been allowed to deduct the tax relating to the aforementioned expenditure incurred in respect of its staff and third parties.

In the order for reference the national court states as follows:

In the light of the foregoing considerations, the national court decided to stay proceedings pending a preliminary ruling by the Court of Justice on the question set out in the grounds in the order for reference.

The company Sanofi Winthrop SA, which became, following mergers, first Sanofi on 12 May 1998 and then Sanofi-Synthelabo on 18 May 1999 (hereinafter ‘Sanofi), brought an action before the national court against the Director of Tax Services of Val-de-Marne on the following grounds: the competent tax authorities had not approved the deduction of VAT relating to expenditure incurred in November and December 1993 to provide hospitality for suppliers and clients by the Choay Clin Midy and Millot Solac laboratories, whose rights and obligations had been taken over by the applicant. The resolution of the dispute required an examination of the legality of Decision 89/487, on which the current provisions of Article 236 of Annex II to the CGI were based.

The national court (Tribunal Administratif de Melun), after holding that ‘… although this court can assess the validity of a measure adopted by an institution of the European Union, it cannot declare it to be invalid’. It is therefore necessary, pursuant to Article 177 of the Treaty establishing the European Economic Community, to stay proceedings … pending a preliminary ruling by the Court of Justice of the European Communities on the validity, in the light of the principle of proportionality, of the abovementioned Decision of 28 July 1989 of the Council of the European Communities, stayed its consideration of the action for a refund of the additional taxes imposed and the respective penalties, until the Court of Justice of the European Communities had given a ruling on the abovementioned question.

Article 17 of the Sixth Directive concerns the origin and scope of the right to deduct VAT. Under paragraph 2:

Article 17(6) of the Sixth Directive contains a standstill clause which provides for the retention of national exclusions of the right to deduct VAT which were applicable before the Sixth Directive came into force, that is to say, before 1 January 1979:

Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive came into force.

Those provisions are a consequence of the fact that the Council did not draw up an exhaustive list of the goods, services and, generally, the activities for which deduction of VAT must be excluded under the provisions of the Sixth Directive. It should be remembered that, in the statement of reasons accompanying its Proposal for the Sixth Council Directive, 4. the Commission points out that certain items of expenditure, even when incurred in connection with the normal operation of a business, are also intended to meet private needs. Therefore, apportionment between the ‘private part and the ‘business part of the expenditure in question cannot be accurately verified. For that reason the proposal concerning Article 17(6) of the Sixth Directive states that the right to deduct VAT is excluded in respect of expenditure on accommodation, meals, food, drink, passenger cars and cars used for the purpose of entertainment, as well as expenditure on entertainment and luxuries. That proposal was not accepted and, consequently, the provision of the Sixth Directive in question, in its present form, merely states that the Council will resolve the problem within four years and that, in the meantime, the national exclusions will be retained under a standstill clause.

Moreover, in its Proposal for a Twelfth Directive of 25 January 1983, 5. the Commission formulated specific and detailed rules prohibiting deduction of the tax in respect of expenditure on transport, accommodation, food and drink, and also on hospitality, entertainment and luxuries. That proposal was withdrawn following continual disagreements within the Council and, since then, it has not been possible to adopt common rules concerning the restrictions which must be imposed on the right to deduct VAT. Recently, in a proposal for a directive submitted to the Council on 17 June 1998, 6. the Commission suggested that the deduction of VAT on expenditure on accommodation, food and drink should be restricted to 50%, owing to the dual business and private nature of the expenditure in question. On the other hand, the Commission considered that deduction of VAT should be excluded in respect of expenditure on luxuries, amusements or entertainment, because such expenditure is not of a strictly business nature.

Under Article 27 of the Sixth Directive:

Articles 7 and 11 of Decree No 67-604 of 27 July 1967 7. provided as follows:

Article 7: ‘The tax on expenditure incurred in order to provide accommodation or lodging for the management and staff of undertakings shall not be deductible.’

However, that exclusion shall not apply to the tax on expenditure incurred in order to provide free accommodation at the place of work for employees responsible for the security or supervision of an industrial or commercial complex or a works site.

Article 11: ‘The tax on expenditure incurred in order to satisfy the personal needs of the management and staff of undertakings, and in particular the tax on the cost of providing hospitality, food and entertainment, shall not be deductible.’

However, that exclusion shall not apply to expenditure in respect of:

Goods which constitute fixed assets and are specially allocated at the actual places of work for the collective satisfaction of the needs of the staff;

Work clothes or protective clothing which an undertaking provides for its staff.

After the Sixth Directive came into force, that is, after 1 January 1979, Decree No 79-1163 of 29 December 1979 8. was adopted. Article 25 of that Decree replaced Article 236 of the CGI with the following provision:

However, that exclusion shall not apply to work clothes or protective clothing, premises and equipment provided to staff at the workplace, or to accommodation provided free of charge for security or supervisory staff at the workplace.

The French Conseil d'État (Council of State), in its judgment of 3 February 1989 in the Alitalia case, held that Article 25 of the 1979 Decree did not comply with Community law in that it excluded the right to deduct the VAT on goods and services used by persons not employed by the undertaking; it considered that the exclusion in question was not covered by the standstill clause in Article 17(6) of the Sixth Directive and was, therefore, contrary to that directive.

The adoption of Council Decision 89/487 was followed by the promulgation of Decree No 89-885 of 14 December 1989 9. which reformulated Article 236 of Annex II to the CGI giving it its present form:

However, that exclusion shall not apply to:

Following the judgment annulling Article 25 of the 1979 Decree, the French authorities asked the Council to approve national derogations from the general system of the Sixth Directive, on the basis of Article 27 thereof. In particular, they asked for permission to prohibit deduction of VAT on expenditure on accommodation, restaurants, hospitality and entertainment.

In the preamble to Decision 89/487, the Council had regard to the fact that ‘this measure is aimed at excluding other expenditure in respect of accommodation, restaurants, hospitality and entertainment from the right to deduct VAT previously charged, in order to prevent tax evasion and avoidance’.

Article 1 of Decision 89/487 provides:

The Court has taken care, first of all, to make it clear that the right to deduct VAT payable on goods and services used for the purpose of carrying out other taxable transactions, within the limits defined by Article 17 of the Sixth Directive, is one of the foundations of the Community tax structure, because it is directly linked to the basic principles of tax neutrality 10. and equality of treatment in tax matters.

In particular, in its judgment in Commission v France, 11. the Court declared that ‘from the features of VAT … it may be inferred … that the deduction system is meant to relieve the trader entirely of the burden of VAT payable or paid in the course of all his economic activities’. The common system of VAT consequently ensures that all economic activities, whatever their purpose or results, provided that they are then subject to VAT, are taxed in a wholly neutral way. 12. Consequently, ‘in the absence of any provision empowering the Member States to limit the right of deduction granted to taxable persons, that right must be exercised immediately in respect of all the taxes charged on transactions relating to inputs. 13. In other words, the Court attaches particular importance to the total and immediate nature of the deduction of VAT for which Article 17 of the Sixth Directive provides. 14.

In this connection, it is relevant to refer to the Court's judgment in Intiem, 15. which stated that the VAT deduction system established by the Sixth Directive must be applied ‘in such a way that its scope corresponds as far as possible to the sphere of the taxable person's business activity’. 16. On the basis of that premiss, the Court held that the right of deduction of VAT paid on goodswhich, although sold to the taxable person in order to be used exclusively in his business, were physically delivered to his employees, could not be excluded. 17.

The Court had the opportunity to confirm that decision in its judgment in BP Supergas. 18. First of all, it reiterated that ‘the fundamental principle which underlies the VAT system, and which follows from Article 2 of the First and Sixth Directives, is that VAT applies to each transaction by way of production or distribution after deduction has been made of the VAT which has been levied directly on transactions relating to inputs’. 19. Regarding the right of deduction provided for in Articles 17 et seq. of the Sixth Directive, the Court declared that this right ‘is an integral part of the VAT scheme and in principle may not be limited. The Court has consistently held … that the right of deduction must be exercised immediately in respect of taxes charged on transactions relating to inputs. Any limitation on the right of deduction affects the level of the tax burden and must be applied in a similar manner in all the Member States. Consequently, derogations are permitted only in the cases expressly provided for in the Directive. 20.

The standstill clause in Article 17(6) of the Sixth Directive is considered to be such a derogation from the general deduction rule. Nevertheless, in two recent judgments, the Court has refused to interpret this exception strictly and has thereby accorded the Member States considerable latitude.

In particular, in the case of Commission v France, 21. the question was raised as to whether the national exclusion, referred to above, of the right of deduction was to be limited to expenditure which is not strictly business expenditure, that is to say, which is incurred by the taxable person for goods and services which are not absolutely essential for the operation of his business. The Court did not endorse the strict approach for which the Commission argued. It held that the relevantprovision of the Sixth Directive ‘authorises the Member States to retain national rules which deny taxable persons the right to deduct VAT on means of transport which constitute the very tool of their trade.’22.

The Court followed the same line of argument in the case of Royscot and

Others, 23. which concerned, as did Case C-43/96 Commission v France, the compatibility with Community law of national derogations which prohibited the deduction of VAT on the purchase of motor cars. The Court held that it followed from the wording of the disputed standstill clause ‘which is clear and unambiguous, that Article 11(4) authorised Member States to exclude from the right of deduction even expenditure which is strictly business-related …’. 24. Consequently, the discretion conferred on the Member States is especially wide; the only restriction imposed on the national authorities is that they may not ‘exclude all and any goods and services from the system of the right of deduction …’. 25.

Another aspect of that judgment is also significant. The Commission had maintained that a Member State might lose the right to retain exclusions of the right of deduction, based on the standstill clause contained in Article 17 of the Sixth Directive, if it had subsequently amended its national law so as to render the clause in question inapplicable. 26. The Court did not give an express reply to this assertion; from its attitude it may be deduced a contrario that it considered either that, in the case pending before it, the disputed amendments of national law had not undermined the standstill clause, or that amendments made to the national rules after the introduction of the clause do not justify the Member States losing their rights under the clause. In any event, however, the Court did not deal indepth with the matter of the effects, with regard to application of the standstill clause, of subsequent amendments to domestic law. 27.

To understand the approach taken by the Court regarding the interpretation of Article 17(6) of the Sixth Directive it is necessary to bear in mind that the Member States and the Community institutions are unable to agree which expenditure does not give a right to deduct VAT. 28. The difficulties which emerged when the disputed provisions of the Sixth Directive were drawn up and the continued failure of the Council, even after the four-year period fixed in theDirective had expired, 29. to take steps to resolve the matter, were invoked both by the Court and the Advocate General in the case of Commission v France30. and by the Advocate General in Royscot. 31. Since the Community legislator in the matter has not managed to formulate the appropriate provisions which would have made it possible to remove the standstill clause in Article 17, it is not for the Court to assume the role of the legislator by proposing that the clause should be interpreted strictly.

So far as concerns Article 27 of the Sixth Directive, which provides that the Council may authorise any Member State to introduce special national measures for derogation from the directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance, the case-law of the Court of Justice has, to date, been as follows:

First of all, the judgment in Commission v Belgium32. clearly showed that the opportunity given to the national authorities to retain divergent or to introduce new legislation authorised only those derogations which were necessary to achieve the expressly stated aims of Article 27, that is, to simplify the tax and to prevent tax evasion and avoidance. In that judgment, the Court held that, since Belgium had not proved that the disputed national measures concerning car taxation were necessary to prevent tax evasion or avoidance, it had failed to fulfil its obligations under Community law.

Subsequently, in its judgment in Direct Cosmetics I, 33. the Court pointed out that the derogations provided for in Article 27 of the Directive were by way of exceptions. National legislation which diverges from the rules of the Sixth Directive, pursuant to Article 27(5), cannot be interpreted widely. Subsequent amendments to that legislation which extend the scope of application of the national rules derogating from the Sixth Directive are compatible with Community law only if they are approved by the Council in accordance with the provisions of Article 27(2) of the Sixth Directive.

In Direct Cosmetics and Laughtons Photographs, 34. the Court was invited to review the validity of a Council decision authorising the adoption of special national measures derogating from the Sixth Directive. The Court examined the legality of the Council decision approving the measures in the light of the criteria laid down in Article 27 of the Sixth Directive, the principle of proportionality and the basic principles of the Directive. After declaring that the notification made by the Member State concerned to the Commission, in accordance with Article 27(2) of the Sixth Directive, referred in ‘sufficient detail to the needs which the measure in question was intended to meet and that it contained all the essential elements to enable the aim pursued to be identified,’35. the Court finally held that the measures approved by the Council decision were not disproportionate to the aim pursued, 36. whilst acknowledging the ‘freedom of action that the measures would confer on the competent authorities ‘to make use of that measure in cases in which its application is considered appropriate.’37.

That case-law also served as a basis for the judgment in BP Supergas, 38. according to which national measures derogating from the Sixth Directive ‘do not accord with Community law unless they remain within the limits of the objectives referred to in Article 27(1) and have also been notified to the Commission and impliedly or expressly authorised by the Council in the circumstances specified in paragraphs (1) to (4) of Article 27.’39.

Lastly, in the Skripalle case, 40. the Court was invited to define the scope of application of the authorisation granted by the Council to Germany, under Article 27 of the Sixth Directive, to adopt a special measure derogating from the provisions of that directive so far as concerns supplies of services for consideration between associated persons. In its judgment, the Court states that ‘national derogating measures designed to prevent the evasion or avoidance of tax must be strictly interpreted and may not derogate from the general rules of the Sixth Directive ‘except within the limits strictly necessary for achieving that aim.’41. The Court considered to what extent those conditions were satisfied in the case and, although acknowledging that there may be a risk of evasion or avoidance between family members or associated persons, said that there is no such risk‘where the objective facts show that the taxable person has acted properly.’42. On these grounds the Court limited the scope of application of the authorisation granted to Germany by the Council.

From the case-law analysed above, it appears that the Court has traced the following guidelines with regard to the question at issue. The deduction of VAT payable on goods and services at an intermediary stage, before other transactions subject to VAT are carried out, under Article 17 of the Sixth Directive, is an important element of the Community VAT scheme, which is directly linked to the fundamental principle of tax neutrality. Therefore, exceptions to the application of that general rule, which are the consequence in particular of the possibility afforded under Article 27 of the Sixth Directive of introducing further derogations from the general scheme of the Directive, must, in principle, be interpreted strictly. However, the latitude for derogation which the Member States are given by virtue of the possibility, under the standstill clause in Article 17(6) of the Sixth Directive, of retaining exclusions from VAT deduction introduced before that directive came into force, is, according to the Court's case-law hitherto, particularly extensive, inasmuch as it applies to any expenditure, irrespective of whether or not it is business expenditure; a limit is imposed on the above national power to exclude VAT deduction only in the extreme circumstances of a Member State ultimately excluding almost all goods and services from the right of deduction scheme.

Ampafrance first of all sets out its view of the applicable tax law in France. It considers that the original scheme, which was introduced by the aforementioned 1967 Decree, excluded from the right to deduct VAT only expenditure incurred to meet the private needs of the management and staff of undertakings. The 1979Decree extended the exclusion from the right to deduct to all expenditure relating to accommodation, restaurants, hospitality and entertainment, without drawing any distinction between whether they benefited the management and staff of the undertakings or third parties as well. Nor does the 1979 Decree draw any distinction between items of expenditure depending on whether or not they are of a business nature. Ampafrance also points out that, in its judgment of 3 February 1989 in the Alitalia case, the French Conseil d'État held that the exclusion of the right to deduct VAT payable on the expenditure at issue, which the taxable person had incurred for the benefit of third parties, was incompatible with Community law. So far as concerns this kind of expenditure, Ampafrance deduces from the case-law of the Conseil d'État 43. prior to the Alitalia judgment that VAT could be deducted, under the 1967 Decree, when the expenditure was incurred for the benefit of the management and staff of the undertaking, if it was proved that it was of a business nature. From the case-law of the Conseil d'État, Ampafrance draws the conclusion that it has never been disputed that taxable persons may deduct VAT on expenditure directly linked to their business activity. It believes that this is why the French authorities initiated the procedure established in Article 27 of the Sixth Directive, in order that the Council would allow them to exclude from the right to deduct VAT any expenditure relating to accommodation, food, hospitality and entertainment, whether of a business nature or not.

Ampafrance relies on the above interpretation, which it suggests in connection with the tax scheme in force in France since 1967, to support its argument that Decision 89/487 at issue in this case covers all expenditure relating to accommodation, restaurants, hospitality and entertainment, not only that which taxpaying companies incur in respect of third parties. Ampafrance maintains that, since the French Republic had kept the 1967 Decree in force, the standstill clause in Article 17 of the Sixth Directive allowed it to exclude from the right to deduction of VAT only expenditure incurred to meet the private needs of the management and staff of an undertaking. The fact that, in the Alitalia judgment, the Conseil d'État questioned the compatibility with Community law only of those provisions of the 1979 Decree which apply to expenditure incurred for the benefit of third parties, cannot be construed — according to Ampafrance — as an indication that the general exclusion from the right to deduction of VAT on expenditure incurred for the benefit of the employees of the taxpaying company, as was provided for by the 1979 Decree and is still applicable, is covered by the standstill clause in Article 17 of the Sixth Directive and is therefore compatible with Community law. In any event, Ampafrance considers that the 1979 Decree repealed the 1967 Decree; the French Republic had therefore lost the opportunity to invoke the standstill clause at the time it initiated the procedure under Article 27 of the Sixth Directive. Ampafrance draws the conclusion that the logical consequence of this is that theauthorisation conferred by the Council in Decision 89/487 could only apply to all expenditure relating to accommodation, food, hospitality and entertainment.

Sanofi took the same view during the hearing. It maintained that the subject-matter of the impugned decision included all expenditure relating to accommodation, restaurants, hospitality and entertainment, irrespective of the status of the person for whose benefit it was incurred.

On the other hand, the French Government claims that the subject-matter of Decision 89/487 is manifestly narrower than as described by the applicants in the main action. In this connection it cites the judgment given by the French Conseil d'État in the Alitalia case, from which it infers a contrario that the general exclusion from the right to deduction of VAT on expenditure relating to accommodation and so forth for the management and staff of taxpaying companies, an exclusion which had already been introduced by the 1967 Decree, was covered by the standstill clause in Article 17(6) of the Sixth Directive and was not, therefore, contrary to Community law. After the Alitalia judgment, and in order to tackle the specific problem of the tax treatment of expenditure incurred by companies for the benefit of third parties, the French Republic decided to take advantage of the opportunity offered to it by Article 27(1) of the Sixth Directive and submitted a request to the Commission. The French Government maintains that, as a consequence, given the context in which the request was submitted to the Community institutions, the subject-matter of Decision 89/487 is confined to excluding from the right to deduct VAT on expenditure relating to accommodation, food, hospitality and entertainment only cases in which the expenditure is incurred by the taxpaying companies for the benefit of third parties.

In this respect the Commission explains that the derogation from the general provisions of the Sixth Directive which was introduced by Decision 89/487 relates to Article 17(2) of the Sixth Directive, not Article 17(6) as inadvertently stated in Decision 89/487. According to the Commission, the request submitted by the French authorities referred to Article 17(2) of the Sixth Directive and consisted in the amendment of the current national legislation towards extending the exclusion from the right to deduction of VAT particularly in respect of expenditure incurred by taxpaying companies for the benefit of third parties. The Commission maintains that that narrow interpretation of Decision 89/487 is based only on the judgment of the Conseil d'État in the Alitalia case, in which it held that the extension of the national scheme of exclusions from the right to deduct VAT was contrary to Community law only in so far as it concerned the specific category of expenditure incurred for the benefit of third parties.

At the hearing the parties attached great importance to the problem of specifying from which provisions of the Sixth Directive the French Republic sought the authorisation to derogate granted to it by Decision 89/487. The Commission again argued that Article 17(2) was involved, not Article 17(6) as inadvertently indicated in the text of the decision. The French Government and the Councilconsidered that the derogation in question was perfectly correct and, in any event, concerned both Article 17(2) and Article 17(6) of the Sixth Directive. The applicants in the main proceedings pointed out that, since the text of Decision 89/487 referred to Article 17(6) of the Sixth Directive, the Commission could not maintain that that was merely an oversight. In so far as it authorises the introduction of derogations from Article 17(6), Decision 89/487 was invalid.

First of all, I do not dispute that the combating of tax evasion and avoidance is a legitimate and important aim of any tax authority seeking to implement the objectives of the Sixth Directive and the proper working of the VAT mechanism. If that were not the case, the risk that taxation on final consumption might be evaded would be contrary to the very philosophy of the tax system in question.

In that connection, the Community legislature provided for a fundamental distinction between expenditure of a strictly business character and that which is unconnected with the taxpayer's business activity, and has expressly excluded expenditure on luxuries, amusements or entertainment from the right to deduct VAT. Only strictly business expenditure may be considered to relate to goods or services ‘used [by the taxpayer] for the purposes of his taxable transactions, within the meaning of Article 17(2) of the Sixth Directive, and is therefore eligible for a deduction of VAT.

That is where the problem lies in this case. There is, of course, expenditure which it is very difficult to categorise as business or other expenditure. Expenditure relating to accommodation, food, hospitality and entertainment, on which this analysis is concentrated, presents the greatest degree of difficulty in this respect, since its connection with a company's business activity is not clear, which may wellfacilitate tax evasion or avoidance. Indeed, this is why it has not been possible to adopt an overall legislative solution to the problem at Community level, as is evidenced by the difficulties encountered during the preparation of the Sixth and Twelfth Directives. 55. Even more so, for some of this expenditure it may well be impossible in practice to separate business expenditure entitled to deduction of VAT from private benefits which are subject to tax, when only a total exclusion from the right to deduct VAT makes it possible to safeguard the public interest, namely penalising certain kinds of unlawful conduct on the part of taxable persons. It should be pointed out, once again, that the proper working of the VAT mechanism developed by Community tax legislation obviously requires action to counteract any kind of tax evasion or avoidance; the Community legislature recognises this necessity when it allows the Member States to request and obtain from the Council authorisation to adopt, under Article 27 of the Sixth Directive, special measures for derogation from the general provisions of that directive in order to ‘prevent certain types of tax evasion or avoidance’.

From the foregoing observations, it seems clear that the contested provisions of Decision 89/487 prima facie follow the logic of Article 27 of the Sixth Directive, inasmuch as they serve the objectives described in that article. However, it cannot necessarily be concluded from those observations that the provisions in question are in keeping with the overall objectives of the Sixth Directive and may be incorporated into the regulatory system which that directive creates. The problem is a consequence of the fact that, if the right to deduct VAT is excluded in respect of all expenditure on accommodation, food, hospitality and entertainment, with the sole exception of the three situations listed in Article 1(2) of Decision 89/487, it is excluded in respect of expenditure which may be shown to have a genuine connection with the production process of undertakings, that is to say, strictly business expenditure. Ampafrance cites the example of the expenditure incurred by a company in respect of hospitality for commercial representatives or customers when presenting its products for sale; it is indisputable that, up to a certain point, that expenditure is directly connected to the company's activities and cannot be regarded as final consumption.

As a result, it is not impossible for the unqualified application of the system to exclude the right to deduct VAT introduced by Decision 89/487 to lead to the exclusion of the right to deduct VAT relating to company business expenditure; nor is that possibility disputed by those parties which maintain that the Community act under examination is lawful. In that way, however, the attempt to rectify a problem created by a possible malfunctioning of the procedure for charging VAT (risk of tax evasion or avoidance), has, at the same time, an adverse and equally serious effect on that tax system, since it subjects to the tax certain forms of intermediate consumption, contrary to the fundamental principle of tax neutrality. I think that, if the Sixth Directive is correctly interpreted and implemented, a tax mechanismproblem cannot be resolved by resorting to a solution which is just as problematical from the point of view of compatibility with the fundamental rules governing the operation of the mechanism in question. In any event, an exclusion from the right to deduct VAT as wide and unqualified as the one at issue here is contrary to the objectives of that directive and upsets the balance of the provisions it contains. By that I mean that Article 27 of the Sixth Directive cannot be used as a weapon with which to undermine one of the bases of that directive, namely tax neutrality.

In that connection, it is not irrelevant from a legal point of view that the contested Community provisions amount to the adoption of an irrebuttable presumption in respect of a given category of tax charges. In my view, the introduction of a presumption of that kind raises questions as to its compatibility with the fundamental rules of the Community legal order. The principle of the rule of law, the maintenance of equal treatment in tax matters and the guarantee of full and effective judicial protection — notions which are receiving greater and greater emphasis nowadays in the legal system constructed by the Community — are hardly compatible with the idea of introducing irrebuttable presumptions designed to provide a legal solution to specific problems such as the legal classification, from a tax point of view, of a category of expenditure. It is no accident that there is a tendency, in the national legal systems of the Member States, to consider ‘legal axioms of this kind anticonstitutional. 56. Indeed, it is not certain that they are compatible with the principles of the European Convention on Human Rights, observance of which is expressly imposed by the EC Treaty. 57. Furthermore, thereare indications in its case-law that the Court of Justice does not view the phenomenon of irrebuttable presumptions very favourably. 58.

To these considerations may be added others concerning the principle of proportionality. It must be pointed out that the possibility of considering that the abovementioned irrebuttable presumptions are consistent with the general objectives of the Sixth Directive and do not by their nature raise any other issue of legality from a Community point of view has no bearing on the appraisals made with regard to the principle of proportionality. Irrespective of the manner chosen to resolve the problems at issue, it is necessary, if the legality of Decision 89/487 is to be upheld, for its provisions to be deemed necessary and appropriate to the achievement of the specific objective pursued and for them to affect the objectives and principles of the Sixth Directive as little as possible. 59.

The method consisting of a general and unqualified exclusion of the right to deduct VAT in respect of a category of expenditure already seems problematical in the light of the principle of proportionality. The three exceptions to the general exclusion from the right to deduct VAT listed in Article 1(2) of Decision 89/487 do not prove — although there have been submissions to the contrary — that the French Republic, the Commission and the Council examined all the circumstances in which expenditure on accommodation, food, hospitality and entertainment constitutesstrictly business expenditure, thus restricting the prohibition in paragraph 1 to what is absolutely essential to prevent tax evasion and avoidance. Furthermore, the statement of reasons for Decision 89/487, even when analysed in the light of the letter which the French Republic sent to the Council asking for the contested derogation, does not make it possible to understand the reasoning of the Community legislature when it excluded from the right to deduct VAT all the circumstances described in Article 1(1) of Decision 89/487, since they involved a risk of tax evasion or avoidance, and when it allowed VAT to be deducted in the circumstances listed in paragraph 2 of the same article. Moreover, it does not adequately explain why the prohibition in paragraph 1 is the only effective means of achieving the aim pursued, namely, to remedy situations of tax evasion or avoidance. More generally, the flaws in the statement of reasons for Decision 89/487 could alone constitute valid grounds for annulment.

However, irrespective of the formal defect in the statement of reasons which I have just mentioned, I think that there are, in any event, strong grounds for believing that the national and Community authorities could effectively protect the public interest, which is to combat tax evasion and avoidance, by adopting measures with a less detrimental effect on the general system of the Sixth Directive. I do not have in mind the introduction of a provision under which the deduction of VAT in respect of expenditure on accommodation, food, hospitality and entertainment would be allowed only up to a given percentage of that expenditure; it is not absolutely certain that this would be the most effective solution. However, it might be possible to introduce a rebuttable presumption concerning the non-business nature of the expenditure concerned, a presumption which the taxable persons could negate by furnishing sufficient proof.

Furthermore — and this is particularly important — French tax law provides for the opportunity to prove that expenditure of the same kind is business expenditure, in the context of corporation tax. I believe that some of the parties were wrong to maintain that the example taken from the corporation tax regime in force in France is not relevant to the case. The risk of tax evasion or avoidance resulting from the classification of certain expenditure on accommodation, food, hospitality and entertainment as expenditure linked to business activity, followed by its deduction from taxable income, profits, goods or services, is generally the same in the case of income tax or corporation tax as in the case of VAT. Consequently, it is not a logical consequence for the tax authorities, in the first case, to allow the expenditure concerned to be deducted from the taxable profits or income and, in the second case, to prohibit the deduction of VAT in respect of goods or services, on the ground that this distinction is dictated by the need to combat certain kinds of tax infringements.

I do not, therefore, understand why it was necessary to formulate such an unqualified prohibition particularly for that specific category of expenditure, a prohibition which leaves taxable persons no latitude to furnish proof to the contrary, since the risk of tax evasion or avoidance which might be inherent in thededuction of the amounts concerned could be counteracted by milder means: for example, by a strict application of Article 230 of Annex II to the CGI, under which VAT may not be deducted in respect of any expenditure which is not incurred in the ‘interest of the company, or even by adopting stricter provisions of a similar content, particularly for the category of expenditure at issue.

In the light of all the foregoing conclusions, I consider that Council Decision 89/487 at issue here was not adopted in a manner consistent with the requirements of the fundamental principle of proportionality.

Before concluding this part of my analysis, I think it is necessary to examine one of the Commission's submissions to the effect that the disputed provisions of Decision 89/487 are, in principle, consistent with Community law; however, when the national authorities implement them, they must specifically consider the extent to which each item of expenditure on accommodation, food, hospitality and entertainment is in fact unconnected with the taxable activities of the company and therefore comes under the heading of tax evasion or avoidance. The fact of the matter is that the Commission is trying to salvage the legality of the provisions in question by giving them an interpretation contra legem, which is not, however, possible. The provisions of Decision 89/487 expressly and absolutely exclude the deduction of VAT in respect of a certain category of expenditure without at the same time providing for any verification as to whether or not it is business expenditure and whether it represents a real danger to the proper working of the VAT system. That is the only possible interpretation of the provisions in question, taken directly from their wording, which is clear. Consequently, since, in accordance with the foregoing analysis, those provisions are contrary to the general system introduced by the Sixth Directive and to the principle of proportionality, they become inapplicable in the national and Community legal system.

In that regard, I am called upon to examine the request made orally by the French Government concerning the limitation of the effects of the Court's judgment on the illegality of the Council decision at issue here. I think that this request should be denied for two reasons. Firstly, it is not possible, in my view, for a Member State to invoke the principle of protection of legitimate expectations in order to avoid the consequences of a judicial decision establishing the invalidity of a Community act. Such a solution does not flow from the principle of legal certainty, as happens in certain cases in which individuals entertain legitimate expectations created by the public authorities; rather it undermines the fundamental principles of legal certainty and the rule of law, since that solution deprives citizens of the possibility of effective protection against actions which, although taken by the administrative authorities in good faith, are based on illegal rules of law. Secondly, the principle nemo auditur propriam turpitudinem allegans means that the French Government may not escape the consequences of a judgment establishing the invalidity of Decision 89/487, since it contributed itself, by its request to the Council and in its general attitude, to the adoption of the decision the unlawful content of which is at issue.

However, in order to reply to the question referred for a preliminary ruling, it is not enough to express a negative conclusion with regard to the legality of Decision 89/487. As I have observed in previous points in my analysis, 60. establishing that Decision 89/487 has irreparable flaws and is invalid raises the question as to the tax law applicable to the disputes in question. Owing to the fact that the current national legislation, as set out in the French Decree of 14 December 1989, 61. now has no legal basis once it is established that Decision 89/487 is invalid, it is necessary to apply — in so far as they are not incompatible with Community law — the provisions designated by the national law in accordance with its own rules. 62.

From the point of view of Community law, it remains to reply to the question concerning the way in which the standstill clause in Article 17(6) of the Sixth Directive will be applied again, if indeed it may be applied again. As has already been pointed out, 63. the clause concerned related, in France, to Decree No 67-604 of 1967. However, could the fact that the cases previously covered by the 1967 Decree 64. also came within the field of application of Decision 89/487 be interpreted as meaning that the Decree had already ceased to be applicable when the French Republic requested the adoption of Decision 89/487, and that, if Decision 89/487 is removed from the body of applicable Community tax law provisions, the French Republic will then be prevented from reinvoking the 1967 Decree and, by extension, the standstill clause in Article 17 of the Sixth Directive?

I think that this question should be answered in the negative. The French Republic introduced a special tax system excluding a given category of expenditure from the right to deduct VAT; this system was set out in the 1967 Decree. The provisions concerned were not affected either by the adoption of Decree No 79-1163 of 1979, amending the previous legislation, or by Decree No 89-885 of 1989, which followed Decision 89/487. The French Republic merely tried to extend the system of exclusions in question in a way which — as emerges from the foregoing analysis — is contrary to the requirements of the Sixth Directive. This shows that it was the firm intention of the French authorities to retain the initial exclusions from the right to deduct VAT and not to abandon the idea of using the standstill clause in Article 17 of the Sixth Directive. For that reason, I believe that,if Decision 89/487 is declared invalid, the effect will not be to deprive the French Republic of the advantages it has already gained from application of the standstill clause in question. Furthermore, it should be pointed out that the actions taken by that State hitherto cannot be regarded as prejudicing legal certainty.

Finally, in order to help the national court, I think it is appropriate to offer the following clarification. To give an appropriate ruling in the pending cases, it is necessary to determine the precise field of application of the exclusions from the right to deduct VAT which the 1967 Decree had introduced. Did the exclusions relate only to expenditure on accommodation, food, hospitality and entertainment which was not business expenditure, as Ampafrance maintains, or did they comprehensively cover certain expenditure, whether or not it was business expenditure, as appears to be inferred from a literal interpretation of the provisions in question? Of course, this problem falls exclusively within the jurisdiction of the national court.

For my part, I would merely recall the aforementioned case-law of the Court of Justice, 65. according to which the discretion enjoyed by a Member State which wishes to retain, by virtue of the standstill clause in Article 17 of the Sixth Directive, the exclusions from the right to deduct VAT which were applicable before the Directive came into force, is particularly wide; the exclusions may also relate to expenditure which is strictly business expenditure. However, that weakens the principle of tax neutrality and the logic underlying the tax system of the Sixth Directive. This gives rise to the following inconsistency: although Community law provides, in principle, for the deduction of VAT on the business expenditure incurred by companies, that deduction may be excluded by national provisions which predate the Sixth Directive. However, that inconsistency, which clearly is not conducive to improving the Community and national tax system, can be eliminated only if the Council adopts legislative measures in respect of the problem at issue.