The European Court of Justice (ECJ) ruled that member states, when giving their taxable persons the right to opt for taxation under art. 13© of Directive 77/388 (‘the sixth directive’), might make a distinction by reference to types of transactions or groups of taxable persons provided that they observed the general objectives and principles of the sixth directive, in particular the principle of fiscal neutrality and the requirement of correct, straightforward and uniform application of the exemptions provided for. It was for the national court to determine whether national legislation which, by exempting generally the transactions of non-profit-making sports clubs, restricted their right to opt for taxation of leasing and letting transactions exceeded the discretion conferred on the member states.

Facts

The taxpayer was a sports club classed as a non-profit-making association established in Austria. The taxpayer's transactions were exempt from VAT, as activities in the public interest, under art. 13(A)(1)(m) of the sixth directive, provided that they were closely linked to the practice of sport or physical education. In 1997 it commenced construction of an annexe to its clubhouse, part of which was intended to be used for the practice of sport, whilst the other part, having a surface area equal to approximately a quarter of the total area of the annexe, was to be used as a refreshment bar and leased to a lessee. In its 1997 VAT declaration, the taxpayer deducted an amount in respect of the input VAT paid exclusively for that part of the annexe intended to be used for the bar. It opted to waive application of the national law relating to small businesses.

The tax authorities refused to allow the deduction on the grounds that, as the taxpayer was exempt from tax under art. 13(A)(1)(m), it could not waive the exemption available under art. 13(B)(b) in respect of turnover resulting from the leasing and letting of immovable property, pursuant to art. 13©. The national court dismissed the taxpayer's challenge to that decision, taking the view that the exemption for nonprofit-making sports clubs, as a special law, prevailed over the exemption for the leasing and letting of immovable property. When the taxpayer appealed, the Higher Administrative Court doubted whether the exemption for leasing and letting could be restricted by reference to the types of transactions or taxable persons. It stayed the proceedings and referred that question to the ECJ for a preliminary ruling.

Issues

Whether a member state might exercise its option under art. 13© of the sixth directive to give taxable persons the right, despite the tax exemption for the letting of immovable property provided for in art. 13(B)(b), to opt for taxation only in a uniform manner or whether it might distinguish by reference to types of transactions or groups of taxable persons; and whether art. 13(B)(b) in conjunction with art. 13(C)(a) permitted member states’ legislation under which the possibility of opting for taxation of leasing and letting transactions was limited in such a way that non-profit making sports clubs did not have that option.

Decision

The ECJ (ruling accordingly) said that the taxation of leasing and letting transactions was a power which the Community legislature had conferred on the member states in derogation from the general rule established in art. 13(B)(b) of the sixth directive, according to which leasing and letting transactions were exempt from VAT. The right to deduct attached to that taxation did not therefore operate automatically in that context, but only if the member states had made use of the power under art. 13© and subject to the taxable persons exercising the right of option allowed to them.

The member states had a wide discretion under art. 13©. It was for them to assess whether they should or should not introduce the right of option, depending on what they considered to be expedient at any given time. Thus, in exercising their discretion with regard to the right of option, member states might also exclude certain transactions or categories of taxable persons from the scope of application of that right. Nevertheless,

when the member states used their ability to restrict the scope of the right of option and to determine the arrangements for its exercise, they were to observe the general objectives and principles of the sixth directive, in particular the principle of fiscal neutrality and the requirement for correct, straightforward and uniform application of the exemptions provided for.

With regard to the question whether the member states might exclude non-profit-making sports clubs from the right of option by way of a general exemption of all their transactions, art. 13© did not specify on what conditions and by what means the scope of the right of option might be restricted. It was therefore for each member state to specify, in its national law, the scope of the right of option and to lay down the rules pursuant to which certain taxable persons might benefit from the right to opt for taxation of the leasing and letting of immovable property. Nevertheless, art. 13© did not confer upon the member states the right to place conditions on or to restrict in any manner whatsoever the exemptions provided for by art. 13(B). It merely reserved the right to the member states to allow, to a greater or lesser degree, persons entitled to those exemptions to opt for taxation themselves, if they considered that it was in their interest to do so.

In accordance with art. 13(B), the member states exempted the leasing or letting of immovable property under conditions which they laid down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse. The decision of a member state, pursuant to art. 13©, to restrict the scope of the right to opt for taxation of leasing of immovable property might be justified, inter alia, by the same aims. However such a decision had to observe the principle of neutrality. It was for the national court to determine, having regard to the specific circumstances of the case, whether or not the application of a general exemption to all transactions, including the leasing of immovable property, effected by non-profit-making sports clubs entailed a breach of the principle of fiscal neutrality. Thus, there might be a breach of the principle of fiscal neutrality if a sports club having as its purpose under its statute the exercise or furthering of physical education could not opt for taxation where that was possible for other taxable persons carrying out comparable activities which were therefore in competition with those of that club.

In order to determine whether the limits of that discretion were exceeded, the national court must also check whether there was a breach of the requirement for a correct, straightforward and uniform application of the exemptions provided for. To that end, it must take account, in particular, of the fact that the exemption system instituted by the sixth directive provided for differentiated treatment of the transactions of nonprofit-making associations only to the extent that they were connected to the practice of sport and the services were supplied to persons practising sport. In such a case, those transactions were exempt from VAT for reasons of the public interest.

European Court of Justice (Third Chamber). Judgment delivered 12 January 2006.