The European Court of Justice (Second Chamber) ruled that art. 15(4)(a) of Council Directive 77/388 (‘the sixth directive’) applied to vessels used on the high seas not only for the carriage of passengers for reward but also for commercial, industrial or fishing activity. Under art. 15(8), the exemption provided for therein applied to the supply of services directly to the shipowner for the direct needs of sea-going vessels. Furthermore, in the framework of the common system of VAT, national tax authorities were obliged to respect the principle of protection of legitimate expectations. It fell to the referring court to decide whether the taxable person could reasonably have believed that the decision in question had been taken by a competent authority.

Facts

The taxpayer company operated a tanker which carried petroleum products within Greece on behalf of various charterers that traded in liquid fuel. In the course of a fiscal audit of its books and accounting documents for the tax years 1994, 1995 and 1996, it was found that one of its charterers/suppliers was a Panamanian company (‘Oceanic’), whose business was trading in petroleum products. The taxpayer had not charged VAT on the gross freightage it levied on each bill of lading issued for the carriage of petroleum products intended for the provisioning of vessels within Greece on behalf of Oceanic, on the ground that those transactions were exempted from VAT.

Following the abolition, with effect from 1 January 1993, of the VAT exemption in respect of supplies of services for the transport of petroleum products, the services supplied by the taxpayer became subject to VAT because they took place within Greece, irrespective of the fact that the recipient of those services was established outside the Community. In those circumstances, the tax authority charged the taxpayer the difference in the main tax payable, together with an increase for making a wrong declaration in respect of each of the years concerned and a fine.

The taxpayer challenged those decisions before the national courts and the appeal court made a reference to the ECJ for a preliminary ruling as to the scope of the VAT exemption for the chartering of sea-going vessels.

Issues

Whether art. 15(4)(a) of the sixth directive, to which art. 15(5) referred, concerned the chartering of both vessels used on the high seas which carried passengers for reward and vessels used for the purpose of commercial, industrial or fishing activities; whether, for the exemption from tax in accordance with art. 15(8) to apply, the service had to be supplied to the vessel owner, or whether the exemption also applied in respect of a service supplied to a third party, subject only to the condition that it met the direct needs of the vessels covered by art. 15(4)(a) and (b); and whether Community law permitted tax to be charged for a past period where the person liable did not pass tax on to the other contracting party during that period, so that the tax was not paid to the state, resulting from the belief of the person liable, brought about by conduct of the tax authorities, that he did not have to pass on the tax.

Decision

The European Court of Justice (Second Chamber) said that, even if certain language versions of art. 15(4)(a) lent themselves to different interpretations, the scheme and purpose of the article suggested that the criterion of ‘use on the high seas’ applied to all the vessels mentioned in that provision. It was clear from the title of that article, ‘Exemption of exports from the Community and like transactions and international transport’, that it was intended to exempt provisioning, and, under certain conditions, supplies of goods for sea-going vessels from VAT.

Applying the criterion of ‘use on the high seas’ did not enable exemption to be given for sea-going vessels used for the purpose of commercial, industrial or fishing activities unless those activities took place on the high seas. If that provision were to be understood as referring only to vessels used on the high seas, then art. 15(4)(b), which provided for such an exemption for vessels used for inshore fishing, would be superfluous.

Furthermore, VAT exemptions were to be interpreted strictly, since they constituted exceptions to the general principle that turnover tax was to be levied on each service supplied for consideration by a taxable person. Therefore, art. 15(4)(a), to which art. 15(5) referred, applied not only to vessels used on the high seas for the carriage of passengers for reward, but also to vessels used on the high seas for the purpose of commercial, industrial or fishing activity.

Services supplied to shipowners

The cases pending before the referring court had as their subject-matter the carriage of fuel by the taxpayer on behalf of Oceanic, which sold it to the owners of the vessels in question. Thus, the taxpayer supplied its services not directly to the shipowners but to Oceanic, which itself effected delivery of the goods to the shipowners.

Exemptions were independent concepts of Community law which had to be placed in the general context of the common system of VAT introduced by the sixth directive. Furthermore, exemptions from VAT had to be interpreted strictly. The operations of fuelling and provisioning of vessels mentioned in art. 15(4) were exempted because they were treated as exports.

In the case of export transactions, just as the automatic exemption laid down in art. 15(1) applied exclusively to the final supply of goods dispatched or transported outside the Community by the seller, or on his behalf, the exemption laid down in art. 15(4) could only apply to the supply of goods to a vessel operator who would use those goods for provisioning and it could not therefore be extended to the supply of goods effected at an earlier stage in the commercial chain.

Extending the exemption to stages prior to the final supply of the goods to the vessel operator would require member states to set up means of supervision and monitoring in order to be sure of the ultimate use of the goods supplied free of tax. Such means would give rise to constraints for the member states and the economic agents concerned which would be irreconcilable with the ‘correct and straightforward application of such exemptions’ prescribed by the first sentence of art. 15. The same considerations applied to the exemption for the supply of services under art. 15(8). It followed that, in order to guarantee a coherent application of the sixth directive as a whole, the exemption provided for under this provision applied only to services supplied directly to the shipowner, and could not therefore be extended to services supplied at an earlier stage in the commercial chain. Accordingly, the exemption provided for in art. 15(8) applied to the supply of services directly to the shipowner for the direct needs of sea-going vessels.

Legitimate expectations

The principles of protection of legitimate expectations and legal certainty formed part of the Community legal order and had to be respected not only by the institutions of the Community, but also by member states in the exercise of the powers conferred on them by Community directives. It followed that national authorities were obliged to respect the principle of protection of the legitimate expectations of economic agents.

As regards the principle of protection of the legitimate expectations of the beneficiary of the favourable conduct, it was appropriate, first, to determine whether the conduct of the administrative authorities gave rise to a reasonable expectation in the mind of a reasonably prudent economic agent. If it did, the legitimate nature of this expectation must then be established.

It fell to the national court to decide whether the taxpayer, which operated a tanker to carry petroleum products within Greece on behalf of various charterers, could reasonably have believed that the tax authority was competent to rule on the application of the exemption to its activities. Therefore, in the framework of the common system of VAT, national tax authorities were obliged to respect the principle of protection of legitimate expectations. It fell to the referring court to decide whether, in the circumstances, the taxable person could reasonably have believed that the decision in question had been taken by a competent authority.

European Court of Justice (Second Chamber). Judgment delivered
14 September 2006.