The European Court of Justice (ECJ) (Grand Chamber) ruled that, on the true construction of art. 4(1) and (2) of Council Directive 77/388 ('the sixth directive') the issuing of licences, such as third generation mobile telecommunications licences ('UMTS'), by auction by the national regulatory authority responsible for spectrum assignment of the rights to use telecommunications equipment, did not constitute an economic activity within the meaning of that provision and did not fall within the scope of the directive.

Facts

In spring 2000, the Secretary of State allocated certain telecommunications licences by public auction. The undertakings which obtained those licences were those that bid the most money for the frequency lots offered, one of those lots being reserved for a new entrant in the market. As a result of the auction, the tenderers as a whole paid a total sum of £22,477,400,000. The auction was carried out in the name of the Secretary of State by the Radiocommunications Agency, which was an executive agency of the Department of Trade and Industry. No reference to VAT was made during the auction procedure.

The licences thus allocated were due to expire on 31 December 2021 unless revoked earlier by the Secretary of State or surrendered by the licensee. As they considered that those allocations were subject to VAT and that the VAT was included in the amounts paid, the tendering companies sought to recover the sums which they claimed to have paid as VAT under the UK legislation which transposed art. 17 of the sixth directive. As their claims were rejected on the ground that the grant of the licences was not subject to VAT, they brought proceedings in the VAT tribunal. In the circumstances, the tribunal stayed the proceedings and referred to the ECJ for a preliminary ruling.

Issue

Whether an activity such as the issuing of the licences in question by the Secretary of State by auction constituted an 'economic activity' within the meaning of art. 4(1) and (2) of the sixth directive.

Decision

The ECJ (Grand Chamber) (ruling accordingly) said that under art. 4(1) of the sixth directive, 'taxable person' meant any person who independently carried out in any place any economic activity specified in para. 2 thereof, whatever the purpose or results of that activity. 'Economic activity' was defined in art. 4(2) as including all activities of producers, traders and persons supplying services, inter alia the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis. Although art. 4 gave a very wide scope to VAT, only activities of an economic nature were covered. Moreover, an analysis of the definitions of 'taxable person' and 'economic activities' showed that the scope of the term 'economic activities' was also very wide, and that the term was objective in character, in the sense that the activity was considered per se and without regard to its purpose or results.

In this case, it appeared that the activity carried out by the Secretary of State consisted of allocating, by auction, rights to use certain frequencies in the electromagnetic spectrum to economic operators for a specified period. At the end of the awards procedure, those operators were issued with the authorisation to exploit the rights thus acquired to set up telecommunications equipment operating in defined parts of the electromagnetic spectrum. Therefore it had to be established whether the issuing of such an authorisation was to be regarded, by its very nature, as the 'exploitation of property' within the meaning of art. 4(2).

In accordance with the requirements of the principle of neutrality of the common system of VAT, the term 'exploitation' referred to all transactions, whatever their legal form, by which it was sought to obtain income from the goods in question on a continuing basis. The activity at issue in the present case consisted of the issuing of authorisations which allowed the economic operators who received them to exploit the resulting frequency use rights by offering their services to the public on the mobile telecommunications market in return for remuneration. Such an activity constituted the means of fulfilling the conditions laid down by Community law, for the purpose, inter alia, of ensuring the effective use of the frequency spectrum and the avoidance of harmful interference between radio-based telecommunications systems and other space-based or terrestrial technical systems and also the efficient management of radio frequencies, as was apparent from art. 2(1)(d) of Council Directive 97/13 read in conjunction with art. 4(1) and 8(1) thereof. Furthermore, the issuing of such authorisations fell exclusively within the competence of the member state concerned.

Thus, an activity such as the present constituted a necessary pre-condition for the access of economic operators such as the taxpayers to the mobile telecommunications market. It could not constitute participation in that market by the competent national authority. Only the operators, who were the holders of the rights granted, operated on the relevant market by exploiting the property in question for the purpose of obtaining income therefrom on a continuing basis. In those circumstances, an activity such as the present could not, by its very nature, be carried out by economic operators. It was irrelevant that those operators thereafter had the right to transfer their rights to use radio frequencies. Such a transfer, apart from remaining subject to the control of the national regulatory authority responsible for spectrum assignment, in accordance with art. 9(4) of Council Directive 2002/21, could not be compared to the issuing of an authorisation by the state.

Therefore, in granting such an authorisation, the competent national authority was not participating in the exploitation of property, consisting in rights to use the radio-frequency spectrum for the purpose of obtaining income therefrom on a continuing basis. By means of that allocation procedure, the authority exclusively carried out the activity of controlling and regulating the use of the electromagnetic spectrum which had been expressly delegated to it. Furthermore, the fact that the issuing of licences gave rise to a payment could not affect the legal status of that activity. Consequently, the issuing of those licences could not constitute an 'economic activity' within the meaning of art. 4(2).

Even if a regulatory activity carried out by a body governed by public law might constitute an economic activity within the meaning of art. 4(2), the fact remained that the application of art. 4(5) of the sixth directive implied a prior finding that the activity considered was of an economic nature but that was not the case here.

European Court of Justice (Grand Chamber).
Judgment delivered 26 June 2007.