The European Court of Justice ruled that art. 15(5) of Council Directive 77/388 covered both full chartering and partial chartering of vessels used for navigation on the high seas. Consequently, that provision precluded national legislation which granted the benefit of the exemption from VAT only in the case of full chartering of such vessels. It was for the referring court to determine whether the contract concluded between the parties to the main proceedings satisfied the conditions of a chartering contract within the meaning of art. 15(5).

Facts

The taxpayer entered into a partial chartering contract under which, in return for payment, it provided part of the space on its vessels to transport containers between several ports on the Iberian peninsula and the Canary Islands, an area outside the scope of Community legislation according to the second subparagraph of art. 3(3) of the sixth directive. The taxpayer did not include VAT on the invoices relating to that contract since it believed that the chartering transaction was exempt. However, the Spanish tax authorities, holding that the exemption did not apply, in so far as the contract in question related to partial chartering and not full chartering, made adjustments for VAT linked to the sums paid under that chartering contract.

The taxpayer then challenged that adjustment before the regional economic administrative court in Madrid, which dismissed its application. It appealed to the High Court of Justice, which held that the resolution of the dispute before it required an interpretation of the sixth directive, stayed proceedings and made a reference to the European Court of Justice for a preliminary ruling.

Issue

Whether the term ‘chartering’ in the exemption provided for in art. 15(5) of the sixth directive was to be interpreted as including only chartering of the entire capacity of the vessel (full chartering) or as including chartering relating to a part or percentage of the vessel's capacity (partial chartering); and whether the sixth directive precluded a national law which allowed exemption only for full chartering.

Decision

The European Court of Justice (Fourth Chamber) (ruling accordingly) said that the national law exempted from tax the full chartering of vessels used for international maritime shipping, and used for commercial activities of carriage of goods against payment. Further, it was common ground that, according to the second subparagraph of art. 3(3) of the sixth directive, the Canary Islands were an extra-Community territory and that, under that provision, read together with art. 15(1) thereof, the carriage of goods to those islands was considered as an export for VAT purposes. Moreover, the exemptions provided for by the sixth directive constituted 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.

That system was based in particular on two principles. First, each supply of goods and services effected for consideration by a taxable person was subject to VAT. Second, in accordance with the principle of fiscal neutrality, economic operators carrying out the same transactions might not be treated differently in relation to the levying of VAT. In light of those principles, such exemptions had to be interpreted strictly since they constituted exceptions to the general principle that VAT was to be levied on all services supplied for consideration by a taxable person. That requirement of strict interpretation did not, however, mean that the terms used to specify the exemptions should be construed in such a way as to deprive those exemptions of their intended effect. The concept of chartering in art. 15(5) of the sixth directive had to be interpreted in light of those criteria.

Article 15 contained no definition of the concept of ‘chartering’. It was necessary to consider not only its wording, but also the context in which it occurred and the objective pursued by the rules of which it was part. It was clear, in the first place, from the wording of art. 15(5) that member states were to exempt the supply, modification, repair, maintenance, chartering and hiring of the sea-going vessels referred to in paragraph 4(a) and (b) of that article, particularly those used for navigation on the high seas and for the purposes of commercial activities, as well as the supply, hiring, repair and maintenance of equipment – including fishing equipment – incorporated or used therein.

Further, art. 15(5) made no distinction between full chartering and partial chartering. It merely included the chartering of vessels used for navigation on the high seas within those cases exempt from VAT laid down in art. 15, without specifying whether such chartering must be full or partial. Although the introductory sentence of art. 15 stated that member states were to lay down the conditions for exemptions in order to ensure the correct and straightforward application of the exemptions and to prevent any possible evasion, avoidance or abuse, those conditions could not affect the definition of the subject-matter of the exemptions envisaged.

Whether a specific transaction was subject to or exempt from VAT could not depend on its classification in national law. Article 15 dealt with the exemption from VAT of transactions for export outside of the Community, equivalent transactions and international carriage. In the context of international business, such an exemption sought to respect the principle that the relevant goods or services should be taxed at their place of destination. Every export and equivalent transaction should thus be exempt from VAT in order to ensure that the relevant transaction was taxed only in the place where the relevant products were consumed.

In the present case, under national law only the full chartering of vessels used for navigation on the high seas and for international shipping was exempt from VAT. Therefore, notwithstanding that they might be transactions equivalent to export, that law did not allow the VAT exemption to apply to partial chartering of those vessels. It followed that levying tax on that type of chartering at the time of such transactions infringed the principle that the relevant goods and services should be taxed at their place of destination and went against the objective of the exemption scheme set out in art. 15.

By limiting VAT exemption to full chartering alone, the national law made the benefit of that exemption subject to the size of the vessel used for the chartering, as the same volume of freight might be subject to VAT or exempt depending on whether the volume of freight filled all or only part of the vessel's capacity. Such a condition deprived the exemption of chartering set out in art. 15(5) of its effectiveness. In those circumstances, while the words used to describe the exemption set out in art. 15(5) had to be strictly interpreted, to maintain a particularly strict interpretation of the concept of chartering would lead to misconstruing both the wording and the objective of that provision. Therefore, art. 15(5) covered both full chartering and partial chartering of vessels used for navigation on the high seas. Consequently, that provision precluded national legislation which granted the benefit of the VAT exemption only in the case of full chartering of such vessels.

European Court of Justice (Fourth Chamber).
Judgment delivered 18 October 2007.