Discretionary power of the Member States

This reference for a preliminary ruling concerned the interpretation of Article 135(1)(i) of Council Directive 2006/112/EC which provides that Member States shall exempt from VAT “ ... other forms of gambling, subject to the conditions and limitations laid down by each member state”. The reference was made in proceedings between Leo-Libera and the German Tax Authorities concerning the charging of VAT on revenue generated through the organisation of gambling by means of gaming machines.

Leo-Libera disputed a determination by the German Tax Authorities claiming that its operations of a gaming hall equipped with gaming machines were exempt from VAT. It claimed that an amendment made to German national legislation changed the VAT exempt status of licensed public casinos.

The German tax authorities rejected the complaint as unfounded; Leo-Libera subsequently brought an action to the Finance Court, which also rejected their claim on the grounds that the transactions relating to gaming machines were not exempt under national legislation.

Leo-Libera brought their claim to the Federal Finance Court and maintained that in accordance with Article 135(1)(i) of Directive 2006/112 a member state cannot exempt from VAT only betting and lotteries, but must also exempt ‘other forms of gambling’ from that tax. It further claimed that the legislation infringes the principle of fiscal neutrality since it places operators of gaming machines at a disadvantage in relation to public casinos, inasmuch as the latter can pass VAT on to the gamblers. The Federal Finance Court referred the following question to the European Court of Justice (ECJ) for a preliminary ruling

• ‘Is Article 135(1)(i) of Directive 2006/112 ... to be interpreted as meaning that Member States are permitted to have a rule under which only specified forms of (race) betting and lotteries are exempt from tax, and all “other forms of gambling” are excluded from the tax exemption?’

Judgment

The ECJ's starting point was to note that exemptions from VAT, as set out in the Directive, must be interpreted strictly as they are exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person. The ECJ had to consider whether Member States may validly restrict the scope of the VAT exemption provided in Article 135(1)(i) in such a way that only a minor proportion of the gambling organised within the territory of those states can benefit from that exemption. The provision leaves broad discretion to the member state as regards the exemption or the taxation of transactions as it allows the state to fix the conditions and the limitations to which entitlement to that exemption may be made subject. In previous cases, the Courts held that the organisation and operation of gambling and gambling machines is in principle to be exempted from VAT. For gambling, Member States are not only free to lay down the conditions and limitations of the exemption provided for in the Article but also have the discretion which allows them to prohibit activities, totally or partially, or to restrict them and to lay down more or less rigorous procedures for controlling them. The ECJ considered that the German national legislation does not treat differently, for VAT purposes, similar forms of gambling which may be regarded as being in competition with one another.

The answer to the question referred was that “Article 135(1)(i) of Directive 2006/112 must be interpreted as meaning that the exercise of the discretionary power of the Member States to fix conditions and limitations on the VAT exemption provided for by that provision allows those States to exempt from that tax only certain forms of gambling”.

The full judgment is available at http://curia.europa.eu/jcms/jcms/j_6/