Opinion of the Advocate-General

I - Introduction

1 In this reference for a preliminary ruling, the Tribunal de Première Instance (Court of First Instance), Charleroi (Belgium), asks the Court to interpret Article 11A(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment (hereinafter: the `Directive'). (1) More specifically, the question seeks a determination as to whether a subsidy paid to a body supplying goods and services is liable to value added tax.

II - Legal framework

2 Article 11A(1) of the Directive sets out the basis of liability to value added tax on transactions within the territory of the country as follows:

`The taxable amount shall be: (a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies'.

This article was incorporated into Belgian law by the first paragraph of Article 26 of the Belgian Value Added Tax Code.

III - Facts and procedure

3 The Office des Produits Wallons ASBL (hereinafter: `OPW') is engaged in advertising and selling Walloon products, and is subject to VAT in that respect. It also publishes a magazine. It receives a subsidy from the Région wallonne (Walloon Region) with which it has concluded a framework agreement.

4 On 19 February 1997, the VAT authorities carried out an audit of OPW's accounts of which a formal record was made dated 25 April 1997. The VAT authorities allege that OPW has not paid VAT on the subsidy paid to it by the Région wallonne. For that reason, the authorities claim an amount of BEF 6 712 500 for the period from 1994 to 1996, together with an uncontested amount of BEF 33 833.

5 On 7 December 1998 a final demand was issued for payment of the amounts of BEF 6 746 333 (VAT) and BEF 1 349 000 (fines), together with interest at a rate of 0.8% per month as from 21 January 1997. In an action dated 14 January 1999, OPW challenged the final demand before the Tribunal de Première Instance, Charleroi. It sought a declaration that it was null and void as regards the sum exceeding BEF 33 833 and an order that the Belgian State repay all amounts unduly received, together with interest as provided for by law.

6 The proceedings between OPW and the Belgian State before the national court were based on Article 26 of the Belgian Value Added Tax Code.

7 It is common ground between the parties to the litigation that a subsidy forms part of the taxable amount if it is directly linked to the price. Such is the case when:

- it is paid to the producer, supplier or provider of goods or services;

- it is paid by a third party;

- it constitutes consideration or part of the consideration for a supply of goods or services.

The parties disagree as to the scope of that third condition.

8 By a decision of 11 May 2000, received at the Court Registry on 16 May 2000, the Tribunal de Premiere Instance, Charleroi (Second Civil Chamber) subsequently asked the Court for a preliminary ruling on the following questions:

`(1) For the purpose of applying Article 11 A of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes ..., do operating subsidies covering part of a taxable person's running costs (investment aid, contribution to general or current expenses, staff costs) and affecting the final cost price of its goods or services, but without being able to be distinguished from a transaction price, constitute a taxable amount?

(2) Is their taxable nature conditional on the existence of a distinct service to the body paying the subsidy and on the benefit derived by that body being equivalent to the consideration supplied?

(3) If the answer to that question is in the affirmative, how is the value of the benefit derived by the body paying the subsidy to be determined?'

IV - Applicable case-law

9 The final limb of Article 11A(1)(a) of the Directive is referred to in certain interesting observations made by Advocate General Jacobs in his Opinion in the case of Landboden-Agrardienste: (2)

`12. One might, with some justification, take the view that there is little, if any, point in imposing VAT on subsidies. By doing so a public authority simply claws back money which has been granted by itself or by another public authority; in the latter case taxation of subsidies amounts to a rather circuitous - and costly - way of reallocating revenue between public authorities. ...

13. Moreover, unless the amount clawed back in tax is offset by a corresponding increase in the amount of the subsidy, taxation will reduce the economic effects which the subsidy seeks to attain. Where the recipient has a choice between selling his produce and accepting a subsidy in return for not marketing it, taxation of the subsidy will make the latter option less attractive.

14. The Sixth Directive makes only limited provision for taxation of subsidies. Article 11A(1)(a) includes in the taxable amount "subsidies directly linked to the price" of supplies. Thus, a subsidy will be included in the taxable amount if it is paid subject to the condition that the recipient makes a supply of goods or services. For example, a support measure whereby a farmer receives a certain sum for each product sold forms part of the consideration for the supply. On the other hand, subsidies that are more remote from particular supplies and intended more generally to improve the undertaking's economic position do not form part of the basis of assessment. Examples of such subsidies include subsidies for the purchase of assets, for covering losses and for the restructuring of an undertaking.

15. The distinction made by the Sixth Directive is not without its difficulties. As the Commission noted in its First Report [on the application of the Directive]:

"Article 11A(1)(a) of the Directive stipulates that subsidies received by a taxable person which are `directly linked to the price' of the supplies made by that person must be included in the taxable amount as components of the prices paid by third parties. While it is relatively easy to decide straight away that subsidies are `directly linked to the price' when their amount is determined either by reference to the selling price of the goods or services supplied, or in relation to the quantities sold, or again in relation to the cost of goods or services supplied to the public free of charge, it is extremely difficult to decide in the case of other types of subsidy such as deficit subsidies or operating subsidies, which are paid with the aim of improving a firm's economic position and which are granted without specific reference to any price. The absence of any substantial difference between these two types of subsidy (those `directly linked to the price' are usually also aimed at improving a firm's position), together with the fact that a Member State can convert a subsidy of the first type into a subsidy of the second type, illustrate the fragility of a distinction based on purely formal criteria (the manner in which the subsidy is granted) and thus the inadequacy of the Directive in this respect.'

16. Nevertheless the treatment of subsidies in the Directive may be seen to conform to the general rule that there should be a direct link between a supply and the consideration paid. It might also be justified on the ground that subsidies granted with reference to specific supplies are likely to have a more direct impact on competition. Superficially at least, there seems to be a greater case for treating such subsidies as part of the price paid by (or on behalf of) the consumer.

10 The Court has had occasion in two cases to examine the liability to VAT on certain subsidies paid by public authorities to individuals. Both the Mohr judgment (3) and Landboden-Agrardienste (4) turned on remuneration paid to farmers who, in exchange for that remuneration, undertook to reduce their production. The Court confirmed in those judgments that a subsidy paid by public authorities in the general interest may constitute consideration for a service within the meaning of the Directive. `Thus, in order to determine whether a supply of services is caught by the Sixth Directive, it is necessary to examine the transaction in the light of the objectives and nature of the common system of VAT'. (5) However, in that case, `the farmer does not supply services to an identifiable consumer or any benefit capable of being regarded as a cost component of the activity of another person in the commercial chain'. (6)

11 The second point of relevance to this case is to determine what is the consideration. According to the Court's settled case-law, `consideration is the "subjective" value, that is to say, the value actually received in each specific case, and not a value estimated according to objective criteria'. (7)

12 In the case of a subsidy, the existence of a subjective value is swiftly established. What is more interesting is to determine whether that value also constitutes consideration for a supply of goods or of services. That therefore raises the issue of the direct link. In accordance with settled case-law, `provision of services is only taxable if there is a direct link between the service provided and the consideration received'. (8) An instructive illustration of the interpretation given by the Court of the concept of `direct link' may be found in the Tolsma judgment. I quote: `If a musician who performs on the public highway receives donations from passers-by, those receipts cannot be regarded as the consideration for a service supplied to them'. (9) There is in reality no contract between the parties, nor the necessary link between the activity and the payment. The payment is in truth quite independent of the enjoyment of the musical performance.

13 I would also refer to the judgment in the Apple and Pear Development Council case. (10) That case concerned a body whose object was to advertise, promote and improve the quality of apples and pears produced in England and Wales. That object is comparable with that of OPW. The Council's revenue derived however from charges paid by the growers. The Court considered that `mandatory charges of the kind imposed on the growers in this case do not constitute consideration having a direct link with benefits accruing to individual growers as a result of the exercise of the Development Council's functions'. (11) I emphasise that that case did not concern a subsidy. The Court had to determine whether the charges paid by the growers were to be regarded as consideration for the service provided to them.

14 In his Opinion, Advocate General Slynn attached importance to the fact that the Council had been set up in the public interest and that the charge was intended to cover administrative costs and other costs linked to a series of activities.

15 The judgment in First National Bank of Chicago (12) provides clarification on two points relating to the strength of the link between the activity and the consideration. That case concerned commission charged by a bank for currency transactions. The commission consists of the margin between the purchase and sale price of currency. In