Court of Justice of the EU

In Veronsaajien oikeudenvalvontayksikkö (Service d’hébergement en centre de données) (Case C-215/19) the Court (proceeding to judgment without an Advocate General opinion) has said that a supply of hosting computer servers in a computer centre, did not amount to an exempt supply of leasing land nor could the service be regarded as connected with land, (the place of supply of which would be the location of the property).

The Finnish taxpayer was an operator of wireless communication networks, and offered a service of data centre hosting to operators established in Finland and in other Member States. The data centre hosting services offered by the taxpayer included the provision of a lockable equipment cabinet as well as other services such as electricity, temperature and humidity control, cooling, power outage detection and smoke detector services intended to ensure that the servers were used in optimal conditions.

The equipment cabinets were bolted to the floor of the property owned by the taxpayer. The servers were screwed into the cabinets and could be removed in a few minutes. The customers would install their own hardware to the cabinets.

The customers did not have a key for the cabinet in which they installed their server, but were able to obtain it from a security service available at any time.

The Finnish referring court asked first whether the data centre hosting service amounted to an exempt supply of land rental, or, failing that, a service relating to land so that the place of supply was where the immovable property was located.

The Court noted that there were two elements to the supply, being, on the one hand, the provision of ‘services bays’ or cabinets equipped with a lockable door, in which the customers could install their servers, and, on the other hand, the provision of electricity and various other services intended to provide optimal conditions for the servers to function.

It was clear to the Court that all of the elements of the data centre hosting made up one supply.

The Court noted that case-law has found that in order for there to be an exempt supply of leasing land, the putative tenant must have the right to occupy the building as if it were the owner, to the exclusion of others. The Court further noted that while the supply of leasing land is an economic activity, it is a relatively passive one, not generating significant added value.

In this case however, the taxpayer provided its customers not only with a place to install their servers but also, other ancillary services intended to ensure the use of the servers under optimal conditions. The taxpayer was therefore doing more than passively providing land. It also appeared to the Court that customers could only access the cabinet or ‘service bay’ that had been assigned to them and did not have the right to control or restrict access to the part of the building allocated to them.

Further, subject to the final determination of the referring court, the Court said that it appeared that the cabinets allocated to customers were not part of the land; they were not an integral part of it either by virtue of the land being incomplete without them nor were they permanently fixed to the land.

The Court therefore concluded that the taxpayer could not be said to be making an (exempt) supply of land.

The Court went on to consider whether the service could be said to be ‘related to land’ and noted that this would require that the land be central and essential to the services provided or that the service would modify the legal status or physical characteristics of the property.

Given that the customers did not have the right to exclusive occupation of the cabinets or service bays and that the taxpayer provided other ancillary services, the Court found that the service was not one ‘related to land’. Read more

DLA Piper comment: In line with Art. 13-b and Art. 31-a, par. 3, letter (b) of the Council Implementing Regulation (EU) No. 282/2011 the Court (par. 59) stated that, in order for a service to be considered related to immovable property, it must be (i) connected to the immovable property and (ii) the immovable property itself must be the core element of the service. Complex supply of services, involving the disposal of space, needs to be deeply analysed from a VAT perspective (has the customer the exclusive use of the immovable property?), since they can lead to a general supply of service different from a mere lease service.

In Blackrock Investment Management (C-231/19), the Court has agreed with the Advocate-General that a single supply of investment management services could not fall within the exemption for supplies of management of special investment funds merely by virtue of the recipient using the supply partly to manage special investment funds (SIFs).

Blackrock Investment Management (UK) Limited (Blackrock) managed both special investment funds (SIFs), the management of which is exempt under the Council Directive 2006/112/EC (i.e. Principal VAT Directive or PVD), and funds which were not SIFs. It used the services of another Blackrock company, established in the US to carry out the management and that affiliate company used an IT platform known as Aladdin to provide the service. Aladdin provided market analysis, monitoring performance, risk assessment, monitoring regulatory compliance and implementing transactions.

The UK Upper Tribunal referred to the CJEU the question of whether it was possible to apportion the consideration for the supply from the US company to Blackrock in the UK, on the basis of its (estimated) use so that part of it would fall within the exemption and part of it would not. The Upper Tribunal asked how that question should be resolved in light of the principle that single supplies must be taxed according to their intended predominant or principal use.

The Court noted that it was clear that the services provided by the Aladdin platform were a single indivisible economic supply from Blackrock’s point of view; it was not a case of there being a principal and ancillary supply but rather the elements of the supply (analysing markets, monitoring performance, evaluating risk) were of equal importance and were merely put to two uses, that is managing special investment funds and managing other funds. In contrast to other exemptions, the exemption for the management of special investment funds does not, according to the Court, permit the tax treatment of a single supply to be dissociated according to its uses. Thus even if the supply had been used mainly to manage special investment funds (and to a lesser extent to manage other funds), it still would not have fallen within the exemption. Read more

DLA Piper comment: As a result of this decision, tax authorities may take a closer examination of supplies of fund management services. Platform service providers or investment managers that have applied similar apportionment methodology to Blackrock are advised to evaluate a voluntary disclosure to limit their exposure to any penalties. More generally, we expect suppliers and investment managers to review their agreements moving forward to clearly delineate those services which are exempt or subject to VAT.

In Vodafone Portugal (C-43/19), the Court was asked whether amounts payable under fixed term contracts that were terminated on the customers' default were consideration for taxable supplies of telecommunications services (and subject to VAT) or compensation for the customers' breach (and outside the scope of VAT).

The case had been stayed pending the outcome of MEO - Serviços de Comunicações e Multimédia (Case C-295/17), where the Court held that amounts payable by customers in the event of default under their service contracts, which were the same as the amounts that would have been paid had the contracts continued, were consideration for supplies of services and therefore subject to VAT.

The taxpayer attempted to differentiate its case by pointing out that under Portuguese law, the amount payable by the consumer was regulated so that it could not exceed the costs incurred by Vodafone and had to be proportionate to the benefit granted to the customer; hence the amounts payable by the consumer differed from the amount that Vodafone would have received if the consumer had not cancelled the contract in the tie-in period.

The Court found that the supply being made by Vodafone consisted of providing customers with the right to use its services irrespective of whether the customers use that right. Consequently, Vodafone made its supply when it placed the customer in a position to benefit from its services and there was a direct link between the service and the consideration even if the customer did not use the right to access the services.

The Court said that as the amounts payable by the consumers represented part of the cost of the service which Vodafone committed to supplying, the purpose of the early termination fee was analogous to that of the monthly instalments and that from an economic reality perspective, the early termination fee seeks to guarantee Vodafone minimum contractual remuneration for the service provided.

The Court found that it was irrelevant that, unlike the amounts at issue in the MEO case, the amounts payable to Vodafone were not equivalent to the amounts which it would have received had the consumer not terminated the contract. The amount payable by the consumers was an integral part of the price which the consumers had committed to paying and was subject to VAT as remuneration for a supply of services. Read more

DLA Piper comment: The Court confirmed its interpretation trend (Unicredit Leasing, case C-242/18 and MEO - Serviços de Comunicações e Multimédia, case C-295/17) focused on supply of services with a minimum commitment period that is terminated early by the customer. In this situation, predetermined amount received by the economic operator must be regarded as the remuneration for a supply of services and not like a penalty or mere transfer of money.

In order to avoid the omitted application of VAT all businesses (not only TLC sector) should carefully analyse the VAT treatment applied to termination fees in similar scheme and consider such Court’s interpretation before implementing incentive business structure.

In HF C-374/19 the taxpayer operated a retirement home and constructed a cafeteria in an annex to the home. The cafeteria was accessible to visitors through an outside entrance and to residents of the retirement home via the home’s dining room. Initially, the taxpayer said that it would use the cafeteria exclusively for taxable transactions since it was intended for use solely by external visitors.

The German tax authority, in an audit, took the view that it was unlikely that absolutely no residents at all would visit and use the cafeteria with their visitors and the parties agreed to assume tax-exempt use of the cafeteria at 10%, leading to an adjustment under the capital goods scheme. Following a later audit, the tax authority sought to make a second adjustment having discovered that the cafeteria was not, by then, used at all by external visitors (i.e. there were no taxable supplies). The taxpayer resisted the second adjustment on the grounds that the cafeteria was not being used simply because it was a bad investment and there was no increase in use by the residents of the home.

The German court asked the ECJ whether the fact of the cafeteria being economically unviable, with the result that only residents of the home used the cafeteria, amounted to a change in circumstance giving rise to a input tax adjustment (either under the capital goods scheme or under the rule covering a change in the factors used to determine input tax deduction).

The Court distinguished case-law such as Imofloresmira – Investimentos Imobiliarios (C-672/16) where it had ruled that input VAT was deductible in full where the taxpayer, having opted to tax on two properties, was unable to let them despite an intensive marketing campaign. In that type of case, pointed out the Court, no transactions took place at all and the link with the proposed taxable transaction was maintained. In this case however, the cafeteria did not remain empty but was used (in the later years) exclusively for exempt business. The ‘direct and immediate’ relationship between the right to deduct input VAT incurred on construction costs and the taxable supplies made at an earlier stage was broken. There was a clear distinction in the Court’s view between an unfulfilled intention to make taxable supplies and taxable supplies being made and then ceasing. The Court ruled that an input tax adjustment should therefore be made under the capital goods scheme rules, notwithstanding that the cessation resulted from circumstances beyond the taxpayer’s control. Read more

DLA Piper comment: According previous case-law of the Court, the right to deduct input VAT remains, in principle, in the possession of the taxpayer even if, subsequently, because of circumstances beyond his control, the taxable person does not use those goods and services which gave rise to the deduction in the context of taxable transactions (case C‑672/16 of 28 February 2018).

There is, on the contrary, a change in the original factors, that implies the recapture of input VAT under Articles 185 and 187 of the EU VAT Directive, when the taxpayer stops to carry out taxable supplies and continues to use goods (to which input VAT refers) only in connection with the VAT exempt activities. A different conclusion (no adjustment to the input VAT) would have been reached in case if the retirement home had found a way to carry out some taxable activity in the premises concerned.

In its judgment in KrakVet Marek Batko (C-276/18), involving the place of supply rules for goods, the ECJ found that the distance sales rules currently only apply where goods are dispatched or transported “by or on behalf of the supplier” and not where the supplier intervenes directly or indirectly in the dispatch or transport.

The basic rule for the place of supply of goods is that where goods are dispatched or transported by the supplier, the place of supply is where the place of transport begins. There is a derogation to the basic rule in the form of the distance selling rules, whereby, in certain circumstances, the place of supply is where the customer is if the goods are dispatched or transported by or on behalf of the supplier. The taxpayer, a Polish company (KrakVet) sold goods (pet food) to customers in Hungary via its website. KrakVet offered customers the option of arranging transport with another Polish company connected to KrakVet (the two companies were owned by brothers). Alternatively, the customer could make use of the services of any other transporter. The taxpayer did not itself offer to transport the goods. KrakVet sought a binding ruling from the Polish tax authorities that the place of supply was Poland and not Hungary on the grounds that its supplies fell within the basic rule as it did not itself transport the goods. On the basis of the reply that it received from the Polish tax authorities, the taxpayer accounted for Polish VAT (at the reduced rate of 8%) instead of paying VAT in Hungary (at the rate of 27%). The taxpayer however received a demand for Hungarian VAT from the Hungarian tax authorities on the basis that the place of supply was in Hungary as it had intervened in the transport.

The Court has agreed with the Advocate General (see our alert in March) that the distance selling rules under which the place of supply of goods to non-taxable persons is the customer's location, apply where goods are dispatched or transported “by or on behalf of the supplier” but not where the merely supplier intervenes directly or indirectly in dispatch or transportation.

The Court also agreed with the Advocate General that proposed changes to the distance selling rules (under which it would also apply where the supplier intervenes directly or indirectly in dispatch or transportation) were not to be taken into account because they only apply from 1 January 2021.

According to the Court, dispatch or transportation was made “by or on behalf” of KrakVet only if it took a “predominant role” in initiating and organising the essential stages of dispatch or transport of the goods (that is, effectively took the decisions governing how the goods were to be dispatched or transported). This was for the national court to determine by considering whether the terms of the contracts reflected economic and commercial reality, or whether the customers merely endorsed KrakVet's choice of supplier. The national court should also consider the commercial practices, to whom the choices over dispatch or transportation could be attributed, who bore the risk of dispatch or transportation, and the payment arrangements. The Court noted several factors for the national court to consider including that, whilst contractual arrangements are important, in this case they may not necessarily have reflected the economic and commercial reality of the transactions; it seemed that the buyers only confirmed the choices for delivery made by the supplier. Finally, the Court agreed with the Advocate General that:

• the Hungarian tax authorities were not precluded from imposing VAT merely because to do so would conflict with a ruling from the Polish tax authority even though this might result in double taxation (subject to any available remedy under EU law); and
• the transactions in this case, being carried out by independent companies engaging in economic activities, were not to be considered as abusive. Read more

DLA Piper comment: Substance over the form approach in determining who, between supplier and purchaser, is organising the transport. Waiting for the new rules concerning distance sales introduced by Directive 2455/2017(applicable from 1 January 2021 but more likely from 1 July 2021 due to Covid-19 emergency as per proposal COM (2020) 198 of 8 May 2020), for indirect e-commerce sales the place of supply is the country of residence of the client if the supplier’s role is predominant in terms of initiating and organising the essential stages of the dispatch or transport of the goods. In this case, the goods can be considered dispatched or supplied ‘by or on behalf of the supplier’ even if, from a pure formal contractual perspective, it is the purchaser that gives mandate to the transport company while the economic and commercial reality leads to a different conclusion.

Due to the explosion of indirect e-commerce, as a consequence of social distancing measures introduced to fight the Covid-19 emergency, businesses must carefully evaluate the substance of the terms and conditions underneath their distance sales strucure.

The Court’s judgment in Terracult (C-835/18) looked at whether invoices could be corrected after a tax authority inspection and assessment when additional information becomes available.

Terracult (Romania) supplied rapeseed to Almos (Germany) as an intra-community supply. In the absence of proper evidence of dispatch, the tax authorities assessed Terracult for Romanian VAT which it duly paid. When Terracult tried to pass the VAT cost on to Almos, it discovered that the rapeseed had never left the country, and should therefore have been subject to a domestic reverse charge. With the benefit of hindsight, it should not have charged VAT on the supply.

The tax authority refused to allow Terracult to correct the classification of the supply and to refund the VAT in correctly paid on the grounds that the relevant transactions had been carried out during a period which was the subject of a tax inspection, following which the tax authorities had issued a tax assessment and that tax assessment had not been challenged.

The Court has agreed with the Advocate-General that where additional information comes to light following the issue of a tax assessment, the principles of fiscal neutrality, effectiveness and proportionality dictate that a taxpayer must be allowed to correct its invoicing position and recover any overpayment of VAT. Although the national legislation provided that the taxpayer had 30 days to challenge the assessment, in reality, since new information had been discovered, the taxpayer had had only a few days to challenge the assessment. Read more

DLA Piper comment: In general terms, to avoid that challenges raised with a tax assessment deed become definitive, taxpayers are obliged to appeal it before the merit court. However, the Court’s view is that the failure to challenge the assessment deed (which has thus become definitive) would not prevent a taxpayer from claiming a refund of the VAT paid in case of different factual circumstances, even if those circumstances were already known at the time of notice.

Before applying the Court judgement, it is important to find a balance between the principles of neutrality and effectiveness and the principle of legal certainty, according to which it would not be possible to override the deadline for changeling the tax assessment and the definitive nature of the tax assessment unchallenged. A case by case analysis is recommended before start (another) litigation path.