At the ECOFIN Council (European Council of Finance Ministers) on 14 May 2024, the Belgian presidency failed to secure unanimous agreement among member states on the European Commission’s ViDA proposal.

On the mandatory digital reporting from 1 July 2030 of intra-Community transactions, member states apparently do agree. Also, on the various measures to ensure that there will be fewer situations where VAT taxable persons established in one member state will need a VAT number and submit returns in another member state (extension of the transactions that can be reported under the OSS scheme, more cases where VAT can or must be reverse-charged to the customer, and so on).

But no unanimity was reached on the third pillar, the ‘deemed supplier regime’ (DSR), under which digital platforms that facilitate services of short-term rental of accommodation and passenger transport by road, will be considered commission agents, and thus will have to be responsible for collecting and passing on the VAT due on these services.

Officially, it is Estonia that continues to oppose this measure. The fact that Bolt, a very well-known platform that facilitates, among other things, road passenger transport services, is based in the Estonian capital Tallinn may have a role in this. The Estonian finance minister fears, among other things, that this new rule will lead to an increase in the cost for consumers, which could lead to less consumption and thus less revenue, and to a possible disadvantage of an EU platform vis-à-vis one based outside the EU.

According to a source close to the negotiations, Estonia has not yet lifted its opposition to that measure. Therefore, Belgium, as Council president, is still holding bilateral talks with Estonia to try to convince them to still give their agreement on the whole ViDA package. For now, Estonia insists on a so-called ‘opt-in’ clause, meaning that each member state could choose whether or not to apply this measure. But neither Belgium nor the European Commission are in favour of this.

Meanwhile, talks are also ongoing to allocate some top European positions. For instance, the Estonian prime minister is in the running to become the new “High Representative of the Union for Foreign Affairs”. Perhaps the allocation of this post could make Estonia give up its opposition to the DSR pillar of the ViDA package after all.

Wait and see what will happen on the ECOFIN Council this Friday 21 June 2024.

As expected, the Ecofin Council today failed to reach agreement on the VAT in a Digital Age (VIDA) proposal. The often-cited problem lies in the proposal to consider digital platforms that facilitate services of short-term rental of accommodation and passenger transport as commission agents, requiring them to declare and remit VAT on the services facilitated through them.

Estonia continues to oppose this part of the proposal adapted under the Belgian presidency. Estonia does agree with the two other parts, mandatory digital reporting of intra-community transactions and taking measures to avoid, as much as possible, VAT registrations for businesses in member states other than that of establishment.

The Commission has always maintained the view that the three parts will be adopted together or not at all. But from the time the proposal was launched in late 2022, we indicated that the part on the platform economy would make an agreement on the whole extremely difficult. Estonia is also in favour of removing that part from the VIDA proposal so that agreement on the other two parts can already be formalised.

Belgian minister of finance Van Peteghem still wants to reach agreement within the Council by the end of the Belgian presidency and, like the Commission, still maintains the position that the three parts should be voted on as a whole even after this Council.

Estonia still puts forward an opt-in as a proposal for agreement, meaning that each member state should be able to choose voluntarily whether they will apply the commissioner principle for those platforms. But both the Commission and minister Van Peteghem indicated during the Council that they are not in favour of this.

Cabot is a Swiss company identified for VAT in Belgium for the sale of carbon-based products. It enters into a tolling contract with the Belgian group company Cabot Plastics. Cabot Plastics exclusively uses its own equipment to process the raw materials into products used in the production of plastics. These services constitute virtually all of Cabot Plastics’ turnover.

After processing, the goods remain stored in Belgium at Cabot Plastics to be later sold from here by Cabot Switzerland. The removal and transportation of the goods is done by the buyers of the products or by transporters appointed by Cabot Switzerland (the seller).

In addition to processing the goods, Cabot Plastics performs a range of additional services for Cabot Switzerland:

• the storage of products;
• providing recommendations for optimizing the production process;
• internal and external technical audits and evaluations;
• communicating results to Cabot Switzerland;
• supplies or services required by other production units.

In a 2012 ruling, the Belgian ruling commission agreed that the activities of Cabot Plastics would not result in Cabot Switzerland having a permanent establishment in Belgium for income tax purposes. However, following a tax audit in 2017, the tax authorities ruled that a permanent establishment does exist in Belgium for VAT. The people and technical resources used by Cabot Plastics to perform its services for Cabot Switzerland are also, according to the Belgian tax authorities, the permanent establishment in Belgium of Cabot Switzerland for which Cabot Plastics performed its services.

Under this assumption by the Belgian tax authorities, based on the main B2B rule for VAT, the services performed by Cabot Plastics take place in Belgium, where the permanent establishment is located for which the services are performed. Thus, Cabot Plastics should have charged Belgian VAT on its services to the Swiss group company, instead of issuing invoices without VAT, assuming that the place of supply of services based on the B2B main rule was Switzerland (Cabot Switzerland’s place of business).

B2B main rule: principal place of business or permanent establishment?

The B2B main rule (Article 44 VAT Directive) states that a service for VAT purposes takes place where the VAT-taxable customer has established the seat of his business. But if that service is provided to a fixed establishment of the customer located elsewhere, then that service for VAT purposes takes place where that fixed establishment is located. In application of this B2B principal rule, the establishment of the place of business as the place of supply of services will only be deviated from in favor of the place where the customer has a fixed establishment, if the service is supplied only to that fixed establishment which uses the service for its own needs (Article 21, 2nd paragraph of Implementing Regulation 282/2011). But then there must first be a permanent establishment that purchases the services for its activity.

Permanent establishment

According to Article 10 of Implementing Regulation 282/2011, the place of business is the place where the central management functions of the company are carried out. Article 11 of the Implementing Regulation 282/2011 defines as a permanent establishment as referred to above: any establishment other than the aforementioned place of business characterized by a sufficient degree of permanence and a structure – in terms of personnel and technical resources – suitable for the purchase and on-site use of the services provided for its own needs. Thus, there cannot be a permanent establishment

• without a clear structure reflected in the availability of personnel or technical resources;
• if this structure exists only temporarily.

With regard to the first criterion, the Court has already ruled that in light of the principle of economic and commercial reality (a fundamental principle of the VAT system), it is sufficient that the person liable for VAT can dispose of those staff and technical resources as if they were his own, for example on the basis of service or rental agreements that place those staff and resources at the disposal of the person liable for VAT and that cannot be terminated at short notice (C- 333/20, Berlin Chemie dd. 07.04.2022).

The Court has also ruled that the concept of “permanent establishment” must be assessed by reference to economic and commercial reality. That qualification cannot depend solely on the legal status. The fact that a company has a subsidiary in another Member State does not automatically mean that it has a permanent establishment there.

And the fact that a company uses its human and technical resources only to provide services for one other (affiliated) company does not mean that these resources are made available to that customer. According to the Court, a legal person is deemed to use the human and technical resources at its disposal for its own needs, even if it has only one customer. Those resources can only constitute a permanent establishment of that customer if the latter can dispose of them as if they were its own.

To determine whether the services are performed for and used locally by the alleged permanent establishment, a distinction must be made between, on the one hand, the contract work services performed by Cabot Plastics for Cabot Switzerland and, on the other hand, the sale of the resulting goods by Cabot Switzerland. The Court found that the file presented did not show that a distinction could be made between the “resources” used by Cabot Plastics to perform its services for the Swiss group company and the “resources” that, according to the tax authorities, are used by the latter to purchase these services in Belgium within its “alleged” permanent establishment. And the Court previously ruled that the people and technical resources performing the services cannot at the same time constitute a permanent establishment of the foreign company receiving those services.

According to the Court, the contract work services are purchased by Cabot Switzerland and used for the realization of its economic activity, namely the sale of the goods resulting from these services in Switzerland. Indeed, Cabot Switzerland does not have an appropriate structure in Belgium for this activity.

The Court in fact comes to the same conclusion as in the aforementioned Berlin Chemie case. There it ruled that a subsidiary that only provides marketing services for the sales activity of the parent company is not a permanent establishment of the parent company.

Operative part of the judgment

Article 44 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2008/8/EC of 12 February 2008, and Article 11 of Council Implementing Regulation (EU) No …. 282/2011 of 15 March 2011 laying down implementing measures for Directive 2006/112 must be interpreted as meaning that a taxable person receiving services whose place of business is established outside the European Union does not have a fixed establishment in the Member State in which the supplier of the services in question – legally distinct from that person – is established if it does not have at its disposal there a, suitable structure in terms of staff and technical resources to form that fixed establishment, even though the taxable service provider, in performance of an exclusive contractual obligation, supplies to that taxable service recipient payroll services and a range of ancillary or ancillary services which contribute to the taxable service recipient’s economic activity in that Member State.

ECJ, C-232/22, Cabot Plastics, June 29, 2023

On 22 November 2021, the Belgian tax authorities published an addendum to their previous circular of 27 October 2021. This postponed the restriction of the VAT exemption for transport services directly linked to an export of goods to 1 April 2022. Now this restrictiction is postponed again, this time until 1 September 2022.

Background

According to Article 146(1)(e) of Council Directive 2006/112/EC of 28.11.2006 on the common system of value added tax, Member States shall exempt the supply of services, including transport and transactions ancillary to transport, but excluding the supply of services exempted in accordance with Articles 132 and 135 of Directive 2006/112/EC, where these are directly linked to the exportation or importation of goods covered by Articles 61 and 157(1)(a) of Directive 2006/112/EC.

In judgment ‘L.C. IK, Case C-288/16, of 29.06.2017, the Court of Justice of the European Union delimited the scope of this exemption with regard to transport services directly linked to the export of goods.

Adaptation of the Belgian interpretation

Circular 2021/C/96 dated 27/10/2021 modifies the application of the Belgian VAT exemption for transport services directly linked to an export of goods.

The exemption for transport services directly linked to the export of goods, provided for in Article 41, § 1, first paragraph, 3° of the VAT Code, can only apply in the relationship between the service provider on the one hand and the consignor or consignee of the goods to be exported on the other hand. More specifically, this concerns:

• the seller or buyer of the goods to be exported
• the owner, the lessee or the borrower of the goods to be exported
• the contractor who exports goods outside the Community for the purpose of repair, processing or adaptation
• the person who re-exports outside the Community goods received on approval, by way of a sample or on consignment
• the person who re-exports goods outside the Community after they have been repaired, transformed, processed or adapted by him.

If the supplier of services uses a subcontractor to supply the service of transporting goods, the service supplied by the subcontractor cannot be exempted from VAT pursuant to Article 41(1)(1)(3) of the VAT Code.

Application circular: postponement until 1 September 2022

The Circular of 27 October 2021 stipulated that the amendments would enter into force on 1 January 2022. After a first postponement until 1 April 2022, in order to give the taxable persons concerned the opportunity to comply with the limitation of the scope of application of the exemption in respect of goods transport services, the entry into force is postponed again, this time until 1 September 2022.

On 7 December 2021, the EU Council reached an agreement on a proposal to update EU rules on VAT rates. The new rules reflect the member states current needs – aiming for more flexibility to apply reduced and zero VAT rates – and the policy objectives of the EU, such as fighting climate change, supporting digitalisation and protecting public health.

The main changes can be summarized as follows:

• Member States may apply their reduced VAT rates to a maximum of 24 of the 33 headings
• In addition, the Member States may subject 7 headings to a reduced VAT rate of less than 5% or an exemption with retention of VAT deduction (zero rate), insofar as it concerns headings 1, 2, 3, 4, 5, 6, 10quater or another section of Annex III for which the Member State already applied a reduced VAT rate of less than 5% or a zero rate on 01.01.2021 (with the exception of non-social housing)
• Introducing new articles in the VAT Directive which shall be addressing possible future crises (i.e., pandemics, humanitarian crises or natural disasters) and Member States entitlement to respond swiftly to such exceptional circumstances.
• No reduced VAT rate is possible for electronically supplied services, with the exception of headings 6, 7, 8 and 13 (certain publications, live streaming of events, webcasting of radio and television broadcasts, live streaming of sports events or sports lessons)
• Abolition of the possibility to apply a reduced VAT rate to natural gas, electricity and district heating
• Existing derogations that allowed some Member States to apply preferential rates for certain products shall be opened to all member states, under conditions.

Next steps:

The updated rules will be sent to the European Parliament for its consultation on the final text by March 2022. Once formally adopted by Member States, the legislation will come into force 20 days after its publication in the Official Journal of the European Union, allowing Member States to apply the new system as of that date.

The current intention is to implement the new rules as from January 1, 2025.

Sources:

https://ec.europa.eu/commission/presscorner/detail/en/ip_21_6608

https://www.consilium.europa.eu/en/press/press-releases/2021/12/07/council-reaches-agreement-on-updated-rules-for-vat-rates/?utm_source=dsms-auto&utm_medium=email&utm_campaign=Council+reaches+agreement+on+updated+rules+for+VAT+rates

In 2019, the Czech government submitted a digital services tax bill to the Czech Chamber of Deputies.

This new tax was to apply to income from targeted advertising and income from the sale of data when the source of the income was a Czech user using a digital interface operated by a foreign company. The tax was also to apply to foreign platform operators’ income generated from the mediation of sales of goods or services in the Czech Republic.

This bill passed through its first and second readings, but time ran out before the third reading. As a consequence, the Czech Chamber of Deputies did not approve the bill before the end of the parliamentary term.

Any proposal for a digital services tax will have to go through the entire legislative process again if the new government wants to introduce a tax on digital services.