EU: VAT intermediation rules not applicable if underlying transaction is not an economic activity (CJEU judgment)

The Court of Justice of the European Union (CJEU) on July 4, 2024, published a decision clarifying the EU value added tax (VAT) rules relating to intermediaries known as “undisclosed agents.”

The case identifying information is: C-179/23

Under EU law, as confirmed by the CJEU, an undisclosed agent is defined as an individual or entity that operates under their own name but represents another party (the principal) in a transaction. In such a scenario, the agent is considered to have personally received and supplied the services involved.

A collective management organization for copyright and related rights in Romania was responsible for gathering and distributing the remuneration owed to performing artists from those who use their artistic services. To cover its operating costs, the Romanian organization deducted a management fee from this remuneration. The CJEU's decision in SAWP (C-37/16) determined that remuneration for private copying falls outside the scope of VAT. This decision was incorporated into Romanian law through Government Decision No 354/2018, which states that remuneration for private copying collected by collective management organizations on behalf of rightsholders is not subject to VAT. However, the management fees deducted by these bodies from the remuneration are subject to VAT. The Romanian organization disputed the application of VAT to its management fees.

The CJEU decided that the management fees were part of an economic activity conducted by the organization as a taxable entity. The CJEU found a direct connection between the service provided and the consideration received, establishing a legal relationship with reciprocal performance. Therefore, the management fee was categorized as supplies of services for consideration under the EU VAT Directive, even though the organization was a non-profit association, and the provision of services and payment of the management fee were regulated by statute.

The CJEU also considered whether the taxpayer could be viewed as an undisclosed agent in relation to transactions that are outside the scope of VAT, and therefore whether its own services could be considered outside the scope. The CJEU reiterated, based on Henfling (C-464/10), that applying the undisclosed agency provision would result in the management fee being subject to VAT as part of the remuneration collected on behalf of rightsholders, and would follow the tax scheme applicable to that remuneration. However, the CJEU emphasized that non-taxable transactions, such as those in question, could not be classified as an "economic activity" under the EU VAT Directive and therefore did not fall within its scope. As a result, the CJEU held that the undisclosed agency provision, which creates the legal fiction of two identical supplies of services provided consecutively, did not apply in this case because the copyright holders did not provide any services in which the collective management organization participated. Nonetheless, this did not alter the fact that the management fees themselves were subject to VAT.

Given that the undisclosed agency provision (i.e., Article 28 of the EU VAT Directive) forms the basis for holding marketplaces accountable for VAT on the supply of digital services (i.e., Article 9a of the Implementing Regulations), digital intermediaries such as platforms and marketplaces may need to review the application of the case to their business. If a person sells services through a digital intermediary and does not engage in an economic activity, the digital intermediary would not apply VAT on the sale to the final consumer, but rather would apply VAT on its service fees to the seller. However, determining whether the seller is engaged in an economic activity may be challenging for the digital intermediary as it is based on a bright line test rather than objective criteria.
 

For more information, contact a KPMG tax professional:

Philippe Stephanny | philippestephanny@kpmg.com