New criterion for the use and enjoyment rule
The Spanish High Court (Tribunal Supremo) recently issued a judgment (Judgement STS 4073/2019) related to the application of the so-called use and enjoyment rule (article 59a b) of VAT Directive 2006/112).
This rule subjects to Spanish VAT certain services (mainly those intangible) where the recipient is established in a third non-EU country and the recipient directly uses the services to carry out operations subject to VAT in Spain. The partial application of this rule has been admitted by the Spanish tax authorities and the courts in cases where the recipient uses the services not only for its taxable activities in Spain but also in other countries using a proportional income calculation.
The High Court’s judgment challenges such partial applications.
The Spanish regulations have only incorporated into the national law the possibility of applying the use and enjoyment rule as set up in letter b) of article 59a of the VAT Directive, that is only for those cases where the place of supply is situated outside the EU due to the place of supply rule but its effective use and enjoyment takes place within the territory of the supplier.
Given the conditions for its application, the regulation must be analysed on a case-by-case basis. As a result, it has been subject to interpretation on many occasions by the Spanish tax authorities and the courts.
In the case at hand, in the course of a VAT audit, the Spanish tax authorities took the view that advisory and marketing services rendered by a Spanish entity (BWIN INTERACTIVE MARKETING ESPAÑA, S.L.) to two entities established in Gibraltar (BAW INTERNATIONAL LTD And BWIN PARTY MARKETING LIMITED) were subject to Spanish VAT because the services were used by the recipients in online gaming activities taking place in Spain. Thus, the tax authorities issued a VAT assessment to the entity.
The entity appealed, arguing that the partial application of the measure should apply because the services were used by the recipients not only for the development of activities in Spain but in other territories, given the global nature of the services. The Spanish High Court rejected this argument.
Denial of partial application
The partial application of the rule has been admitted several times by the Spanish General Directorate of Taxes, stating that the percentage of use made of the services in Spain is to be determined on a case-by-case basis. In the tax authorities’ opinion, however, when there is no other more realistic criterion, the proportional income derived from the activities to which the services refer that are carried out by the customers in the Spanish VAT territory must be compared with the total income obtained as a consequence of the use of the services acquired. This was the criteria used by the taxpayer. But, the Court has rejected this method, arguing that there is no legal basis for such treatment and, in the case at hand, the taxpayer did not offer enough proof to provide the real percentage that allows the partial application.
Though it seems that the partial application was denied based on the taxpayer’s weak argument, this is the first case in which the proportional method was expressly not allowed.