Providing services? Be aware of potential effective use and enjoyment rules in the EU
Services subject to VAT in a non-EU country according to the normal place of supply rules may still be taxed in the EU as a result of any applicable effective use and enjoyment rules; the latter rules allow EU member states to deviate from the general place of supply rules to ensure that certain services are taxed in the place they are actually used and enjoyed. In its 15 April 2021 decision in the SK Telecom case (case C-593/19), the Court of Justice of the European Union (CJEU) clarified the effective use and enjoyment rules in the context of roaming services provided in an EU member state.
Facts of the case
SK Telecom, a South Korean-based telecommunications operator, provided B2C roaming services to its Korean customers who are temporarily located in Austria. To enable these individuals to use their Korean mobile phones in Austria, an Austrian network operator made its network available to SK Telecom in exchange for the payment of a user fee, plus 20% Austrian VAT. SK Telecom passed these costs on to its customers and requested a refund of the VAT charged by the Austrian network operator, because SK Telecom considered the roaming services provided to its customers to be taxable in South Korea (where the individuals had their permanent addresses or usually resided). The Austrian tax authorities rejected the refund request on the grounds that the roaming charges invoiced to SK Telecom’s customers were taxable in Austria based on the domestic use and enjoyment rule concerning telecommunication services, which shifted the place of supply to Austria.
The CJEU held that the roaming services provided by SK Telecom for the use of the Austrian mobile telephone network by the Korean company’s customers in Austria must be regarded as services for which the "actual use" is in Austria. This rule applies even when the customers’ domicile or habitual residence is in South Korea, but they are temporarily travelling in Austria.
It is important to note that an EU member state’s exercise of the optional right to introduce an effective use and enjoyment rule prevents the services from not being taxed at all within the EU. The court ruled that the tax treatment in a third country (South Korea in this instance) is irrelevant. EU member states, therefore, are allowed to shift the place of supply to their territory even if this leads to double taxation with VAT in the EU and the relevant third country.
Impact of the CJEU decision
The SK Telecom case has important consequences for non-EU telecommunications operators, and it may trigger VAT obligations in EU member states that have use and enjoyment rules concerning telecommunications services or other services. Use and enjoyment provisions may be applied by EU member states if services would be subject to VAT in a non-EU country based on the normal place of supply rules, but the service is used and enjoyed in an EU member state. As noted above, the provision is optional for member states so it is important to ascertain upfront whether a particular member state has introduced effective use and enjoyment rules. Implemented use and enjoyment rules must be considered both by taxable persons established in a third country and taxable persons established in the EU. (The EU website contains an up-to-date database that provides an overview of the member states that have effective use and enjoyment provisions for telecommunications, broadcasting and electronically provided services.) Finally, it should be noted that the CJEU decision does not prevent double taxation from arising in situations where telecommunication services also are taxed in a non-EU country.