David Duffy highlights the latest VAT cases and discusses recent VAT developments.

IRISH VAT UPDATES

Services in connection with immovable property

Revenue eBrief No. 142/18 contains a Tax and Duty Manual on the VAT treatment of services connected with immovable property (e.g. land and buildings). The manual contains useful guidance and examples in relation to the VAT treatment of various services including estate agency services, holiday and similar accommodation, construction and similar services, and legal services in connection with immovable property.

By way of background, services connected with immovable property are subject to VAT in the jurisdiction where the relevant property is located. This is a departure from the normal VAT “place of supply” rules, which deem a service to be subject to VAT in either the supplier’s or the customer’s country of establishment depending on whether it is a supply to another business or to a consumer. However, in order for a service to fall within the specific rule for immovable property, the service must have a direct connection with a specific property as opposed to an indirect connection.

The criteria for a direct connection between the service and a specific property include that the service must be derived from immovable property and the property makes up a constituent element of the service and is central to, and essential for, the services supplied; or where the services are provided to, or directed towards, an immovable property, they have as their object the legal or physical alteration of that property. The manual provides a number of examples of services that would be considered to be directly connected with immovable property as well as examples of other services that would not. The manual also contains guidance on the Irish VAT rate that is applicable to various types of services in connection with the property, as well as further information on which party is liable to account for the VAT.

VAT treatment of cryptocurrencies

In eBrief No. 88/18, Revenue issued a Tax and Duty Manual addressing the taxation of cryptocurrencies, such as Bitcoin. This includes guidance in relation to the VAT treatment of transactions involving cryptocurrencies. The Court of Justice of the European Union (CJEU) ruling in the Hedqvist case (C264-/14) had established that Bitcoin should be considered a currency for VAT purposes, and therefore trading in Bitcoin is VAT exempt. Supplies of goods or services that are paid for using cryptocurrency are subject to normal VAT rules, with any Irish VAT due being calculated based on the euro value of the cryptocurrency at the relevant point in time when the VAT charge arises. The manual also states that income received from cryptocurrency mining activities will generally be outside the scope of VAT.

EU VAT UPDATES

VAT recovery on share acquisition costs

The CJEU issued a judgment on the VAT recovery position of a holding company on costs relating to the acquisition of shares in Marle Participations SARL (C-320/17). This judgment is the latest in a line of case law on the complex question of a holding company’s entitlement to VAT recovery on costs relating to acquiring shares of its subsidiaries. The case law up to this point has established that a holding company whose only activity is to acquire and hold shares is not engaged in economic activities (i.e. activities within the scope of VAT) and is not entitled to VAT recovery on its costs. However, a holding company is engaged in economic activities and is generally entitled to VAT recovery on its costs relating to its acquisition of subsidiaries where it becomes involved directly or indirectly in the management of its subsidiaries and charges its subsidiaries for those management services.  

In this case, the holding company let out a building to its subsidiaries. The French referring court asked the CJEU whether the letting of the building by the holding company to its subsidiary can constitute the direct or indirect involvement in the management of that subsidiary such that the holding company has a right to VAT recovery on the costs of acquiring the shares in that subsidiary. The CJEU concluded that the letting of a property comes within the meaning of management of the subsidiary providing the letting is on a continuing basis and is for consideration. Therefore, where the holding company has elected to charge VAT on the rent of the property to its subsidiary, this should give the holding company a right to recover VAT on costs relating to the acquisition of shares in that subsidiary.

If, however, the holding company also acquires shares in other subsidiaries to which it does not grant VATable lettings and is not otherwise engaged in their management, there is no right to VAT recovery on costs relating to those acquisitions. Therefore, an apportionment of costs for VAT recovery purposes would be required in cases where both managed and unmanaged subsidiaries are acquired. The judgment does not specify the exact mechanism for carrying out this apportionment but states that it must objectively reflect how the input costs are attributed between the holding company’s economic activity (i.e. the provision of management/letting of the property to certain subsidiaries) and the non-economic activity of passively holding shares in other subsidiaries.

The Irish Revenue Commissioners has not yet published guidance following this or other recent cases on the topic. It wll be interesting to see the approach that is taken in light of the recent case law developments.

Import VAT 

In Enteco Baltic (C-108/17), the CJEU had to determine the criteria under which a company could apply 0% VAT to the import of goods from outside the EU into an EU member state, which were subsequently dispatched to other EU member states. While VAT is normally payable on an import of goods into an EU member state, the 0% VAT rate applies where the importer provides to the relevant tax authorities at the time of importation details of its customer’s VAT number in the other member state to whom the goods will be sold as well as evidence that the goods are intended to be dispatched to that other member state.

Enteco Baltic had applied 0% VAT to its imports into Lithuania and had provided the Lithuanian customs authorities with the VAT number of its customers in other member states to whom the goods would be dispatched. However, while the goods were in fact dispatched from Lithuania, in some cases they were sold to different customers than those indicated to the custom authorities at the time of import. Enteco Baltic did provide their actual customers’ VAT numbers to the Lithuanian tax authorities at the time of onward sale, but the customs authorities contested the application of the 0% rate on import on the basis that the VAT numbers subsequently provided did not correspond to those provided at the time of import.

The CJEU ruled that the taxpayer could apply 0% VAT on imported goods in these circumstances as the taxpayer had satisfied the substantive conditions that the goods were dispatched to VAT-registered customers in another EU member state (albeit not those originally identified at the time of import). However, the Court made clear that the formal conditions (e.g. recording the customer’s VAT numbers) cannot be completely disregarded and that it is only where a taxpayer has made every effort at the time of the import to fulfil the requirements that the 0% rate can apply.

David Duffy ACA, AITI Chartered Tax Advisor, is a VAT Director at KPMG.