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The Court of Justice of the European Union (CJEU) today published the nonbinding opinion of its Advocate General (AG) case regarding whether an electronic marketplace acts as undisclosed agent under Article 28 of the EU VAT Directive before 2015 when the EU introduced Article 9a of the EU VAT Implementing Regulations (the deeming provision for marketplaces facilitating ESS).

Background

Under Article 28 of the EU VAT Directive, intermediaries acting in the name but on behalf of a principal (so-called undisclosed agents) are deemed to buy-sell the services provided by the principal, therefore creating a fiction of two transactions for value added tax (VAT) purposes that the principal sells the services to the undisclosed agent who resells the services to the customers.

Since 2015, the EU, through Article 9a of the EU VAT Implementing Regulations, which refers to Article 28 of the EU VAT Directive, has clarified that electronic marketplaces are deemed to act as undisclosed agents for the sale of electronically supplied services (i.e., digital services such as streaming, video games, software, etc.) they facilitate if they meet certain conditions (e.g., set the general terms and conditions, authorize the charge to the customer, or the delivery of the services).

As a result, electronic marketplaces are liable to collect VAT on all business-to-consumer (B2C) sales of electronic supplied services they facilitate.

Facts

Between 2012 and 2014, a German company provided mobile applications (games) through an app store operated by an Irish company, X. While the games were free to download, users paid for in-app purchases via the app store, with X confirming and charging for these purchases. Initially, the German company considered itself the service provider to end users and filed its VAT returns in Germany accordingly. However, on January 29, 2016, the German company corrected its tax returns for 2012 to 2014, stating that company X was the actual service provider, and thus, the services were supplied in Ireland, not Germany, meaning VAT was not due in Germany. The German tax authority however found that company X was merely an intermediary, and the actual supplier of services to end users was the German company.

Questions before the CJEU

• Under circumstances such as those in the main proceedings, in which a German taxable person (developer) supplied, before 1 January 2015, a service by electronic means to non-taxable persons (end customers) established within the territory of the EU, via a marketplace for applications operated by an Irish taxable person, is Article 28 of the EU VAT Directive to be applied, with the result that the Irish taxable person is treated as if it had received those services from the developer and supplied them to the end customers, because the marketplace for applications did not name the developer as the supplier of the service and show German VAT until it did so in the order confirmations issued to the end customers?
• If the first question referred is answered in the affirmative: is the place of supply of the fictitious service supplied by the developer to the marketplace in Ireland, by virtue of Article 44 of the EU VAT Directive, or in Germany, by virtue of Article 45?
• If, by virtue of the answers to the first and second questions referred for a preliminary ruling, the developer has not supplied any services in Germany: is the developer subject to a tax liability for German VAT under Article 203 of the EU VAT Directive, on the ground that the marketplace for applications, acting in accordance with an agreement, named the developer as the supplier of the service and showed German VAT in the order confirmations it sent by email to the end customers, even though the end customers are not entitled to deduct input VAT?

Advocate General opinion

First question

The AG observes that under Article 28 of the EU VAT Directive, a taxable person who participates in a service transaction on behalf of another but under their own name is considered the supplier for VAT purposes. This creates a legal fiction where the intermediary, such as an app store, is seen as receiving the service from the principal (app developer) and then providing it to the end user. This interpretation holds even if the end user is aware of the app developer's identity, as the identity of the principal does not need to be undisclosed for Article 28 to apply. In this respect, the AG observes that withholding the identity of the principal is not a condition for the application of Article 28 because (1) there is nothing in the wording of Article 28 to indicate that its application is conditional on the identity of another person on whose behalf the intermediary acts being kept secret; (2) the CJEU has previously explicitly ruled out that requirement for the application of the provision in question; and (3) the CJEU allowed the application of that provision to the intermediation of collective management organizations in the authorization for the public performance of works by the holders of copyright in those works, even though the identity of the creators of those works is often well known.

The assessment of whether a taxable person is acting in their own name should be determined based on all the available information, including the contractual relations between the taxable person and its customers as contractual agreements reflect, in principle, economic and commercial realities of transactions. The AG further observes that a taxable person acts as himself in relation to the recipients of the service and determines his own rules for establishing and executing that legal relationship. He does not, however, undertake to provide the service and is not responsible for it, because in such a case he would be acting on his own behalf rather than on behalf of another person. Therefore, the taxable person remains an intermediary between the actual service supplier and the recipient, and only for VAT purposes is the taxable person fictitiously assumed to be the service supplier.

In the specific context of app stores, the operation of making mobile applications available is conducted entirely within the app store's platform, setting uniform conditions for access. The app store acts on its own behalf, providing the service directly to the customer, who may not be aware of the contractual arrangements between the app store and the app developer. The app store is considered the direct supplier of the application for VAT purposes, aligning closely with the legal fiction established by Article 28.

Therefore, the AG concludes that Article 28 is to be interpreted as applying to the situation of the supply, prior to January 1, 2015, by electronic means, of services consisting in making available computer programs (mobile applications) and additional services through a portal (app store), with the result that a taxable person operating an app store is treated as if it had received those services from an application developer and supplied them to end users.

Second question

The AG re-emphasizes that Article 28 introduces a legal fiction involving two consecutive services: in the case at hand, the first service is supplied by a third party to a taxable person and the second by the taxable person to the end user. For the first service, which is fictitious and supplied to a taxable person, the place of supply is determined by Article 44, typically the place of establishment of the taxable person. The second service, aimed at non-taxable persons, generally follows the rules of Article 45, identifying the place of supply as the supplier's place of establishment.

However, the question arises whether in a specific scenario where the fictitious service is considered as being supplied directly to end users (non-taxable persons), if the place of supply should instead follow Article 45, suggesting the place of establishment of the end users. The AG argues that the fictitious service should be treated as supplied to the taxable person, and its place of supply should be determined by Article 44, maintaining consistency and avoiding complications in VAT assessment and collection. This interpretation holds both before and after the legislative changes on January 1, 2015, concerning electronically supplied services to non-taxable persons. Adopting the referring court's alternative suggestion could complicate VAT calculations and undermine regulatory objectives, leading to the recommendation that the place of supply for the fictitious service remains governed by Article 44.

Third question

In the third question, the referring court is trying to determine if, under Article 203 of EU VAT Directive, a person represented by a taxable person in a service transaction can be held liable for VAT if they consent to being named as the service provider on purchase confirmations sent to end-users who are not taxable. According to Article 203, anyone who lists VAT on an invoice must pay that VAT. This rule aims to prevent tax revenue loss that could occur if VAT is incorrectly invoiced, and the recipient improperly claims a tax deduction. The AG observes that the CJEU has previously decided that Article 203 does not apply when invoices are issued to non-taxable persons (like consumers), as they cannot claim VAT deductions, thus eliminating any risk of tax revenue loss from such deductions. In this specific case, the end-users are primarily consumers, indicating no risk of tax revenue loss from incorrect VAT deductions on the invoices.

Furthermore, the referring court is considering whether purchase confirmations to non-taxable persons can be treated as invoices under Article 203. Generally, an invoice is necessary for transactions between taxable persons to allow for tax deductions. While the CJEU allowed a document other than an actual invoice to be considered an invoice for the purpose of applying Article 203, this applies only to documents that contain all the information necessary for the tax authorities of a member state to be able to establish whether the substantive conditions for the right to deduct VAT are satisfied. However, according to the AG, an order confirmation or another document issued to a non-taxable person does not allow any right to deduct VAT to be controlled, because that person has no such right. Nor does such a document allow for effective control over the payment of VAT by the taxable person who issued the document, because it is in the possession of the recipient, and the taxable person is under no obligation to make and keep a copy of it. The AG thus considers that such documents should be considered invoices for the purpose of applying Article 203 only in situations where EU law provides for the obligation to issue an invoice, that is to say, when there is at least a potential right to deduct VAT.

Moreover, the AG observes that in cases where Article 28 applies, the principal should not be considered the “person who enters the VAT on an invoice� if the alleged invoice is issued by the agent, even if the principal is indicated therein as the service supplier with his consent. Because the agent acts in his own name and has control over the essential elements of the supply, it can be assumed that it is the agent, in his own name, who confirms the acceptance and performance of the order.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø observation

If the opinion is followed by the CJEU, the case would further clarify the application of the undisclosed agency under Article 28 beyond what is already included in Article 9a of the VAT Implementing Regulations. Potential consequences could be:

• Application of the undisclosed agent principle to electronically supplied services transactions facilitated by electronic marketplace prior to 2015, subject to country specific statute of limitations.
• Application of the undisclosed agent principle to electronic marketplaces facilitating other services. While the case focuses on the facilitation of electronically supplied services, the AG’s position is broad enough to include other services facilitated by electronic marketplaces that are currently not caught by Article 9a of the EU VAT implementing regulations (e.g., personal services) as long as such electronic marketplaces meet the conditions under Article 28 to qualify as undisclosed agent.
• Application of the undisclosed agent principle to electronic marketplaces facilitating the sale of goods before the introduction of the e-commerce package in July 2021 when an explicit liability for such marketplaces was introduced. While the undisclosed agent principle for goods is based on a different provision of the EU VAT Directive (Article 14 instead of Article 28), the principles laid out by the AG could also be applied for the electronic marketplaces facilitating the sale of goods. However, it should be noted that with respect to goods, the e-commerce package introduced a new Article 14a in the EU VAT Directive and not a simple clarification through an article in the EU VAT Implementing Regulation. Therefore, the application of the undisclosed agent principle to electronic marketplaces before 2021 on the basis of Article 14 is still less clear.  

The AG’s recommendation on the applicable place of supply rules would also provide further clarity when undisclosed agents are involved in transactions that have different place of supply rules for business-to-business (B2B) and B2C transactions as the AG suggests that each leg of the deemed buy/sell for VAT purposes should apply its own VAT place of supply rule (i.e., the first transaction follows the B2B place of supply rules while the second transaction follows the B2C place of supply rules).

Contact us

For more information, contact a ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø tax professional:

Philippe Stephanny | philippestephanny@kpmg.com

Chinedu Nwachukwu | chinedunwachukwu@kpmg.com