The closing clause or effective use rule allows the countries of the member states of the European Union to transfer to the territory of application of their national VAT the taxation of those supplies of services which, according to their localization rules, are deemed to be carried out outside the EU, but are effectively used or exploited in the territory of application of their national VAT. This clause prevents such supplies from being left untaxed.
To what services can we apply the closing clause?
The VAT Law considers the services listed below as being supplied in the territory of application of the tax when, in accordance with the localization rules applicable to these services, they are not deemed to be carried out in the European Union, but their effective use or exploitation is carried out in the territory of application of the tax:
- The services set out in paragraph 2 of Article 69 of LIVA, when the recipient is a trader or professional established in a third country.
For example, services relating to property or industrial rights, advertising, insurance, financial, advisory, auditing, engineering, legal, consulting, accounting or tax experts, translation or interpretation, dubbing of films, assignment of personnel, data processing and provision of information, leasing of movable tangible property, etc.
- Mediation services in the name and for the account of others, when the recipient is a businessman or professional established in a third country and the underlying of the mediation is used in the territory of application of VAT
- Services supplied by electronic means, telecommunications, radio and television broadcasting, regardless of whether the recipient is a businessman or a private individual
- Leasing services of means of transport, regardless of whether the recipient is a businessman or a private individual.
This is a matter of great controversy. Recently, the High Court of the European Union, in its judgment 593/19 of April 15, 2021, ruled in favor of the Tax Office of Graz, Austria, in a dispute between the latter and the South Korean telecommunications company SK Telecom.
This dispute was based on the tax treatment of roaming services provided by this company to users resident in South Korea, who are in Austria on a temporary basis and consist of giving them access to a mobile telephone network in this Member State through an Austrian provider in exchange for a fee with its corresponding VAT, in Austria of 20%.
In these proceedings, SK Telecom requested a refund of this VAT, as it had not been passed on to its South Korean clients.
If you have any doubts about the application of the VAT effective utilization rule, do not hesitate to contact the professionals at Arintass.
Roberto Cerrato
