On March 29, 2007, the ECJ issued its decision in the case C-111/05 (Aktiebolaget NN). The case discussed the VAT treatment Supply and installation of a fibre-optic cable linking two Member States.
Context: Supply and installation of an undersea fibre-optic cable between two Member States separated by international waters – Classification of the taxable transaction – Place of that transaction
Article in the EU VAT Directive
Article 8(1)(a) and 9(2)(a) of Sixth Directive 77/388 (Place of supply)
‘1. The place of supply of goods shall be deemed to be:
(a) in the case of goods dispatched or transported either by the supplier or by the person to whom they are supplied or by a third person: the place where the goods are at the time when dispatch or transport to the person to whom they are supplied begins. Where the goods are installed or assembled, with or without a trial run, by or on behalf of the supplier, the place of supply shall be deemed to be the place where the goods are installed or assembled. In cases where the installation or assembly is carried out in a country other than that of the supplier, the Member State into which the goods are imported shall take any necessary steps to avoid double taxation in that State;
1. The place where a service is supplied shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides.
(a) the place of the supply of services connected with immovable property, including the services of estate agents and experts, and of services for preparing and coordinating construction works, such as the services of architects and of firms providing on-site supervision, shall be the place where the property is situated;
- Aktiebolaget NN’s activities are in the area of telecommunications, consisting, inter alia, of laying, maintaining and repairing fibre-optic cable. The company intends to conclude contracts involving the supply and laying, between Sweden and another EU country, of an undersea fibre-optic cable which will be used for the supply of transmission services to different telecommunications operators. Aktiebolaget NN will buy the cable and all other material necessary from different manufacturers, charter a vessel with its crew and employ staff specialising in the laying of cables.
- The cable is fixed and buried in the ground on the Swedish mainland, then, if possible, buried in the seabed, firstly in Sweden’s inland and territorial waters, then on the Swedish continental shelf and the other country’s continental shelf as coastal countries and, finally, in the other country’s territorial and inland waters, and is fixed and buried in the ground of the mainland of the other country. Depending on the distance between the fixing points, it can in certain cases be necessary to lengthen the cable, which is a relatively complicated technical procedure. In normal circumstances, the cost of materials accounts for up to 80 to 85% of the total cost. In unfavourable circumstances, for example in storms, the percentage of the total cost accounted for by materials is reduced.
- After laying and after certain preliminary tests have been carried out, ownership of the cable is transferred to the purchaser. Thereafter, the work is brought to a close by further testing over about 30 days, when Aktiebolaget NN repairs any faults.
- Aktiebolaget NN requested an interim decision from the Skatterättsnämnden regarding, on the one hand, whether the proposed service relates to immovable property in accordance with Chapter 5, Paragraph 4, of the ML or to work on movable property in accordance with Chapter 5, Paragraph 6, of the ML, or whether it constitutes some other service and, on the other, whether Sweden is the country of performance of the service.
- The Skatterättsnämnden gave its decision on 13 June 2003. It found that the proposed service was to be regarded as a service provided in Sweden under the first subparagraph of Chapter 5, Paragraph 8, of the ML, since the service is of such a nature that the special connecting factors in Chapter 5, Paragraphs 4 to 6(a) and 7(a) of the ML cannot be applied.
- Aktiebolaget NN appealed against the interim decision to the Regeringsrätten (Supreme Administrative Court). It claims that the laying of the undersea cable at issue in the main proceedings constitutes a service relating to property in accordance with Chapter 5, Paragraph 4, of the ML and that, consequently, VAT is due only on services carried out on the Swedish mainland and in Swedish internal waters and territorial waters.
(1) A taxable transaction for the supply and installation of a cable, which is run between the territories of two Member States and also outside Community territory and to which the clearly greater part of the total cost of that transaction is attributable, is to be considered a supply of goods within the meaning of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995 introducing new simplification measures with regard to value added tax – scope of certain exemptions and practical arrangements for implementing them.
(2) Article 8(1)(a) of Sixth Directive 77/388, as amended by Directive 95/7, is to be interpreted as meaning that, for the purposes of determining the power of the Member States to charge tax, the transaction is to be split on the basis of the territorial positioning of the cable.
(3) Article 8(1)(a) of Sixth Directive 77/388, as amended by Directive 95/7, read in conjunction with Articles 2 and 3, is to be interpreted as meaning that VAT is not payable on that part of the supply of goods relating to the area outside the territory of the Community.
1. A transaction for the supply and installation of a fibre-optic cable linking two Member States and sited in part outside Community territory must be considered a supply of goods within the meaning of Article 5(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 2002/93/EC of 3 December 2002, where it is apparent that, after functionality tests carried out by the supplier, the cable will be transferred to the client who will dispose of it as owner, that the price of the cable itself clearly represents the greater part of the total cost of that transaction, and that the supplier’s services are limited to the laying of the cable without altering its nature and without adapting it to the specific requirements of the client.
2. Article 8(1)(a) of Sixth Directive 77/388 must be interpreted as meaning that the right to tax the supply and laying of a fibre-optic cable linking two Member States and sited in part outside the territory of the Community is held by each Member State pro rata according to the length of cable in its territory with regard both to the price of the cable itself and the rest of the materials and to the cost of the services relating to the laying of the cable.
3. Article 8(1)(a) of Sixth Directive 77/388, read in conjunction with Articles 2(1) and 3 of that directive, must be interpreted as meaning that the supply and laying of a fibre-optic cable linking two Member States is not subject to VAT for that part of the transaction which is carried out in the exclusive economic zone, on the continental shelf and at sea.
ECJ issued its decision in Case C-111/05 Aktiebolaget NN on several preliminary matters relating to application of VAT on the laying of seabed optic cables. Although the issues arising particularly concern the criteria according to which supplies of goods may be distinguished from the provision of services, and how to determine the place of supply when providing line constructions, the ECJ decision also has general application.
For a transaction to qualify as a service, the service element of such a transaction must be of “decisive” (i.e. crucial) significance. Factors relevant in this regard can be the work/ materials ratio and the fact of whether the material or goods are supplied or provided without altering its nature and without adapting it to the specific requirements of the client (to comply with the definition of supply of goods).
To determine the place of supply, reference needs to be made to the Sixth Directive, which provides that as regards the supply of goods including assembly thereof, the place of supply is the country in which the assembly or installation takes place. Hence in the given case, the place of supply is in several Member States. No VAT is due on supplies made to countries outside the EU. The price of the service to be supplies in each country is calculated pro rata the length of the cable laid in each territory.
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