WebMindLicenses (WML) is a Hungarian company. WML is described as making available to a separate company, Lalib, know-how enabling a website to operate. Lalib is a company established in Madeira (Portugal). The site, according to the Judgment, provides interactive audiovisual services in which individuals throughout the world take part in real time. Output VAT on payments received for these services was accounted for in Madeira where Lalib was established. The specific VAT rates were not mentioned but we know historically a number of internet businesses established in Madeira to take advantage of low VAT rates and Hungary has the highest standard rate in the EU of 27 percent.
Following a tax inspection, the Hungarian authorities considered that the transfer to Lalib was not a genuine economic transaction and that the know-how was being exploited by WML in Hungary, such that Hungarian VAT was due on the payments. The taxpayer was assessed for over €33 million, rising to around €68 million, including penalties and interest. The key points from the Judgment are:
- The concept of place of supply is objective and applies without regard to the purpose or results. Differences between VAT rates in Member States are a result of the absence of full harmonisation. Given the freedom to provide services, entering into arrangements such as licensing, which result in accounting for VAT in another Member State at a lower rate of VAT, cannot be regarded as an abusive practice in the absence of other factors.
- For an abusive practice in the current case, this would require the agreement to transfer know-how to constitute a wholly artificial arrangement, concealing the fact that the services were not actually supplied in Madeira by Lalib, but were in fact supplied in Hungary by WML.
- To establish this, the referring court would need to consider all of the facts, including whether:
- the establishment of Lalib’s place of business or fixed establishment in Madeira was not genuine;
- that company, for the purpose of engaging in the economic activity concerned, did not possess an appropriate structure in terms of premises and human and technical resources; and
- it did not engage in that economic activity in its own name and on its own behalf, under its own responsibility and at its own risk.
- The fact that VAT has been paid in another Member State does not prevent an assessment for tax in the Member State where the VAT is correctly due.
Member State Cooperation and evidence
The reference also contained questions around the Regulation No 904/2010 on administrative cooperation and on the use of evidence obtained without the taxable person’s knowledge as part of a criminal investigation. The CJEU summarised its guidance on these points and this can be found starting at paragraphs 59 and 90 respectively.
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