Everything you need to know about use and enjoyment for VAT purposes
This article explains use and enjoyment rules throughout the European Union and changes pertaining to Brexit.
What is use and enjoyment in VAT?
It is a rule that determines the place of supply of a service according to the effective use and enjoyment of such service.
Some countries apply a use and enjoyment rule on the place of supply of services. This rule deviates the place of supply from the general rules based on the place where the service is effectively provided. Under the general rule, the supply of services between businesses is usually taxed in the customer’s country, while services supplied to private individuals are taxed in the supplier’s country. You can find more information on this here. With the implementation of the use and enjoyment rule, we can see some changes in the deemed place of supply.
The purpose of the use and enjoyment provisions is to avoid double taxation (where the place of supply is claimed by two countries at the same time) or non-taxation (where there are no jurisdictions claiming the supply).
When the provisions of use and enjoyment are introduced to avoid double taxation, we refer to them as positive use and enjoyment. Respectively, if the purpose is to avoid non-taxation, we refer to them as negative use and enjoyment.
When does use and enjoyment apply?
According to Article 58 of the VAT Directive, the place of supply of certain services may be deemed outside of the supplier’s country if the effective use and enjoyment of said service takes place outside of said country. Likewise, if the service is provided by a supplier in a non-EU country and enjoyed within the EU, the place of supply will be in the Member State in which the service was enjoyed.
Use and enjoyment rules are optional. Member States can apply the use and enjoyment rule on a wide array of services laid out by Article 56(1) of the VAT Directive. Some of these services include:
- Transfer of assignments and copyrights
- Advertising services
- Services provided by consultants, lawyers, and engineers
- Banking and financial services
- Telecommunication services
- Radio and broadcasting services
- Means of transport
It is important to keep in mind that the use and enjoyment rule will not apply to most of these services if they are rendered to non-taxable persons.
However, we can see further exceptions related to use and enjoyment in telecommunication services rendered to a non-taxable person as explained in Article 59 of the VAT Directive.
Examples of the use and enjoyment rule in the European Union
Different Member States have introduced positive use and enjoyment, negative use and enjoyment, or both.
Let’s take a look at Spain. Spain has introduced negative use and enjoyment rules, making the place of supply in Spain for certain applicable services rendered by Spanish businesses to non-EU taxable persons.
Another example is Germany, which has introduced positive use and enjoyment rules. This means that if a German business supplies services that fall into scope of the rule to a non-EU business, the place of supply is where the service is enjoyed (hence, the place of supply would be the non-EU country.)
Impact of use and enjoyment after Brexit
As of 1 January 2021, the UK is not considered to be a part of the European Union due to Brexit.
UK businesses will be subjected to use and enjoyment rules in EU countries, as their status of non-EU taxable persons will attract the application of use and enjoyment provisions where the relevant conditions in each country are met.
From a UK perspective, the UK will continue to utilize both positive and negative use and enjoyment rules as before. This means that when certain services are supplied by a UK business but effectively used enjoyed outside of the UK, the place of supply would be outside of the UK. This is where we can see positive use and enjoyment.
Comparably, we can see negative use and enjoyment when other certain services are rendered outside of the UK by UK-established companies. In these circumstances, the place of supply would be deemed the UK and there is risk for double taxation.
For EU-established businesses supplying services to the UK, their use and enjoyment rules of their Member State to taxable persons established outside of the EU will apply.
Need help figuring out if your services fall under the use and enjoyment rules?
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