CJEU rules that the zero percent VAT rate is applicable to cargo loading and unloading services by subcontractors
On 4 May 2017, the Court of Justice of the European Union (hereafter: “CJEU”) delivered its judgment in the A Oy case (C-33/16) on the VAT treatment of the services consisting of the loading and unloading of the cargo of sea-going vessels. The CJEU judgment gives clarity on the application of the zero percent VAT rate (or the exemption with the right to deduct input VAT) (hereafter: “zero rate”) on supplies of services concerning cargo or unloading cargo of sea-going vessels. The CJEU confirmed that the application of the zero rate is not only allowed for supplies of services concerning loading or unloading cargo onto or from sea-going vessels which take place at the end of the commercial chain of such a service, but also supplies of services made at an earlier stage. In this case, the services supplied by a subcontractor to an economic operator which then re-invoices them to a freight forwarder or transporter. Furthermore, also the services for loading and unloading of cargo supplied to the holders of that cargo, such as the exporter or importer, may be exempt.
11 May 2017
The A Oy case
In the current case A Oy operates in two ports where it supplies loading and unloading, warehousing, shipping agency and freight forwarding services. The services supplied by A Oy include the loading and unloading of the cargo of sea-going vessels. In practice, the loading and unloading is carried out by a subcontractor which invoices those services to A Oy. These costs are re-invoiced by A Oy to its customers which, depending on the circumstances, may be its holding company B Oy, the holder of the goods, the loader, the forwarding company or the ship owner. The details of the vessel and the cargo concerned are sent to the subcontractor and set out both on its invoice and on the invoice issued by A Oy.
A Oy made a request for a tax decision from the Finnish Tax Authorities asking whether the loading and unloading of cargo carried out by subcontractors acting on behalf of its customers are eligible for the zero rate. The Finnish Tax Authorities considered that these services are not zero rated for VAT, relying on the judgment of the EUCJ of 14 September 2006, Elmeka (C‑181/04-C‑183/04), arguing that the zero rate applies only at the end of the commercial chain of the services concerned. The Finnish referring court decided to seek a preliminary ruling from the CJEU.
Loading or unloading cargo of sea-going vessels
The zero rate applies to the supply of services that meet the direct needs of sea-going vessels and/or their cargoes. First of all, the CJEU rules that the loading and unloading of cargo qualify as services supplied for the direct needs of the cargo of the vessels.
The transport of cargo constitutes a usual form of operating vessels used for navigation on the high seas. In order for cargo to be transported and, thus for a vessel to be operated, it is necessary for that cargo to be transported from the port of departure and then unloaded at the port of arrival.
Therefore, such services must be regarded as meeting the direct need of the cargo of a vessel. As such the zero rate can be applied on these supplies.
Supplies of services at earlier stages and sub-contractors
Secondly, the CJEU judges that not only supplies of services concerning loading or unloading cargo onto or from a sea-going vessel which take place at the end of the commercial chain of such a service may be zero rated, but also supplies of services made at an earlier stage in the commercial chain. For example, services supplied by a subcontractor to an economic operator which then re-invoices them to a freight forwarder or transporter.
In this regard, the CJEU observes that the wording of the provision in the VAT Directive does not refer to a particular stage of the commercial chain. Also the provision does not mention any person to whom those services are to be invoiced. Furthermore, the context of the provision does not give rise to the conclusion that services supplied at a stage prior to the end of the commercial chain or those invoiced to an intermediary are excluded from the benefit of the zero rate which it provides.
According to the CJEU, the applicable provision of the VAT Directive has the objective to facilitate the international transport of goods or persons. This objective should be interpreted broadly. If the provision were only applicable to the end of the commercial chain this would lead to an increase in prices applied in international transport.
Such a limitation of the scope of the zero rate is justified in case additional measures are required to guarantee the correct application of this provision. This situation occurred in previous case law (e.g. Elmeka, C-181/04-C-183/04 and Velker, C-185/89).
However, according to the CJEU this case law cannot be applied to this situation. Unlike previous case law, the final use of the services can be guaranteed in the current A Oy case by the nature of the activities from the moment that these are carried out. If the type of vessel of which the cargo is (un)loaded is entitled to the exemption, then there is no doubt that in the end the conditions for the exemption will be fulfilled.
Furthermore, in the VAT Directive it is stated that if a VAT taxable person acts in its own name, but on behalf of another, takes part in a supply of services, he is to be considered to have received and supplied those services himself. Following this provision the CJEU ruled that in this case two supplies of services may take place for VAT that could both be subject to the zero rate. This possibility was disregarded in previous case law (we refer to the case Fast Bunkering Klaipeda, C- 526/13).
Holders of the cargo
Finally, since the (un)loading of cargo of sea-going vessels is directly related to the cargo transported, the CJEU held that these services have to be regarded as part of the commercial chain also in case the supplies are made to the holders of that cargo, such as the exporter or importer. As such last-mentioned services may also be zero rated.
The CJEU judgment provides guidance to companies on the application of the zero rate on supplies of services where these concern the loading or unloading of cargo of sea-going vessels. This guidance is useful as each EU Member State currently has its own interpretation on the scope of the zero rate.
Next to this the CJEU judgement provides arguments to apply the zero rate broadly for other supplies made for the need of sea-going vessels and their cargoes as well. However, this will largely depend on various facts and circumstances, e.g. the nature of the supplies, the guaranteed use thereof, the objective of the legal provision and whether additional control measures may be required.