New developments in relation to VAT liability for colocation services in Sweden

In its preliminary ruling the ECJ stated that a data centre’s supply of lockable equipment cabinets holding customers’ servers are not regarded as letting of immovable property. Letting of immovable property is generally a tax-exempt supply in Sweden but with the possibility to, pending certain conditions, opt for taxation. The supply at hand, in addition to the physical storage, included electricity and other ancillary components in order to ascertain optimal conditions for the servers, such as temperature, cooling and moisture surveillance, safeguards related to the electricity supply, smoke detectors and controls for electronic access. The customers did not have their own keys to the cabinets but could upon proper identification receive such access from the third-party security supplier surveilling the data centre. Although the data centre operator had access to the storage facility as such, it did not have direct access to the customer cabinets. 

In support for its conclusion the ECJ held that the service did not appear limited to the passive activity of making immovable property available to the customer as if he was the owner thereof and to exclude any other person from enjoyment of such a right, which typically defines letting of immovable property. Nor did the customers have the right to control or limit the access to the building where the cabinets were stored. Furthermore, there were no indications that the cabinets qualified as immovable property in their own right as they were neither an integral part of the property without which the building would be incomplete, nor was it plausible that the property were to be destroyed or significantly altered if the cabinets were removed.

In addition to the question of VAT liability of the service, ECJ also held that the service should not be regarded as a supply connected with immovable property, where the place of supply is the location of the property. Consequently, the supply should fall under the main rule for B2B services, i.e. subject to taxation at the place where the customer has established his business.
 

Deloitte comments

Whether or not the supply of server storage in specifically tailored buildings (in Sweden known as colocation services) has been subject to two rulings from the Supreme Administrative Court in Sweden. In both cases, from 2008 and 2016, the court ruled that the supply is to be regarded as letting of immovable property. Contrary to the ECJ, the Swedish court, with reference to ECJ case law, held that the main component of a supply of colocation services is the exclusive right to a separate and specifically tailored area for storing servers. 

On the basis that the facts in the recent ECJ ruling appears similar to the older Swedish rulings, it seems reasonable to conclude that the Swedish position may change and that colocation services supplied in a similar way as in the ECJ ruling going forward should be regarded a mandatory taxable supply. Given the fact that the character of the supply where connectivity, stability and security typically are of greater importance than the actual physical storage, it is also our opinion that such a conclusion should be in line with the purpose of the applicable provisions.

Exactly how the ruling will be interpreted by the Swedish authorities and courts is yet to be seen, but the ruling from the ECJ should in our view be positive for the Swedish data centre and colocation industry. To the extent this becomes applicable it should reduce the administrative burdens of optional VAT liability and also remove the competitive disadvantage otherwise suffered in relation to non-Swedish operations where the findings of the ECJ already apply. In countries where similar supplies have not been regarded as letting of immovable property, VAT on investments should have been directly recoverable, which has not always been the case in Sweden due to some of the restrictions that may occur when option to tax is applied. Even when option to tax has been possible it has been a competitive disadvantage for Swedish suppliers to have to charge Swedish VAT when a customer has had the choice between a Swedish supplier and non-Swedish supplier who has been able to apply reverse charge under the main rule for place of supply.

Suppliers with Swedish data centre’s who has suffered irrecoverable VAT may now have the opportunity to apply for reassessments to recover such VAT. Before doing so it should however also be considered if this would lead to a VAT liability of historical supplies. As a final note, an amended interpretation of the VAT liability of colocation services may also trigger the need to review existing and upcoming customer contracts.