Place of supply. Use and enjoyment rule
Binding tax ruling V3234-15 issued by the Spanish General Tax Directorate on October 21st, 2015.
This ruling is about the location and the generation of the right to deduct VAT of advice and consultancy services rendered by an entity established in the Spanish VAT territory to a company established in the United States, consisting of the location of distributors in other markets. These services allow the expansion of the American company in other countries excluding Spain.
In terms of the location of the service, it must be mentioned that the general rule of location of services between companies (B2B), contained in article 69.One of the Spanish VAT Law, establishes that, without prejudice to special rules (articles 69.Two, 70 and 72 of the Spanish VAT Law), B2B services shall be deemed rendered at place of establishment of the recipient.
Despite the foregoing, the special rule contained in article 70.Two of the Spanish VAT Law, attracts taxation of certain services (including advisory and consulting) to the Spanish VAT Territory when, according to the general location rule the service would be understood rendered outside the EU but the effective use or enjoyment of the service is carried out in the Spanish VAT Territory.
At this point, the determination of whether the “effective use or enjoyment” has place in the Spanish VAT Territory generated quite a few controversies. Although its valuation is done individually for each service, when the Spanish VAT Law mentions the use and enjoyment, it does so from an economic perspective.
In the present case, to appreciate the applicability of the criterion of effective use in the Spanish VAT Territory, shall act in two phases:
1) Have located operations that serve or in connection with which there is the use or effective exploitation of the service concerned. Only if this location leads to consider these operations carried out in the Spanish VAT Territory will fit the application of the provisions of article 70.Two of the Spanish VAT Law (use and enjoyment rule).
2) Has determined the relationship of such operations with the provision of services that it is locate, to see if indeed effect occurs effective in carrying out operations to that referred to in the previous point or does not use or exploitation. This relationship can be direct or indirect.
Since the American based company does not perform any activity in the Spanish VAT Territory or plans to do it in the future it can be concluded that the requirement of effective use within the Spanish VAT Territory is not met, therefore does not apply article 70.Two of the Spanish VAT Law, but general B2B rule. So the service is not considered as rendered within the Spanish VAT Territory.
In relation to the right to deduct VAT, pursuant to article 94.One.2nd of the Spanish VAT Law, the transactions performed out of the Spanish VAT Territory will also generate the right to deduct VAT if they would be considered deductible within the Spanish VAT Territory.
Therefore, these consultation services, which are not located within the Spanish VAT Territory, will generate the right to deduct VAT. All this without prejudice to the need that the rest of general requirements are met to be able to deduct the VAT.