The tax/VAT landscape in Luxembourg is changing, the new tax reform substantially increasing penalties for governance infringements. Thus, properly monitoring VAT obligations has become very important.

On a European level, services related to immovable property have been heavily discussed and inconsistently applied in the Member States, leading to double taxation or to non-taxation. Naturally, this has raised discussions about VAT registration obligations.

Therefore, it's not just asset or fund managers managing real estate portfolios who are affected by the new rules and explanatory notes effective 1 January 2017, but also legal or tax advisors.

The current context

According to the European VAT legislation, the place where immovable-property-related services should be taxed is defined by Article 47 of the VAT Directive, which provides that it shall be where the immovable property is located. The purpose of that particular provision is to ensure taxation at the presumed place of consumption of the service.

In contrast, according to the destination principle, the place of supply for services exchanged between taxable persons shall be where the recipient of the service is established.

This article gives an overview of the new provisions, and illustrates some areas of conflict which may arise while determining the place of supply for services which may or may not be connected to immovable property.

New and binding rules from 1 January 2017

As the application of the place-of-supply rule has been inconsistently applied in the past, the European Commission has responded to the need for more consistency and legal certainty concerning VAT treatment applied by adopting the VAT Implementing Regulation,1 > which became binding and directly applicable in all Member States on 1 January 2017.

After extensively consulting business representatives and the Member States, the EU Commission also published explanatory notes2 in October 2015 meant to provide guidance and additional practical examples on how to implement the European legislation as well as of the Implementing Regulation.

It is only with two new articles that the Commission intends to provide the necessary clarifications.

Definition of "immovable property"

Now, the European Legislator defined the concept of immovable property in Article 13b by including an exhaustive list of four categories helping to clarify what should qualify as immovable property. The first step is therefore to analyse whether the service in question relates to a good qualifying as immovable property.

But even though a good might qualify as immovable property as defined in Article 13b, this does not necessarily mean that all services in relation to this good must be considered immovable-property-related services as article 31a states, that, to be considered connected with immovable property, a service needs to have a sufficiently direct connection with immovable property.

Sufficiently direct connection with immovable property

Article 31a provides guidance on what qualifies as services connected with immovable property and by giving a list of examples which should (31a [2]) or should not (31a [3]) be considered connected to immovable property.

Referring to the settled case law, the new provision implies that, to have a sufficiently direct connection, a service must (1) involve a specific immovable property and (2) originate from that same immovable property as the dominant element of the supply, focusing on any modification of the legal or physical status of the property.

While the Commission does further elaborate on the definition of physical alteration as being any kind of physical alteration, even road or bridge maintenance for example, the term legal alteration is not further explained. Given the wide scope of interpretation especially in the context of a legal alteration, we must wait to see whether the provision is sufficiently precise and concrete to ensure the desired uniform application in different jurisdictions.

Legal and tax advisory services

In addition it might be particularly difficult to determine the place of supply for legal and tax advisory services.

Article 31a (2) says that legal services need to relate to the transfer of a title to immovable property, to the establishment or transfer of certain interests in immovable property, or to rights in rem over immovable property in order to qualify as connected to immovable property.

As the Commission further explains, legal services relating to the transfer of a title of immovable property can take many different forms such as legal services relating to property investments, the drawing up of construction or leasing contracts.

Accordingly, the predominant criteria is whether the services rendered relate or not to the legal alteration of the property.

The question remains, however, of how situations should be handled where a bundle of services is rendered and the legal or tax advisory services are indirectly connected with the act of transfer of the title of immovable property.

Falling back to the general VAT principles as developed by the CJEU in cases where a service consists of several elements, it must be assessed whether it should be treated as a single supply or as several distinct and independent supplies.

In a second step, the predominant element of this supply has to be identified and it should be verified whether this predominant element is connected with immovable property or not.

Asset management contracts

Typically, asset management contracts consist of complex supplies including several elements such as portfolio management but also property management, which is strongly connected to the immovable property itself.

Aware of the need to distinguish between portfolio and property management, the legislator clearly excluded portfolio management from the services to be considered connected to an immovable property (Article 31a[2][o] and Article 31a[3][g]). In this context the explanatory notes provide valuable guidance by illustrating the differences between these services.

Whilst a property manager focuses on the proper running and functioning of the property itself, a portfolio manager rather acts in the financial interest of his or her clients with the clear objective to increase the value of the portfolio. Accordingly, the major differentiator should be how the immovable property is used in the actual context: in cases where immovable property is only bought for investment purposes and thus constitutes an investment asset, the respective and linked management services should qualify as portfolio management and not considered immovable-property-related services.

Translated into practice, this means that the decisive criterion would be to assess from the customer's point of view whether a financial investment service qualifies as portfolio management.

Conclusion

Even though the explanatory notes will surely evolve with the obstacles of the practical implementation of the Regulation throughout the European Union, they already provide valuable guidance and surely increase the desired legal certainty and uniform application of the provisions concerned.

1. Council Implementing Regulation (EU) No 1042/2013 of 7 October 2013 amending Implementing Regulation (EU) No 282/2011 as regards the place of supply of services

2. Explanatory notes on EU VAT place of supply rules on services connected with immovable property that enter into force in 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.