The ECJ decision on the WebMindLicenses case (published 17 Dec 2015) provides guidance on points to consider when determining whether a licensing agreement amounts to VAT ‘abuse’ (and, accordingly, points to watch to make sure a licensing agreement is not abusive!)
In this particular case, know-how had been licensed from Hungary to Madeira, an autonomous region of Portugal which has a preferential VAT rate compared to Hungary (almost everywhere has a preferential VAT rate when compared to Hungary).
The know-how was used to provide online services from Madeira to consumers worldwide, and so charging VAT in Madeira. Note that this sort of arrangement is no longer VAT-advantaged, as the VAT rate charged on supplies to consumers is now the rate where the consumer is located, not the rate where the supplier is located (with effect from 1 Jan 2015). As a result, the case of historic interest for the specific structure, but the guidance points remain useful.
The Hungarian tax authorities claimed that the know-how transfer was essentially a sham and that the know-how continued to be exploited in Hungary, so that Hungarian VAT should have been applied.
Given that there is freedom of establishment etc within the EU, it is not automatically VAT abusive to arrange a business in order to ensure that it benefits from a lower VAT rate. Essentially, a licensing agreement will be considered to be VAT abusive where the arrangements are artificial and intended to disguise the fact that the relevant services are actually provided from another EU country. In considering this, the place of performance of services will be critical – taking into account the location of staff and equipment in particular, and whether the location from which services were said to be supplied had the appropriate resources to provide such services on its own behalf and at its own risk.
The ECJ noted that the place of creation of the know-how is not decisive – even in a case such as this, where the creator had significant control and influence over the business. Similarly, the location of back office functions and the location of subcontractors was not a decisive factor.
Largely, it boils down the usual substance, substance, substance – important for direct tax purposes still, even if VAT advantages are slimmer these days.