Services provided by datacenters are not services relating to real property

Just before the end of 2020, the network firm of WTS Global, Atlas Tax Lawyers won an appeal on behalf of a US-based global datacenter operator, (“the company”) against a VAT assessment by the French Tax Authorities (“FTA”).

The FTA had taken the view that these interconnection services qualified, for VAT purposes, as services related to real property and were thus taxable in France, even if the B2B customer was not based in France.

The company operates several datacenters in France and provides a range of services to its customers, including interconnection services (i.e. establishing a physical connection by means of physical cables between its customers’ servers). These so-called interconnection services also included hosting services, such as installation work, the provision of rack space, electric power supply, air conditioning, etc.

According to the company, the services provided to its customers who are not established in France should fall under the B2B place of supply rules and would thus be taxable at the customer. As a consequence, services charged to non-French established customers had to be invoiced without French VAT, under the Reverse Charge regime.

However, the FTA argued that these interconnection services had to be charged with French VAT at all times, since they were related to real property (i.e. the datacenters) located in France. 

In its assessment, the French Court of Appeal quoted the ECJ and recollected that hosting services in a datacenter (in the framework of which the services provider makes rack space available to its customers (i.e. colocation), installs their servers, and provides them with ancillary goods and services, such as electricity and various services intended to ensure the use of these servers under optimal conditions), for VAT purposes, does not constitute services relating to real property. As such, customers do not benefit from a right of exclusive use of the part of the property in which the racks are installed (ECJ, July 2nd, 2020,. C-215/19,( A Oy)).

In the underlying case, over which the French Court of Appeal had to rule, it decided that, for VAT purposes, the services provided by the company e.g. the installation work, server storage, electric power supply, air conditioning, and, most importantly, the interconnection services, qualify as a single supply.

Furthermore, the Court of Appeal ruled that it appeared from the underlying contracts that the customers also were not obtaining any exclusive right to use an expressly-designated portion of the datacenter buildings. Rather, according to the Court of Appeal, the company was merely providing a secure space for each client to install its equipment and benefit from the company's interconnection services.

As a result, the services provided by the company could not be considered as being related to real property located in France. For the full judgment, please go to CAA Versailles, December 8th, 2020, aff. 19VE00526.

WTS Global

In addition to the ECJ’s A Oy case, we find that the French Court of Appeal’s ruling is a welcome addition for the datacenter industry. Both cases show that, although datacenters require a physical location to supply their services in an optimal way, this physical location is merely ancillary to such a datacenter’s key services.

In our view, the ECJ, as well as the French Court of Appeal, have taken the correct approach in these cases. Not only do the outcomes of these cases reflect the economic reality of the underlying services (i.e. the main purpose for customers in acquiring such services is to establish, improve or upgrade their connection speed), they are also aligned with the approach on the EU VAT rules relating to services related to real property as set out in the Explanatory Notes of 2017.

In this regard, we point out that a number of EU Member States in the past have already taken a position, i.e. by means of a ruling or a specific policy, that is aligned with this approach by treating a datacenter’s services as services taxable under the general VAT rules for the place of supply, rather than treating these services as services related to real property.  

However, some EU Member States, while only a few in number, still treat these services as services related to real property. Given the ECJ case, as well as the French Court of Appeal ruling, we find that datacenter operators, or their customers, have very good arguments to take the position that these services should be taxed under the general VAT rules for the place of supply.

Sweden

One of the EU Member States that has recently changed its legal stance relating to the VAT qualification of services supplied by datacenters is Sweden. In the past, the Swedish Courts had ruled that such services qualified as services related to real property (RÅ 2008 ref. 48 en HFD 2016 ref.75).

However, in a recent court ruling, the Swedish Administrative Supreme Court changed the Swedish legal position by qualifying colocation services as services taxable under the general VAT rules for the place of supply.

We recommend that datacenters operating in Sweden, as well as the customers of such datacenters, review their financial position in order to align the VAT logic with this recent ruling.

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