Following a previous post on the Spanish VAT rules for UK taxpayers after Brexit, this post addresses the so-called use and enjoyment VAT rule. 

Article 59(a) of the Principal VAT Directive allows Spain, and any other Member State, to introduce an exception to the general VAT services-location rules, which results in Spanish VAT being due when certain services are used by certain persons in Spanish VAT territory. The purpose of this effective-use special-location rule (the Use-and-Enjoyment Rule) is to avoid cases of double taxation or, more likely, the non-taxation of certain services supplied to persons not established for VAT purposes in an EU VAT territory.

Spain is the only EU Member State to have implemented the Use-and-Enjoyment Rule in relation to specific categories of services, such as legal and consultancy services. The Use-and-Enjoyment Rule was transposed into Spanish law in 2003 as article 70.2 of Law 37/1992 of 28 December on Value Added Tax (the VAT Law).

The importance of the Use-and-Enjoyment Rule has recently increased due to Brexit, since it now applies to business arrangements between Spanish and UK persons, as the latter are no longer EU-established.

In Spain, the Use-and-Enjoyment Rule applies if all of the following three conditions are met:

• The services provided fall under specific categories, which include the lease of means of transport and telecommunication services or electronically supplied services and, if the services are supplied to an entrepreneur undertaking a trade or business, intermediation services, the transfer of industrial and property rights and goodwill, advertising, counselling and advising services; data-processing services, translation and dubbing services; insurance and financial services, assignment of workers, leasing of movable property, access to the electric and gas system and the transport and distribution of electricity and gas; as well as the obligation not to render the aforementioned services.
• The services are located outside of the EU VAT territory, the Canary Islands and the autonomous cities of Ceuta and Melilla, as per the general location rules. As a general rule, B2B services will be deemed to have been supplied where the recipient is located. For example,  services supplied by Spanish VAT taxpayers to a UK entrepreneur will be located in the UK (i.e., outside the EU and therefore outside the scope of Spanish VAT).
• The effective use or enjoyment of the services must occur, from an economic standpoint, in the Spanish VAT territory.

Spanish VAT regulations neither define what is deemed to be the “effective use or enjoyment” of the services, nor establish specific rules to determine the corresponding place. As a result, this legal concept has been progressively developed in binding tax rulings issued by the Spanish General Directorate of Taxes (SGDT) based on relevant EU guidance.

Pursuant to these rulings, in order for a service supplied to a person not established for VAT purposes in the EU to be deemed effectively used in Spain, the service must be directly or indirectly linked to an underlying transaction that is located for VAT purposes in Spain. This is nevertheless not a clear-cut issue and the Spanish tax authorities have not provided decisive criteria; as such, the analysis must be made on a case-by-case basis.

Additionally, according to the SGDT’s criterion, the Use-and-Enjoyment Rule might also apply when the corresponding service is supplied to a person not established for VAT purposes in the EU and who does not carry out any transaction in Spain but rather acts as an intermediary who supplies or reinvoices those services to another person who does carry out the transaction in the Spanish VAT territory. 

In our view, recent rulings issued by the SGDT attempt to extend the interpretation of the Use-and-Enjoyment Rule to all services whether rendered directly or indirectly (as in services rendered through an intermediary), even where there is only an indirect link to Spain. 

As Spain is the only Member State that has implemented this anti-abuse provision as described above, this creates a situation in which Spanish service providers are in a less favourable position than other EU established entrepreneurs. Therefore, one would expect the SGDT to ensure that their interpretation is consistent with the ultimate goal of the Use-and-Enjoyment Rule and avoid the possibility of creating undesirable double-taxation scenarios by excessively expanding its application.

In any event, now that UK persons are no longer persons deemed to be established for VAT purposes in the EU, the Use-and-Enjoyment rule must not be ignored when determining whether services supplied by Spanish providers fall within the scope of Spanish VAT. However, as explained in the already cited blog, not all Brexit developments are bad news for UK entrepreneurs: even if the services are located in Spain pursuant to the Use-and-Enjoyment Rule, the Spanish General Directorate of Taxes recognises reciprocity with the UK and it is possible to request the refund of any Spanish VAT borne by UK entrepreneurs through a simple procedure (that requires the appointment of a Spanish tax representative).