EC: Involuntary supplies can be VAT-taxable

Facts

The plaintiff, Credidam, is a collecting society for copyright and related rights in Romania that collects and distributes the remuneration corresponding to these rights. Under Romanian law, producers of sound recordings and performing artists are entitled to a one-off remuneration if sound recordings produced for commercial purposes are used, reproduced, broadcast or otherwise publicly performed. If this exploitation takes place without a licence, the remuneration amounts to three times what would have had to be paid for a licence. Credidam is asserting such a triple remuneration claim against a holiday guesthouse, as it is alleged that the guesthouse reproduced sound recordings in public without a licence.

Questions referred

The referring Romanian court wanted to know whether the rightsholder provides a supply for remuneration if a user publicly reproduces a protected work without the appropriate licence and if the rightsholder cannot object to the use but only has a one-off statutory remuneration claim. It also wanted to clarify whether only the single remuneration or the triple remuneration forms the basis for assessing VAT if a supply is provided for remuneration.

EC decision

The EC affirmed the legal relationship between the provider and the recipient of a supply, pointing out that such a legal relationship does not necessarily have to arise from a contract, but can also be based on a law. The necessary direct link between the supply and the remuneration resulting from this legal relationship exists – according to ECJ case law, the fact that a collecting society acts on behalf of the rights holders and that the collective management of the remuneration is based on a law basis does not preclude the direct link. The law establishes the direct link.

The fact that the holiday guesthouse had publicly reproduced the protected works without first obtaining a licence was irrelevant, as neutrality prohibited any differentiation between permitted and unauthorised transactions.

Accordingly, in the opinion of the CFI, a service against remuneration is provided.

As regards the amount of the remuneration, the EC refers to established case law, according to which the consideration actually received determines the basis for VAT assessment. This includes surcharges or additional fees if they reflect the direct link between the supply and the consideration, such as fines payable by users of a car park for illegal parking (reference to Apcoa Parking Danmark, C-90/20). Since, in the present case, the tripling of the remuneration was a direct consequence of the reproduction of the works without a licence, the basis of VAT assessment in this case is three times the licence fee.

Analysis

This is the second time that Credidam has been before the European Courts: on 4 July 2024, the ECJ ruled in case C-179/23 that the administration and collection of remuneration by Credidam, which is VAT taxable in itself, cannot be considered a "quasi-ancillary supply" to the non-taxable exercise of rights and cannot therefore also be non-taxable. The VAT directive does not provide that the connection with an activity not covered by it can negate the taxability of a supply.

The present case essentially concerns the question whether there is such a thing as involuntary supplies – after all, the unlicensed use of his work is not desired by the rightsholder, but simply cannot be prevented. The ECJ last dealt with this question in the Fluvius Antwerp case (C-677/21, 27 April 2023). In this case, a private individual had not registered with the electricity supplier but had secretly consumed electricity. Here, too, the ECJ found that the legal provisions governing "compensation" in such a case can establish the legal relationship necessary for an exchange of supplies.

Even more clearly than in the Credidam case, the ECJ had established that this supply constituted an economic activity, even if it was unintentional. It is true that the "intention" to generate income is a criterion of economic activity. However, it must be countered that Fluvius was legally obliged to supply anyone who did not have a contract with a commercial distributor. In addition, there were explicit regulations for cases of clandestine electricity consumption. It followed from this that this phenomenon was a typical business risk of entrepreneurial activity.

In both decisions, Fluvius Antwerp and Credidam, the proactive consideration and regulation of the consequences of a possible involuntary supply thus played a major role and can be regarded as prerequisites for VAT taxability. In other words, if the potential supplier takes into account the unlawful use of its supply and makes provisions for this case, VAT taxability is given. Otherwise, e.g. in the case of ordinary theft of goods, it is not.

Author: Nadia Schulte