The CJEU addresses the scope of Directive 2006/112 of November 28 on the common value added tax system (the “VAT Directive”).
The Court of Justice of the European Union (“CJEU”) handed down the judgment in case C-501/19 on January 21, 2021. It addresses the scope of Directive 2006/112 of November 28 on the common value added tax system (the “VAT Directive”) and, particularly, whether it applies to invoices issued when holders of the right of public communication grant licenses through management entities.
Background and questions referred
The dispute was between the Romanian musical works rights management organization UCMR-ADA and the Romanian Soul Cultural Association (the “Association”), which organizes shows. It related to the royalties that the Association owed UCMR-ADA for organizing a show in which musical works were played to the public under the non-exclusive license for communication to the public of works that are part of the management company’s repertoire.
The conclusion reached by the courts of first and second instance were identical in relation to the amount of the debt: the Association owed the royalties claimed in full. However, the second instance ruling stated that the collection of those royalties by UCMR-ADA was not subject to VAT and, therefore, reduced the amount payable by the Association. According to UCMR-ADA, this ruling infringed the principle of VAT neutrality established in the VAT Directive, as its main effect was to assign the VAT burden to the management company, even though it was not the end user of those works.
The case was escalated in cassation to the Romanian Supreme Court, which had some doubts regarding the legal classification of the transaction by which right holders authorized the use of their works, and as to whether a collective management organization acted as a taxpayer within the meaning of the VAT Directive when it collected royalties from users.
Services for consideration
As a result, the Romanian Supreme Court suspended the proceedings and asked the CJEU, first, whether, within the meaning of the VAT Directive, a holder of copyright on protected works supplies “services for consideration” to a show organizer, the end user, where that organizer obtains a non-exclusive license authorizing it to communicate those works to the public, in return for the payment of royalties to the corresponding collective management organization, which acts in its own name but on behalf of that copyright holder.
The CJEU says it does.
Under article 2 of the VAT Directive, the supply of services for consideration within the territory of a Member State by a taxable person acting as such will be subject to VAT. Article 25 provides that “A supply of services may consist, inter alia, of (a) the assignment of intangible property.”
According to the CJEU, to determine whether the copyright holder’s activity can be classified as a supply of services consisting of the assignment of intangible property within the meaning of the
VAT Directive, it should be first assessed whether the supply in question is carried out for consideration. It reminds that, as inferred from repeated caselaw (including the judgment of January 18, 2017, SAWP, C-37/16), a supply of services is made for consideration and, therefore, will be taxable if there is a legal relationship between the service provider and the recipient under which there is reciprocal performance, and the remuneration received constitutes the value given in return for the service supplied.
The CJEU ruled that the copyright holder supplies services for consideration to the show organizer. This is the case regardless of the involvement of the collective management organization acting on behalf of the copyright holders. In this case, that involvement is mandatory, as the applicable Romanian regulations envisage mandatory collective management of the right to communicate musical works in public shows. It should be noted that, in Spain, collective management is considered voluntary or individual, and no specific form of management is imposed. That being said, copyright holders often entrust the management of their exclusive rights, such as the right of communication to the public, to the corresponding management organization (e.g., the SGAE for authors of musical works) to be managed collectively.
In the CJEU’s opinion, this scheme implies the existence of a legal relationship under which there is reciprocal performance (i.e., copyright holders grant the use of their work to a user, and the user complies with the obligation to pay the royalty to the corresponding collective management organization). Consequently, it meets the requirement of consideration in the supply of services to consider the transaction a “supply of services for consideration” within the meaning of the VAT Directive.
The management organization, VAT taxpayer
On this basis, the judgment answers the second question referred for a preliminary ruling, namely, whether collective management organizations act as taxpayers within the meaning of the VAT Directive when they receive royalties from show organizers. If they do, the referring court asks whether the management organization must issue invoices in its own name to the end user containing the royalties collected, including VAT, and whether the copyright holders are, in turn, required to issue invoices with VAT to the management organization.
In relation to the first part of the question, the CJEU says it does act as a taxable person under the VAT Directive. It reminds that, when a taxable person acting in its own name but on behalf of another person takes part in a supply of services, under article 28 of the VAT Directive, it will be considered to have received and supplied those services personally. This fits comfortably within the activity of the collective management organization in question. To reach this conclusion, the CJEU considered several elements of the management organization involvement (including the fact that the management entity also represents copyright holders who have not entrusted it with the management of their rights; that the right of communication to the public cannot be assigned to management organizations; or that the management organization is required to draw up a payment method for royalties in the case of works whose use makes it impossible for right holders to grant individual authorization).
With regard to the consequences of this on invoicing, addressed in the second part of the question, the CJEU established that the disputed supply of services is subject to VAT, which must be included in the invoices, with regard to both the relationship between the management organization and the user and between the management organization and the copyright holder, when they receive the corresponding royalties.
Authors: Marta Zaballos and Nora Oyarzabal