Background

EU VAT legislation provides for a deemed reseller rule for "electronic interfaces," i.e., online platforms, that facilitate the sales of ESS. This rule is laid down in Article 9a of the EU VAT Implementing Regulation. This article aims to clarify the scope of the commissionaire fiction of Article 28 VAT Directive ("Article 28"). If this rule applies, the online platform facilitating the provision of the underlying ESS is deemed to have both received (from the supplier of the ESS) and supplied (to the customer) the ESS. Effectively, this means that the online platform becomes the supplier of the ESS to the final customer for VAT purposes.

In the Fenix case, the UK tax authorities (HM Revenue and Customs (HMRC)) are of the view that Fenix International Limited ("Fenix") is captured by Article 9a fiction. After all, Fenix operates a social media website known as OnlyFans ("Platform"). On the Platform, creators can create a profile and post content such as photos and videos. Creators can also live stream videos and send private messages to fans who subscribe to them. The creators determine the monthly subscription fee for their profile, although Fenix sets the minimum amount for the subscription. The Platform is available to creators and fans across the globe, including users in the UK.

However, Fenix did not collect any VAT on the subscription fees of the creators and only collected and remitted VAT on its own service fee for the use of the Platform.

The legal dispute

The dispute revolves around the legality of Article 9a. More specifically, the question is whether the Council of the European Union ("Council") correctly adopted Article 9a through the VAT Implementing Regulation, a type of legislative act.

For background, the EU legislator can adopt its policy in principle through the following legislative acts:

• Basic legislative acts — these contain the essential elements of an area that are reserved for the legislative act and cannot be subject to a delegation of power.¹
• Delegated acts, which are non-legislative acts of general application supplementing or amending certain non-essential elements of a legislative act. The EU legislator can delegate this power to the European Commission ("Commission").²
• Implementing acts, which are non-legislative acts laying down conditions for the uniform implementation of legally binding EU acts. The EU legislator may confer this power to the Commission or, in duly justified specific cases, the Council.³

Settled case law determines the limits of the implementing power of the Commission by reference to, amongst others, the essential general aims of the legislative act in question.⁴ The EU legislator is authorized to adopt measures that are necessary or appropriate for the implementation of an act, provided they are not contrary to it.⁵ An implementing regulation may therefore only lay down uniform conditions for implementing the basic legislative act and cannot be used to impose new obligations upon taxpayers or to broaden the scope of existing obligations (i.e., it may not amend or supplement the act itself).

With this in mind, the reason Article 9a refers to Article 28 is because a provision in the Implementing Regulation needs to have its legal basis in the VAT Directive. The only provision in the VAT Directive that could serve as a basis for Article 9a is the "reseller or commissionaire fiction" of Article 28 of the Directive.⁶

Position of parties

According to Fenix, Article 9a amends the application of Article 28 in two fundamental ways:

1. First, Article 9a introduces the presumption that an intermediary platform is acting in its own name but on behalf of the underlying supplier (in the first subparagraph of Article 9a(1)). In other words, it is deemed that the platform has purchased and subsequently provided the services itself, as a result of which the liability to collect and remit VAT is shifted from the supplier to the platform. This presumption is only rebuttable if very specific conditions are met.
2. Second, Article 9a prevents the presumption from being rebutted, even when the platform specifically indicates the underlying supplier of ESS to the customer as set out in the second subparagraph of Article 9a(1) (i.e., indicating this supplier as the taxable person on the relevant invoice(s) and bill or receipt issued to customers), when the platform does either one of the following things (set out in the third subparagraph of Article 9a(1)):
   • Setting the general terms and conditions of the supply carried out by the content creator (including terms and conditions for the use of the website)
   • Authorizing the charge to the customer
   • Authorizing the delivery of the services to the customer

According to HMRC, Article 9a does not supplement or amend the scope of Article 28 VAT Directive as it merely clarifies the autonomous meaning of this provision.

Opinion of AG Rantos

On 15 September 2022, Advocate General (AG) Rantos concluded in his opinion that Article 9a is valid. The AG reasoned that this was the case because it respects the essential general aims pursued by Article 28 and that Article 9a is of a mere technical nature establishing criteria to determine who is liable for VAT. In the absence of such clarification, issues around double-taxation and non-taxation are likely to arise. Accordingly, the AG considers that Article 9a is also necessary and appropriate for the implementation of Article 28 by member states. Furthermore, the AG opined the three subparagraphs of the first paragraph of Article 9a do not supplement or amend Article 28.

In these circumstances, the AG concluded that the Council did not go beyond its implementing power and advised the ECJ to declare Article 9a valid.

Judgment of the CJEU

The CJEU followed the AG in his reasoning. To start, the CJEU first clarified that the power to establish implementing acts by the Council does not defer from that of the Commission, meaning that the Council cannot supplement or amend a legislative act through an implementing act, even in its non-essential elements.

The CJEU then holds that in accordance with the recitals of Implementing Regulation 282/2011, Article 9a ensures uniform application of the presumption established by Article 28 in the specific situation to which Article 9a sees. The CJEU also considers Article 9a appropriate, or even necessary, for the uniform implementation of Article 28, citing double or non-taxation as the primary cause.

With respect to the presumption introduced in the first subparagraph of Article 9a(1), the CJEU ruled that in the specific context of platforms facilitating ESS, a presumption is introduced in line with the logic underlying Article 28 and that the article is, therefore, not amended or supplemented by Article 9a. This is further underlined by the fact that the presumption can be rebutted, thereby taking into account the contractual reality as required by CJEU 14 July 2011, C-464/10 (Henfling). The conditions provided by the second subparagraph of Article 9a(1) to be able to rebut the presumption are also necessary to make the determination of who is the actual supplier and are therefore justified and do not amend or supplement Article 28. Regarding the third subparagraph, the CJEU ruled that the conditions it sets out allow the platform to unilaterally define essential elements related to the supply of ESS. They therefore reflect the economic and commercial reality of the platform supplying ESS to the final customer in that specific context and preclude platforms contractually designating the underlying supplier as the taxable person making the supply to the customer. The fact that these conditions are not mentioned in Article 28 cannot invalidate the aforementioned.

Finally, the argument that the final customer is aware of the existence of the agreement between the creator (as principal) and OnlyFans (as agent) also does not invalidate Article 9a. This is because this circumstance alone is not sufficient to exclude that by taking part in the supply of services, the Platform acts as in Article 28. The powers enjoyed by the Platform in the context of the supply of services are decisive in that respect. To conclude, the CJEU ruled that there are no grounds to declare Article 9a invalid.

Commentary

The fact that the CJEU followed the AG's opinion did not come as a surprise to us. The underlying reasoning of the CJEU can, however, be questioned. For example, to determine whether Article 9a complies with the general aims pursued by Article 28, the CJEU refers to the recitals of the implementing regulation. In our view, this is questionable. After all, if the recitals of an implementing regulation can alter the essential general aims of the article in the basic act, this test will by default be met if recitals of that implementing act cite the aim of the article in that implementing act. Without having to pass all the hurdles and essential democratic safeguards of the legislative procedure of a basic act, the executive branch (for the VAT Directive, the Council) could then alter and amend the essential general aims of a basic act, merely by explaining it in the recitals of an implementing regulation. In our view, this increases the risk of a democratic deficit, where the Council is being granted power exceeding that of the implementing powers as provided for in Article 397 VAT Directive. In this case, the CJEU had the opportunity to provide more background on the rationale behind Article 28, explaining what the general aims of this article are. We believe it would have made more sense for the CJEU to follow this route to justify its conclusions. Instead, the CJEU followed the path of stating the consequence that Article 28 brings about, to subsequently turn to the recitals of an implementing regulation when looking for an explanation for the general essential aims that this consequence pursues.

Aside from this, the judgment may open discussions on a potential broader application of Article 28 than perhaps initially presumed. After all, Fenix stated that Article 28 would not apply to its case without the existence of Article 9a. This reasoning may no longer be valid after the CJEU's judgment. This is because, following this judgment, application of Article 28 would also have been possible without Article 9a in the Fenix situation as it merely provides uniform conditions for member states to apply Article 28. These conditions, however, would not have been required for this specific interpretation of Article 28, in particular with respect to complex (online) supply chains. Were this to be the case, then the CJEU would have ruled that Article 9a did in fact amend or supplement Article 28. Therefore, tax administrations may use this case to further expand the Article 28 commissionaire fiction to online platforms facilitating services other than ESS.

On the other hand, we note that the CJEU may perhaps take a stricter interpretation of the third subparagraph of Article 9a(1) than that envisioned by the Commission in their explanatory notes for Implementing Regulation 1042/2013. In these explanatory notes, which can be seen as non-binding guidance, the Commission seems to take the position that merely setting the terms and conditions for the use of a website is enough to not be able to rebut the presumption of Article 9a(1) first subparagraph.⁷ The CJEU, however, in paragraph 83 states that this comes down to rules that set the general framework of that (ESS) service. In our view, it is difficult to uphold that merely setting the terms and conditions for the use of the website of an online platform can be seen as setting the general framework of rules under which the underlying service is provided.

Other jurisdictions

United Kingdom

Effective from 1 January 2021, the UK exited the EU VAT regime. However, despite Brexit, the effect of the European Union (Withdrawal) Act 2018 was to incorporate relevant EU legislation in effect immediately before the end of the transition period (31 December 2020) into UK domestic law as "retained EU law". This provides that post-Brexit, Article 9a continues to have a direct effect in the UK and must be considered when interpreting the UK equivalent provision of Article 28 of the VAT Directive (Section 47(4) of the VAT Act 1994) and what is meant in the context of ESS by "services supplied through an agent acting in the agent's own name". 

The concept of retained EU law is continuing to develop in the UK and the Revocation and Reform Bill 2022 currently under review by the UK government will revoke retained EU law on 31 December 2023 unless it has otherwise been preserved elsewhere in domestic law. However, it is very likely that the UK government would seek to retain Article 9a. We do not believe the UK government intend to move away from this or the concepts set out by the CJEU decision in Fenix given that (i) Fenix was a UK case that was referred to the CJEU, whereby the UK tax authority was arguing for Article 9a to apply; (ii) unwinding the current position adopted by UK intermediaries of ESS would be complex; and (iii) the incredibly broad scope of Article 9a as currently drafted results in additional revenue for the UK government, as was demonstrated in Fenix. 

Following the CJEU decision that the Article 9a merely clarified the VAT Directive and does not go beyond the implementing power or duty of the Council (insofar as it does not supplement and/or amend Article 28), the case will now be passed back to the UK tribunal to hear the arguments of Fenix and HMRC and consider whether Fenix is to be deemed as acting in its own name pursuant to Article 9a.

Switzerland

Switzerland does not currently have a deemed reseller rule comparable with Article 9a of the EU VAT Implementing Regulation. Instead, Switzerland will implement online platform reseller rules for supplies of goods, but not for services. The parliamentary legislative process is still underway and it is expected to come into force in 2025.

Swiss VAT law already contains general rules covering deemed supplies and services, i.e., a supply or service is deemed to be provided by the person who appears to the outside world as the service provider (even if not the actual service provider). Accordingly, under Swiss VAT law, it is important to pay close attention to the specific circumstances of the individual case in order to determine who appears as the provider of the service.

A potential platform service provider should therefore ensure that the platform provider does not itself render the particular service in question, but is acting as a direct representative of a user/content creator (i.e., acts in the name and for the account of the user/content creator). Acting as a direct representative requires that (i) the platform provider can prove that it acts as the representative of the user/content creator (e.g., by separate contractual relationship with the user/content creator), and (ii) the representation is expressly disclosed to the customers of the platform or that the representation is evident from the circumstances.

Whether the direct representation is clear must be determined on a case-by-case basis and the user experience should therefore be closely examined. As a general example for online platforms, it should be clearly stated in each step of the payment or subscription process for a service that the service is delivered by a user/content creator and not by the platform itself. Furthermore, the same must be clearly stated on the invoice sent or emailed to the customer. While the subscription/payment process is certainly essential in determining whether a direct representation relationship exists, in any case, the entire user experience of the platform should be examined as well.

South Africa

Similar to Article 9a(1) of the Implementing Regulation, the South African VAT Act ("SA VAT Act") deems a supply of electronic services made by an intermediary on behalf of an electronic services supplier to be made by that intermediary. However, contrary to the EU rules that presume a taxable person who is taking part in a supply of ESS through a telecommunications network, an interface or portal such as a marketplace for applications, to be acting in their own name, this deeming provision only applies to the following extent:

• The intermediary, regardless of its residency, is VAT-registered in South Africa.
• The intermediary is responsible for issuing the invoices and collecting the payment for the supply.
• The electronic services supplier is not a resident of, and not VAT registered in, South Africa.  

Where these requirements are not met, the normal agency rules contained in the SA VAT Act will apply. Therefore, the person acting in an intermediary capacity would be considered an agent who is acting on behalf of a principal. Consequently, any supply that is made by that agent on behalf of that principal is deemed to be made by the principal and not the agent.

Further, where the total value of supplies of electronic services by a non-resident supplier of electronic services who is not VAT-registered in South Africa exceeds the VAT registration threshold of ZAR 1 million in any consecutive 12-month period and, as a result, that supplier becomes liable to and registers for VAT in South Africa, the deeming provision would cease to apply. As a backstop to ensure the VAT is recovered, the deeming provision would not cease to apply until that supplier is registered for VAT in South Africa.

1 The "ordinary" legislative procedure. Article 290(1) TFEU.

2 Delegated acts allow the EU legislator to adopt policy and objectives through a less extensive legislative procedure. Article 290(2) TFEU.

3 Implementing acts provide rules and principles for member states to ensure that (legally binding) EU law is implemented in a uniform way. Article 291(2) TFEU.

4 Meaning that the VAT Directive is a "duly justified specific case" in which the Council may lay down uniform conditions for implementing legally binding EU acts as stipulated in Article 291(2) TFEU. The case law referred to are, e.g., ECJ 15 October 2014, Parliament v Commission (C‑65/13, EU:C:2014:2289, paragraph 44 and the case-law cited), and of 9 June 2016, Pesce and Others (C‑78/16 and C‑79/16, EU:C:2016:428, paragraph 46).

5 ECJ 15 October 2014, C-65/13 (European Parliament vs. European Commission).

6 By way of comparison, the EU's 2021 deemed supplier rule for goods has its legal basis in the VAT Directive: Article 14a VAT Directive.

7 Explanatory Notes for Implementing Regulation 1042/2013 published on 3 April 2014, p. 34.