CJEU Guidelines on VAT Treatment of Bundle of Services

The question of the value-added tax (VAT) treatment of a bundle of services—i.e. multiple services rendered by one supplier to one client—arises primarily where the services would require different VAT treatments if taken in isolation (e.g. VAT-taxable versus VAT-exempt status, or different places of taxation). Otherwise, the answer is quite straightforward: the same VAT status applies equally to the whole transaction and to each service in turn, and no further questions arise.

A general principle exists to the effect that, for VAT purposes, services are to be regarded as distinct and independent (the “general individual rule”). During its long history of jurisprudence, the Court of Justice of the European Union (CJEU) has set out exceptions to this rule in the case of bundles of services. However, these CJEU findings, spread as they are over various instances of case law, might be seen as having lost some clarity of content and scope.

In the Frenetikexito case (C-581/19, March 4, 2021), the CJEU had the opportunity to clarify the VAT regime applicable to a bundle of services once and for all. The interest of this case lies in its clarification of the exceptions to the general individual rule.

Background and Question Before the CJEU

The dispute related to the supply of fitness services together with nutrition advice services. The applicant offered two types of program in particular: one consisting of fitness services only, subject to VAT, and one also including nutrition advice/dietary monitoring services, for which the applicant claimed the VAT exemption related to medical care under Article 132 of Directive 2006/112/EC, as amended (the VAT Directive).

The question referred to the CJEU consisted essentially in determining whether:

• the nutrition advice should be regarded as ancillary to the fitness activities so that the ancillary service would receive the same VAT treatment as the main supply (i.e. VAT-taxable status); or
• fitness activities and nutrition advice should be regarded as distinct supplies subject to their own respective VAT treatments. Under this second option, the question arises of whether the VAT exemption under Article 132(1)(c) of the VAT Directive should be applicable to such nutrition advice services.

Findings of the CJEU

The CJEU first addressed the VAT treatment of such nutrition advice services taken in isolation, as the question relating to bundles of services does not arise unless several different VAT treatments could apply. Here, the CJEU specified that Article 132(1)(c) of the VAT Directive only covers nutrition services with a therapeutic purpose. Because the services at issue would not satisfy this condition (a fact requiring confirmation by the relevant national court), they should not benefit from this VAT exemption.

Although the CJEU dismissed that question, deferring to the national court to determine the nature of the particular services at issue with respect to applicability of the VAT exemption, the CJEU still addressed the question of the bundle of services in order to enable national courts to assess with certainty whether a service bundle constitutes a single supply or multiple independent services (“From that point of view, the following considerations ought to be noted” (Frenetikexito, paragraph 36)).

As a reminder, the general individual rule of the VAT system requires that each supply be considered as distinct and independent from other supplies. This means that each service should follow its own regime for VAT purposes, regardless of the VAT treatment applicable to other supplies provided at the same occasion (see in particular: Card Protection Plan, C-349/96, February 25, 1999, paragraph 29; Blackrock, C-231/19, July 2, 2020, paragraph 23).

That being said, “a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system” (emphasis added) (Blackrock, paragraph 23). Accordingly, in this type of scenario, the underlying elements must be viewed as collectively constituting a single supply for VAT purposes, with one VAT treatment applicable to the whole (either VAT exempt or VAT taxable).

This approach must be ascertained by reference to various aspects, and should not be used merely because the services are connected. In addition, in referring to the economic angle, and in line with the philosophy of the VAT system, the CJEU stressed the need to go beyond the mere legal/contractual aspects of the transaction in order to assess the existence of a single economic supply.

In this respect, the CJEU recalled that, in the case of a bundle of services, regard must be had “to all the circumstances in which the transaction in question takes place in order to determine whether it gives rise to one or more supplies”( Frenetikexito, paragraph 37).

Following this, the CJEU summarized three exceptions developed in its settled case law on this topic as follows.

First Exception

Single Complex Supply: “there is a single supply where several elements or acts supplied by the taxable person to the customer are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split” (Frenetikexito, paragraph 38). Under this exception, the various elements supplied are so closely linked that they are indivisible and constitute components of a single supply. Accordingly, the whole has to be considered as one single supply for the determination of the VAT treatment.

In practice, in order to determine if there is a single complex supply, it is necessary to identify the features of the transaction from the point of view of an average/typical consumer. This includes two components:

• the “intellectual” component (of decisive importance for the assessment): the determination of whether the elements of the transaction are indivisible, and whether they serve a single economic purpose, from the point of view of a typical consumer;
• the “substantive”/formal element (not of decisive importance for the assessment): here the CJEU only gave examples, such as separate access versus joint access to the related services, or the existence of a single invoice versus separate invoices.

For instance, in the Deutsche Bank case (C-44/11, July 19, 2012), the bank offered two types of services to its consumers: investment advice (subject to VAT) and the purchase/sale of securities (VAT exempt).

The supply of such services together is necessarily indivisible in the eyes of the CJEU, as the typical consumer requires the discretionary management of its securities, meaning that the bank must decide on the actions to be taken and implement them. Thus, both elements (advice and purchase/sale of securities) constituted a single supply of services consisting in the growth of the assets of the typical consumer, which does not benefit from a VAT exemption. Accordingly, the CJEU considered this single service as subject to VAT.

Second Exception

Dependent ancillary supply: “constitutes a single supply where one or more elements are to be regarded as constituting the principal supply, while, by contrast, other elements are to be regarded as one or more ancillary supplies which share the tax treatment of the principal supply” (Frenetikexito, paragraph 40). Under this exception, the services are not indivisible; rather, one constitutes the main service required by an average consumer and the others appear as only ancillary.

In practice, national courts must look for two criteria here:

• “a supply must be regarded as ancillary to a principal supply if it does not constitute for customers an end in itself but a means of better enjoying the principal service supplied” (emphasis added) (Frenetikexito, paragraph 41). This means that the national court has to assess the essential element required by a typical consumer. In this respect, there should be no distinct interest for the recipient as regards the ancillary supplies.
• “the respective value of each of the benefits making up the economic transaction, one being minimal or even marginal in relation to the other” (Frenetikexito, paragraph 42). This relates to a comparison of the value of each of the underlying elements in order to determine which is the main one compared to the others. According to the CJEU, this criterion actually constitutes evidence of the preceding one.

Third Exception

Closely related services: this third exception actually stems from the wording of Article 132(1)(b) of the VAT Directive. Under this exception recalled by the CJEU, the Advocate General (AG) explains that this does not cover ancillary services, but distinct services supplied in the context of the VAT-exempt activity. Considering the closely related services as similarly VAT exempt respects the purpose of the VAT exemption, which is to relieve medical care activity of any VAT burden.

However, this exception highlighted by the AG and recalled by the CJEU is merely based on the VAT Directive itself, which refers to “closely related services” explicitly. This means that such an approach should not be extended to other VAT exemptions for which the explicit reference to closely related services is not provided.

Decision of the CJEU

The CJEU transposed the application of each exception to the case at hand:

• As regards the first exception, the CJEU noted that the applicant is engaged in managing and operating sports facilities and physical well-being and fitness activities. The nutrition activities are supplied through a certified professional on the applicant’s premises. The different services offered can be invoiced separately and it is possible to subscribe to only some of them. Accordingly, nutrition and fitness services do not appear as indivisibly linked and cannot be considered as a single complex supply.
• As regards the second exception, the nutrition services have autonomous purposes for a typical customer. They might have different objectives than a mere sport-related one. Furthermore, the nutrition services constitute 40% of the total monthly fee paid by the customer, so that they cannot be considered as minimal in comparison to the fitness services. Therefore, the dietary monitoring services cannot be considered as ancillary services to the fitness ones.
• As regards the third exception, the CJEU rejected the applicability of the VAT exemption for medical care to the dietary monitoring services.

As a consequence, the CJEU considered that the nutrition and fitness services were distinct and independent from each other, so that they should receive their own VAT treatment.

Conclusion

The above concept of single economic supply for a bundle of services is not new to VAT. However, the recent decision of the CJEU can be seen as serving to further clarify this concept, by classifying the existing exceptions and defining their scope. Indeed, the fact that the three scenarios cited constitute exceptions to the general individual rule indicates that the concept of single economic supply can only be used under certain specific circumstances.

In any case, to apply this concept is to apply a single VAT treatment to an entire transaction. This might be of use, for example, in the case of VAT-exempt activities whose scope can be extended to ancillary VAT-taxable services. However, this can also have the reverse effect of causing full taxation to apply to a bundle of services that includes VAT-exempt elements.

The applicability of the concept of single economic supply should therefore be assessed on a case-by-case basis, and the choice to apply it or not to a bundle of services should be justified based on objective elements.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Bruno Gasparotto is a Principal and Claire Schmitt is Senior Associate in the VAT Department of Arendt & Medernach.

The authors may be contacted at: bruno.gasparotto@arendt.com; claire.schmitt@arendt.com