Rental of server racks – place of taxation

In the matter of place of taxation the Court of Justice of the European Union (CJEU) issued on the 2nd of July 2020 a judgement on the place of services connected to server racks (C-215/19).

The matter concerned provision of rack cabinets for storing servers in a data center, supplying energy and maintaining order in this area. According to Court these services are not related to immovable properties. Consequently the place of supply of these services, and thus VAT taxation, is where the seat or fixed establishment of the client (the lessee of the racks) is located, and not the location of the property on which the racks are located.
The verdict was issued as a result of a dispute between the tax authority and a Finnish company. The taxpayer offered storage services to entities operating in the field of information technology. The company was using their own servers to provide electronic connections to their clients.
According to the individual tax ruling, the lease of the technical room necessary to store customers servers is the main service within the package of services. This should therefore be considered as a transfer of the right to use the property, the place of which is provided where the property is located. The taxpayer did not agree with the ruling and made an appeal to the court.
The first instance court overturned the interpretation and the second instance court asked the CJEU for a preliminary ruling.

The CJEU shared the company’s position. According to the judgement the provision of the services is not limited to making space available to its clients in a passive manner by providing them with the right to occupy them as if they were their owners, thus excluding third parties to exercise this right. In particular, there is no indication that the customers of the service provider had the right to control or limit access to part of the building, in which server cabinets are installed.

The server cabinets are also not an integral part of the building in which they are installed –  if they are removed, the building cannot be considered incomplete in terms of construction. 

Taking that all into consideration , the Court ruled that the server cabinets should not be classified as real estate thus making them available to clients does not constitute land related services.

Consequently, the provision of the server racks services should be taxable in the country of residence or fixed establishment of the customer of the service.

This is the CJEU judgement for the Finnish taxpayer in individual case therefore each situation concerning renting of rack space shall be interpreted individually, especially that the Polish law does not refer to such services directly.

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