Server colocation – place of taxation

A company who stores other companies servers for a fee must settle VAT at the customer’s registered office or permanent place of business. It does not provide a service related to real estate – ruled the Court of Justice of the EU.

According to this judgment of the Court of Justice of the EU (CJEU) of July 2, 2020, services consisting in providing customers with cabinets for storing servers in a data center, providing energy and maintaining order in this respect do not constitute real estate services. Therefore, the place of supply of services, and therefore of VAT taxation, is the registered office or permanent place of business of the customer (lessee of the cabinets), and not the location of the real estate where the cabinets are located.

The judgment was issued as a result of a dispute between the tax authority and a company incorporated under Finnish law. The company considered that, in principle, VAT on these services should not be settled in Finland unless the customer’s registered office or permanent place of business is in Finland.

The tax office thought otherwise. He stated that the server cabinets provided by the company could be treated as real estate within the meaning of Art. 13b of Council Implementing Regulation (EU) No 282/2011. Therefore, he stated that since it is a service related to real estate, the tax on it should be settled in the place where the server room is located, i.e. in Finland.

The first-instance court overturned the interpretation challenged by the company, and after the authority’s appeal, the second-instance court asked the CJEU for a preliminary ruling.

The CJEU also shared the company’s point of view. They recalled that they had previously referred to the concept of renting real estate (including in the judgment of February 28, 2019, reference number C-278/18). Therefore it is about granting the tenant the right to occupy the property as if he were its owner, and excluding the exercise of this right by third parties.

According to the CJEU, there is no question of rental in this case, because the Finnish company does not limit itself to passively providing customers with space or space in the server room (since it also provides them with utilities and ensures the proper performance of the service). In addition, the right to use the property by third parties is not excluded.

According to the CJEU, there is no such thing as rental in this case, because customers using storage services in a data center do not have the exclusive right to use the part of the property where the server racks are installed. They can gain access to the server rack assigned to them only after receiving the appropriate keys from a third party, upon presentation of an identity document.

Moreover, in order for the provision of services to be considered related to immovable property, it must be subject to immovable property, the European Court of Justice pointed out. In his opinion, server racks cannot be considered real property within the meaning of EU Regulation No. 282/2011. They are not an integral part of the building and are not permanently installed there.

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