The zero rate and services relating to exports

In L.Č. IK the Court of Justice made clear that the zero rate for export services applies only where the service is supplied directly to the owner or buyer of the goods.

On 29 June 2017 the Court of Justice of the EU gave judgment in L.Č. IK (C-288/16). The judgment clarifies the circumstances in which the zero rate may be applied to services connected with the export of goods, and emphasises who the recipient of those services must be.

The facts

L.Č. IK is a Lithuanian business specialising in transport services. It supplied transport and logistics services for goods exported to destinations outside the EU: driving the vehicles, repairs, refuelling, customs formalities, guarding the goods and delivery to the consignee. It applied the zero rate to those services, since the goods were leaving the EU.

L.Č. IK had contracted with Atek SIA, another Lithuanian business that had taken on a transport assignment in its own name and subcontracted the carriage to L.Č. IK. Atek therefore acted in effect as an intermediary. The question arose whether L.Č. IK's services qualified for the zero rate, given that they were supplied not directly to the owners or buyers of the goods but to that intermediary.

The Lithuanian tax authorities disputed the zero rate. In their view the services did not contribute directly to the export by the owners or buyers, but were supplied to the intermediary and were therefore too far removed from the export.

The importance of the recipient

The Court held that it is crucial to whom the services are supplied. The zero rate can be applied only where the services are supplied directly to the owner or buyer of the goods. Because L.Č. IK supplied an intermediary, the zero rate did not apply.

The services must contribute to the actual export and be supplied directly to the party economically involved with the goods, that is the owner or buyer. Services supplied to a third party do not qualify, even where they are connected with the export.

Points to watch

• Identify the recipient. Make sure the services are supplied to the owner or buyer of the goods. That is the key to applying the zero rate.
• Check the contracts. Establish who the actual recipient is. If you carry out comparable transport on the instructions of another Dutch transport business, failing to charge 21% Dutch VAT can lead to an assessment.
• Document carefully. Keep detailed records showing who the recipient is and how the services contribute to the export.

Conclusion

The judgment has important implications for applying the zero rate to export services. It is essential that the services are supplied to the owner or buyer of the goods. Working carefully and identifying the right parties avoids problems with the tax authorities.