We explain what the closing clause is and how to apply it.
In previous articles we explained the general rule for determining the location of VAT on the provision of services and a series of special rules for determining the location of VAT specific to certain services, in order to determine in which State these should be taxed.
The application of these general and special rules for determining the place of supply may result in some services not being supplied within the territory where VAT applies, nor in any other member state of the European Union, but rather in third countries, including the Canary Islands, Ceuta, or Melilla. Likewise, it is possible that the actual use or exploitation of these services, located outside the European Union, may take place within the territory where VAT applies.
To prevent these services from going untaxed, the closing clause or effective use rule, which allows the countries of the member states of the European Union to transfer to the territory of application of their national VAT the taxation of those services that according to their location rules are considered to be carried out outside the European Union, but are effectively used or exploited in the territory of application of their national VAT.
To which services can we apply the closing clause?
The VAT law considers the services listed below to be supplied within the territory where the tax applies when, according to the rules of location applicable to these services, they are not considered to be supplied in the Community, but their effective use or exploitation takes place within the territory where the tax applies:
- The services listed in section Two of Article 69 of the VAT Law when the recipient is a businessperson or professional established in a third country. For example, services relating to intellectual property rights, advertising, insurance, financial services, advice, auditing, engineering, legal services, consultants, accounting or tax experts, translation or interpretation, film dubbing, staffing, data processing and information provision, leasing of tangible movable property, etc.
- Mediation services on behalf of and for the account of others, when the recipient is a businessperson or professional established in a third country and the underlying mediation is used in TIVA.
- Services provided electronically, telecommunications, broadcasting and television services, regardless of whether the recipient is a business or a private individual.
- Transport rental services, regardless of whether the recipient is a business or a private individual.
How to apply the closing clause rule?
For the rule of effective use and enjoyment of services to have its effects, it is necessary that those services be used by the recipient in the operations carried out in TIVA.
For example, let's imagine the case of a Spanish advertising company that provides services to a Swiss company (Switzerland is not an EU member). According to the rules of place of supply, these advertising services would be considered to be supplied in Switzerland, and therefore not subject to Spanish VAT. However, if these advertising messages are disseminated in Spain to promote the sale of the Swiss company's products in Spain, then the advertising services will be considered to be effectively used within the territory where the tax applies. Therefore, by application of the closing rule, these advertising services will be subject to Spanish VAT.
In reality, determining when a service is effectively used or exploited within the territory where VAT applies is not at all simple. First, the transactions that constitute the effective use of the service must be identified. Next, it must be determined whether these transactions are considered to have taken place in Spain, and if so, the closing clause will apply. Sometimes, the service may also be exploited simultaneously in Spain and other countries, in which case a reasonable weighting criterion must be established to determine what portion of the service is effectively being used within Spain.
Recommendation
Our advice to companies that provide services to non-EU clients is to always ask their non-EU clients what they intend to use the services they provide, because if these services are exploited or used within the territory where the tax applies, then they will be subject to Spanish VAT.
If you require further information or have any questions, please contact us via email at ambit@ambitassessor.com or at our offices.
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A graduate in Business Administration from the University of Barcelona, she continued her education with a Postgraduate Diploma in Accounting and Management Control from Pompeu Fabra University, and completed various courses in tax and fiscal matters offered by the Terrassa Chamber of Commerce, the Barcelona Bar Association, and the Center for Financial Studies. Before joining Àmbit Assessor in 2001 as a tax and accounting consultant, she worked as an administrative assistant at Caixa Manresa and Banc Sabadell and as a tax information call center operator at the Spanish Tax Agency. For three years, she served as treasurer of the L'Alzinar Recreational and Cultural Society, a position she held concurrently with her work at Àmbit Assessor.
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