VAT shocker: ECJ Case C‑581/19 Rules Nutrition Services Are Not Exempt

The case between Frenetikexito, a Portugal-based sports facilities management company that also provides fitness, wellness, and health-related services, including nutritional advice and physical evaluations, and the Portuguese Tax and Customs Authority concerns the VAT treatment of nutrition monitoring services offered in conjunction with fitness and well-being programs.

More specifically, the case raises critical questions regarding the distinction between primary and ancillary services, as well as the scope of VAT exemptions for medical and paramedical services under both EU-wide rules and national legislation.

Background of the Case 

After completing the registration process with the national health regulator, Frenetikexito began offering nutrition monitoring services in 2014 and 2015 through a qualified part-time employee nutritionist. What is important to note is the fact that the company treated these services as exempt from VAT.

The programs offered by the company to its clients varied in the services they included. For example, some covered only fitness and well-being, others combined those with nutrition monitoring. Customers had the freedom to choose the service they wanted and needed. If they selected the nutrition monitoring option, they were charged for it, regardless of whether they actually used the service or attended the required consultations. Moreover, both members and non-members could purchase the nutrition monitoring services separately.

When charging for services provided, the company issued invoices that distinguished between fitness and nutrition-related charges, although there was no direct link between the charged nutrition services and the number of consultations offered.

However, the tax inspectors determined that many clients had paid for nutrition monitoring but had not used it. Consequently, the tax inspectors concluded that the nutrition service was not independent but merely an ancillary element of the leading fitness service, meaning both should be subject to the same VAT treatment. As a result, an additional assessment of EUR 13,253.05, plus interest, was issued to the company. 

Initially, Frenetikexito did not pay the additional VAT. However, once the Tax and Customs Authority (Tax Authority) started a legal procedure, the company agreed with the Tax Authority to pay the amount in installments. Nevertheless, it challenged the tax assessment before the Tax Arbitration Tribunal, arguing that the fitness and nutrition services were separate and should not be treated as a single taxable supply.

The Tax Arbitration Tribunal referred two questions to the European Court of Justice (ECJ) for a preliminary ruling, before deciding on the subject matter.

Main Questions from Request For Ruling

The first question referred to the ECJ asking whether secondary health-related services, particularly nutrition monitoring services, should be considered merely ancillary to the Frenetikexito’s main fitness activities. If so, the VAT treatment would be the same as the principal fitness services. Alternatively, the ECJ must also determine whether these health-related services are independent and distinct from one another. In this case, each type of service would be subject to its own VAT regime, according to its nature.

The second question concerns the scope of the VAT exemption provided for medical and paramedical professions. The issue at hand is whether the exemption can apply when such services are only made available to customers, regardless of whether they are actually utilized, or whether the exemption requires that the services be genuinely supplied and performed.

Applicable EU VAT Directive Article

The ECJ noted that Articles 2(1)(c), 132(1)(b), and 132(1)(c) of the EU VAT Directive were the key articles when answering the raised questions, where Articles 2(1)(c) and 132(1)(c) were directly mentioned in the questions. Article 2(1)(c) establishes that any supply of services carried out for consideration within an EU country by a taxable person acting in that capacity is subject to VAT.

However, Article 132 exempts certain activities from VAT, including hospital and medical care services, as well as closely related activities, when performed by public bodies or by other recognized medical institutions operating under comparable social conditions, and medical care services delivered by professionals practicing in the medical or paramedical fields, as defined by national legislation.

Portugal National VAT Rules

The most relevant article from the Portuguese VAT Law was Article 9(1), which defines a VAT exemption for services provided in the exercise of certain medical and paramedical professions, such as doctors, dentists, midwives, nurses, and other recognized paramedical practitioners. Notably, this provision aligns with the principles of the EU VAT Directive, ensuring that healthcare and related professional medical services are exempt from VAT when provided by qualified professionals within their respective fields of expertise.

Importance of the Case for Taxable Persons

Interpretation of the applicable VAT rules, along with the reasoning of the ECJ in this case, helps businesses, particularly those offering combined health, fitness, or other complementary services, structure their offerings and billing practices to minimize disputes with tax authorities and better manage VAT risk. 

Moreover, taxable persons may find particularly beneficial guidance that the ECJ provides to the Tax Arbitration Tribunal, as they can gain insight into how courts will interpret VAT provisions in similar cases, which could prevent them from engaging in lengthy and costly legal proceedings.

Analysis of the Court Findings

The ECJ began its analysis of the case by examining the Portuguese Government's arguments that the request for a preliminary ruling should be considered inadmissible because the Tax Arbitration Tribunal failed to provide sufficient factual and legal information to enable the ECJ to give a meaningful response.  

However, based on applicable rules and established case law, the ECJ found that the order for reference provided an adequate factual background and sufficient detail to allow it to understand both the questions posed and their context. Thus, both questions were found admissible for examination.

Once this matter was settled, the ECJ proceeded to examine the merits and facts of the case, noting that the Tax Arbitration Tribunal had based its questions on the assumption that the nutrition monitoring service offered by the company might qualify for the VAT exemption provided for medical and paramedical professions. Therefore, the first task for ECJ was to assess whether that underlying assumption was correct. 

Accordingly, the ECJ emphasized that exemptions listed in Article 132 of the Directive must be interpreted strictly, as they represent exceptions to the general principle that all supplies of goods and services are subject to VAT. Nevertheless, when interpreting these strict rules, it is also necessary to consider the objectives of those exemptions and the principle of fiscal neutrality that underpins the EU VAT system. Thus, strict interpretation should not undermine or nullify the purpose of the exemptions themselves.

What distinguishes the exemption provided in Articles 132(1)(c) and Article 132(1)(b) is where services are provided. VAT exemption provided under Article 132(1)(c) does not cover services delivered in hospitals, medical centres, or similar establishments, which fall under Article 132(1)(b). Medical and paramedical services provided outside such institutional settings, whether at the practitioner’s private address, the patient’s home, or other locations, fall under Article 132(1)(c).

While both articles are defined to cover services aimed at diagnosing, treating, and, where possible, curing diseases or health disorders, for a service to qualify as medical care under Article 132(1)(c), it must have a therapeutic purpose. However, this purpose is not limited to a narrowly defined scope. Thus, services that protect, maintain, or restore a person’s health can benefit from the VAT exemption.

However, for an exemption to apply, two conditions must be met. Firstly, the supply must have a therapeutic or health-related purpose. Secondly, the service supply must be made within the context of the exercise of the relevant medical or paramedical profession as defined under the national law of the EU country concerned.

Therefore, it is first necessary to determine whether the nutrition monitoring service at issue fulfills the second condition. More specifically, it must be determined whether such a service provided by a certified professional within sports facilities, possibly as part of a program that also includes fitness and well-being services, qualifies under Portuguese VAT Law as being supplied in the exercise of a medical or paramedical profession.

The ECJ noted that it is up to the Tax Arbitration Tribunal to determine whether the second condition is met under national legislation, adding that, assuming that it is, the focus turns to the purpose of the service, which corresponds to the first condition for exemption. Notably, exemptions provided under Article 132 are provided for activities done in the public interest. Therefore, a service cannot be VAT-exempt unless it serves a public interest objective.

While a nutrition monitoring service provided in a sports facility can, in a broad or long-term sense, contribute to the prevention of certain health conditions, such as obesity, the same preventive effect can be attributed to exercise itself.

Accordingly, even though a service may have a general health-related purpose, it does not necessarily have a therapeutic purpose. If there is no evidence that the service serves a therapeutic purpose, such as prevention, diagnosis, treatment of a condition, or restoration of health, the public interest criterion is not met. 

The ECJ added that this interpretation of EU VAT rules does not conflict with the principle of fiscal neutrality. Nutrition monitoring services with a therapeutic purpose and those without such a purpose are not considered identical, nor do they serve the same consumer needs. Therefore, treating them differently under VAT rules is consistent with this principle. 

Moreover, exempting any service provided by a medical or paramedical professional that merely has a distant or indirect preventive effect on health from VAT would exceed the strict limits of the provision contrary to the EU legislature’s intent. Based on these conclusions, the key issue was resolved, and the ECJ found that there is no need to address the second question.

However, the ECJ provided guidelines for the Tax Arbitration Tribunal to determine whether the transactions in question are a single supply or multiple independent supplies. More specifically, the question of whether the nutrition services are independent from or ancillary to the fitness and well-being services remained. The key determining factor outlined by the ECJ is whether the transaction elements are indivisible and the overall economic purpose of the transaction, which may be unique in nature. 

Whether there is separate or joint access to services, the existence of a single or separate invoice, and other practical aspects that clarify the economic nature of the transaction, may serve as supporting factors in determining the outcome. Additionally, a transaction is treated as a single supply when it includes one or more principal elements accompanied by ancillary elements, with the latter sharing the same tax treatment as the principal supply.

When determining if a supply is ancillary, it is necessary to identify whether it has an independent purpose from the perspective of the average consumer. Furthermore, ancillary supply has minimal or marginal value compared with the principal supply. These two criteria determine whether multiple elements of a transaction should be treated as a single economic supply for VAT purposes. 

Courts Final Decision

Based on the determinations, Advocate General's Opinion, and established caselaw, the ECJ ruled that, subject to verification by the Tax Arbitration Tribunal, a nutrition monitoring service provided by a certified and authorized professional in sports facilities, even when offered as part of programs that also include physical well-being and fitness services, should be treated as a separate and independent supply. Consequently, these services do not fall within the VAT exemption provided under the EU VAT Directive.

Conclusion

Ultimately, the ECJ left it to the Tax Arbitration Tribunal, as the referring court, to determine whether the supply of nutrition monitoring services meets the conditions and criteria for VAT exemption. However, it noted that, based on the provided evidence and factual background, such services should be treated in the same way as primary services offered by the company, meaning that they should be subject to VAT.

Source: Case C‑581/19 - Frenetikexito – Unipessoal Lda v Tax and Customs Authority, EU VAT Directive