Cross-Border VAT Exemption for Social Services: ECJ Clarifies Supplier Country Rules

The rules regarding the cross-border supply of services within the EU and the application of VAT exemption to social services are the central point of dispute between the Bulgarian company Momtrade and the Bulgarian Tax Authority. 

As the company provided social services in other EU countries, the main issue in this case was where such services are deemed to be supplied for VAT purposes and under which country’s legal framework the exemption should be assessed.

Background of the Case 

Momtrade, a Bulgarian-based and VAT-registered company, offers social services and holds certificates of registration for personal care, welfare, and home help for elderly individuals. The company primarily provided care to individuals and home help services to elderly people living in Germany and Austria, as a result of contracts concluded between the company and its clients.

During the tax audit for the period between June 2014 and December 2015, the Bulgarian Tax Authority determined that the services provided by Momtrade were performed in Germany and Austria. Furthermore, to benefit from the VAT exemption provided by the Bulgarian VAT Law, the company must present proof that the services meet the conditions for social well-being as defined by the laws of Germany and Austria. 

Due to Momtrade's failure to provide necessary documentation, the Tax Authority issued a VAT assessment in October 2018, establishing a VAT liability for the company for that period.

Momtrade appealed against the VAT assessment, which was partially accepted by the Administrative Court in Ruse, which reduced the VAT debt, but upheld the rest of the assessment. However, this decision led to an appeal by both Momtrade and the Tax Authority before the Bulgarian Supreme Administrative Court (Supreme Court).

To clarify legal uncertainties, specifically regarding the VAT treatment of cross-border social services, the Supreme Court paused the proceeding. It referred three questions for preliminary ruling to the European Court of Justice (ECJ), raising concerns about potential unequal VAT treatment for Bulgarian providers serving individuals in other EU countries.

Main Questions from Request For Ruling

With the first question, the Supreme Court asked Article 132(1)(g) of the EU VAT Directive allows a company registered as a social service provider in one EU country, such as Bulgaria, to claim VAT exemption for social services performed in the territory of other EU countries for individuals who are nationals of those countries.

The second question, if the ECJ positively answers the first, is which legal framework, Bulgarian, Austrian, or German, should be applied to assess whether the audited company qualifies as a body devoted to social wellbeing and whether the services are closely linked to welfare and social security work.

Finally, the third question asks whether merely being registered as a social services provider under national law is sufficient for a company to be considered a body recognised for social wellbeing under EU law.

Applicable EU VAT Directive Articles

Regarding the applicable EU VAT Directive article, the ECJ outlined Article 45 and Articles 131 to 134. Article 45 sets the general rule that when services are supplied to a non-taxable person, the place of supply is where the supplier has established their business.

Article 131 states that exemptions under Articles 132 to 134, which include services and goods closely connected to welfare and social security work, specific conditions when applied to private bodies, and reasons for denying exemption under Article 132(1)(g), respectively, are subject to conditions set by EU countries.

Article 132(1)(g), which is the pivotal point of the dispute, requires EU countries to exempt services and goods closely connected to welfare and social security work, including those provided by public bodies or others recognized by the state as dedicated to social wellbeing, such as care homes or social service providers.

In addition to these articles, Recitals 3 and 5 of Council Directive 2008/8/EC, which amend the EU VAT Directive, clarify the underlying principles for determining where VAT should be applied. Recital 3 states that VAT on services is charged where services are consumed, except in some instances where exceptions must still be made for reasons of administrative simplicity and policy considerations. 

Recital 5 reinforces the application of the general rule that the place of supply for services provided to non-taxable persons should be where the supplier has established their business.

Bulgaria Country National VAT Rules

The list of applicable and relevant articles from the Bulgarian national legislation includes articles from the Constitution of the Republic of Bulgaria, the Tax and Social Security Code of Procedure, the VAT Law, the Law on Social Assistance, and the Law on Social Assistance Implementing Regulations.

Regarding the most relevant articles from the VAT Law, Articles 21, 38, 40, and 67 were considered by the ECJ in the decision-making process. According to the VAT Law, when services are provided to a non-taxable person, the place of supply is deemed to be the location where the supplier conducts their economic activity, which is in line with the EU VAT general rules.

Article 38 outlines which transactions are VAT-exempt, and Article 40 specifies that social services, as defined by the Bulgarian Law on Social Assistance, qualify as exempt transactions. Finally, Article 67 describes how VAT is calculated and clarifies that, unless stated otherwise during the transaction, the price is assumed to include VAT, especially in retail settings.

Importance of the Case for Taxable Persons

As the Momtrade case addresses a critical ambiguity in EU VAT law for taxable persons, especially those providing cross-border social services within the EU, the ECJ ruling establishes a broader legal precedent ensuring that cross-border providers of public-interest services are not penalized with VAT obligations just because they operate in more than one EU country.

More specifically, the case and ECJ decision clarify the rules applicable to services provided to non-taxable persons located in other EU countries. Although the case involves a particular type of service, the explanations and clarifications included in the decision help taxable persons better understand these rules.

Analysis of the Court Findings

The ECJ conducted a comprehensive and extensive analysis of the facts, the applicable article from the EU VAT Directive, the Bulgarian legal regulatory framework, and relevant case law. Regarding the first question, the ECJ underlined that when interpreting a provision of EU law, such as Article 132(1)(g) of the VAT Directive, the analysis must go beyond the literal wording. Moreover, it must consider the context and purpose of the provision within the broader legal framework.

In this case, the ECJ emphasized that the VAT exemption for services closely related to welfare and social security work is contingent upon two cumulative conditions. The first requirement is the nature of the service, which must be social, and the second is the status of the service provider, which must be a public body or another body recognized by the relevant EU country as being devoted to social well-being.

Notably, the Court pointed out that Article 132(1)(g) does not impose any requirement concerning the location where the services are physically performed, nor does it require that both the service provider and recipient are located in the same EU country.

Furthermore, the placement of Article 132 in the chapter dedicated to exemptions for certain activities in the public interest underscores that the determining factor for granting a VAT exemption is not the geographical location of the service provision, but rather the public interest nature of the service. Therefore, the exemption rule is based on the social function, not on the location, namely, an EU country where the service is provided.

All the rules defined in Articles 133 and 134 further reinforce that the exemption is designed to support genuine public interest activities and prevent distortion of competition, regardless of where those activities occur within the EU. 

Therefore, Article 132(1)(g) must be interpreted broadly, applying to any qualifying services that meet its two main conditions, regardless of the country in the EU where the services are physically performed. Additionally, the fact that the service provider may use intermediaries based in the recipient’s country to connect with clients does not impact the right to exemption.

Regarding the second question, the ECJ stated that, even though EU countries may set conditions to ensure correct application and prevent abuse, the concept of VAT exemptions in Article 132, as well as the specific conditions required to grant them, are autonomous concepts of EU law. 

The determination of whether services meet the criteria for exemption is not tied to national legal frameworks, but it must be interpreted in line with EU-wide legal standards and definitions, primarily Article 134(a) of the EU VAT Directive, which adds that such services must be essential to welfare-related activities. 

The ECJ further added that services provided to individuals in situations of physical, economic, or mental dependence, such as home care or legal protection services for those lacking legal capacity, are generally considered closely linked to welfare and social security work. Therefore, they fall within the scope of the VAT exemption when provided by a public body or a private entity recognized for its role in social well-being.

The ECJ also clarified that, although the social services in question are provided by a company based in Bulgaria to individuals living in Germany and Austria, since they are provided to non-taxable persons, the place of supply for VAT purposes is considered to be the country where the supplier is established. Therefore, the determination of whether the services provided qualify for VAT exemption under the EU VAT Directive must be assessed under Bulgarian VAT law.

Additionally, the ECJ clarified that, based on a literal, systematic, and teleological interpretation of the EU VAT Directive, the responsibility for recognizing the social well-being of private entities for the exemption falls within the jurisdiction of the EU country where the supplier is established, not where the supplies are made. In this case, that is Bulgaria, not Germany or Austria.

Furthermore, the ECJ stated that national authorities must assess a range of factors, in line with EU law and subject to national judicial review, when determining whether a company’s registration with a public body in the EU country of taxation as a supplier of social services, according to that country’s laws, is enough to consider the company as a body recognised as being devoted to social wellbeing.

Determining factors may include the existence of legal or administrative provisions that regulate such recognition, the public interest nature of the services provided, whether other similar providers have been granted such recognition, and whether public systems, such as health insurance or social security schemes, primarily fund the services.

Courts Final Decision

After carefully considering all the relevant facts and circumstances, the ECJ concluded that, under Article 132(1)(g) of the EU VAT Directive, social services provided to individuals in an EU country other than where the supplier is established still qualify for VAT exemption. The existence of the local intermediary company for reaching clients is irrelevant in this case.

To determine whether the exemption applies, the relevant legal framework is that of the EU country where the supplier is established, which in this case is Bulgaria.

Finally, registration of a company with a public authority as a social service provider under national law can be one factor used to determine whether it qualifies as a body recognised as being devoted to social wellbeing. However, registration alone is insufficient and must be accompanied by a substantive assessment from the competent national authorities, taking into account a range of factors underlined by the ECJ.

Conclusion

The ECJ clarified that VAT exemptions for social services under Article 132(1)(g) are not limited by the geographic location of service delivery within the EU. Moreover, the application of the rule depends on the nature of the service and the provider's recognition in the country where it is established, which in this case was Bulgaria.

Respecting the policy of fairer treatment for organizations pursuing public interest objectives, the ECJ considered the broader importance of social services. With its decision, it further ensured legal certainty for cross-border social service providers and reinforced a unified interpretation of VAT exemptions across EU countries.

Source: Case C‑620/21 - Momtrade v Director of the ‘Appeals and Tax/Social Insurance Practice’ Directorate, EU VAT Directive, Council Directive 2008/8/EC