Liability for VAT in Copyright Transactions: Key Takeaways from the UCMR-ADA Case

Interpreting VAT rules and regulations can be a challenging task in itself. However, adding copyright regulations to the equation further complicates the situation, necessitating a more comprehensive approach and analysis of the legal and tax implications. 

The case between the UCMR-ADA, a Romanian organization responsible for managing copyrights of musical works, and the Cultural Association ‘Romanian Soul’, as the organizer of a musical event, involves both VAT and copyright rules and regulations. Moreover, it raises questions about who is liable for VAT and who should issue an invoice relating to royalties received for musical works.

Background of the Case 

UCMR-ADA is the officially designated Romanian organization responsible for managing the economic rights of authors in musical works. More specifically, they are appointed by the Romanian Copyright Office to collect royalties for musical works when they are publicly performed at concerts or entertainment events.

In 2012, Cultural Association ‘Romanian Soul’ organized a show featuring public performances of musical works and obtained a non-exclusive licence from UCMR-ADA in exchange for remuneration. However, the association made only a partial payment, which led to a legal action by UCMR-ADA.

During the process, both the First Instance Court and the Appellate Court concluded that UCMR-ADA was entitled to the full remuneration. However, the Appellate Court ruled that the remuneration collected by UCMR-ADA was not subject to VAT. Consequently, the Appellate Court reduced the amount the association had to pay by the value of VAT.

Holding that the Appellate Court had wrongly interpreted the Romanian Tax Code and violated the VAT neutrality principle, the UCMR-ADA appealed to the Romanian High Court of Cassation and Justice. Furthermore, the UCMR-ADA claimed that the ruling shifted the VAT burden onto them rather than on the association, although they were not the final user of the copyrighted works.

The High Court of Cassation and Justice was uncertain on whether transactions in which copyright holders authorize event organizers to perform musical works publicly qualify as a "supply of services for consideration" under the VAT Directive. Therefore, it decided to refer questions to the European Court of Justice (ECJ) for a preliminary ruling.

Main Questions from Request For Ruling

The High Court of Cassation and Justice, or the referring court, posed two main questions to the ECJ.  The first one is whether holders of rights in musical works are considered making supplies of services under the EU VAT Directive when collective management organisations grant a non-exclusive licence, collect remuneration in their name but on behalf of the copyright holders for the public performance of those works.

If the ECJ answers the first question affirmatively, the referring court asks whether collective management organisations, by receiving such remuneration from event organisers, qualify as taxable persons. Additionally, the High Court sought clarification on whether these organizations are required to issue VAT-inclusive invoices to event organizers and, conversely, whether authors and copyright holders are obligated to issue VAT invoices to the collective management organizations when they receive payment.

Applicable EU VAT Directive Article

Regarding the EU VAT Directive, Articles 2, 24, 25, and 28 were in the focus of the ECJ, since they define and set rules for taxable supplies of services. While the ECJ generally considers Articles 2, 24, and 25 in cases involving the supply of services, Article 28 was specifically crucial in the present case.

Article 28 states that when a taxable person is involved in a supply of services in their name but on behalf of someone else, they are considered, for VAT purposes, to have both received and supplied those services themselves.

Romania National VAT Rules 

Articles 126 and 129 of the Romanian Tax Code were the central point as they define taxable transactions and supply of services, respectively. While Article 126 defines table transactions as those that fulfill certain cumulative conditions, including being considered a supply of goods or services, Article 129 further clarifies that the supply of services is defined as any transaction that is not a supply of goods.

Additionally, Article 129 specifies that when a taxable person acts in their name but on behalf of someone else in such a transaction, they are treated as both the recipient and supplier of the services. Transfer or assignment of intangible property, such as copyrights, is included in the definition.

Besides these articles from the Tax Code, the ECJ considered several articles from the Romanian Copyright Law. Considered articles define rules about how authors control the use of their works and how collective management organisations act on their behalf. Under the provided rules, authors retain their rights, but collective management organisations are permitted to license use, collect royalties, and distribute payments without owning the rights themselves.

Importance of the Case for Taxable Persons

Since the ruling provides an answer on whether collective management organisations that issue licences and collect royalties in their name but on behalf of authors are considered a taxable person, the ruling is important for both the management organisation operating in this sector and the copyright holders, that is, authors of the musical works. 

The ECJ decision clarifies the roles of collective management organisations from a VAT perspective, and underlines who needs to issue VAT-inclusive invoices and when, which further helps both the management organisations and copyright holders to remain VAT compliant.

Analysis of the Court Findings

Under EU VAT rules, services are only taxable if a legal relationship exists between the parties, where each side provides something in return. More precisely, if there is a clear exchange or direct link, such as access to music in return for royalties, the transaction qualifies as a taxable supply under VAT rules.

 Under Romanian law, the right to publicly perform musical works, such as shows, must be managed through a collective management organisation (CMO). Moreover, the CMOs must issue a non-exclusive licence to event organisers and collect fees in their name but on behalf of the copyright holders, even if those rights holders are not members of the organisation.

Therefore, the ECJ concluded that the copyright holders are ultimately making the supply of services for a fee, despite the CMOs' involvement in the transaction. Although the CMO collects the fee, it is considered a payment to the copyright holder, which in turn allows the user to perform the work publicly. 

Thus, a legal and mutual relationship exists between the copyright holder and the user, which establishes a clear connection between the service provided and the payment made, thereby fulfilling the VAT condition for a service provided for consideration.

Regarding the provision from Article 28, the ECJ clarified that when a taxable person acts in their name but on behalf of another, they are considered to have both received and supplied the services themselves. In other words, this creates a legal fiction, where the person acting as an agent first receives the services from the principal and then supplies them to the client, effectively treating the two steps as identical supplies of services provided in sequence.

In the present case, a CMO, such as UCMR-ADA, is mandatory for the public performance of musical works, regardless of whether the copyright holders have authorized such representation. Furthermore, the ECJ concluded that the national regulations governing the mandatory CMO system do not distinguish between members and non-members when it comes to granting licences, collecting remuneration, distributing payments, or determining the commission for CMOs.

Since the CMOs grant non-exclusive licences to users, establish methodologies for appropriate remuneration, and ultimately collect payment on behalf of copyright holders for the use of their works, they act as a commission agent. 

Regarding the part of the question that refers to the invoicing requirements relating to Article 28 of the EU VAT Directive, the ECJ underlined that when CMO grants non-exclusive licences to performance organisers in return for remuneration, this transaction is treated as a taxable supply, just as if the copyright holders themselves were providing the service.

Therefore, to maintain fiscal neutrality, the CMO must issue an invoice to the end user in its name, documenting the royalties collected, including VAT. Once the copyright holder receives the royalties from the CMO, if it is a taxable person, it must issue an invoice to the CMO documenting the remuneration received and the applicable VAT on that amount.

Courts Final Decision

The ECJ underlined that Article 2(1) of the EU VAT Directive must be understood in such a way as to mean that a copyright holder in musical works provides services for consideration to the end user. For this case, it means that the copyright holder is the one providing a service, even though the performance organiser, as an end user, is granted a non-exclusive licence to perform those works publicly in exchange for remuneration by the CMO, who collects the remuneration in its name but on behalf of the copyright holder.

Furthermore, the ECJ stated that the CMOs are deemed to have received the services from the copyright holders before providing them to the end user. Consequently, the UCMR-ADA, as a CMO, must issue invoices to the end-user, including VAT on the collected royalties. The copyright holders must, in turn, issue invoices to the CMOs, including VAT on the services provided for the royalties received.

Conclusion

Different industries and sectors present distinct challenges from a VAT perspective, and case C-501/19 exemplifies this perfectly by highlighting the complex interplay between VAT and copyright regulations, particularly in the context of CMOs and their role in collecting royalties on behalf of copyright holders.

By determining that the copyright holders are considered to be providing services under the EU VAT Directive, even if a third party, such as UCMR-ADA, collects the royalties, the ruling has important implications for CMOs, copyright holders, and event organizers.

Source: Case C-501/19 - UCMR-ADA v Cultural Association ‘Romanian Soul’, EU VAT Directive