3.6 The activity has to be performed within the territory of a Member State

Because the purpose of VAT is taxation of expenditure for local consumption, transactions have to take place within the territory of a Member State to be subject to (local) VAT. This does not mean that transactions that are performed by taxable persons that are established in the EU but that take place outside the EU are not considered economic activities. This is clear from the fact that in the EU VAT Directive, the provisions regarding VAT deduction allow deduction of VAT incurred on costs of goods or services insofar as these goods or services are used for economic activities that are performed outside the Member State where the tax deduction is applied.1

The territory of a Member State means the territory of each Member State of the Community (now: Union, JB) to which the Treaty establishing the European Community is applicable, in accordance with Article 299 of that Treaty,2 with the exception of Mount Athos in Greece, the Spanish Canary Islands as well as the municipalities of Ceuta and Melilla, the French overseas departments, the Finnish Åland Islands, the British Channel Islands, the German Island of Heligoland as well as the territory of Büsingen and the Italian municipalities of Livigno and Campione d'Italia and the Italian waters of Lake Lugano.3

The EU VAT Directive contains several provisions for determining where a transaction is deemed to take place (the ‘place of supply rules’). Only if a transaction is deemed to be made within the territory of a Member State under these rules, the transaction can be subject to VAT in that EU Member State.