3.4 The ‘direct link’-requirement as a prerequisite for a payment to be a ‘consideration’ from an EU VAT perspective

There has to be a (direct) link between the supply and what is received in return for the supply to be subject to VAT and for the payment to be ‘consideration’.1 An ‘indirect link’, where a supplier receives payments (‘funding’) so that it can perform its activities but where no actual price or consideration is stipulated (and charged) for specific supplies, is not sufficient. The ‘direct link’ is the essential linking element between a supply and a consideration. This also applies to supplies consisting of multiple elements, where it must be determined whether all elements are supplied for consideration and, for the elements that are supplied for consideration, how the taxable amount for the supply of each element should be determined. I will elaborate on this in Chapter 4.

According to the CJEU’s settled case-law, a direct link is established if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the payment received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.2 This means that the ‘direct link’ brings together the requirements that I discussed in Sections 3.3.1 and 3.3.3. In the last decade, this ‘direct link’ was the focus of many CJEU cases.3 This direct link, which is a prerequisite for qualifying a supply against payment as a supply made ‘for consideration’ from an EU VAT perspective, applies to each individual supply or each individual component of a composite supply.

Situations exist where the above direct link is, however, not sufficient to consider the transactions as ‘economic activities’ from an EU VAT perspective. For activities to be subject to VAT, they need to be economic activities (or, in the words of Article 2 of the EU VAT Directive, they have to be performed by a taxable person acting as such). Supplies that are performed for consideration as referred to in Article 2 of the EU VAT Directive qualify as economic activities if they are performed ‘for the purpose of obtaining income therefrom on a continuing basis’.4 This must be ascertained by evaluating all the specific circumstances of the given case.5 For determining whether certain transactions qualify as economic activities, the CJEU looks at the type of activity as a whole rather than assessing this per individual activity. This means that if, for example, a person rents out a motor caravan for consideration to her husband as well as to third party lessees, as in the Enkler-case, the whole activity of ‘putting the motor caravan at the disposal of other as well as the private use thereof’ is tested.6 The same applies to, for example, a local authority that transported school children to and from school. In a court case on this topic, the Borsele-case, the facts were that only approximately one third of the parents paid for the transportation of their children, and the money received by these parents covered about 3% of the cost of the transportation services. In this case, the CJEU ruled that these ‘transportation activities’ as a whole did not qualify as economic activities.7

The CJEU did not consider the individual transportation services for which it had actually received payment, or the actual putting at the disposal of a third party of the motor caravan against payment. Instead, as mentioned above, it took into account all the specific circumstances of the case at hand. This can be done, for example, by comparing the circumstances in which the type of transactions under scrutiny with the circumstances under which such supplies are usually performed,8 the nature of the goods concerned,9 the number of customers,10 the amount of earnings,11 and the lack of symmetry between payments received and costs made for performing a certain activity.12 All these tests are examples of tests that can be used for determining whether certain activities are indeed performed for the purpose of obtaining income therefrom on a continuing basis. If that is the case, they in principle qualify as economic activities.

The relevant provision in the EU VAT Directive where the transactions that are subject to VAT are listed also requires that for these activities to be subject to VAT, they have to qualify as ‘economic activities‘. In this provision, these transactions are only subject to VAT if they are performed by a taxable person acting as such.13 In my view, activities performed by a taxable person acting as such are always economic activities.