Intermunicipal entities and VAT: the Belgian emanation theory called into question

The emanation theory is not contained in the VAT Directive but stems from a Belgian administrative practice. It is historically rooted in Circular No 148 of 5 October 1971 and Circular No 6 of 27 February 1975. The reasoning is straightforward. Where municipalities transfer their management and regulatory powers to an association entrusted with tasks, the fact that the activity is carried out by that association is disregarded for VAT purposes. From a VAT perspective, the activity is deemed to be performed by the municipalities themselves. In that approach, the association substitutes for the municipalities, not merely acting on their behalf.

In practice, this has two consequences.

First, the VAT treatment of transactions carried out by the association vis-à-vis third parties follows the treatment that would have applied to the municipalities. What would fall outside the scope of VAT or be exempt at municipal level is treated in the same way at the level of the association. Conversely, transactions that would be taxable for the municipalities are likewise subject to VAT for the association.

Second, supplies made by the association to its members are regarded as supplies to itself. Since self-supplies are, in principle, outside the scope of VAT, the relationship between the association and its members is, under that logic, in principle not treated as a VATable transaction.

Facts

Digipolis was a public law legal entity organised as an association entrusted with tasks, with transfer of management powers. It provided telematics services and supplied related IT equipment to its members, and occasionally to non-members. Following an amendment to its articles of association, externally autonomous agencies also became members, including several autonomous municipal companies.

The Belgian dispute focused on whether the emanation theory could also apply to these acceding members, to whom the administration attributed a different VAT status. In essence, the Court of Appeal of Antwerp asked whether, on the basis of that Belgian practice, supplies made to members could be treated as self-supplies outside the scope of VAT, and whether a distinction should be drawn depending on the VAT profile of the members.

Assessment by the Tribunal

The Tribunal begins with Article 2(1)(a) and (c), the basic provision determining which supplies of goods and services are, in principle, subject to VAT. The contributions received by Digipolis constitute actual consideration received within a legal relationship involving reciprocal performance. The fact that those contributions are fixed in advance, calculated on a flat-rate basis and cost-covering does not, according to settled case law, break the direct link between the supply and the consideration. The absence of a profit motive is not decisive.

The Tribunal then applies Article 9(1), which defines a taxable person as any person who independently carries out an economic activity. The activity is objectively economic as it is carried out on a continuing basis for consideration.

Telematics services can also be supplied by private market operators, and Digipolis even supplies non-members on an occasional basis. The continuity of the activity follows from its statutory duration and the systematic payments.

The criterion of independence is then examined: does the entity act in its own name, on its own account and under its own responsibility, bearing the economic risk. The Tribunal identifies several elements of autonomy despite governance by the members: separate legal personality, its own governing bodies, its own resources, staff and procedural autonomy. Subject to verification of the facts by the referring court, Digipolis must therefore be regarded as a taxable person.

The exception provided for in Article 13 is interpreted strictly. That provision states that bodies governed by public law are not to be regarded as taxable persons in respect of activities or transactions in which they engage as public authorities. Even if Digipolis qualifies as a body governed by public law within the meaning of Article 13(1), first subparagraph, that is not sufficient. It must also genuinely act as a public authority, which requires that it operate under a specific public law regime and not under the same legal conditions as private operators.

As regards telematics services, the Tribunal finds no exercise of public authority powers, but rather an activity that can be carried out under comparable conditions by private operators. The distortion of competition criterion is also relevant: treatment outside the scope of VAT is excluded where it is liable to give rise to more than negligible distortions of competition.

In addition, the third subparagraph of Article 13 must be taken into account. Through Annex I, certain activities are, in any event, brought within the scope of VAT where they are not negligible. Telecommunications services are expressly listed. Given the scale and duration of the activity, it cannot be regarded as negligible.

Finally, the Tribunal rejects the scope attributed by the Belgian emanation fiction to supplies made to members. A national practice that recharacterises the services supplied by the association to its members as self-supplies sets aside taxation in a manner for which the VAT Directive provides no basis, except where the Directive itself expressly provides for an exception or mechanism, notably through Articles 11 and 13.

Article 11 is relevant by comparison, as it governs the VAT grouping regime and therefore constitutes an explicit instrument in the Directive allowing different treatment of transactions within a closely linked group. The VAT status of the members is not decisive, since Article 2 is based on whether the supplier, acting as a taxable person, makes a supply for consideration.

The conclusion is that Digipolis is liable to VAT on the services supplied to its members once the conditions of Articles 2 and 9 are met.

Comment

This judgment calls into question a historically developed Belgian administrative tolerance that has long been applied by public authorities, but which runs up against the limits of the VAT Directive. The Directive does not rely on national labels, but on the facts. Where a separate entity structurally supplies services and receives remuneration constituting the consideration for those services, the activity will quickly fall within the scope of VAT.

The Tribunal accepts that an association entrusted with tasks may, under Belgian law, in principle fall within the notion of a body governed by public law under Article 13(1). However, in order to remain outside the scope of VAT, the entity must genuinely act as a public authority. In the field of telematics and related IT services, the Tribunal finds no exercise of public powers, but rather an activity that can equally be offered by private operators. In such a context, treatment outside the scope of VAT is difficult to defend, particularly where it is liable to cause significant distortions of competition.

The judgment primarily affects internal supplies, namely the services provided by the association to its members. On this point, the Tribunal clearly distances itself from the Belgian approach that seeks to treat such supplies as self-supplies outside the scope of VAT.

For supplies made to third parties in traditional public authority spheres, the analysis is less straightforward. The Tribunal does not exclude that, for certain activities, an association entrusted with tasks may fall under Article 13, but only where it genuinely acts as a public authority and no significant distortion of competition arises. In practice, this means that a delineation will have to be made activity by activity in order to determine what falls within or outside the scope of VAT.

For public authorities that still rely on the emanation theory today to maintain VAT neutrality in their cooperative structures, this judgment may have significant consequences. It must be acknowledged that the taxpayer took a considerable risk in bringing the proceedings. By litigating, not only has the debate regarding the acceding members been settled, but the entire surrounding system has been put under pressure.

What was accepted practice for many years may now disappear. The ball is in the administration’s court. The question is not whether it will react, but how quickly.