EU –ECJ finds collection fees for mandatory copyright licences subject to VAT

Previous relevant case law

In its SAWP ruling of January 18, 2017 (C 37/16), the Court ruled that the ‘equitable compensation’ for reproduction rights, imposed by law and levied through the mandatory intervention of a management organization, is not subject to VAT as it qualifies as an indemnity. In its UCMR-ADA ruling of January 21, 2021 (C-501/19), the Court seemed to take a U-turn by stating that the ‘equitable compensation’ to authors (such as composers and songwriters) for the communication of musical works to the public, through the mandatory intervention of a management organization, was indeed subject to VAT.

The explanation for these seemingly contradictory decisions was as follows: a service is only subject to VAT (i) if there is a legal relationship between the provider and the recipient pursuant to which there is reciprocal performance (there must therefore be a direct link between the service and the consideration), and (ii) if the compensation received by the service provider constitutes the actual consideration for the service provided to the recipient.

Consequently, an equitable compensation does not constitute a service when a legal provision determines the allocation as well as the extent of it (there is then no ‘legal relationship’ between the parties), and (ii) the compensation serves as fair compensation for the disadvantage suffered by the rights holders because their works are reproduced without permission and their rights are not respected (the compensation is then not a direct consideration for a performance).

However, if users must obtain explicit permission (from the copyright levy society, which acts on behalf of the rights holders), a legal relationship does come into effect. Here, the payment of the equitable compensation by the user demonstrates the direct link between the service and the consideration. Furthermore, the compensation received is also the actual consideration, if the amounts have been negotiated with the users, using methods established by law, and in that sense are intended to effectively and proportionally compensate for the service provided.

Management fees

The Romanian copyright levy society argued that the management fees were in addition to the non-taxable compensation and therefore was also non-taxable. In an alternative defence, it argued that the rules of intermediaries had to be applied. This meant that the copyright societies, acting in their name but on behalf of the rights holders, are rendering a non-taxable service to the end users and are deemed to have acquired a non-taxable service from the rights holders. The Court argued that both reasonings could only be valid if the ‘underlying’ service was a service for VAT purposes. Given that this was not the case and that the only economic and commercial reality is that the copyright levy society is rendering a service of collecting and distributing equitable compensations to rights holders, such service is the only one qualifying as a service for VAT purposes and should therefore be subject to VAT.

Practical impact

Copyright levy societies should verify whether their collection fees relate to equitable compensation are in line with the ECJ case law and, if not, start issuing invoices to the beneficiaries which will allow them to recover the VAT (in proportion to their applicable deduction right).

Further resources

The case can be found in EUR-Lex. A more detailed analysis and commentary regarding practical implications can be found here (in Dutch).