VAT exemption for data centre colocation: CJEU says 'no'

By Brent Springael

07-2020

Data centre colocation entails the leasing of server rooms or racks in a data centre together with ancillary services (such as power, temperature and humidity control, fire control, cleaning services, etc.) so that the customers can store their own servers in the best possible conditions. Some EU Member States (such as Finland and Belgium) generally consider such services as the leasing or letting of immovable property, which are exempt from VAT.

With its judgment of 2 July 2020 (A Oy, C-215/19), the Court of Justice disagrees with such point of view and considers the colocation services to be subject to VAT. Even though it is not entirely a black and white decision, most data centre colocation services will reflect the fact pattern as presented in the case and thus, in practice, should be subject to VAT. 

This is particularly good news for the data centres as this allows them to deduct all VAT on services and goods that have been provided to them for purposes of their colocation services.

But why isn't it (exempt) "letting of immovable property"?

The VAT exemption for the 'regular' letting of immovable property is justified by its passive nature given that the leasing activity does not bring significant added value. 

However, the colocation services clearly go beyond such passive leasing of immovable property, as it entails the provision of electricity, backup power in case of power outage, lighting maintenance, cooling, humidity control, smoke detection in the server racks, cleaning services, … Moreover, the customers do not seem to have free access to the server rooms or racks "as if they were the owner", but need to request an access key and only receive such a key after identification as authorized person. Finally, the server racks are not integrated fixtures permanently installed in the building. And so the racks cannot, in themselves, be considered as immovable property either.

Thus, the Court has held that that exemption does not apply to an activity which includes not only the passive provision of immovable property but also a number of commercial activities such as the ongoing supervision, management and maintenance by the owner, as well as the provision of other facilities, so that, in the absence of very specific circumstances, the letting of that property cannot be the predominant activity (judgment of the Court of 28 February 2019 in Case C-278/18 Sequeira Mesquita, paragraph 21).

But maybe could those services be (exempt) "services related to immovable property"?

The CJEU has already ruled that a service can be regarded as relating to immovable property if the service relates to an expressly designated immovable property and is itself subject to that property. That is the case, in particular, where an expressly designated immovable property is to be regarded as an essential part of a service, in the sense that it constitutes an indispensable element of that service (RR Donnelley Global Turnkey Solutions Poland, C-155/12, dd. 27 June 2013). However, according to the Implementing Regulation 282/2011, the letting of immovable property for the storage of goods cannot be regarded as an exempt supply of services in relation to immovable property if no specific part of that property is intended for the exclusive use of the lessee.

In this case, however, the customers using the colocation services at hand do not have an exclusive right of use in respect of the part of the building in which the server racks are installed. Hence, also for this second question, the CJEU concluded that no exemption could be applicable.

Conclusion

Based on similar fact patterns, data centre colocation will normally never be exempt. An exception could exist where the colocation service would entitle the customer to avail of a specific, exclusive and freely accessible server room.