IT services can be considered common. Their scope is broad and may include, among others, software development, infrastructure management, provision of cloud solutions, and many others. Precise determination of the nature of a given service is particularly important for Value Added Tax (VAT) purposes, within which electronic services are distinguished. These are subject to different VAT rules than IT services (as understood for VAT purposes).
Definition of electronic services
According to Article 7 of Council Implementing Regulation (EU) No 282/2011, electronic services are those provided over the Internet, in an automated manner, with minimal human involvement, and which could not be provided without the use of information technology. This definition is also referred to in the VAT Act in Article 2(26), which defines electronic services.
Article 7(2) of Regulation 282/2011 and Annex I of Regulation 282/2011, as well as Annex II of Directive 2006/112/EC, provide examples of electronic services. Among them are:
- the general supply of products in digital form, including software, its modifications, or newer versions;
- creation and hosting of websites;
- remote management of systems;
- subscription to newspapers and magazines published online;
- delivery of audio and audiovisual content via communication networks;
- automated distance learning, the functioning of which requires the use of the Internet or a similar electronic network.
At the same time, Article 7(3) of Regulation 282/2011 provides exclusions from the classification of services as electronic. These include, among others, telecommunications, radio, broadcasting, television services, data warehouse services, and internet access services.
In light of the above, a service may be considered electronic if it meets all of the following conditions:
- it is provided via the internet or an electronic network;
- its provision, by nature, is essentially automated and requires minimal human involvement;
- its performance without the use of information technology is impossible;
- it is not excluded under Article 7(3) of Regulation 282/2011.
In practice, the classification of services as electronic for VAT purposes is a subject of discussion.
For example, services such as designing and implementing dedicated IT systems, IT consulting, infrastructure management, server administration, or technical support (helpdesk) are generally provided by specialists and require customization to the client’s individual needs. Due to the high degree of personalization and the necessity of human involvement in providing these services, they do not meet the criteria of the definition of electronic services.
However, there are examples that raise more doubts, such as server colocation services (consisting of physically placing a client’s servers in another provider’s data center), which may be classified in two ways depending on the scope of service. If the service consists solely of providing space (e.g., a server rack), it is treated as a service related to real estate (a different category of services for VAT purposes). However, when colocation also includes additional services such as cooling, power supply, monitoring, or technical security, it may be considered a complex service.
Consequences of recognizing a service as electronic
The classification of services as electronic under VAT regulations is important for correct tax settlement. In particular, tax law provides specific rules for determining the place of supply of electronic services for VAT purposes.
Electronic services (as well as broadcasting and telecommunications services) provided to consumers are taxed at the place of residence of the recipient (Article 28k of the VAT Act). If the annual sales threshold is exceeded (currently PLN 42,000), the service provider is obliged to register for VAT purposes in that country or may use the simplified OSS (One Stop Shop) settlement system. For IT services (other than electronic services), the general rules for determining the place of supply for VAT purposes apply.
Thus, when services are provided to VAT taxpayers (B2B), according to the general rule set out in Article 28b of the VAT Act, the place of taxation is the country of the recipient’s seat. On the other hand, when the customer is a consumer (B2C), the legal basis becomes Article 28c of the VAT Act, meaning that the place of taxation is the service provider’s seat.
Summary
The correct VAT settlement of IT services requires a detailed analysis of both technological and legal aspects. The key is to determine whether a given service meets the definition of an electronic service, as this may affect its taxation rules, including VAT.
