Executive Summary:
The Court of Justice has held that Italian rules imposing withholding tax (WHT) and data-gathering obligations on platforms active in the short-term property rental sector were not prohibited by the EU law fundamental freedom to provide services, although the obligation to appoint an Italian tax representative liable to pay the WHT was held to be prohibited. The data-gathering and sharing obligations imposed by the Italian rules have largely been supplanted by Council Directive (EU) 2021/514 (DAC 7), which are now in force and which online platforms have been busy preparing for.
More unwelcome, however, will be the possibility of other Member States imposing WHT obligations on online platforms (both in the property rental and other sectors), requiring them to deduct income tax at source on payments to users offering services on their platforms. The prospect of un-harmonised and ad hoc WHT regimes springing up across the EU may prove a real headache for online platforms in the medium term.
Airbnb Ireland and Airbnb Payments UK, Case C-83/21 ECLI-EU-C-2022-1018
What are the practical implications of this case?
The short-term practical implication of this case is that it is lawful in principle for the ITA to impose WHT obligations on non-resident online platforms facilitating short-term property rentals such as holiday lets. As the Court of Justice acknowledged in its judgment, this imposes a ‘much greater burden’ on platforms than the information gathering obligation, because it imposes financial liabilities on platforms with respect to the ITA and to their users. In effect, this brings non-resident platforms within the scope of Italian tax obligations, and changes the relationship between the platforms and their Italian users.
The medium and longer-term implication is that other EU Member States with buoyant holiday rental markets and ever-increasing fiscal pressures might be tempted to bring in their own WHT regimes applicable to online platforms. The judgment confirmed that direct taxation is not an EU-competence (yet), meaning that as long as WHT regimes comply with the EU law fundamental freedoms, in principle each Member State could introduce its own WHT regime applicable to online platforms—possibly applying to the wider gig economy, not just to property rentals. Other Member States might conclude that data-collection and sharing is adequate to address perceived avoidance by platforms’ users.
What was the background?
In 2017, Italy introduced three obligations on non-resident platforms in the short-term letting sector:
- to collect income-related data on Italian rentals
- to withhold on account of Italian tax from rental income, and
- to appoint a local tax representative with responsibility for withholding the tax
Airbnb challenged these rules on the basis of incompatibility with the freedom to provide services (and also argued they were in technical breach of Directive 2000/31/EC (the EU E-Commerce Directive). .
This judgment is part of the EU’s (and other jurisdictions’) ongoing attempts to grapple with the economic models of online platforms in areas such as tax and data-protection. The judgment concerns tax and data-collection and sharing obligations imposed on online platforms and the extent to which tax authorities can use platforms as a de facto compliance arm for the ‘gig’ economy.
One key part of this is DAC 7. Since 1 January 2023, most online platforms will have had to conduct due diligence on their service-providing users, and on an annual basis collect information relating to the income those users earn and report it to one or more EU tax authorities by 31 January 2024 for the first report. The data will then be automatically shared across the EU, and eventually with other tax authorities adopting similar rules. For larger platforms at least, DAC 7 may be a welcome replacement of various jurisdictions’ ad hoc and mismatched data-gathering and sharing rules, including the rules in this case. Importantly, DAC 7 does not take the additional step of requiring platforms to act as tax collector but only as information-provider—the job of tax collecting remains with the local tax authorities.
What did the court decide?
The Court of Justice held that the obligations to collect data and withhold tax at source did not constitute a restriction on the freedom to provide services (meaning issues of proportionality were not considered). This was essentially because these obligations and burdens applied to residents and non-residents, so the fact they imposed costs and administrative burdens on non-resident platforms was not enough to amount to a restriction on the cross-border freedom to provide services. The Court of Justice relied on Google Ireland (Case C-482/18), where it had held that the key test for whether a restriction existed was whether providing services between Member States had been rendered more difficult than ‘purely within a Member State’, and that rules with the effect of creating ‘additional costs’ were not a restriction. That conclusion may be surprising given that: the AG argued that the WHT obligation did amount to a restriction; and, in reality any WHT obligation will deem Airbnb and similar platforms to be liable for their users’ income tax.
Conversely, the Court of Justice held that it was a breach of the freedom to provide services for the Italian rules to oblige Airbnb to appoint a tax representative in Italy, creating uncertainty regarding how in practice Italian WHT should be calculated and paid by the non-resident platform—under current Italian law it is not clear that a non-resident platform without a tax representative can be made liable to collect and remit WHT on behalf of users in Italy, and the Italian courts are likely to provide further guidance on this point. It may be that a change in Italian law is needed.
The tax representative obligation was only imposed on non-resident platforms without an Italian permanent establishment. Although many platforms will have a marketing or other entity in each Member State, generally their services are provided from a single entity within the EU (often in Ireland), so they will not necessarily be required to change their structures as a result of this decision and create a local presence if they choose not to do so.
The Court of Justice also held that the Directive on Electronic Commerce, which (among other things) obliges Member States to notify the Commission before regulating certain e-commerce services, did not apply to tax-related rules and therefore did not assist Airbnb in this case.
Case details:
- Court: European Court of Justice of the European Union
- Judges: A Prechal, President of the Chamber, ML Arastey Sahún, F Biltgen, N Wahl (Rapporteur) and J Passer
- Date of judgment: 22 December 2022
This analysis was first published on Lexis®PSL on 25/01/2023 and can be found here (subscription required).
