Use and enjoyment rule

What it means

The use and enjoyment rule is an option the VAT Directive gives member states to move the place of supply of certain services to where they are actually used and enjoyed. It stops a service consumed in the EU from escaping tax just because it was formally supplied from outside the EU, and vice versa.

Without the rule, the place of supply would follow only the general criteria, such as where the customer or supplier is established. For services like hiring means of transport, telecommunications or some electronically supplied services, that could result in no taxation or double taxation.

It is an optional tool. Whether a state applies it, and to which services, is set by national VAT law. Cross-border services involving third countries therefore require a look not only at the Directive but at the specific rules of the state where the service is used.

How it works in practice

A typical case: a company hires a car from a provider in a third country and uses it in Slovakia. If the state applies the use and enjoyment rule, the place of supply may be the country of use and the service is subject to domestic VAT, often through the reverse charge.

Conversely, a service a Slovak provider supplies to a customer but which is consumed outside the EU may fall outside Slovak VAT. The actual place of use must then be provable, for example by the contract, technical data or the address where the service is provided.

For recurring cross-border services it helps to keep an internal table setting out the place of supply, rate and invoicing method for each type of service. That prevents errors and speeds up an audit when the tax authority asks how a particular invoice was treated.

What to watch out for

A wrongly determined place of supply leads to incorrect invoices, unpaid tax in one country and claims in another. Fixing it during an audit means back tax with interest and sometimes the need for VAT registration in another state.

The rule covers only specific services and only dealings with third countries, as the state has implemented it. It cannot be applied by analogy to other services or to trade between member states, where the Directive's general rules apply.