Overruling earlier precedent, the Swedish Supreme Administrative Court decided, in a ruling from 4 February 2021, that the supply of connectivity, capacity and space in a data center should not be exempt from VAT liability as letting of immovable property. The ruling aligns Swedish law with the reasoning of the European Court of Justice (CJEU) in the recent A Oy case and is positive news for the Swedish co-location and data center industry.
Background and case
Interxion Sverige AB (“Interxion”) operates several data centers and provides “interconnected co-location” and a “co-located digital marketplace.” The company applied for an advance ruling from the Swedish Board for Advance Tax Rulings to find out if the supply should be treated as the VAT exempt letting of immovable property.
Interxion’s services include connectivity, flexible capacity and access to services directly in the data center. To access the services, customers must have their IT equipment in the data center. Customers have an exclusive right to dispose of a certain space and the company has created an extensive infrastructure to ensure the reliable delivery of electricity and cooling.
The Swedish Tax Agency claimed firstly that the company’s entire supply should be VAT exempt. Secondly, it claimed that the supply should be considered to refer to several separate supplies, of which the letting of property and services that could be considered as ancillary to the letting should be VAT exempt.
The Supreme Administrative Court referred to a recent ruling from the CJEU, C-215/19 (“A Oy”). In this case, the CJEU ruled that data center services, where the service provider places cabinets in a data center at the disposal of its customers for the purpose of installing their servers in them, do not constitute VAT-exempt letting of immovable property. In the A Oy case, the service provider also provided the customers with goods and ancillary services, such as electricity and various services to ensure that the servers were used in optimal conditions.
Based on the ruling in A Oy, the Supreme Administrative Court stated that Interxion supplies highly specialized co-location services and that its customers should be considered to mainly demand access to connectivity, while the exclusive right to dispose of a certain space in the data center should be considered to be of secondary importance. The court ruled that the entire supply should be subject to VAT liability.
In two previous rulings (from 2008 and 2016), the Supreme Administrative Court considered that the supply of co-location services should be considered as letting of immovable property. In these cases, the supplies included the delivery of electricity and cooling, access to server racks and communication networks as well as the monitoring of the facility. In both cases, the court found that the main component of the supply was the exclusive right to a separate and specifically tailored area to store servers.
It is clear that the Supreme Administrative Court is now overruling earlier precedent and rules in accordance with A Oy. This is not surprising but still good news, since it gives additional clarity to data center providers in Sweden and provides more opportunities to recover VAT on investments. We also find it to be in line with the purpose of the legislation that the court acknowledges that, for co-location services, connectivity is typically of greater importance than the disposal of a certain space.
Finally, Sweden has previously stood out in the EU by treating co-location services as VAT exempt. Following the ruling in the A Oy case, equal VAT treatment of co-location services should apply in all EU Member States and this is further emphasized by this ruling.