Taxation on intangible services
Taxation on intangible services (fiscalité des services immatériels, Besteuerung immaterieller Dienstleistungen) constitutes a comprehensive system for the taxation of economic performances lacking physical form, encompassing an expansive range of intellectual, advisory, technical, and digital activities. The proper functioning of this system necessitates specialized rules determining the place of supply, applicable tax rates, and collection mechanisms. The taxation of intangible services represents one of the fundamental challenges confronting contemporary fiscal systems in the era of globalization and digital transformation, requiring the adaptation of traditional legal constructs – originally designed for an economy predicated upon material goods and domestic transactions – to accommodate the reality of cross-border flows of intangible value and the global-scale exploitation of intellectual property rights.
Definition and Scope
Intangible services comprise all economic performances unrelated to the transfer of ownership or possession of physical goods and not classified as supplies of goods under applicable tax provisions. This category exhibits extraordinary breadth and heterogeneity, encompassing both traditional professional services rendered by qualified individuals and modern digital services delivered electronically without any physical interaction between provider and recipient.
The principal categories of intangible services include: advisory and consulting services (strategic consulting, financial, tax advisory, audit, and management consulting, legal advice); intellectual and technical services (programming, information systems design, data analysis, database administration, server hosting, cloud computing); services related to intellectual property rights (licensing of patents, trademarks, copyrights, know-how, trade secrets, with corresponding royalties); digital services (music and video streaming, electronic publication downloads, mobile applications, subscription-based Software-as-a-Service offerings, online gaming, internet courses, educational platforms); advertising and marketing services (digital media advertising, search engine marketing, social media management, search engine optimization); and management and administrative services (business process outsourcing, back-office services, transaction processing, customer relationship management).
The distinction between intangible services and supplies of goods proves fundamental for tax purposes, particularly regarding value-added taxation, where distinct place-of-supply rules and tax rates apply. This boundary is not invariably sharp – the downloading of software constitutes an intangible service, whereas the sale of identical software on physical media (CD, DVD, USB) represents a supply of goods. Similarly, online database access constitutes an intangible service, while the sale of a database on a hard disk represents a supply of goods.
Historical Genesis and Regulatory Evolution
In antiquity and the medieval period, tax systems concentrated almost exclusively upon the taxation of material goods – land, real property, agricultural harvests, commercial merchandise – owing to difficulties in identifying, valuing, and enforcing taxes on intangible performances. The concept of taxing income from intellectual activity or professional services remained virtually absent from pre-industrial fiscal systems, where the majority of economic activity centered on agricultural production, craftsmanship, and trade in physical goods.
Medieval authorities taxed certain forms of professional activity indirectly – through levies on craft guilds, royal monopolies on specified types of production, commercial concessions, and border customs duties – yet the very concept of intellectual property as a legal category subject to taxation remained unknown to European medieval law. Only with the development of Renaissance humanism and Gutenberg’s invention of movable-type printing did conditions emerge for the creation of copyright law as protection for creators of literary and scientific works.
A pivotal moment in the history of taxing intangible value came with the emergence of intellectual property as a distinct legal category in the early modern period. Ancient Greece (Sybaris, sixth century B.C.E.) first introduced a rudimentary form of patent protection – a one-year exclusivity for “inventors of luxurious culinary dishes.” The Statute of Monopolies, enacted by the English Parliament in 1624, represented the first modern statute regulating the patent system, granting inventors a fourteen-year period of exclusive protection for their inventions. The Statute of Anne of 1710 introduced the first modern copyright system, affording authors fourteen years of protection with the possibility of a single renewal. These foundational legal instruments established the basis for future taxation of royalties and licenses for the exploitation of intellectual property rights.
Taxation on Intangible Services – Withholding Tax in the Income Tax Context
In the nineteenth and early twentieth centuries, concurrent with industrial development, international trade, and technology transfer, states began imposing withholding taxes on cross-border payments for licenses, patents, trademarks, and know-how. The first tax treaties regulating international taxation appeared in 1899 (Austria-Hungary’s treaty with Prussia), though these contained no separate, specific provisions concerning royalties. These treaties generally regulated income taxes in broad terms, treating income from licenses, patents, and know-how as “other income” subject to general taxation rules.
Following World War I, the League of Nations undertook systematic efforts to standardize international taxation, including payments for intangible assets. League experts developed a series of model tax conventions during the 1920s and 1930s that contained royalty provisions, though these remained inconsistent and reflected the conflict of interests between technology-exporting countries (preferring low or zero withholding taxes) and technology-importing countries (seeking to maximize tax revenue from cross-border payments).
After World War II and the establishment of the Organisation for Economic Co-operation and Development in 1961, the OECD assumed leadership in standardizing international tax law. In 1963, the OECD published its first Model Tax Convention on Income and on Capital, which included Article 12 dedicated to royalties. This article defined royalties as “payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.”
The OECD Model recommended that royalties be taxed exclusively in the country of residence of the payment recipient, rather than in the source country, with the objective of eliminating double taxation and facilitating international technology transfer. This recommendation, however, met resistance from developing countries, which sought to preserve the right to tax royalties paid by their residents to foreign licensors. The UN Model Tax Convention, developed by the United Nations as an alternative to the OECD model, provided for source-country rights to impose withholding tax on royalties, typically with rate limitations of 10-15% in bilateral agreements.
The withholding tax collection mechanism for royalties operates simply – the royalty payer (licensee) bears an obligation to withhold the appropriate tax amount from the gross payment and remit it to the local tax authority, while the licensor receives the net amount. The payer’s failure to fulfill this obligation may result in personal liability for the unwithheld tax, together with interest and penalties.
Taxation on Intangible Services – Value-Added Tax
A fundamental breakthrough in intangible services taxation came with the introduction of value-added tax (VAT) in France during the 1950s (experimentally in 1954, on a full scale in 1967) and its rapid adoption by other European countries and subsequently the majority of jurisdictions worldwide. VAT as a consumption tax replaced traditional cascading turnover taxes, which led to double or multiple taxation of the same good or service at various stages of the supply chain. By 2020, over 160 countries had implemented VAT or its variant (GST – Goods and Services Tax in Anglophone countries), rendering it the world’s most widespread indirect tax.
A critical challenge for VAT systems involved determining the place of supply for intangible services in cross-border transactions. Initially, most jurisdictions applied the straightforward rule that the place of supply constituted the place of the supplier’s business establishment or fixed establishment, which resulted in situations where services supplied cross-border bore taxation at the supplier’s country rates, regardless of the place of actual consumption. This principle proved inadequate in the era of globalization and electronic commerce development, leading to competitive distortions and tax revenue losses for countries where services were actually consumed.
In 2008, the European Union adopted fundamental reform of place-of-supply rules for business-to-business services (B2B). The new rules provided that the place of supply for B2B intangible services constituted the place of the recipient’s business establishment rather than the supplier’s, with application of the reverse charge mechanism, wherein the service recipient, if a VAT-registered taxable person, self-assesses VAT due at the rate applicable in his country. This change aimed to ensure taxation at the place of consumption and eliminate artificial shifting of services to low-VAT jurisdictions.
In 2015, the EU implemented another revolutionary reform, addressing digital services supplied to consumers (B2C). From January 1, 2015, the place of supply for electronic, telecommunications, and broadcasting services to consumers became the consumer’s place of residence, regardless of the supplier’s location. This meant that digital suppliers worldwide providing services to EU consumers had to register for VAT purposes in EU member states and charge VAT at the rates of consumers’ countries. To simplify compliance, the EU introduced the Mini One Stop Shop (MOSS) system, subsequently transformed into the One Stop Shop (OSS), enabling suppliers to register in a single member state and account for VAT on all B2C transactions throughout the EU via a single quarterly return.
With the explosion of the digital economy in the twenty-first century and the dominance of major technology platforms (Google, Facebook, Amazon, Apple, Netflix), numerous countries began experiencing frustration regarding their inability to effectively tax income these firms generated within their territories. Traditional nexus rules – requiring physical presence of an enterprise in a country for tax liability to arise – proved inadequate for digital firms, which could generate substantial revenue from a given market without any physical presence through utilization of online platforms, algorithms, and user-generated value.
In response to this situation, many countries unilaterally introduced so-called Digital Services Taxes (DST) – turnover taxes imposed on revenues (not profits) from specified digital services supplied by large technology corporations. France pioneered in Europe, introducing in 2019 a 3% DST on revenues from digital advertising, e-commerce marketplace platforms, and user data sales for firms with global revenues exceeding €750 million and revenues in France exceeding €25 million. Similar implementations rapidly followed in the United Kingdom (2% DST from 2020), Italy (3% DST from 2020), Spain (3% DST from 2021), Turkey (7.5% DST from 2020), Canada (3% DST from 2024), and India (6% Equalisation Levy from 2016).
Unilateral DSTs triggered sharp tensions between the United States and countries introducing them, as the overwhelming majority of firms subject to these taxes constitute American technology corporations. The U.S. administration accused these taxes of discriminating against American firms and threatened retaliatory trade tariffs on products from DST-implementing countries. In response to this crisis, the OECD intensified work on a global solution within the Base Erosion and Profit Shifting 2.0 (BEPS 2.0) project framework, particularly on Pillar One, which aims to reallocate a portion of multinational firms’ profits to market jurisdictions where their users and customers reside, regardless of the firm’s physical presence in those countries. Under the political agreement reached in October 2021 by over 136 jurisdictions, countries committed to withdrawing unilateral DSTs upon Pillar One implementation; however, implementation delays (originally planned for 2024, currently anticipated for 2025-2026) suggest that DSTs will likely remain in force for coming years.
Taxation Systems in Jurisdictional Practice
With respect to value-added tax, contemporary systems employ complex place-of-supply rules differentiated according to transaction character (B2B versus B2C) and service type. For business-to-business transactions (B2B), the general principle adopted by most jurisdictions, including the entire European Union, provides that the place of supply for intangible services constitutes the place of the recipient’s business establishment or fixed establishment. In practice, this entails application of the reverse charge mechanism, wherein the service recipient, being a VAT-registered taxable person in his country, self-assesses VAT due at the rate applicable in his jurisdiction, while the supplier does not charge VAT on the invoice. This mechanism eliminates the necessity for supplier registration for VAT purposes in the recipient’s country and ensures taxation at the place of consumption.
For business-to-consumer transactions (B2C), the rules prove more complex. The general principle for most intangible services provides that the place of supply constitutes the supplier’s place of establishment, meaning the supplier charges VAT at his country’s rate. This general principle, however, admits significant exceptions, particularly for digital services (telecommunications, broadcasting, electronic), where since 2015 in the EU the place of supply has been the consumer’s place of residence or habitual residence. This means that a digital supplier providing services to consumers in various EU countries must charge VAT at each of those countries’ rates, creating substantial administrative challenges.
To simplify compliance for digital suppliers, the EU introduced One Stop Shop (OSS) and Import One Stop Shop (IOSS) systems, enabling suppliers to register in a single member state and account for VAT on all cross-border B2C transactions throughout the EU via a single quarterly return filed electronically. Until June 30, 2021, a de minimis threshold of €10,000 in annual EU consumer sales existed, below which non-EU suppliers could charge VAT at their country’s rate; however, this threshold was abolished as part of broader e-commerce VAT reform, meaning all B2C digital services transactions to EU consumers bear VAT in the consumer’s country from the first euro of sales.
With respect to income taxes, the principal instrument for taxing intangible services comprises withholding taxes on royalties. Royalties – payments for the use or right to use intellectual property rights – typically bear withholding tax in the country where such rights are exploited or from which payment originates. Absent a double taxation treaty, withholding tax rates on royalties may prove quite substantial – typically ranging from 20% to 35%. For instance, the United States imposes 30% withholding tax on royalties paid to nonresidents absent a tax treaty, Mexico applies a 35% rate for trademark royalties, and numerous European countries apply 20-25% rates.
Bilateral double taxation treaties significantly modify these rates. Most treaties based on the OECD Model Tax Convention contain provisions reducing or eliminating withholding taxes on royalties. Under the pure OECD model, royalties should bear taxation exclusively in the recipient’s country of residence (0% rate in the source country), intended to encourage international technology transfer. In practice, however, numerous bilateral agreements provide compromise solutions, whereby the source country retains the right to impose limited withholding tax on royalties, typically at 5-15%, with the recipient then obtaining foreign tax credit in his country of residence to avoid double taxation.
Transfer Pricing and the DEMPE Framework
With respect to transfer pricing, intra-group transactions concerning intangible assets bear particularly rigorous provisions arising from the OECD Transfer Pricing Guidelines. These Guidelines define an intangible asset as “something which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances.” This definition encompasses patents, trademarks, trade secrets, know-how, customer lists, software, trade names, goodwill, and other intangible assets.
The OECD recommends utilization of DEMPE functional analysis (Development, Enhancement, Maintenance, Protection, Exploitation) to determine which entities within a corporate group should receive economic compensation related to intangible assets. Under the arm’s length principle, profits from intangible assets should be allocated to entities performing DEMPE functions and bearing associated risks, rather than exclusively to the entity constituting the legal owner of the intangible asset. This principle aims to prevent artificial transfer of intangible assets to low-tax jurisdictions without transfer of economic substance (functions, assets, risks).
Future Prospects and Challenges
The taxation of intangible services remains among the most dynamic and controversial areas of international tax law. The digitalization of the economy, development of artificial intelligence, blockchain and Web 3.0, the growing economic value of personal data, and the dominance of major technology platforms necessitate fundamental revision of traditional concepts of nexus, place of supply, and profit allocation.
A crucial trend involves international convergence toward taxation at the place of consumption or market jurisdiction (destination-based or market jurisdiction taxation). OECD Pillar One, if ultimately implemented, will reallocate a portion of the largest multinational firms’ profits (global revenues exceeding €20 billion, profitability exceeding 10%) to market countries proportional to revenues in those countries, regardless of the firm’s physical presence. This represents a fundamental departure from the traditional model predicated upon physical presence (permanent establishment) and may significantly affect taxation of digital firms and firms providing intangible services on a global scale.
Concurrently, Pillar One implementation encounters substantial political and technical obstacles. The United States, where most firms subject to Pillar One maintain their headquarters, has expressed reservations concerning certain aspects of the proposal, particularly regarding its impact on American technology firms. Failure of the U.S. Congress to ratify the multilateral convention implementing Pillar One may lead to the maintenance or even proliferation of unilateral DSTs, which in turn may escalate trade tensions and lead to fragmentation of the international tax system.
For enterprises providing intangible services, escalating compliance requirements constitute a serious operational and financial challenge. The abolition of the de minimis threshold for B2C digital services in the EU means that even small firms and individual digital creators must register for VAT in multiple jurisdictions or utilize OSS/IOSS systems. Compliance automation through technology platforms becomes indispensable, yet entails implementation and subscription costs that may prove disproportionately high for small enterprises.
The future of intangible services taxation will be shaped by the tension between the need for fair and efficient taxation of the digital economy and the necessity of preserving international competitiveness, supporting innovation, and avoiding excessive administrative burdens. The ultimate shape of this system depends largely upon the international community’s capacity to achieve consensus within the OECD/G20 framework and upon the political will of major players – the United States (check out – How to set up a company in the US), European Union, China, and other largest economies – to subordinate particular national interests to common global solutions.
Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.
