Opinion Statement FC 3/2023 on VAT Groups

The CFE has issued an Opinion Statement on VAT Groups.

The Court of Justice’s decision in C-812/19 Danske Bank A/S, Danmark, Sverige Filial v Skatteverket considered the question of how the provisions relating to VAT Groups in Article 11 of the Principal Directive interrelate with the decision of the Court of Justice in C-210/04 Ministero dell’Economia e delle Finanze v FCE Bank plc.

In the FCE Bank case, the Court considered that no VAT was chargeable on supplies of services between the head-office of the Bank in the UK and its fixed establishment in Italy. The Court considered that the Italian branch was not performing an independent economic activity because it was the Bank as a whole, rather than the branch, that was incurring the risk and any charges agreed between the branch and head office could not be considered to be negotiated between independent parties. FCE Bank was a member of the UK VAT group of Ford, the car manufacturer. However, that fact was not highlighted to the Court.

As in the earlier decision of C-17/13 Skandia America Corp (USA), filial Sverige v Skatteverket, the reference in Danske Bank related to a Member State, Denmark, that considered that only fixed establishments within its jurisdiction could form part of a VAT group. The Court considered that taxable supplies were made when the head office in Denmark, which was part of a VAT group, made taxable supplies in providing services to its Swedish fixed establishment. In reaching this conclusion, the Court was following the reasoning of the Court in the earlier Skandia America case. However, one significant difference between the Skandia America case and the Danske Bank case is that the Danske Bank case also raised the issue of whether the Swedish authorities were obliged or entitled to recognise the existence of a VAT Group in another Member State.

On this additional issue the Court, at paragraph 33, observed that:

“The fact remains that the existence of a VAT group in that Member State must, where appropriate, be taken into account for the purposes of taxation in other Member States, in particular when the latter assess the tax obligations of a branch established in their territory”.

Here, the Court was clearly recognising that there may be a need for tax authorities to recognise the existence of VAT groups in other Member States. However, the use of the words “where appropriate” leaves open the possibility that there may be limitations on this obligation.

Many Member States have adopted a similar approach to Sweden and Denmark and consider that only fixed establishments that are within that state can form part of a VAT group. However, there have also been Member States that have favoured the whole entity approach, so that on joining a VAT group in those states the entire entity, including any foreign establishments, form part of the grouping for the purposes of imposing VAT in that Member State.

This approach accords with the literal reading of Article 11 which talks about “persons” and not “fixed establishments” in a Member State forming part of the grouping. It also accords with the legal and economic realities, because as the Court recognised in the FCE case, fixed establishments cannot generally be considered distinct taxable persons.

One issue that arises from the Danske Bank case is whether it remains open to a Member State to adopt the whole entity approach. There are comments in the Danske Bank case which could be read as rejecting a whole entity approach. However, those comments were made in the context of a Member State that adopted the national establishments only approach. There is in fact nothing in the explicit wording of Article 11 which prevents the adoption of a whole entity approach. Indeed, if anything the contrary is the position, since Article 11 refers to “persons” rather than “establishments” joining the grouping. While the Court in Skandia America clearly accepted that a national establishment only approach could be adopted, it certainly did not question the legitimacy of the whole entity approach.

It could also be suggested that the fact that the Court in Danske Bank, at paragraph 33, considered that Member States were required to recognise VAT groups in other Member States also supports the conclusion that the Court was rejecting the whole entity approach to VAT grouping. The Danske Bank decision illustrates how the process of recognition can have VAT consequences in other Member States that are required to recognise the grouping, in that case a VAT charge in Sweden on services rendered by the Danish head-office which only arose because Sweden recognised the Danish VAT group. It could also impact on the ability to recover input tax. If the whole entity approach is acceptable, these consequences potentially become more complex.

We consider that there would be considerable merit in developing the idea of EU wide VAT groupings. The effect of a national establishment only approach is effectively to discourage the provision of cross-border services within a commercial grouping within the EU, which we consider to be unfortunate and inconsistent with the idea of an EU wide single market.

We invite you to read the statement for further analysis and remain available for any queries you may have.