With its judgment dated 11 March 2021 (“Danske bank”, C-812/19), the ECJ has confirmed and extended its so-called “Skandia” case law (judgment dated 17 September 2014, C-7/13). This ruling was already a landmark, as many EU countries amended their VAT rules: cost allocations were no longer considered as internal non VAT-able sales between a head office based in a third country and its European permanent establishments, if the latter belongs to a fiscal unity (VAT group); indeed such cost allocations may be deemed as remuneration for taxable services.
The specific issue in the “Danske bank” case was the VAT assessment of cost allocations (IT platform costs) of a Danish head office to its Swedish branch. The head office was a member of a VAT group in Denmark, while the Swedish branch was not part of a Swedish VAT group. The Swedish tax authorities referred to the aforementioned ECJ case law, and informed the company that the head office and the Swedish branch were to be regarded as “two separate taxable persons” due to the head office’s membership in a Danish VAT group. The cost recharges made by the head office should give rise to a VAT liability of its branch in Sweden (reverse charge VAT).
The ECJ ruled that the principal establishment (“head office”) of a company belonging to a VAT group and its branch established in another Member State are to be regarded as separate taxable persons and that there may be an exchange of services between them. The ECJ argued that this normally would not apply to head offices and its branch offices, as they are parts of the same taxable person (cf. ECJ judgment of 23 March 2006, FCE Bank, C-210/04). However, the question of the existence of an exchange of services may also be determined by membership in a VAT group. The members of a VAT group would indeed “merge into a single taxable person”. However, that effect is limited to the respective Member State in which this VAT group is established and thus cannot include persons or companies which are domiciled in another Member State. Consequently, the head office belongs to the Danish VAT group, which is then also to be regarded as the provider of the IT services. The Swedish branch could not be part of the Danish VAT group, so therefore the head office and the branch could no longer be regarded as a single taxable entity (parts of one company).
It becomes apparent that the ruling could have far-reaching consequences for the VAT practice in Germany. So far, the tax authorities have not even responded to the VAT implications of the ECJ ruling in the “Skandia” case, and the present ruling goes far beyond the application initially envisaged: all cross-border (“top-down”) cost allocations between the head office and the permanent establishment might thus be considered as remuneration for taxable transactions in the country of residence of the recipient of the allocation, if the “service provider” or “service recipient” belongs to a VAT group in another EU country. The constellation of cost allocations of a branch to its head office (“bottom-up”) has not been expressly decided. In any case, it is evident that it should be irrelevant whether the head office is located in an EU Member State or in a third country.
The implementation of the jurisdiction affects the entire economy, e.g. by creating the necessity to modify accounting and invoicing routines for all parties involved. Companies with limited input tax deduction, such as banks, asset managers and insurance companies would be affected in particular: due to a potential incomplete relief from input VAT, there is a risk of additional cost burdens as a result of VAT taxation – by applying the reverse-charge mechanism. It is therefore advisable to review the possible VAT consequences now in order to be able to develop procedures on how these could at least be mitigated, if necessary, e.g. by withdrawing from tax groups or changing contractual arrangements or reorganisations.
The Global VAT Newsletter focuses on changes in compliance duties in various EU and non-EU countries.
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