Possible implementation of the ECJ Ruling Skandia into German VAT Law from January 1, 2019

In July 2018, the German Ministry of Finance published a draft position statement regarding the implementation of the Skandia Ruling of the ECJ (C-7/13, dated September 17, 2014) into German VAT Law. In its Skandia decision, the ECJ ruled that the supply of services from a head office located in a third country to its branch located in a Member State results in a taxable transaction in that Member state if the branch is part of a VAT group. Currently, under German VAT law, any cross-border transactions between headquarters of companies and their branch offices are considered internal turnover, not liable to VAT, since the branch is considered a dependent part of the third-country company, regardless of the membership of the branch in a VAT group. According to the draft position statement, the general principles of the Skandia ruling may only be applied if the head office of a group structure is located in a third country, the supplies are rendered to a branch located in a Member state and the branch is part of a VAT group according to German VAT Law. In these cases, the affiliation of the branch to a VAT group shall take priority over the affiliation of the branch to the parent company in the third country. However, there is a restriction in case the German branch is the only VAT group member established in Germany.

Scenario 1

A head office “S” in Switzerland has set up a branch “B” in Germany. Head office “S” also has a subsidiary “G” in Germany, which is part of a German VAT group together with “B”. “S” renders services to “B”. According to the draft statement, these supplies from “S” to “B” are taxable in Germany and can no longer be regarded as non-taxable internal turnovers.

Scenario 2

A Swiss-based head of a VAT Group “S” has a subsidiary “F” in France and several branches in Germany. “S” renders services to its German branches. The German branches form a single company according to sect. 2 (2) no. 2 s. 3 German VAT code, which is limited to Germany. As the German parts of the group structure consist of branches of “S” only, the services rendered by “S” are still qualified as non-taxable internal turnover in Germany; the principle of the Skandia ruling may not be applied. The draft was published in order for interested parties to comment and may be altered before its final publication at the beginning of next year. According to the current wording of the draft statement, the example given (see above, Scenario 1) is the only exception to the general rule of the non-taxability of services rendered to branches located in EU Member states by third country headquarters. The draft statement is supposed to be applied for all assessment periods that are not timebarred and consequently might also be applied for the current tax year. It shall not be contested if the above-stated amendment of the fiscal authority’s opinion is not applied for transactions that are carried out before January 1, 2019. Therefore, clients should now review their intra-company service structure and implement a reporting system, if necessary.