ECJ: Transactions within VAT group outside the scope of VAT

16/07/24

On July 11, 2024, the European Court of Justice (ECJ) published a judgment concerning the VAT group, following preliminary questions from the German referring court. The ECJ considers it not possible for members of the same VAT group to provide VAT-taxable services to each other, irrespective of the extent to which the recipient has a right to deduct input VAT.

In previous rulings, the ECJ had suggested that supplies between members of a VAT group could lead to VAT being due. However, the ECJ rules that this is not the case since the members of a VAT group are regarded as one taxable person.

The ruling of the ECJ shows that the Dutch VAT group practice is correct, i.e. disregarding transactions between its members. This ruling has clarified previous uncertainties on this matter. In this alert, we discuss the ruling in more detail.

The German VAT group

The specific German implementation of the VAT grouping regime is based on the Organschaft-principle. Following this principle, the members of the VAT group do not collectively form a new taxable person; instead, the VAT group members are absorbed into the parent company of the VAT group (referred to as the Organträger). This is different from the Dutch VAT grouping regime, where all members of the VAT group form a single, new VAT taxable business.

Questions from the referring court

The German referring court posed two preliminary questions in relation to the German VAT grouping regime. The first question is whether the existence of a VAT group means that supplies between its members cannot fall within the scope of VAT. The second question is whether such supplies should always fall within the scope of VAT if the recipient has no (or partial) right to deduct paid input VAT, as otherwise, there is a risk of loss of tax revenue.

Background

This case concerns a German public foundation (“S”) that is the parent entity of a university, a medical faculty, and a company (“U-GmbH”). In 2005, U-GmbH provided cleaning, hygiene, laundry, and patient transport services to S. The German tax authorities considered these services as subject to VAT and rejected VAT recovery for S because its educational services were carried out as part of its public duty for which it is not a VAT taxable business. S contested this decision, arguing that the cleaning services were not taxable because S and U-GmbH are part of the same VAT group (Organschaft) under German law, meaning they were treated as one taxable business for VAT purposes.

Previously, Advocate General Rantos of the ECJ delivered an opinion in this case. The Advocate General concluded that transactions within a single taxable person cannot be subject to VAT and that recent ECJ case law does not alter this.

Answers from the ECJ

The ECJ rules that the VAT Directive allows Member States to designate persons who are legally independent but closely connected financially, economically, and organizationally as one taxable person for VAT purposes. According to the ECJ, forming one taxable person means that the members of the VAT group no longer act as separate taxable persons but as one, and they cannot file individual VAT returns or be identified as taxable persons within or outside their group.

The ECJ rules that a supplier who is part of a VAT group cannot be considered a different taxable person from the VAT group. Therefore, a service provided for consideration to another entity within the same VAT group does not fall within the scope of VAT. A service provider, which is part of a VAT group, cannot be individually considered a different taxable person from the taxable person formed by the VAT group.

The ECJ rejects the argument that such services should be taxed to avoid the risk of loss of tax revenue, as this risk does not arise from the application of the national rules on VAT grouping but from the application of the common VAT system and the rules on VAT deduction.

What does this mean for your organization?

In the Netherlands, it is generally assumed that supplies between members of a VAT group are not subject to VAT. The ECJ confirms this practice in its judgment. If the ECJ had ruled that such internal transactions were (or could be) subject to VAT, it could have significant financial implications for businesses without the (full or partial) right to deduct input VAT. Moreover, it would lead to uncertainty about the VAT treatment of internal transactions and it would not be consistent with the purpose and system of VAT grouping.

In our opinion, this is a desirable outcome for businesses who are part of a VAT group, especially in cases where they have no or limited right to deduct VAT. The standing Dutch practice does not need to be changed as a result of this judgment. However, we see in practice that tax authorities in certain foreign EU Member States apply a different interpretation of the conditions and consequences of a VAT group. In certain cases, foreign tax authorities take the position that transactions between members of a VAT group are subject to VAT. This judgment can be an important argument for these tax authorities and affected businesses to change their approach.