VAT Group and transactions carried out within the Group

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VAT Group and transactions carried out within the Group

04 Oct 2024

Judgement of the Court of Justice of the EU C-184/23 dated 11 July 2024,  Finanzamt T II case

By Mario Spera - Principal of Bernoni Grant Thornton

1. Foreword

Judgement of the Court of Justice of the EU C-184/23 dated 11 July 2024,  Finanzamt T II case is particularly interesting, as the Court was asked, also taking account of the previous judgments concerning VAT Groups, to provide specifications on the possibility to include within the VAT Group system and, therefore, to exempt from taxation, those transactions occurring between entities participating to the same Group, if the entity receiving the good or service is not entitled to tax deduction or has a limited right to deduction.

The analysed case concerns a German tax system in which local cleaning services were provided within a tax group, incorporated as an “Organschaft” (which, in fact, the VAT Group at EU level was inspired to), created by S, a German foundation governed by public law, which is the controlling company of a university, and U-GmbH, an operating company which provided S with cleaning, hygiene and laundry services, as well as patient transport services. In the case at issue, S acted both as taxable person, within the performance of its specific economic activity, and as public entity, within its institutional activity, in relation to which, in principle, it would not have been considered as a taxable person.

According to the Tax Authority, the services provided to the entity as a public authority appeared as carried out “for purposes other than that of the business”, since they were performed “for S’s activities for which it is not considered to be subject to VAT”.

Based on the previous case law provided under judgment C-269/20, Finanzamt T I case, referred to the same S, and C-141/20, Diakonie case (or also NGD GmbH), both dated 1 December 2022, the appellate Court deemed it appropriate to ask for clarifications to the Court of Justice regarding the tax treatment applicable to the transactions occurring between the entities belonging to a VAT Group.

In fact, in Finanzamt T I judgment, the CJEU concluded that, in case of services provided within a VAT Group to a "single taxable person (…) which carries out economic activities for which it is subject to VAT and activities in the exercise of its powers as a public authority, in respect of which it is not considered to be a taxable person liable for VAT”, the provision rendered to the entity that acts in the exercise of its powers as a public authority “must not be taxed under Article 6(2)(b) of that directive [editor’s note: Sixth VAT Directive]” (see point 63 of judgment C-269/20).

However, the appellate Court believed that there were some interpretation uncertainties based on what the same Court expressed on the coeval judgment concerning Diakonie case, where the following principles were underlined: i) in case of transactions occurred between entities participating in the same VAT Group, it was necessary to assess whether the supplier of the provision carried out an independent economic activity, meant as an activity performed “in its own name, on its own behalf and under its own responsibility”, bearing “the economic risk arising from its business” (see point 78 of judgment C-141/20); ii) the entities participating in the VAT Group, bearing the risks related to the performance of their activity, "must be regarded as carrying out independent economic activities, with the result that they cannot be classified, by categorisation, as ‘non-independent entities’ (...) simply because they belong to a VAT group” (see point 79); iii) the existence of financial, economic, and organizational links between the members of the Group, does not involve “the exercise of a non-independent economic activity by an entity of the group other than the controlling company”, therefore, “it does not follow from that provision that that entity would cease to carry out independent economic activities (...) solely because it belongs to the VAT group” (see point 80).

Based on the above, the appellate Court asked the CJEU “whether supplies made for consideration between persons belonging to the same VAT group fall within the scope of application of VAT”, or should they be considered as taxable transactions “where the recipient of those supplies is not or is only partly authorised to deduct input tax due or paid, in order to avoid a ‘risk of tax losses”.

2. Analysis of the Court of Justice

The starting point of the judgment under analysis is the need to define the quality of taxable persons being the parties to the transactions occurring within the Group, in order to determine the applicable law regime (i.e., VAT application or exemption). From the analysis of previous judgments, such as judgment C-165/17 dated 24 January 2019, Morgan Stanley case, it is clear that “a supply of services is taxable only if there exists between the service supplier and the recipient a legal relationship in which there is a reciprocal performance” (see point 37 of the abovementioned judgment), which also implies that the consideration collected by the supplier (of the good or service) actually constitutes the equivalent value of the service provided to the receiver. Then, with reference to the provisions rendered between the members of a same VAT Group in judgment C-184/23 under analysis, the Court stated that actually the Diakonie case did not give a negative solution to this matter, since it analysed the different question concerning the possibility for a Member state to “classify, ‘by categorization’, given entities as being non-independent, (...) when those entities are financially, economically and organisationally integrated into the controlling company of a VAT group” (see point 33 of judgment C-184/23). Therefore, such statement cannot prejudice the analysis on how supplies between the members of a same VAT Group can/must fall within the scope of VAT application. 

In fact, when Member states introduce the VAT Group in their system, the same becomes a single entity towards external parties and the members of the Group cannot be considered, for VAT purposes, as taxable persons being separate from such entity. This implies that the VAT Group files a single VAT return and has a single VAT number. In the guidelines resulting from the 119th meeting (22 November 2021), at point 3 of Document B [taxud.c.1(2022)2315070 – 1034], the VAT committee, set up under art. 398 of VAT Directive 2006/112/CE, stated (almost unanimously) that “the treatment of a VAT group as a single taxable person precludes the members of the VAT group from continuing to operate, within and outside their group, as individual taxable persons for VAT purposes”. Moreover, point 3.4.3 of Communication COM (2009) 325 of the European Commission on the participation to the VAT Group states that transactions occurring between the members of a VAT Group “should be deemed to have been carried out by the group for itself”, since the VAT group is “treated as a single taxable person”, and therefore are outside the scope of VAT.

3. Conclusions of the CJEU

Based on the considerations above, the Court focuses on a further element relevant to the situation in which, if the supplier cannot benefit from the right to deduct VAT for the service provisions, through the VAT group system there would be the risk of lower inland revenue returns. However, besides underlining “that, within the framework of a VAT group, the right to deduct input VAT due or paid is conferred on the group itself and not on its members” (see point 43), the CJEU adds that the risk of tax losses mentioned by the appellate Court would derive “not from the application of conditions specific to the VAT group regime which are also specific to the law of a Member State but rather from the application of the common VAT system laid down by the Sixth Directive and the rules relating to the deduction of input VAT due or paid which it lays down”. The Advocate General also expressed, in his conclusions, some doubts on the existence of an actual risk of tax losses for the inland revenue deriving from the application of the VAT Group. Moreover, the Advocate General pointed out that in judgment C-85/11 dated 9 April 2013, European Commission/Ireland case, the Court deemed it possible to include in the VAT Group – i.e., a single taxable person – more entities, including those that, individually, would have not been qualified as taxable persons.

Given the above, the Court, considered the conclusions of the Advocate General, concluded that “services provided for consideration between persons belonging to the same VAT group are not subject to VAT, even where the VAT due or paid by the recipient of those services cannot be subject to an input deduction” (see point 47 of judgment C-184/23).