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ECJ focus: How Skandia ruling affects VAT exempt business activities
Skandia America Corporation (SAC) was a United States (US) based legal entity that was set up by the Swedish insurance group Skandia. The purpose with SAC was to act as the purchasing entity of all IT-services needed by the Skandia Group globally. After the establishment of SAC all externally acquired IT-services were supplied to SAC and SAC in turn rendered the IT-services 'internally' with a mark-up on its fee towards all Skandia entities globally.
In this context, SAC also established a Swedish branch through which SAC provided its IT-services to all Swedish Skandia entities. In Sweden, Skandia had also established a national VAT group in accordance with Article 11 of the European VAT Directive (Directive 2006/112).In 2007, the Swedish branch of SAC became a member of the Skandia VAT Group.
In accordance with the principles laid down in the FCE Bank case (C-210/04) Skandia did not account for any Swedish VAT for the IT-services 'allocated' between the US based head office of SAC and its Swedish branch. Since the services supplied to the Swedish Skandia entities by the Swedish branch were supplied within the Swedish VAT group of Skandia, no Swedish VAT was charged on these supplies. Therefore, a very VAT effective structure was established by creating the global purchasing entity outside of the EU, since no European VAT from any Member State would be charged towards SAC as the IT-services rendered were deemed supplied in the US, according to the place of supply rules applicable at that time.
The Swedish Tax Agency (STA) did challenge the structure and decided to charge Swedish VAT on the supplies of IT services from SAC to the Swedish Skandia Group. The reasoning for this standpoint taken by the STA was that the IT services were rendered to a Swedish VAT Group in which the Swedish branch of SAC was a member. These IT services could not be looked upon as internal services rendered between different establishments of the same legal entity (the same taxable person) but rather as services rendered between 2 separate taxable persons.
In short, the STA took the view that the existence of 2 separate taxable persons is the decisive factor when determining if services that are supplied cross border between 2 establishments of the same legal entity are of a taxable nature or not.
Skandia brought an action against the decisions by the STA before the court and the court in turn decided to refer the case to the ECJ.
The questions referred by the local county court in Sweden to the ECJ were as follows:
- Do supplies of externally purchased services from a company´s main establishment in a third country, to its branch in a Member State, with an allocation of costs for the purchase to the branch, constitute taxable transactions if the branch belongs to a VAT group in the Member State?
- [If the answer to the above question is in the affirmative] Is the main establishment in the third country to be viewed as a taxable person not established in the Member State, within the meaning of Article 196 of the VAT Directive, with the result that the purchaser is to be taxed of the transactions?
With regards to the first question the ECJ discussed the principles laid down in the FCE Bank case and again stated that transactions/allocations between 2 different establishments of the same legal entity does not constitute a taxable supply of services from a VAT perspective, since these establishments cannot be regarded as 2 separate taxable persons. After that, the ECJ stated that “However, it is common ground that Skandia Sverige is a member of a VAT group, created on the basis of Article 11 of the VAT Directive and therefore forms with the other members a single taxable person. For VAT purposes, that VAT group was allocated a registration number by the competent authority.”
Based upon this, the ECJ determined that “Therefore, for VAT purposes, the services supplied by a company such as SAC to its branch which, such as Skandia Sverige, belongs to a VAT group, are considered not to be supplied to that branch but must be regarded as being supplied to the VAT Group.” And the conclusion by the ECJ was that “supplies of services from a main establishment in a third country to its branch in a Member State constitute taxable transaction when the branch belongs to a VAT group”.
As regards the second question, the ECJ stated that “In those circumstances, and where it is also not disputed that the company which supplied those services is located in a third country and that it constitutes a separate taxable person from the VAT group, it is that group which, as the purchaser of the services for the purposes of Article 56 of that directive, is liable for the VAT pursuant to the exception in Article 196 of the VAT Directive.”
The ruling given by the ECJ in the SAC case seems both very clear and straightforward. It is very likely that the tax authorities in all Member States, where the concept of VAT grouping in accordance with Article 11 of the VAT Directive is utilised, will carefully analyse the ruling and implement it, increasing the VAT burden within the financial sector.
However, there is a current lack of clarity for taxpayers on how the tax authorities in different Member States will apply the case. Will the case be referred for retroactive assessments? Or will the tax authorities instead only apply the case going forward? Due to local administrative policies, practice may prove that this depends on the Member State involved. Much is still unclear at this point as some of the Member States are still reviewing their response to Skandia.
Your Taxand contacts for further queries are:
Martijn Jaegers, Taxand global indirect tax service line deputy leader
T. +31 20 43 56 414
It is apparent that the consequences of the outcome in the SAC case will be costly in terms of additional non-deductible VAT in all business sectors where VAT exempt activities are carried out. A lot of business restructuring activities must be considered in order to reduce the negative impact of the case. Although the ruling is to a certain extent clear and easy to read, there are a number of questions that remain unanswered. For instance:
- Will the same principles apply in the reverse situation where the services are provided by an EU established head office, included in a VAT group, to its branches outside the EU?
- What if third countries are not involved and the supplies are rendered between Member States?
- Will taxpayers receive sufficient time to update their ERP systems?
The case opens many discussion points. Some of these may actually be to the benefit of the taxpayer: for example where an EU based VAT group provides financing to branches located outside the EU. Multinationals should think of reassessing the use of cost sharing agreements and take into account that the ERP set-up for branch VAT group supplies need to be updated to cope with this new reality in a different way.
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