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VAT group: scope and optimisation
There are indeed various mechanisms (VAT group) in the VAT Directive. However, the practical incidences and day-to-day management should be carefully taken into account to determine which mechanism could be implemented. Taxand's global indirect tax service line discusses.
Article 132(1)(F) of VAT Directive 2006/112/EC provides for a VAT exemption mechanism for services that are supplied by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity, where those groups merely claim from their members exact reimbursement of their share of the joint expenses, provided that such exemption is not likely to cause distortion of competition.
The purpose of such a group is to enable economic operators to make joint investments under better conditions, while sharing the costs of these investments between the members, with exemption from VAT.
Article 261 B of the French Tax Code incorporated VAT exemption within a group into national law. Incidentally, the application of this exemption mechanism extends beyond France, since the French Tax Authorities allows this VAT exemption to be applied to services supplied to their members by de jure or de facto cross-border groups.
However, this independent group mechanism should not cause distortions of competition. Yet, it appears that the European Commission has concluded that this was the case in Luxembourg.
Accordingly, on 20 February 2014, the Commission referred the matter of the Luxembourg VAT regime that is applicable to independent groups of persons to the European Court of Justice. Under Luxembourg law, the services (not goods) provided by an independent group to its members are completely exempt from VAT provided that the members’ taxed activities do not exceed 30% (or 45% under certain conditions) of their annual turnover. Group members are also allowed to recover the VAT charged to the group on its purchases of goods and services from third parties. Lastly, operations by a member in his or her own name but on behalf of the group are regarded as outside the scope of VAT.
The purpose of the VAT group, as defined by Article 11 of the VAT Directive, is to create a fictitious entity, where economic substance is given precedence over legal form. Therefore, as the European Court of Justice reiterated in its Ampliscientifica Srl and Amplifin SpA judgment of 22 May 2008, the VAT group, which is based on financial, economic and organisational links between its members, must be treated as a single taxable person. Moreover, the European Commission has specified that a single VAT number is allocated to the group, that its internal operations are outside the scope of VAT, that its obligations are the same as for an individual taxable person and that its VAT recovery rights must be computed at group level.
The European Commission has brought actions for failure to fulfil obligations before the Court of Justice against certain member states, on the grounds that they included non-taxable persons in a VAT group (Ireland, the Netherlands, Finland, the United Kingdom, Denmark and the Czech Republic) and, against other member states, for having limited access to VAT groups to companies in the banking, financial and insurance sector (Sweden and Finland). Yet, seven of these judgments, one of which was handed down by the Grand Chamber, rejected the Commission’s pleas.
The most recent, but by no means least important, judgment by the ECJ concerning VAT groups, is the Skandia judgment of 17 September 2014 in which the Court of Justice ruled that services supplied by a main establishment in a third country to its branch in a Member State constitute taxable transactions when the branch belongs to a group of persons whom it is possible to regard as a single taxable person for VAT purposes (i.e. a VAT group within the meaning of Article 11 of the VAT Directive).
Firstly, the court confirmed that in light of the criteria defined in its FCE Bank judgment of 23 March 2006, the Swedish branch, which did not operate independently and did not bear any of the risks arising from the exercise of its activity, cannot be characterised as a taxable person for VAT purposes. However, the court immediately clarified that the VAT analysis should not be performed at the level of this branch, but rather at the level of the VAT group to which it belongs. Indeed, this group is regarded as a single taxpayer, and each member of the group has no separate existence from the group in terms of VAT. Therefore, the Court of Justice found that Skandia America Corporation in no way supplied a service to its branch, but to a separate third party that existed in its own right for VAT purposes, namely the VAT group established in Sweden to which the local branch of Skandia belonged. Consequently, the service supplied did indeed fall within the scope of VAT.
Therefore, for VAT purposes, the group appears to take precedence over all legal forms, regardless of whether they are provided for by company law, commercial law or civil law.
However, this decision has significantly impacted certain VAT principles and in particular those according to which services that are supplied within a given legal entity (e.g. between a parent company and its branch) are not taken into account. These services are thus never subject to VAT, however their performance in principle has no impact in terms VAT deduction or liability to payroll tax. Therefore, we should consider that the services that are exchanged between a headquarters and its branch, which does not perform an independent economic activity, are not, in principle, subject to VAT, unless the branch belongs to a VAT group.
The UK authorities clarified in February 2015 that there would be no changes to how the UK VAT grouping rules work since the Skandia decision did not consider the type of VAT grouping arrangements that the UK has implemented. The UK authorities did however note that UK establishments delivering and receiving services to and from establishments in other member states, where VAT rules like those considered in Skandia may exist, would need to consider the implications of those services no longer being disregarded for VAT purposes.
In Luxembourg, the application of this VAT exemption is however quite difficult to set-up in practice. It notably requires a specific accounting, sufficiently detailed to allow the VAT Authorities to check the exact activity of the independent groups of persons. It also requires that each group member can proof that it fulfils the conditions to be part of the independent group. Consequently, the use of the VAT exemption applicable to independent groups of persons in Luxembourg has not really succeeded. The use of the 'commissionaire' structure through recharges of costs is much more common in practice for example.
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The implementation of a VAT group may be critical, depending on local VAT regulations, but the advantages could be significant. The practical incidences of Skandia’s case law should also be made in perspective in each Member State with the VAT recovery rights computation resulting from ECJ case Law Crédit Lyonnais dated of 13 September 2013.