CJEU rulings determine new policy
When are intra-group supplies not subject to VAT?
- FCE Bank ruling (C-210/04): the provision of services between HO and its VI are not subject to VAT.
- Morgan Stanley ruling (C-165/17): confirmation that one should consider a VI and HO as a single taxpayer and that any sharing of costs/provision of services between them is outside the scope of VAT.
The CJEU decided that this is however different if one or both establishments belong to a VAT group. Namely, in its decisions in Danske Bank (C-812/19) and Skandia (C-7/13) the CJEU held that if a FE and/or HO are part of the VAT group in its country of establishment, then they should be treated as separate taxable persons. The CJEU held that EU VAT grouping is limited to one EU MS only and its membership cannot be extended to persons established in other MSs. Consequently, transactions between a HO and its FE are within the scope of VAT if either the HO or the FE or both are a member of a VAT group in different MSs.
For example, if a HO provides services to its branch that is a member of a VAT group in another EU Member State, the services must be considered as provided to the VAT group. Namely, because the branch belongs to the VAT group in another MS, the HO and its branch cannot be considered to be a single taxable person. Because the branch belonging to the VAT group is considered to be a separate taxable person to its HO, the transactions between them cannot be disregarded for VAT purposes. Any services provided between the HO and its branch consequently fall within the VAT scope.
How do we currently do this in the Netherlands?
If a VI of a foreign company belongs to a Dutch VAT group, then according to the Dutch Supreme Court, its HO abroad also belongs to this Dutch VAT group.
Until now, the entire legal entity (the HO including its foreign or Dutch branches) is part of the Dutch VAT group, meaning:
- For example, if a Dutch FE is part of the Dutch VAT group, then its HO located abroad is also part of the Dutch VAT group.
- And vice versa: if a Dutch HO is part of the Dutch VAT group, then its FEs established abroad Also belong into this Dutch VAT group.
Provision of services between the FE/HO belonging to the Dutch VAT group and the HO/FE established abroad, consequently fall outside the scope of VAT. No VAT currently applies if a business involving foreign establishments belongs to a VAT group of the Netherlands or another Member State. Under the current rules, provision of services between HO and its FEs are outside the scope of VAT even if one or both belong to a VAT group in separate Member States.
How does the scope of VAT change as of January 1, 2024?
From January 1, 2024, the Dutch Decree on the Fixed Establishment (hereafter; ‘Decree’) will introduce the following rules:
- Transactions between your HO and a FE will be outside of the VAT scope if neither of them belong to a VAT group within the EU.
- If your HO and/or its branch/FE are part of a VAT group in a member state, the transactions between your HO and its subsidiary/FE will no longer fall outside the scope of VAT from January 1, 2024.
- The Decree only applies to transactions between your HO and its FEs. The VAT treatment of transactions taking place within other structures (such as between FEs/branches or more broadly between establishments of the same legal person) are not explained in the Decree but the principles of the territorial applicability of the VAT grouping introduced by the CJEU are also expected to apply to them. This means that the supplies within the same legal entity may fall within the VAT scope if the HO of this legal entity or any of its FEs is part of a VAT group of any MS.
How does changed scope VAT affect you?
- If your HO or FE is part of a VAT group in the Netherlands or another member state, transactions between your HO and its FE no longer fall outside the scope of Dutch VAT.
- If the reverse charge mechanism applies, a recipient of services may become liable for VAT. For example, if your HO abroad charges its Dutch FE for services and the place of service is in the Netherlands. Or if your FE in another EU member state charges your Dutch HO for services and the place of supply is in the Netherlands.
- This has major consequences! Namely, you must then calculate (reverse charge) VAT on cross-border supplies between your HO and its FE or vice versa. If your company performs (partly) exempt services, then your input VAT due is (partly) not deductible.
- If no EU VAT groups are involved, then transactions between your HO and its FE/branch remain outside the scope of VAT. The tax authorities will then apply the CJEU decisions in FCE Bank and Morgan Stanley.
How do you prepare for changed scope VAT?
If an EU VAT group is involved, the changes will have a major impact on your business structures with cross-border supplies between your HO and the FE. Therefore, prepare well with these three steps:
- Check whether VAT is payable on transactions that take place between your different establishments of the same legal entity. Does one of your establishments within the EU belong to a VAT group? If so, the tax authorities will treat them as separate VAT payers under the new Dutch rules. The transactions between HO and FE will then fall within the scope of VAT from January 1, 2024.
- If your business performs (partially) exempt services, then you will owe (partially) non-deductible VAT on these costs. If your company has this structure but only performs taxable services, then this entails, for example, changes in reporting and compliance obligations or required updates in your ERP systems.
- Map the transactions between your different establishments and the VAT implications of the changes.
How do you avoid paying too much VAT?
- Explore the possibility of changing your company's group structure to optimize VAT treatment. For example, have the HO/FEs purchase services directly or have the HO purchase partially and the FEs partially.
- If the place of supply is in another member state that does not yet apply the Skandia and Danske Bank ruling, you may not owe VAT. However, most member states have already taken or are currently taking measures, bringing their legislation into line with the Skandia and Danske Bank ruling. Therefore, check the VAT rules of other affected member states carefully!
More information on changed scope VAT?
The changed scope VAT policy is tricky. Do you have questions or want to make sure you are well prepared for the new policy? Then contact one of our VAT specialists. They have international knowledge and work closely with the specialists of other members of Grant Thornton International Ltd. They know quickly which policies apply in the various countries.
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