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After two recent decisions on VAT groups rendered by the ECJ (in cases C-141/20 Norddeutsche Gesellschaft für Diakonie and C-269/20 Finanzamt T I), some doubts were expressed as to whether in light of those judgments, the transactions carried out between the members of a VAT group were taxable or not. Therefore, the decision in Finanzamt II was awaited with great interest by VAT specialists.
The ECJ had been asked to judge whether German legislation relating to VAT groups complied with EU law. The ECJ decided that the German VAT grouping was EU-proof and that the controlling entity could be held liable for VAT payments of the group. However, in Norddeutsche Gesellschaft für Diakonie, C-141/20, the ECJ additionally ruled that the German legislation did not comply with EU law in all aspects and that several aspects of the German VAT grouping rules needed to be changed.
The group consisted of the university; the foundation controlling the university (S); and company U that provided S with cleaning and other services in respect of the building of the university.
S performed economic activities for VAT purposes (medical treatments) and non-economic activities (teaching).
German tax authorities (GTA) found S and U had to be treated as a VAT group. Services provided by U to S were provided within the VAT group. However, the GTA, at the same time found that cleaning services were subject to VAT. This was because, to some extent, these services were provided “for purposes other than that of the business.”
In so far as those services had been carried out for S’s non-economic activities, the GTA found that they had given rise to a ‘supply of services free of charge, treated as a supply of services for consideration’ under Article 6(2)(b) of the Sixth Directive.
The ECJ had decided on 1 December 2022 in the Finanzamt I case that a VAT group can be considered a single taxable person provided that this designation does not entail a risk of tax losses. No “deemed supply” or “benefit in kind” was created between the members of the VAT group (as was argued by the German tax authorities). Consequently, no VAT should be charged, when the controlling entity of a VAT group receives services rendered to it by a different entity of the same group.
However, the ECJ did not decide in Finanzamt I, C-269/20 or Norddeutsche Gesellschaft für Diakonie, C-141/20 on the question of whether VAT may apply on supplies between members of the VAT group. Therefore, the referring court found it necessary to refer the matter again to the ECJ.
The German Federal Finance Court referred the following questions to the ECJ:
The ECJ ruled that supplies of goods and services between members of a VAT group are not subject to VAT, even if the recipient of the supplies cannot deduct the VAT in full.
Thus, if several persons are recognized as one VAT taxpayer - they cannot be recognized as separate taxpayers. They file one VAT return and are entitled to a single VAT ID number. A VAT group member does not perform an activity that could be classified as a VAT-taxable supply of services for consideration to another group member.
The ECJ confirms in the Finanzamt II case that supplies made between members of a VAT group are not subject to VAT even if the recipient member of the VAT group cannot fully deduct input VAT. Since the ECJ confirmed the long-standing practice of disregarding activities between VAT group members, the practical consequences of the Finanzamt II case are not expected to be significant.
Every case is different, and its facts and circumstances should be analyzed on a case-by-case basis in light of legislation and ECJ case law. Please contact us if you have any questions or need VAT advice.
