Latest CJEU case law on VAT groups
On 1 December 2022, in cases C-141/20 "Norddeutsche Gesellschaft für Diakonie" and C-269/20 "Finanzamt T," the CJEU gave its long-awaited decision on the German regulations on fiscal unities for VAT purposes. The CJEU clarified two important issues, one of them being that the court rejected the German understanding (ie in particular that of the German tax authorities) of financial integration. And the CJEU decisions lacked conclusive clarity with regard to the treatment of intra-group supplies in a VAT group. So it remains to be seen how the German Federal Fiscal Court will deal with the CJEU's case law. Here are the most important points of the decision:
The controlling company is and remains the taxable person
Sec. 2 para. 2 no. 2 sentence 1 of the German VAT Act (UStG) states that the controlling company in a VAT group should be regarded as the taxable person in the context of a VAT group. This (German) view, which the Directive on the VAT system does not prescribe, is now also recognised by the CJEU. Although the court leaves it up to the Member States to decide which company, or the VAT group itself, they want to qualify as the taxable “person” or “unit” in a VAT group, it does not consider the German regulation to be contrary to European law. However, in the Advocate General's opinion, there was cause for concern that in the future the entire VAT group would be considered a taxable person. The CJEU did not take up this interpretation.
This means that what applied in the past remains in force: controlled companies lose their status as taxable persons (for VAT purposes) when they’re integrated into a VAT group.
Financial integration does not require a majority of voting rights
With regard to the requirement of financial integration, the CJEU contradicts the German view. In Germany the requirement of financial integration is not fulfilled if the controlling company only has the majority of shares in the controlled company; a majority of voting rights must also be guaranteed (German VAT application degree 2.8. para. 5). According to the CJEU, this understanding of financial integration is contrary to European law. So, in the future, financial integration will already exist if the controlling company (indirectly) holds the majority of shares in the controlled company, even if the majority of voting rights – eg due to agreements in the articles of association – do not exist.
German tax authorities will not be able to adhere to their view in relation to the majority of voting rights. For taxpayers, this means this criterion no longer has to be observed as – based on an interpretation in conformity with European law – conflicting domestic law is superseded.
Non-taxable intra-group supplies – still a model for the future?
The statements of the CJEU with regard to the independence of controlled companies attracted the most attention. The CJEU ruled that a Member State is not permitted to classify companies as non-independent by way of categorization just because they are integrated into the VAT group as controlled companies. From this, it can (logically) be concluded that because controlled companies are deemed independent, they don’t lose their status as a taxable person, despite their integration into the VAT group. Supplies within the VAT group (ie intra-group supplies) would then continue to be regarded as being subject to VAT. This would affect, for example, companies from the banking or insurance industry, as they can take advantage of the fact they can still claim input VAT despite rendering non-taxable intra-group supplies. If intra-group supplies are subject to VAT in the future, the VAT due on these supplies could lead to a considerable cost burden.
However, this (legal) consequence cannot be clearly deduced from the CJEU's decision, especially since the CJEU emphasises that in the case of a VAT group, the companies are to be treated as only one taxable person, which in turn suggests the existence of non-taxable intra-group supplies. So it’s not yet possible to reach a final judgement on this point and it remains to be seen what the Federal Fiscal Court will decide. However, the characteristic of independence will have to be analysed more closely in the future in the case of controlled companies, as the CJEU rejected the classification of a company by categorisation.
If you have any further questions about this subject, contact the Tax team at DLA Piper. Feel free to give us a call or send us an email.