Court of Justice of the EU

The case of Danske Bank (C-812/19) was a Swedish referral concerning the head office of Danske Bank in Denmark, which was part of a VAT group there, and its Swedish branch which was not part of any VAT group. Danske Bank used a computer platform for its business across Scandinavia and the costs associated with the use of the platform were charged to the Swedish branch by the Danish head office.

The Swedish branch requested an advance ruling as to whether the head office and branch should be considered separate persons and whether the use of the computer platform in return for a recharge of costs should be regarded as a supply of services with a resulting obligation to account for VAT on the branch as recipient of the supply. The Revenue Law Commission in Sweden ruled that the Danish VAT group (of which the Danske Bank’s head office was a member) and the Swedish branch were to be regarded as being two separate taxable persons. The branch challenged the ruling on the grounds that it did not perform any independent economic activity and was not part of a VAT group in Sweden.

The issue was referred to the CJEU and the referring court observed that two interpretations of the relevant VAT law were possible:

• Following FCE Bank (C-210/04), the Swedish branch, which is not independent of its head office and is not part of a VAT group in Sweden, is part of the same taxable person as the head office even if the head office is a member of a Danish VAT group; or
• By joining a Danish VAT group, for VAT purposes, Danske Bank’s head office was separated from the taxable person which the head office and branch were otherwise deemed to constitute (following the guidelines of the VAT Committee and Skandia America (USA), filial Sverige (C-7/13) save that in that case, it was the branch which was a member of a VAT group).

The Court said that in order for there to be a legal relationship between a branch and head office (a perquisite for a taxable supply), the branch must perform an independent economic activity. In particular it must bear the economic risk arising from its business. The effects of belonging to a VAT group are that members are treated as a single taxable person which precludes them from submitting VAT returns separately and from being identified, within and outside their group, as individual taxable persons. As the VAT group is in the same position as a single taxable person and the group can only include members from the same jurisdiction (in this case Denmark), the principle in Skandia applied in this case to the effect that the Danish VAT group made a supply to the Swedish branch.

It did not matter, said the Court, that (unlike in Skandia) the head office was in a member state and not a third country. The principle of fiscal neutrality was also not of relevance since a transaction between a Danish VAT group and a Swedish branch of a member of that group could not be regarded as similar to a transaction between a branch and head office which is not part of a VAT group. 

DLA Piper comment: The application of the Skandia case to this situation is likely to result in many cross-border businesses having to review their intra-entity supplies to analyse the VAT consequences in each case. For some, this may result in a VAT cost. Particularly, businesses of sectors where the right to deduct VAT is restricted or denied due to VAT-exempt output transactions need to revisit and to optimise their supply chains.

It is interesting that the Court said that the wording of the VAT Directive contains a ‘‘territorial limitation‘‘ so that a Member State may not provide for a VAT group to include persons established in another Member State; this suggests that those Member States which have a ‘whole entity’ system to their group registration rules may be in breach of the VAT Directive.

In Gmina Wroclaw (C-604/19) the municipality of Wroclaw was the owner of some land subject to a third-party perpetual usufruct (a civil law concept, similar to the common law concept of a lease) requiring the payment of an annual fee by the usufructuary (akin to a lessee). As part of a reform of the law of property, the usufructuary was able, on payment of a ‘‘transformation fee‘‘ to consolidate its rights into full property ownership so that it was able to sell the land as well as to use it. The transformation fee was equal to 20 years-worth of annual fees to the municipality.

Agreeing with the Advocate General, (as to which, see our earlier alert), the Court rejected the arguments of the municipality that the fees paid by the new owners should not be subject to VAT. The Court first analysed whether the transaction amounted to a supply of goods within the meaning of a specific provision of the Principal VAT Directive which states that where there is a transfer of a right of ownership by order made, or in the name, of a public authority against payment of compensation, there is a supply of goods. The Court found that all three elements of this definition were met in this case; ‘‘compensation‘‘ had an EU law meaning in this context and, given the method of calculation of the annual fees as a percentage of the price of the land, the transformation fees were directly linked to the transfer of ownership.

In relation to the question of whether the municipality was acting as a taxable person rather than a public authority, the Court found that the transaction constituted an economic activity since it enabled the municipality to obtain income from the property on a continuing basis and it was irrelevant that the transformation took place in pursuance of the law and that the amount of the transformation fee was established by that same law. Marketing the property was not a prerequisite to there being an economic activity.

Consequently, the transaction amounted to a taxable supply of goods. 

DLA Piper comment: This decision is in line with the practice of those tax authorities and case-law which treat payments for compulsorily purchased land as taxable supplies. From our legal point of view we would in essence agree with this decision as the recipient is empowered to dispose over the land as if he were its owner, i.e., he can deal with it like an owner. The transfer of ‘‘legal‘‘ ownership should be immaterial to the concept of supply of goods where the right to dispose is the relevant criteria (economic point of view). Consequently, the conversion of the usufructuary right into property should be relevant under VAT law.

Taxpayers which might be affected by this decision, should revisit their VAT compliance towards the tax authorities. This applies not only to Polish taxpayers but also to taxpayer from other countries where such conversion of the usufructuary right into property is possible under national civil law aspects. Taxpayer who are currently in a planning and structuring position should keep this decision in mind.

In Frenetikexito (C-581/19) the taxpayer ran fitness studios in Portugal, and offered its customers fitness services and, following its registration with the Regulatory Authority for Health in Portugal, nutrition monitoring services through a qualified nutritionist, for a monthly fee. Customers could select the programme most suited to their particular requirements but when they signed up for the nutritional service, they were charged whether or not they make use of it. The taxpayer recorded amounts for the fitness service and nutritional advice separately on the invoices (60% of the charge was allocated to fitness plans and 40% to nutritional advice regardless of the extent to which customers used either of them) and did not charge VAT on the latter on the grounds that it fell within the exemption for medical services. The tax authority argued that VAT should have been applied to the whole supply since the nutritional advice (which was optional) should properly be considered as ancillary to the fitness services.

Although the referring court appeared to have assumed that the dietary advice service fell within the exemption for medical services, the Court noted that the concept of ‘‘medical care‘‘ and ‘‘personal care‘‘ are intended to cover services which diagnose, treat and, where possible, cure disease or health disorders. The service must have a therapeutic purpose and take place in the context of the exercise of the medical and paramedical professions. The Court recognised that the prevention of ill-health, as well as its treatment, can be exempt if it has a therapeutic purpose. Although the Court noted that the nutritional advice service was supplied by someone with a qualification, in the absence of any indication that the services were provided for the purposes of prevention, diagnosis, treatment of a disease and recovery of health (which was for the referring Court to verify), they could not fall within the medical care exemption.

Both the fitness and nutrition plans were therefore standard rated supplies. Although it was not necessary to rule on whether the nutrition advice was a separate supply, the Court went on to summarise the rules under which, in principle, each supply must be regarded as distinct and independent and transactions should not be artificially split. Two exceptions to the principle that a supply is independent have been developed by case-law:

• ‘‘single complex supplies‘‘ where two or more elements form a single indivisible economic supply; and
• ‘‘dependent ancillary supplies‘‘ where supplies do not constitute an end in themselves for customers but a means of better enjoying the principal service supplied.

Also, in the case of the medical exemption, the VAT Directive contains the exception for closely related activities.

The Court found that the first exception did not apply since the supplies of nutrition advice and fitness services were available to the recipient independently of one another and each customer could choose whether to subscribe to one or both of the services. The nutrition advice service could not be regarded as ancillary to the main service since it had an autonomous purpose from the perspective of the average customer and 40% of the amount paid by the customer was attributed to it. Thus the second exception could not apply. The Court was therefore of the view that the nutrition advice services were independent services, separate from the provision of fitness services.

DLA Piper comment: The two major questions which have been under discussion in the fitness and nutrition sector for a long time have now been answered by the CJEU. Nutrition counselling and fitness training should qualify as independent supplies if there is no link between both (e.g., can be attended separately from each other, are supplied at different times and locations). However, if both are sold as a “package” they should be no independent supplies anymore. Consequently, by not creating such link the taxpayer might be in the position to shift the taxable base and therefore, also to manage the amount of VAT due to the tax authorities. However, this might lead to abusive practices in the pricing which strongly need to be avoided.

Further, the CJEU points out that the nutrition services should not be VAT exempt as medical care services even if they are provided by certified and authorized professionals. Even if such services may have a health purpose this does not automatically make them to therapeutic services (see Article 132(1)(c) of the VAT Directive). Therefore, fitness studios need to verify and establish the therapeutical aim of their nutrition counselling services on a case-by-case basis to be able to benefit from the VAT exemption. Tax authorities might want to pick up this decision e.g., in tax audits to assess VAT in comparable cases.

The Wellcome Trust (C-459/19) case involved a charitable organisation (WLT) which used the services of investment managers to assist it in managing its large endowment portfolio. The endowments generated very significant annual income which was then disbursed by WTL by way of grants for the purposes of medical and pharmaceutical research.

Some of the investment management services were supplied by businesses established outside the EU. The services were used for the charity’s investment activities which a 1996 Wellcome Trust decision of the ECJ (C-155/94) found were non-economic activities.

The question was whether the taxpayer was “a taxable person acting as such” within the meaning of article 44 of the VAT Directive when receiving the investment management services. The result of falling within article 44 was that the place of supply of the services would be the UK and the taxpayer would have to operate the reverse charge and consequently suffer irrecoverable VAT. If the services could be said to be supplied to a non-taxable person, they would be within article 45 of the VAT Directive and the place of supply would be where the supplier was established (and therefore potentially outside the scope of VAT).

It was agreed that WTL was a taxable person, that WTL’s investment activities were unchanged from the judgment of the Court in 1996 but that its non-economic activities were not private activities; WTL used the investment management services for its business activity but not for taxable supplies and indeed was prohibited from carrying on a trade.

The Court agreed with the conclusion of the Advocate-General (see our earlier alert) that where a taxable person carries on a non-economic activity in a business capacity and acquires services for the purposes of that non-economic activity, those services must be regarded as being supplied to that taxable person ‘‘acting as such‘‘. The place of supply was therefore the UK and WTL would have to account for VAT.

According to the Court, although WTL was not a “taxable person acting as such” for the purposes of article 2(1) of the VAT Directive this did not necessarily mean that it could not be regarded as a ‘‘taxable person acting as such‘‘ for the purposes of article 44. It was clear to the Court that the EU legislature wished to give that expression a different meaning in the place of supply rules; those rules contained (at article 43 of the VAT Directive) an extended definition under which a taxable person who also carries out activities which are not taxable supplies of goods or services is to be regarded as a taxable person in respect of all services made to it.

Applying the implementing regulation of 2011, a taxable person would only be considered not to be ‘‘acting as such‘‘ for the purposes of the place of supply rules, if it were acting in a non-business capacity, in particular for private purposes including use of the supply by its staff (which the parties agreed was not the case here).

DLA Piper comment: Entities carrying on non-economic activities (like the investment activities in the case at hand) should revisit their VAT compliance status. Those entities need to verify whether they need to register for VAT and to account for the reverse charge mechanism. Also it needs to be verified whether VAT should be disclosed to the tax authorities for past periods as such cases now might be picked up in tax audits. We expect this to be the case for a not insignificant number of funds and similar entities which are carrying on non-economic activities.