Advocate General opinion in C-141/20

In Norddeutsche Gesellschaft fur Diakonie (C-141/20) the Norddeutsche Gesellschaft für Diakonie (NGD) and the tax office Kiel are arguing as to whether a VAT group arrangement existed between A as the parent company of NGD and NGD as subsidiary in 2005.

NGD is a Gesellschaft limited liability company governed by German law. Its shareholders are A (51%) and C eV (49%). A is a public-law body and C eV is a registered association. In 2005, NGD’s sole managing director was E, who was also the sole managing director of A and an executive board member of C eV. Before NGD was founded, two versions of its articles of association were presented to the tax office in order for the latter to take position on the existence of a VAT-group-arrangement scheme between A and C eV. The tax office informed NGD that only the second version of those articles of association fulfilled the applicable VAT group conditions in relation to the so-called financial integration. However, NGD was founded on the basis of the first version of the articles of association. It was only in 2010 that the second version of the articles of association was the subject to a notarial act and was entered into the commercial register.

During an external audit of NGD, the auditor reached the conclusion that a VAT group arrangement did not exist between NGD and A in the year at issue (2005), as NGD was not financially integrated into A’s company. Although A held a 51% majority shareholding in NGD’s share capital, it did not hold a majority of the voting rights, owing to the provisions of the articles of association, and was therefore unable to impose its decisions on NGD.

In its request for a preliminary ruling the German Federal Tax Court has asked the CJEU if the financial integration condition is met where the parent company owns a majority stake in the subsidiary company (but not a majority in voting rights) and the organizational link is very strong (for example, the same persons are responsible for making decisions for all entities in the VAT group). Furthermore, the German Federal Tax Court has asked whether the German practice of the VAT group's parent (rather than the VAT group itself) being liable for  VAT to the German tax authorities is in compliance with EU VAT rules.

EU law provides for conditions to determine VAT groups. Member States may treat single taxable persons established in their territory who, while legally independent, are closely bound to one another by financial, economic and organisational links as VAT groups. However, under EU law, independent companies that are closely linked to one another for VAT purposes do not lose their quality as taxable persons simply because of that link. The concept of a VAT group in no way results in each taxable person in that VAT group being replaced by a single member of that group.

The Advocate General opined that the Common VAT system must be interpreted as permitting closely related persons, who are members of a VAT group (Organkreis), to be treated as a single taxable person for the purposes of VAT obligations. According to the Advocate General, Member States may not fundamentally change the nature of the concept of VAT group and the purpose of Article 4(4) of the Sixth Directive when making use of the option conferred to them by that provision and setting certain conditions and procedures for VAT groups. Furthermore, the Advocate General states that the German measure transposing the EU Directive into national law is overly restrictive as it provides that the VAT group (and, as a result of that transposition, the parent company) is the sole taxable person, whereas the EU Directive is more general in that it only allows, for the purposes of VAT, to be treated as a single taxable person a person who is independent but who is bound to one another by financial, economic and organisational links. Therefore, the Advocate General concludes that the provision must be interpreted as precluding Member State legislation which designates solely the member controlling the group – which owns a majority of the voting rights and has a majority shareholding in the controlled company in the group of taxable persons – as the representative of the VAT group and the taxable person of that group, to the exclusion of the other group members.

DLA Piper comment:

The case should be read in conjunction with another similar case, C-269/20 Finanzamt T v S, which has been brought forward by the German Federal Tax Court with a request for a preliminary ruling as well. In both cases the CJEU will have to answer the question of whether the German legislation regarding VAT groups is in compliance with EU law.

If the CJEU confirms the incompatibility of the German legislation with EU law, materially significant follow-up questions could arise. If these questions are answered in the affirmative by the CJEU, the German treasury will be threatened with tax losses in the 3-digit billion range and advisors who do not file appeals in time against the affected assessments might face considerable recourse claims. Moreover, another consequence will be that VAT assessment notices addressed to the parent company of the VAT group would be unlawful because they have been addressed to the wrong taxable person as the VAT group should be the correct addressee. Those affected, especially VAT groups, should therefore check whether VAT assessments with reference to these pending proceedings can or should be kept procedurally “open” for discussions with the tax authorities. Additionally, it should be considered to file an appeal to keep the affected tax years procedurally “open”.

The new judgments will be issued after the important landmark judgment on the basic principle of equal treatment of all legal forms of VAT groups (C-108/14 - Larentia + Minerva), in which the CJEU affirmed the possibility of an integration of a partnership.