In 2020, the question of who the taxable entity of a VAT group was submitted to the ECJ by the German Federal Fiscal Court. According to the German VAT Act – which is similar to the Austria VAT Act the tax debtor of the VAT group is the head of the VAT group, and the members of the VAT group are considered dependent in this context. In this respect, the German Federal Fiscal Court had doubts as to the compatibility with EU law. In addition, a further question was raised regarding the requirements for the necessary financial integration. In January 2022, the Advocate General issued an initial assessment on these questions in her opinion.
NGD is a limited liability company governed by German law. Its shareholders are A (51 %) and C e.V. (49 %). The sole manager of NGD in the year at issue was E, who was also the sole manager of A and an executive board member of C e.V.. In the course of an external tax audit, the auditor determined that - contrary to the opinion of NGD - no VAT group existed between A and NGD. 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 the appeal proceedings, the tax court ruled that the tax office's requirement that the controlling company must also hold a majority of the voting rights in the controlled company in addition to a majority of shares was too far-reaching and that therefore a VAT group existed in that case. The German Federal Finance Court decided to stay the proceedings and referred four questions to the ECJ for a preliminary ruling.
The ECJ only asked the Advocate General for an opinion on the following two questions:
Question 1: Is the VAT Directive to be interpreted as permitting a Member State to designate, instead of the VAT group (”Organkreis”) a member of the VAT group (”Organträger”, controlling company) as the taxable person?
Question 4: Is the VAT Directive to be interpreted as permitting a Member State to regard a person as not being independent if that person is integrated into the undertaking of another company’s business (“Organträger”, controlling company) in financial, economic and organizational terms in such a way that the controlling company is able to impose its will on the person and thus prevent the person from forming his [or her] own will, which diverges from that of the controlling company?
The Advocate General divided her assessment into three steps. In a first step, the Advocate General examined the conditions for VAT groups laid down in Union law. In this context, she stated that Union law allows Member States to consider closely connected persons belonging to a VAT group as a single taxable person for the purposes of fulfilling VAT obligations. However, this precludes a rule which designates only the member controlling the group as the taxable entity, excluding the other group members. Under the corresponding German legal provision, however, the controlled company is merely a dependent component of the controlling company's business. Consequently, the German regulation goes beyond Union law.
In a second step, the Advocate General examined the legal status of the VAT group and its members. Basically, the concept of the VAT group is a simplification measure. The individual VAT returns of the group members are combined into one VAT return. However, the members of the VAT group remain taxable persons on an individual basis. Under Union law, the taxable person liable for the VAT is the VAT group itself and not a specific member of the group, such as the “Organträger” (controlling company) under the German VAT Act. There may well be an interest that, for example, the company with the highest liquidity pays the VAT owed by the group. If a national regulation now provides that the taxable person is always the controlling company, the freedom of the VAT group to determine its representative is restricted.
In a final step, the Advocate General stated that the German regulation is not justified against the background of preventing abuse or combating tax evasion and avoidance.
As a result, the Advocate General proposed the following answer to the questions referred: Closely connected persons belonging to a VAT group may be regarded as a single taxable person for the purposes of fulfilling VAT obligations. However, it is not compatible with Union law if only the member controlling the group - which owns the majority of the voting rights and a majority shareholding in the controlled company in the group of taxable persons - is designated as the representative of the VAT group and the taxable person of that group, to the exclusion of the other group members.
Since the Austrian provision on VAT groups is similar to the German provision, the Advocate General's initial assessments are also relevant for Austria. However, this is merely an opinion and the ECJ could still decide completely different in its judgment. However, if the ECJ agrees with the opinion, it remains to be seen whether the previous taxes levied at the level of the controlling company are unlawful and how/if they will be amended. For further details, we would like to refer you to our SWK article in issue 8/2022 published on 10 March 2022.
Verena Gabler ist Partner im Bereich Steuerberatung und leitet die Tax Management Consulting Abteilung bei Deloitte Österreich. Die Umsatzsteuer-Spezialistin hat sich auf die Prozessberatung spezialisiert und unterstützt ihre Klienten bei der Entwicklung und Implementierung von Steuerkontrollsystemen. Dabei begleitet sie ihre Klienten bei der Analyse und Reduktion von steuerlich relevanten Risiken, der Optimierung von Prozessen und der Erhöhung des Automatisierungsgrades der Steuerfunktion durch den Einsatz von steuerrelevanter Software.