In the case C-812/19 Danske Bank A/S v Skatteverket (Danske), the Court of Justice of the European Union (CJEU) has held that the Danish VAT group head office is a separate taxable person to its Swedish branch for VAT purposes. The Court also commented on the territoriality of VAT groups which may affect EU Member States with a “whole legal entity” VAT grouping approach.
Background
Danske Bank A/S (‘Danske’) is a bank headquartered in Denmark which operates in Sweden through a branch. Danske’s head office is a member of a Danish VAT group while its branch is not part of a Swedish VAT group. Danske’s head office provided services to its Swedish branch and the Swedish Tax Authority argued that Swedish VAT was due under the reverse charge.
CJEU decision
The Court started by referring to Morgan Stanley (C-165/17) and FCE Bank (C-210/04) to confirm that a branch and its head office must be treated as a single taxable person in the absence of a legal relationship, which depends on whether the branch carries out independent economic activities or not (e.g. autonomy). However, the Court stated that belonging to a VAT group must also be considered to assess this legal relationship.
Regarding the VAT grouping impact, the Court referred to the previous Skandia decision (Skandia America (USA), filial Sverig, C-7/13) in which it held that services supplied by a head office in a non-Member State to its branch established in a Member State constitute taxable transactions when the branch is a member of a VAT group. The Court found that the Skandia decision was applicable in this case, i.e. Danske. Therefore, the Danish head office (part of a VAT group) and the Swedish branch could not be considered as a single VAT taxable person. Hence, the services between them must be considered for VAT purposes.
The CJEU also commented on the territoriality of VAT grouping: based on Article 11 of Directive 2006/112/EC, a VAT group can only include local entities/establishments. In other words, Member States may not foresee the possibility of having “cross-border” VAT groups (“whole legal entity” approach).
What does it mean for tax authorities and businesses?
It is expected that tax authorities will review how they implemented the Skandia decision and will check whether it is in line with the Danske decision. Moreover, it will be interesting to see how Member States which have implemented VAT grouping on a ‘whole legal entity’ basis (e.g. Ireland and the Netherlands) will react. How the Skandia and Danske cases will be reflected in the French tax authorities guidelines regarding VAT grouping which will enter into force next year is also much awaited.
Our recommendation is that businesses should be:
- assessing, where transactions take place within legal entities and whether any establishments of those legal entities are members of a VAT group
- determining the territorial scope of those VAT groups
- obtaining information to identify supplies and determine the VAT liability of those as well as any reporting obligations, should this be required and
- closely following up with any local tax practice developments
Several points, however, remain unclear, which include, whether non-EU VAT groups (e.g. the Swiss VAT group) can affect the VAT treatment from an EU perspective and how this decision will interact with Morgan Stanley and FCE Bank in practice.
If you would like further guidance or insights on this new case please do not hesitate to contact us.
Key contacts
Constant Dimitriou
Director, Indirect Tax
Matthias Höhn
Senior Manager, Indirect Tax
