VAT on secondment of staff

The Court of Justice of the European Union (CJEU) delivered its judgement in case C-94/19 San Domenico Vetraria SpA v Agenzia delle Entrate, concerning the VAT treatment of the secondment of staff by a parent company to its subsidiary.

Background

The case concerned the secondment of a director from the parent company (Avir) to one of its subsidiaries (San Domenico Vetraria) in Italy. A provision in Italian VAT law specifically excludes from VAT any lending or secondment of staff, when this is done on a pure-cost basis.

The CJEU was requested to rule on whether the lending or secondment of staff by a parent company to its subsidiary, in respect of which the subsidiary merely reimburses the related costs, is to be regarded as a supply falling outside the scope of VAT. The CJEU ruled against this and indeed confirmed that the lending or secondment of staff by a parent company to its subsidiary, carried out in return for the mere reimbursement of the related costs, nevertheless give rise to a supply of services falling within the scope of VAT, provided that the amounts paid by the subsidiary to the parent company and the lending / secondment of employees are interdependent.

The Court concluded that the secondment was carried out on the basis of a legal relationship of a contractual nature between parent and subsidiary and further held that if it were to be established that the payment was a condition for the secondment of the employee, it would have to be held that there is a direct link between the two. In this regard, the CJEU maintained that the fact that the amount of the payment merely reimbursed the associated costs does not undermine the existence of this direct link.

Practical impact in Malta

We consider that this judgement may impact the VAT position of Maltese businesses in the following principal ways:

i) Secondment of staff

The secondment or lending of staff carried out for consideration should typically give rise to a supply of services which are in principle subject to Malta VAT, even when carried out on a pure cost basis (i.e. with no mark-up whatsoever).

ii) Allocation of shared personnel costs

In the local context, primarily within groups of companies, we frequently encounter situations involving shared personnel, i.e. where staff is in effect jointly employed by two or more entities forming part of the same corporate group under a cost-sharing arrangement.

Traditionally, such staff cost-sharing has typically been considered as a non-economic activity and thus falling outside the scope of Malta VAT, on the basis that the activities of employees do not qualify as economic activities for VAT purposes.

Following the CJEU’s judgement, in our view the allocation of shared personnel costs may still potentially fall outside the scope of VAT in so far as the related entities which benefit from the employee’s activities and bear their corresponding share of the pure employee costs are in effect joint employers of the employee. In this respect, we strongly believe that it is increasingly important to document and/or review the contractual arrangements in place in order to ensure the correct VAT treatment.

iii) The provision by an entity of an individual to act as holder of an office

Where an individual(s) is provided by a corporate services provider (CSP) or other entity to act as a member of the board of directors of a client of the CSP or to hold some other office, and the client remunerates the CSP as opposed to the individual director, this was typically considered by the Malta tax authorities as falling outside the scope of Malta VAT, again on the basis that the activities of employees (which for VAT purposes are defined to include holders of an office, such as directors) do not qualify as economic activities for VAT purposes.

Following the CJEU’s judgement, we understand that such transactions shall be regarded by the Maltese VAT authorities as constituting supplies which are in principle VAT taxable. Accordingly, the provision by an entity of an individual to act as director or other officer of another company shall no longer be regarded as a supply falling outside the scope of Malta VAT and shall instead be liable to VAT.

In view of these recent developments and their potential VAT impact on Maltese business, we strongly recommend carrying out a review of any such arrangements that your business may have, as well as a re-assessment of the VAT implications thereof. For assistance in carrying out this assessment, or to discuss the potential consequences of the CJEU’s judgement for your business, please do not hesitate to contact us.