VAT cases in CJEU: Cost Sharing Groups red carded in banking and insurance sector
On 21 September 2017 the Court of Justice of the European Union (“CJEU”) rendered its judgments in the VAT cases involving DNB Banka (C-326/15), Aviva (C-605/15), and EC vs. Germany (C-616/15). The CJEU decided in these cases that the cost sharing exemption (“CSE”) exemption is only applicable to cost sharing groups (“CSG”) in which the members perform activities in the ‘public interest’ or non-economic activities. Unfortunately, the CJEU stops short of answering the other questions, particularly with regard to cross-border CSGs and transfer-pricing adjustments, etc., which had the potential of providing guidance for organisations confronted with such issues in recent years.
26 September 2017
Key questions for the CJEU
The most interesting questions before the CJEU were the following:
- Whether the cost sharing exemption only operates as an extension to the ‘public interest’ exemptions in the VAT Directive, and could not be extended to financial services and insurance businesses.
- Whether the exemption can apply to CSGs that span different jurisdictions within the EU, or should be limited to a purely national scope.
- The criteria for establishing that the CSE gives rise to distortions of competition
1. CSE only applicable to the public interest exemptions in the VAT Directive
The CJEU decided that the CSE only operates as an extension to the ‘public interest’ exemptions in the VAT Directive, and is not available to businesses in the exempted banking and/or insurance sector. This follows from the context and the purpose of the provision on the VAT exemption. The CJEU considers that the CSE provision is included in the chapter, entitled “Exemptions for certain activities in the public interest”. That heading indicates that “exemptions for other activities” do not fall under the scope of the CSE.
2. Admissibility of the cross-border application of the CSE remains unclarified
The CJEU stops short of answering the question whether the CSE is applicable in cross-border cases. This aspect of the CSE remains unclarified.
3. Member States not allowed to limit CSE to specific sectors
In the Commission vs. Germany case, the Court decided that the exemption’s scope may not in general terms be restricted to certain “public interest” professions, e.g. healthcare professions; the exemption must also extend to other exempt transactions in the public interest (e.g. welfare and social security, education, sport and culture).
It is possible for the national legislator to lay down rules which are easily managed and supervised by the competent authorities to determine distortions of competition. However, those conditions must not go so far that they affect the definition of the content of the CSE exemption. According to the CJEU this was the case as Germany had determined to exclude all sectors of activity from benefiting from the exemption apart from health care professions.
In case the assessment to determine the condition relating to the absence of distortions of competition is complex, the CJEU seems to keep open the option for tax authorities to restrict the sectors of activity in which the exemption at issue is applicable. According to the CJEU an examination on a case-by-case basis of distortions of competition is necessary.
With this judgment, the CJEU goes against accepted practice in many Member States, including the Netherlands. The VAT exemption for CSGs is frequently applied in the financial and insurance sector. The CJEU’s ruling that this VAT exemption does not apply to the financial and insurance sector will therefore have a huge impact.
The Dutch legislator has determined that certain activities are causing a distortion of competition and has therefore restricted the application of the CSE to certain sectors of activity. In accordance with the CJEU’s judgment, we believe that the application of the Dutch VAT exemption for CSGs to certain sectors of activity has not been correct. As a result the Dutch CSE should be less strict applied.
The Dutch legislator has not examined the condition relating to the presence of distortion of competition for certain activities. The legislator considers that a distortion of competition is present when third parties also perform these activities. In our view this restriction in the application of the CSE is broader than the CJEU’s judgment in the EC vs. Germany case.
The CJEU does not answer the questions whether the CSE is applicable in cross-border cases or when a consideration is paid for the supply of services which goes beyond the expenses incurred. These aspects of the CSE remains unclarified.
Deloitte webinar coverage
On 29 September 2017 at 10:00 pm CEST, there will be a seminar, in which Deloitte experts from the Financial Services and Public Sector industries will discuss these CJEU judgments and their implications. There is a possibility to ask questions via chat and e-mail. The webinar will be in Dutch.
For registration for this webcast please use this link.