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VAT cost sharing exemption also applicable on financial and insurance sector according to Advocate General

On 5 April 2017, Advocate General (AG) Wathelet of the Court of Justice of the European Union (CJEU) released his opinion in the case Commission / Germany (C-616/15). The AG concludes that the German domestic law restricting the cost sharing exemption (CSE) to professionals in the healthcare sector is narrower than the VAT Directive has intended. He suggests that the CSE should be available for all sectors, including financial services and insurance. The AG’s opinion in Commission/Germany is the fourth opinion in recent months on the scope of the CSE, following Commission/Luxembourg (C-275/15), DNB Banka (C-326/15) and Aviva (C-605/15).

13 April 2017

Dutch version

Cost sharing exemption

Based on the VAT Directive the EU Member States are obliged to implement the CSE, subject to certain conditions. The CSE exempts services from a designated provider to its members, which must be taxpayers with exempt and/or non-business activities. These services must be directly necessary for each member’s exempt/non-business activities and must also be delivered at cost under the exact reimbursement criterion, provided that the application of the CSE does not cause distortion of competition.

The CJEU has considered the CSE and its complex criteria on three occasions in the past. Three more cases, having an overlap with the current cases, are currently before the CJEU: Commission/Luxemburg (C-274/15) and DNB Banka (C-326/15) and Aviva (C-605/15).


The Commission/Germany case

The German law restricts the CSE to the supply of services by independent groups of persons whose members carry on activities or professions in the health sector (doctors, paramedical professionals or activities in the hospital and medical care sector.)

The European Commission holds the view that the CSE should apply to taxpayers from all professions and sectors provided that their activities are exempt from VAT. The Commission argues that the interpretation of the CSE in the German law is incompatible with the VAT Directive. Neither the wording nor the objective or the drafting history of that article justifies such a restriction of the exemption from VAT to certain professional groups. On the contrary, the exemption should be granted to independent groups of persons in any profession, provided their members are carrying on activities which are exempt from VAT.

The European Commission also holds the view that the German position could not be permitted on a general distortion of competition principle, as the possible existence of a distortion of competition if the exemption is applied can and should be assessed only in the light of the circumstances of the individual case. It is not possible make a general finding that distortions of competition exist for the supply of services by certain professions.


Opinion AG Wathelet

The main conclusions of AG Wathelet are as follows:

  • The CSE operates as an extension to the public interest exemptions and is also available to businesses in the exempted banking and/or insurance sector. It cannot be restricted to particular sectors;
  • The objective of the CSE is essentially seeking to avoid members of a cost sharing group from having to pay VAT on services provided by those in the group, which they would ultimately not be able to recover. The AG comments that the objective of the exemption justifies it being applied to all group members who are undertaking exempt activities, including those in the banking and insurance sectors who undertake exempt activities. Therefore, the objective of the exemption cannot justifiably be interpreted as being restricted to the health sector.
  • The distortion of competition can only be determined on a case by case basis, rather than taking a blanket approach in the enactment of local legislation. Only an examination in each individual case makes it possible to determine the exemption from VAT, with a view to refusal, ‘if there is a genuine risk that the exemption may by itself, immediately or in the future, give rise to distortions of competition’.

It is noteworthy that AG Wathelet’s conclusion is diametrically opposed to the conclusions of AG Kokott of 1 March 2017 in the Latvian case DNB Banka (C-326/15) and the Polish case Aviva (C-605/15). In these conclusions she takes the view that the CSE only applies to certain activities in the public interest and does not apply to work done by companies which exempt any financial and/or insurance.


Practical consequences

The AG’s opinion functions as an advice to the CJEU. Ultimately the judgments in this case and the Commission/Luxembourg (C-275/15), DNB Banka (C-326/15) and Aviva (C-605/15) cases are the CJEU’s own to make, and it is very difficult to predict how it might rule in these cases.

The judgment in the Commission/Luxembourg (C-275/15) is scheduled for 4 May 2017 and the judgments in the other cases are expected in the next few months. Together they should clarify which sectors can rely on the CSE under CJEU case law and in which geographical and financial circumstances.

The AG’s opinion does not deviate from the current view and the application of the CSE in the Netherlands. Should the CJEU follow this opinion, the scope of the CSE is not likely to be affected for the insurance sector and the financial services providers.

From a Dutch perspective, certain services are considered to be distorting competition and therefore are excluded from the scope of the CSE. The current interpretation of the CSE in the Netherlands is arguably too limited looking at the AG’s opinion. As a result, the scope of the exemption possibly needs to be broadened in accordance with the VAT Directive. Again, this depends on the outcome of the other three pending cases on the application of the CSE.

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