VAT cost sharing exemption not applicable on financial and insurance sector according to Advocate General
On 1 March 2017, Advocate General (AG) Julianne Kokott of the Court of Justice of the European Union (CJEU) released her opinions in two cases, DNB Banka (C-326/15) and Aviva (C-605/15), concerning the cost sharing exemption that should allow a cost sharing group (CSG) established by organizations that cannot recover VAT to exempt supplies it makes to its members. In the AG’s view, the exemption should only apply to public interest exemptions and is not available to financial services organisations or the insurance sector. Furthermore, AG Kokott said the exemption could not apply to cross-border CSGs.
9 March 2017
Cost sharing exemption
Based on the VAT Directive the EU Member States are obliged to implement the CSG exemption, subject to certain conditions. The CSG exemption 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 CSG exemption and its complex criteria on three occasions in the past. Two more cases, having an overlap with the current cases, are currently before the CJEU: Commission/Luxemburg (C-274/15) and Commission/Germany (C-616/15).
The DNB Banka case
In the Latvian case of DNB Banka, DNB Banka is part of the DNB Banka group and provides exempt financial services. DNB Banka was supplied financial services, IT services and the transmission of software licenses by other companies in the group, established both inside and outside the EU. By way of consideration, DNB Banka was invoiced in each case by the companies in the group for the costs for the supply of financial and IT services together with an uplift of 5%.
The Aviva case
In the Polish Aviva case, the Aviva Group provides insurance services in Europe. The Group is considering setting up a series of shared-service centres in selected Member States of the European Union and pursuing that activity in the form of a European Economic Interest Grouping (‘EEIG’). The shared-service centres will supply services that are directly necessary for the exercise of insurance activities by members of the Group (of the EEIG). In particular, these may be HR services, financial and accounting services, IT services, administrative services, customer service facilities or new product development services.
Opinions AG Kokott
The local tax authorities in the different EU Member States interpret the CSG rules differently than DNB Banka and Aviva. Therefore the national judges have referred the cases to the CJEU.
The main conclusions of AG Kokott are as follows:
- The CSG exemption operates as an extension to the public interest exemptions and is not available to businesses in the exempted banking and/or insurance sector;
- The CSG exemption cannot apply to cross-border CSGs;
- EU Member States are not allowed to fill in the criterion requiring that there should be no distortion of competition with their own insights. In principle it must be assumed that the formation of a group will not give rise to a distortion of competition. The criterion requiring that there should be no distortion of competition serves to avoid abuse. Indications that the exemption is being applied inappropriately may be that:
- the group supplies the same services for consideration to non-members;
- the primary purpose of the group’s formation is simply to optimise the input VAT burden rather than to establish reciprocal cooperation with a view to avoiding a competitive disadvantage;
- the group does not supply any services tailored to the specific needs of its members;
- The cost sharing exemption is not applicable where a consideration is paid for the supply of services which goes beyond the expenses incurred. A flat-rate cost uplift is not allowed.
The AG’s opinions function as an advice to the CJEU. The CJEU first needs to decide in two other cases having an overlap with the current cases.
The opinions deviate on important points from the current view and the application of the CSG exemption in the Netherlands. Should the CJEU follow these opinions, the scope of the CSG exemption is likely to be reduced significantly 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 CSG exemption. The current interpretation of the CSG exemption 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.