Tax news for financial institutions

In its ruling of March 11, 2021 (C-812/19, Danske Bank), the CJEU confirmed that where transactions take place between establishments of the same legal entity, in order to analyze whether VAT implications will arise, consideration must be given to their VAT grouping status. If one or both establishments are in a VAT group, then by extension they should be treated as separate taxable persons. Those transactions, therefore, need to be considered within the scope of VAT.

So the CJEU has extended the rules (whereby a transaction between a branch and its head office may be subject to VAT) from the Skandia case (C‑7/13, where a branch was in a VAT group but the head office was not) to transactions where the head office is a part of a VAT group, but a branch is not. This situation is particularly important in case of Poland, because Poland has not implemented any VAT grouping provisions (although there are plans to do so – please refer to our newsletter from November 2020).

So far, Polish tax authorities have not followed this interpretation - if the headquarters are in a VAT group, but the branch is not (this is the so-called reversed Skandia case), the general terms have applied and there has been no taxable supply between a branch in Poland and its headquarters abroad even in the case of headquarters being a member of a VAT group. This standpoint should have been changed, once the CJEU ruling had been issued.

The impact on Polish branches of financial institutions (which have not secured their VAT positions by means of individual tax rulings) may be significant. If the head office is in a VAT group, all transactions between a branch and the head office must be considered for VAT purposes and cannot be disregarded. If a branch has acquired services, it may result in VAT arrears on the import of services.

On the other hand, in some cases, VAT taxation of a transaction between a branch and its head office may lead to an increase in the amount of deductible input VAT.

In all cases, financial institutions that operate through branches in Poland should analyze the issue.

The Polish Minister of Finance has announced the launch of public consultations on VAT taxation of services provided to mutual funds. Polish authorities want to gather information about the business models used in funds-related outsourcing services.

As a rule, under Article 43.1.12 of the Polish VAT Act (implementing Article 135.1.g of 2006/112/EC Directive), services which consist in the management of funds should be VAT exempt (with no right to deduct input VAT).

The term “management” should include certain activities of administering a fund as well as investment management of assets. But the issue is about the extent to which VAT exemption should be applicable and whether or not the nature or characteristics of services should be taken into account.

Special attention should be paid to the issue of whether services (back-office or middle-office) provided by shared service centers (SSC) to a fund should be treated as VAT exempt (with no right to deduct input VAT) or as VAT-taxable (so that input VAT may be deducted by an SSC). There is no common practice among Polish taxpayers and tax authorities. We are aware of cases where Polish tax authorities challenged the VAT treatment of such services during a tax audit. That may be the reason why the Polish Minister of Finance has announced the launch of public consultations on this matter.

VAT taxation of services provided to funds should be analyzed by all shared service centers and asset management companies.