Where there is ‘unity of decision-making’, national tax authorities cannot refuse to recognise the group, even if this reduces their tax revenue.
Intra-group transactions are exempt from VAT, according to a recent ruling by the Court of Justice of the European Union (CJEU). The exchange of goods or services between different business units does not have to be invoiced, provided that the companies have applied to the national tax authorities for consolidation.
‘It is an optional regime that must be applied for’, and the first thing to do is to analyse whether it is worthwhile for them to do so, as consolidation is not always beneficial, Ludmila Frangu, tax director at auditing and consultancy firm Bové Montero y Asociados, tells EXPANSIÓN.
What the fourth chamber of the CJEU has done in a recent ruling in case C-184/23 is to make it clear that, where Member States have implemented the EU VAT Directive, tax authorities may not refuse or split up the consideration of a group in cases where the application of the exemptions results in less tax being collected.
In this way, the ruling supports the consideration of activities between subsidiaries of the same group, as well as between independent legal entities that are firmly linked at a financial, economic and organisational level, as a single taxable person, known as a ‘VAT group’.
The CJEU has ruled on a long-running dispute. It began in the 2005 tax year, when a foundation established under public law claimed exemptions in its VAT returns which the German tax authorities (Finanzamt) considered to be unlawful.
The main purpose of this foundation was to run a university with a health centre. The supplier of the health centre was a company in the group, legally organised as a private limited company (GmbH), the most common legal form in Germany.
For profit.
The parent company was not for profit, but the subsidiary was. The subsidiary was responsible for cleaning, laundry and patient transport at the health centre. As it was an intra-group transaction, the foundation did not charge VAT on the services provided by the company.
For the German tax authorities, exemptions were limited to activities ‘in the interest of the foundation’. ‘It understood that the services were not subject to rebates’ because the subsidiary, unlike the dominant company, had ‘profit-making purposes’, explains Frangu.
The ruling makes it clear that the criterion that state tax authorities should take into account is that they can consolidate VAT returns ‘where there is a unity of decision’, says the expert. This principle should always be taken into account, even if there are profit and non-profit entities within a group.
What groups of companies should do is to assess whether it is worthwhile for them to consolidate VAT and, if so, to formally request it from the tax authorities. It is an ‘optional scheme’, but once formally recognised, it must be applied at all times. The ruling confirms a criterion already established by the CJEU in previous rulings (162/07, 141/20, 269/20) and now extended to the different types of companies within the same group
Common system.
Frangu also clarifies that VAT and corporate income tax are subject to different rules, which extends to exemptions and rebates. In the case of VAT, account must be taken of EU Directive 2006/112, which updated the common rules for the application of the indirect surcharge, which has a long history in the EU.
It was first introduced by France in 1954, and it was subsequently extended to other countries. In 1967, EU members agreed in Directive 67/228 to replace their national systems with a common framework, which has been updated in subsequent regulations.
THE RULING IS BASED ON THREE PRINCIPLES:
- Exemptions must be applied even if a group has profit and non-profit subsidiaries.
- The ruling resolves a legal dispute that began in 2005 between the German tax authorities and a foundation.
- Companies must ask the Treasury to consolidate VAT, but it is not always worthwhile for them to do so.
Official source: newspaper Expansión
