Intragroup VAT: Key Aspects

The recent ruling by the Directorate-General for Taxation (Consultation V2212-25, of 18 November 2025) clarifies key aspects of the treatment of services provided between a Spanish branch and its Italian head office, which forms part of an Italian ‘VAT group’, and its impact on the pro rata deduction.

The consultation, submitted by a multinational banking entity, concerns a common situation in international groups: a Spanish branch providing advisory services to its head office in Italy, which belongs to a VAT group in that country. Clarification is requested as to whether these transactions should be subject to Spanish VAT, whether the reverse charge mechanism should be applied, and whether they should be included in the Spanish branch’s pro rata deduction.

The DGT begins by recalling that both the Spanish branch and the Italian parent company are considered entrepreneurs or professionals for VAT purposes. Therefore, in principle, transactions between the two could be subject to VAT. However, the ruling refers to the case law of the Court of Justice of the European Union (CJEU), particularly the development from the FCE Bank case, in which transactions between the branch and the parent company were not subject to VAT because they were considered a single taxable entity, to the Skandia and Danske Bank cases.

In the latter cases, the CJEU clarified that, when one of the parties (either the parent company or the branch) is part of a VAT group within a Member State, the relationship between them is considered to be between different taxable persons. This means that the transactions may be subject to VAT. In this context, the DGT concludes that the inclusion of the Italian parent company in a VAT group means transactions between the Spanish branch and the parent company must be considered as being carried out between independent entities for VAT purposes.

The key issue is the location of the taxable event. According to Article 69 of the VAT Law, the advisory services provided by the Spanish branch to the Italian parent company are not considered to have been carried out in a territory where the tax applies, since the parent company is established in Italy. Therefore, these services will not be subject to Spanish VAT.

Although services provided to the Italian parent company are not subject to Spanish VAT, the DGT clarifies that these transactions must be included in the Spanish branch’s pro rata deduction calculation. This is because the VAT Law requires both the numerator and denominator of the pro rata deduction to take into account transactions that would give rise to a right of deduction if carried out in a territory where the tax applies. In other words, an intra-group transaction remains relevant for calculating the deduction if the parent company is part of the VAT group. It is therefore less important to clarify whether the entity carries out transactions with sufficient autonomy and independence, as the CJEU Morgan Stanley criteria would not apply when calculating the pro rata.

The DGT ruling establishes the following key points:

– Transactions between the Spanish branch and the Italian parent company, which is part of a VAT group in Italy, must be considered as being carried out between independent taxable persons for VAT purposes.

– The advisory services provided by the Spanish branch to the Italian parent company are not subject to Spanish VAT due to the rule on the location of the taxable event.

– However, although these transactions are not subject to Spanish VAT, they must be included in the Spanish branch’s pro rata deduction.

This means that companies must review and adjust their internal procedures for invoicing and deducting VAT on international intra-group transactions. It is essential to ensure these transactions are included correctly in the pro rata calculation, and that adequate documentation is available to justify their inclusion before the tax authorities.