The Supreme Administrative Court of Sweden recently lodged a request for a preliminary ruling with the Court of Justice of the European Union (CJEU), on whether a branch and its principal establishment (that is, its headquarters in another jurisdiction), where the latter is part of a VAT group, are considered independent parties for VAT purposes.
VAT enthusiasts will know that, over time, CJEU case law has steadily clarified the proper treatment to be given to transactions between a branch and its principal establishment (or headquarters). Among others, (i) the FCE BANK judgment confirmed that a branch and its principal establishment are not separate and independent taxable persons, but rather the same taxable person and that, therefore, transactions carried out between the two parties should not be taken into account for VAT purposes; and, on the other hand, (ii) the Skandia judgment added that, if the branch formed part of a VAT group, the branch and its headquarters had to be treated as independent parties (i.e. separate taxpayers).
One question yet to be addressed is whether the principles applied in the Skandia judgment can be interpreted in reverse. In other words, can a branch and its headquarters be considered independent parties/taxpayers, if the latter is part of a VAT group? It is precisely this question which the Supreme Administrative Court of Sweden has referred to the CJEU (Danske Bank case, C-812/19).
Danske Bank, which has its headquarters in Denmark and belongs to a Danish VAT group, operates in Sweden through a branch, which doesn’t belong to a VAT group. The Danish head office supplies IT services to its Swedish branch, to which it allocates the associated costs. The question referred is whether this branch constitutes a taxable person, independent of the head office, and if, ultimately, it can be considered a separate taxpayer.
We must pay close attention to the CJEU’s ruling on this issue, to see whether it harmonises the different interpretations which have arisen among Member States following the Skandia case, and which put the EU’s equal treatment principle in jeopardy. The ball is in the CJEU’s court to decide whether transactions carried out between (i) a branch and (ii) its headquarters which is part of a VAT group, are carried out by one taxable person or, on the contrary, between two independent entities.
The results of this judgment, along with those of Le Crédit Lyonnais (C‑388/11) and Morgan Stanley (C-165/17), have a direct impact on international groups, such as financial institutions or insurance companies, which usually operate at a cross-border level with branches or fixed establishments in different jurisdictions and may have certain limitations on VAT deductions because they simultaneously carry out both VAT-exempt and non-exempt transactions.