Tax & Legal

Following yet another preliminary ruling regarding the German regulations of consolidated tax groups for VAT purposes the European Court of Justice held that a VAT group’s internal transactions do not fall within the scope of value added tax and remain non-taxable.

In a case previously dealt with by the European Court of Justice the Supreme Tax Court saw the need for yet another preliminary ruling regarding the current German VAT situation of non-taxable intra-group transactions. In his Opinion the Advocate General takes the view that a VAT group’s internal transactions do not fall within the scope of value added tax.

In two current judgments the Supreme Tax Court has commented on the German VAT Group requirements following preliminary rulings which the court had referred to the ECJ in 2109 and 2020 and on which the ECJ provided answers in its judgments of December 2022. In one decision the Supreme Tax Court changed its case law on financial Integration. In the second case, the Supreme Tax Court saw the need for yet another preliminary ruling from the ECJ regarding the VAT situation of intra-group transactions.

France has chosen to exercise the option of Article 11 of the VAT Directive as of 1 January 2023 and to provide for the establishment of a VAT group if certain requirements are met. With this new optional regulation in force France joins most other EU countries providing for one VAT entity for the whole group and a single VAT registration in this respect.

Today, the European Court of Justice (ECJ) published two long-anticipated decisions dealing with German VAT groups. Following our preliminary, quick review of the decision, a “crash” of the current VAT group concept has not transpired. Whilst on the one hand, the financial integration in a VAT group may be eased in future, on the other hand, the ECJ addresses an “independence” of the VAT group affiliates – the practical impact of which is unclear for the time being.

In a recent case, the Supreme Tax Court decided that the liability of a controlled company (subsidiary) in a tax consolidation group (“Organschaft”) for the tax liability of its controlling company (parent in the Organschaft) is not necessarily limited to such taxes which arose during the existence of the Organschaft. The controlled company may be liable to the extent that the parent is required to pay tax on the controlled company’s turnover and may deduct input tax amounts from invoices for services obtained by the controlled company.

Pending before the ECJ are currently two questions of relevance regarding the German regulation of consolidated tax groups for VAT purposes (VAT group). In her Opinion on both cases the Advocate General takes the view that the sole taxable person is, in principle, the VAT group itself and not (as under German VAT law) the controlling member of the group.

The ECI held that it is from the outset not compatible with EU-Law if the possibility for a partnership to form a VAT group - in addition to the controlling company – is limited to those partners in the partnership whose business is financially integrated into that of the parent. Such a restriction can only be justified by a specific need to prevent abuse.

The ECJ held that services by an EU head office, who is part of a VAT group, to its foreign branch are in general subject to VAT if the cost of such services are charged to the branch. For VAT purposes head office and its branch located in another Member State must be regarded as separate taxable persons.

Following decisions of the European Court of Justice and the German Supreme Tax Court the Federal Finance Ministry has issued guidelines on the VAT grouping and the input VAT deduction for holding companies. In a special VAT Newsflash our tax experts take a closer look on the situation as a whole.

The Supreme Tax Court has held that a GmbH & Co. KG can rank as a corporation for the purposes of entitlement to membership as a subsidiary of a VAT group.

The ECJ has held that German provisions excluding partnerships from VAT groups altogether and only admitting closely held subsidiaries are in conflict with the Sixth Directive and can only be justified by a specific need to prevent abuse.

An ECJ advocate general has suggested that management holding companies be allowed an input tax deduction in proportion to the taxable/total turnover of their subsidiaries and that partnership subsidiaries should not be excluded from joining a VAT Group.

The finance ministry has amended the VAT group provisions of its VAT Implementation Decree to take account of recent European and Supreme Tax Court cases.

The Supreme Tax Court has asked the ECJ for a ruling on the determination of the amount of deductible input VAT of holding companies with taxable outputs and on the conditions for joining VAT groups.

The ECJ has followed up its April 9 judgment with a further six decisions against the Commission on the same lines. It has also held that a member state may restrict a VAT group to a specific industry in the interests of curbing evasion and fraud.

The ECJ has upheld Irish legislation allowing a non-business entity, such as a holding company, to be a member of a VAT group.

The finance ministry has redefined the organisational integration requirement for a VAT group.

The finance ministry has issued a decree to the effect that the sale of shares in a company can be non-VAT-able as the sale of a business, if the subsidiary meets the economic integration qualification for joining a VAT group with the acquirer.

The Supreme Tax Court has held that a subsidiary is too independent to join a VAT group if its sole director is able to block his own removal from office.