The traditional interpretation of VAT law in the EU has hitherto
been that transactions within the same corporate entity – for
example between head office and an overseas branch – are not
taxable.
However, in the case of Skandia America Corporation (case C-7/13)
the Swedish VAT authorities questioned the validity of this
approach in the circumstances where a branch that is part of a VAT
group is subject to a charge for services from its headquarters
outside the EU. The case was referred to the Court of Justice of
the European Union (CJEU) to decide whether supplies of externally
purchased services from a company's main establishment in a
third country to its branch in a Member State, with an allocation
of costs for the purchase to the branch, constitute taxable
transactions if the branch belongs to a VAT group in the Member
State.
In its 2009 "Communication from the Commission to the Council
and the European Parliament on the VAT group option provided for in
Article 11 of Council Directive 2006/112/EC on the common system of
value added tax" the European Commission argued that "by
joining a VAT group, the taxable person (the overseas branch in the
Skandia America case) becomes part of a new taxable person, the VAT
group and, consequently, dissolves itself for VAT purposes from its
fixed establishment located abroad."
The CJEU gave its decision on 17 September 2014. It agreed with the
view of the European Commission and held that a VAT group is a
single taxable person, and that the supply of services between the
head office and its branch that is a member of a VAT group
constitutes a supply to the VAT group as a whole and not to the
branch. The supplies are made for consideration and are therefore
taxable.
Following this decision, transactions between a head office and a
branch are subject to VAT if the branch or the head office is part
of a VAT group.
The CJEU decision has multifarious implications. It could give rise
to additional non-deductible VAT in the case of a business with
limited right to deduct input VAT (for example in the financial and
insurance services sectors). On the other hand, there may be
businesses in which the financial impact of the decision is
positive, in that it increases the amount of deductible input tax.
In any event affected businesses will need to make changes to their
invoicing, reporting and information set-up procedures.
As the judgment applies in all Member States and for cross-border
transactions, and in the light of Cyprus's wide use as a
holding and finance centre, it would be prudent to review its
potential impact wherever there are VAT groups that include
branches or head offices as members.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
