In its ruling of 11 March, the European Court of Justice (ECJ) decided that services rendered by the Danish head office of the Danske Bank to its Swedish branch attract VAT. This was based on the fact that the Danish head office had joined a Danish VAT group. As a result of this decision intercompany cross-border services are inside the scope of VAT, if either the head office or the branch are a member of a VAT group. This may result in VAT leakage. We will discuss this ruling and its impact in practice.

Danske Bank

Danske Bank's head office in Denmark has entered into a VAT group with Danish group companies. For the use of a computer platform, the head office has charged costs to its Swedish branch. The question referred to the ECJ was whether these intra group recharges of costs are subject to VAT.

The ECJ ruled that the head office and its branch are considered separate taxable persons for VAT. The Danish group companies of Danske Bank including the head office formed a single VAT taxable person. Since VAT grouping is limited to local entities, the Swedish branch could not be part of the Danish VAT group. Following this reasoning, the services rendered to the Swedish branch are subject to VAT. Assuming the branch cannot fully recover input VAT, this leads to VAT leakage.

Skandia

The ECJ's ruling does not come as a complete surprise. In the Skandia case of 2014 (C-7/13), the ECJ ruled in a ‘reverse' situation. The Swedish branch was part of a VAT group without its foreign head office. As a result, the services rendered by the US head office to the Swedish branch were subject to VAT. Based on the Danske Bank case, it is now clear that in case of a VAT group all services between a head office and its branch – and vice versa – fall within the scope of VAT.

Impact Belgian Practice

After the ECJ judgment in the Skandia case, the Belgian VAT administration has introduced the application of these principles into Belgian VAT legislation with its decision of 10 April 2015 (E.T.127.577). This decision confirms that taxable transactions performed by a non-Belgian established head office to its Belgian branch which is part of a Belgian VAT group are subject to VAT. The same reasoning applies when transactions are performed by a Belgian branch to a non-Belgian branch of the same company, when either one of these branches belongs to a VAT group.

It remains to be seen whether the Belgian VAT administration will also explicitly implement the Danske Bank principles but, in light of the aforementioned, we believe it is likely that latter decision would be amended or a new decision would be issued.

In addition, the ECJ seems to indicate that members of a VAT group cannot be identified by individual VAT numbers. This seems not to match with the current Belgian practice of VAT grouping which provides for a global VAT number for the VAT group, but whereby the members keep their individual VAT number for their transactions with third parties, as well as for the filing of IC sales listings by each member. The question arises whether this Belgian practice would be adjusted in view of this difference.

Impact Dutch Practice

Based on written guidance of the Dutch state secretary, the principles of Skandia and Danske bank are not applied in Dutch practice. Under Dutch case law, a foreign head office and its branch are ‘absorbed' in the VAT group.

In addition, the ECJ clearly restates that members of a VAT group cannot submit separate VAT returns nor have an individual VAT number. This seems not to align with Dutch current practice in which members of a VAT group keep their individual VAT number for handling with third parties. Moreover, upon request, members of a Dutch VAT group can file separate VAT returns.

The question arises whether the Dutch practice will need to be adjusted in view of these aspects.

Impact Luxembourg Practice

This new decision from the ECJ hits the nail of the opinion issued by the VAT Committee on what was then the bill of law for the implementation of the VAT group in Luxembourg.

In particular, the ECJ reinforces the impact of the Skandia case and, in that sense, the comment made by the VAT Committee concerning the uncertainty of the draft bill on the relation between a head office and a branch. This new decision seems to bring an end to potential interrogations on this specific point and fills the void of the Luxembourg rules in that regard.

In addition, the ECJ clearly restates that members of a VAT group cannot be identified by individual VAT numbers, and file individual VAT returns. This comes in confirmation of previous comments questioning the validity of the Luxembourg rules which provide for a global VAT number for the group, but also for auxiliary VAT numbers to be used by the members in their transactions with third parties, as well as for the filing of European sales listings by each member.

What to do now?

If your business has foreign branches and VAT grouping is applied, we strongly recommend assessing the practical impact of the ECJ's ruling. When timely and appropriate measures are taken, your business structure can be optimized preventing possible VAT exposure.

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.