BFH follow-up decision of Finanzamt T II on VAT groups

Facts and course of proceedings

The Finanzamt T case concerned a foundation as the head of a VAT group with economic and non-economic (sovereign) activities. The subsidiary U-GmbH provided, among other things, cleaning services for both the sovereign and the economic area of the foundation. In the first reference for a preliminary ruling by the BFH (German Federal Fiscal Court), the ECJ ruled that it was compatible with EU law if the taxable person under German law was not a VAT group, but the head of the VAT group. Furthermore, the ECJ denied a free transfer that must be treated as made for consideration if, as in this case, the economic part of the VAT group provides a supply to the sovereign part. However, it had not answered the question of whether internal supplies within a VAT group are taxable with the desired clarity – the Advocate General had brought this idea into play. Therefore, the BFH resubmitted the case with regard to this question. After the ECJ ruled on the question in its judgement of 11 July 2024 (C-184/23), the BFH was able to issue its subsequent decision (judgement of 29 August 2024, published on 5 December 2024, V R 14/24).

Decision of the BFH

Internal supplies provided by a subsidiary company to the head of the VAT group are not taxable, even if the head of the VAT group uses the supply for a sovereign and therefore non-economic activity in the narrower sense in accordance with section 2.3 para. 1a sentence 4 UStAE (administrative guidelines to the German VAT Code). The use of the supply by the head of the VAT group is irrelevant.

The BFH justifies this by stating, among other things, that according to the case law of the ECJ (Commission v Ireland, C-85/11), even non-taxable persons can be included in the scope of the VAT group. Although the wording of sec. 2 para. 2 no. 2 UStG (German VAT Code) does not allow this in Germany, this principle can still be applied: If non-taxable persons can already be part of the VAT group, the effects of the VAT group cannot be limited to supplies that the head of the VAT group uses for economic purposes. There is no "partial independence" of the subsidiary. It was not necessary to decide on the legal consequences if the head of the VAT group provides paid supplies to the subsidiary that the latter uses for non-economic purposes.

With regard to a possible free transfer that must be treated as made for consideration, the BFH states that the non-taxability of an internal supply is not to be equated with gratuitousness. The BFH no longer adheres to its previous case law (V R 30/06 of 20 August 2009, which the tax authorities had endorsed in section 2.10 para. 4 UStAE). There, it had still ruled that if the head of the VAT group used non-taxable internal supplies received from a subsidiary for sovereign and thus for non-economic purposes (non-economic activities in the narrower sense according to sec. 2.3 para. 1a sentence 4 of the administrative guidelines), this would lead to a transfer that must be treated as made for consideration. In the opinion of the ECJ, there is already a lack of gratuitousness, so that the question of whether supplies for sovereign activities are provided for "non-business purposes" does not need to be decided.

Practical categorisation

With this judgement, the sometimes heated discussion about the tricky questions in connection with the VAT group can come to rest. However, the BFH's comments on what should not be decided at this point are a little confusing: whether the internal supply is provided by the head of the VAT group to the subsidiary or vice versa should not really matter. The VAT group upon application is still on the BMF's agenda and is still highly desirable even after this judgement in view of the complexity of this legal institution.