Taxable exchange of supplies between the headquarters and a permanent establishment - ECJ-ruling "Danske Bank" (C-812/19)

ECJ: The VAT group is the taxable person

The headquarters of Danske Bank belonged to a VAT group in Denmark. The headquarters charged costs to a Swedish permanent establishment for the use of an IT platform. The ECJ concluded that this was a transaction subject to VAT, which was subject to the reverse charge mechanism in Sweden.

The ECJ assumes that the VAT group itself is the taxable person. Since a VAT group is limited to the territory of a Member State, the Swedish permanent establishment cannot be a member of the VAT group and must therefore be regarded as an independent taxable person distinct from this VAT group. Thus, an exchange of supplies is possible in this respect.

German tax administration: The head of the VAT group is the taxable person

This approach fundamentally contradicts the understanding prevalent in Germany and laid down by the tax authorities in Section 2.9 (2) Sentence 2 of the administrative guidelines to the German VAT Code. Accordingly, in the case of a VAT group, the taxable person is not the VAT group itself but rather the head of the VAT group. The integrated companies are regarded as dependent parts of the head of the VAT group. This means that foreign permanent establishments of the head of the VAT group are also part of the head of the VAT group because the permanent establishment is not an independent legal entity vis-à-vis the head of the VAT group. Thus, from a German perspective, there is no exchange of supplies subject to VAT. 

Recommendation: Check to find the most favourable option, but prepare for changes in the law

Entrepreneurs should carefully examine the structuring of the tax group and, if facts comparable to the ECJ ruling exist, decide which legal approach is more advantageous for them. This is particularly important when the case involves companies lacking a full input VAT deduction. As long as the administrative guidelines to the German VAT Code are not amended accordingly, the legitimate expectations are protected in this respect. However, it is also possible to refer directly to the ECJ case law if it is more favourable in the case at hand. If the case involves a cross-border situation, the companies involved must always check the VAT treatment abroad, in particular with regard to the ECJ rulings in "Skandia America" and "Danske Bank". It should also be noted that the BFH (Germany’s Federal Court of Finance) has referred the question of whether the taxable person is the head of the VAT group or the VAT group itself to the ECJ for a preliminary ruling. The ECJ's decision may soon force a corresponding amendment to Section 2 of the UStG (German VAT Code). In addition, there are still interesting efforts to transform the tax group as a whole into an application tax group.

Dated: May 5, 2021