Internal supplies in a VAT group are out of the scope of VAT: ECJ ruling C-184/23 of 11 July 2024, "Finanzamt T"

Facts and results of the first ruling

A foundation governed by public law was held a university with a university hospital. As far as the university hospital was concerned, it carried out an economic activity. However, the education of students was carried out in the exercise of the foundation´s powers as a public authority.

The foundation was the controlling company of U-GmbH, which provided the foundation with, among other things, building cleaning services that covered both the hospital and the lecture theatres, i.e. were purchased for both the economic and the public areas of the foundation.

In response to the first submission, the ECJ ruled in a judgement dated 1 December 2022, C-269/20, Finanzamt T, that it is compatible with EU law if the taxable person under German law is not a VAT group but the controlling company. Furthermore, the ECJ denied a free transfer of value if, as in this case, the economic part of the tax group provides a supply to the public part.

The ECJ´s ruling was unclear about the Advocate General's thesis that internal supplies could be VAT taxable in the case of a VAT group.

Considerations of the BFH in the context of the second referral

In its order for reference of 26 January 2023, V R 20/22, the V. Senate deals in detail with the various aspects that must be taken into account when interpreting the VAT Directive insofar. Some of these are mentioned here:

When Germany introduced the VAT group, the VAT system did not yet provide for input VAT deduction. The non-taxability of internal transactions was therefore absolutely necessary in order to avoid tax accumulation within related taxable persons. With the introduction of the input VAT deduction, the objective reason for the non-taxability of internal supplies could therefore have ceased to exist.

The tax group also pursues the goal of administrative simplification. However, this does not require the exclusion of internal transactions, as this administrative simplification ultimately lies in the fact that only a single VAT return has to be submitted for the entire VAT group.

Whether the VAT Directive's VAT group regulation also aims to simplify substantive law by removing internal transactions from the scope of VAT appeared questionable to the V. Senate, because if the recipient of the internal supply is not entitled to deduct input VAT, the non-taxability of internal transactions would in fact lead to non-taxation. As some Member States have made use of the authorisation to introduce a VAT group, while others have not, this could lead to distortions of competition within the EU. The V. Senate therefore also wanted to clarify whether it is relevant for the taxability of internal transactions whether the recipient of the service is authorised to deduct input VAT.

Decision of the ECJ in the second preliminary ruling procedure

Now, with the BFH's second attempt, the ECJ has given a clear answer. The treatment of a VAT group as a single taxable person under the second subparagraph of Article 4(4) of the Sixth Directive precludes members of the VAT group from continuing to submit VAT declarations separately and from continuing to be identified, within and outside their group, as individual taxable persons, since the single taxable person alone is authorised to submit such declarations – this statement was already made in the judgement of the first referral procedure, but opinions were divided among experts on the question of whether this clearly excludes intra-group transactions from the scope of VAT.  Now, however, the ECJ explicitly concludes that an internal supply can therefore not fall within the scope of VAT.

It also referred to the VAT Committee, which had already taken the same view on 22 November 2021. Although the decisions of the VAT Committee are binding neither for the ECJ nor for the EU Member States, the ECJ regards them as an aid to interpretation. In a communication from the EU Commission to the European Parliament and the Council (COM [2009] 325 final), it also came to the conclusion that intra-group supplies of goods and services do not exist with regard to VAT.

The ECJ dismissed the BFH's argument that the non-taxation of internal transactions can lead to distortions of competition within the EU if the recipient is not entitled to deduct input VAT, essentially stating that neither the first ruling in the Finanzamt T case nor the ruling in the Norddeutsche Diakonie case said anything about this. It is true that the risk of tax losses was an issue there. However, the question was whether the Member States, rather than the VAT group, were allowed to designate the VAT group as the taxable person  – this was permissible if it did not result in the risk of tax losses. Accordingly, internal transactions are not taxable even if the recipient of the service is not authorised to deduct input tax.

Classification

The number of cases that must be submitted to the ECJ a second time due to an unclear answer to the questions referred is increasing. This is a major nuisance not only for the referring courts, but also for taxpayers and consultants.

As far as the tax group is concerned, things should now be calm again: In Germany, everything remains as before, as the status of the controlling company as a taxable person has been clarified and the non-taxability of both internal supplies and supplies from the economic to the non-economic area of a tax group has now also been confirmed. Taxable persons can therefore continue to use the VAT group to optimise input tax and there is no threat of time-consuming and costly correction procedures. 

Even the tax authorities can breathe a sigh of relief. The BFH had attempted to take precautions in the event that the ECJ had declared internal transactions to be VAT taxable and had already stated in the order for reference that this was compatible with the current wording of sec. 2 para. 2 UStG (German VAT Code) and that the provision could be interpreted in accordance with EU law in this sense. Although, according to this provision, members of a VAT group are "not independent", this is only aimed at the joint tax return. The V. Senate also did not contest the fact that, according to the wording of sec. 2 para. 2 UStG, the effects of the VAT group are "limited to internal supplies between the parts of the company located in Germany". This was not intended by the legislator to establish the non-taxability of internal services, but only to restrict the VAT group to Germany. Nevertheless, the tax authorities can also be relieved that everything remains the same.