Following the Danske Bank ruling, head office and branch could be seen as separate taxable persons for VAT purposes, but consequences are expected to vary between member states
On 11 March 2021, the Court of Justice of the European Union (CJEU) issued its ruling in case C-812/19 (“Danske Bank ruling“). The case concerned the VAT treatment of the supply of services from a head office, which was part of a VAT group in Denmark, to its branch in Sweden.
The VAT burden on intra-entity transactions for businesses that operate in the EU by using a branch structure has historically been eased by the disregard of head-office-to-branch transactions (as per the decision of the CJEU in FCE Bank, C-210/04). The subsequent decision of the CJEU in Skandia (C-7/13) began to erode the protection offered by the disregard, but left many questions unanswered with respect to how far the principles established in that case should apply.
In Danske Bank, the CJEU confirmed that where a branch or head office is in a VAT group, the head office should be considered as a separate taxable person from its branch such that transactions between the head office and branch should be recognized for VAT purposes. This was because, in the circumstances at hand, the head office was a member of a VAT group in one member state while the branch was situated in another member state, and the effects of VAT grouping should only apply on a territorial basis.
The consequence is that the supplied services should be subject to reverse charge VAT in the member state where the branch is established, i.e., Sweden in this case. The administrative implications of the Danske Bank ruling may be significant for companies operating across borders via branches and with a VAT group in one or more EU member states. Partially exempt businesses in, for example, the insurance or financial sectors, may be required to assess the VAT liability of intra-entity supplies and the application of new reverse charge obligations, and there may be an impact on their VAT recovery and compliance obligations.
The consequences of the Danske Bank ruling are expected to vary across the EU, particularly since the individual member states have varied ways of implementing the VAT grouping rules under Article 11 of the VAT Directive.
The Danske Bank ruling
Danske Bank, which has its headquarters in Denmark, was a member of a Danish VAT group and conducted business in Sweden through a Swedish branch. The bank used a common IT platform in the entire Nordic region, and a portion of the costs for the platform was allocated to the Swedish branch. The Swedish Supreme Administrative Court posed the following question to the CJEU for a preliminary ruling:
“Does a Swedish branch of a bank established in a member state other than Sweden constitute an independent taxable person where the principal establishment supplies services to the branch and imputes the costs thereof to the branch, if the principal establishment is part of a VAT group in the other member state, while the Swedish branch is not a member of any Swedish VAT group?”
The Danske Bank case has several similarities with the earlier decision in Skandia, in which the CJEU ruled that the transaction between a head office (located outside the EU, in the US) and a branch that was part of a VAT group (in Sweden) was subject to VAT. Danske Bank deals with the scenario where it is the head office that is part of a local VAT group. Furthermore, Skandia involved a head office established outside of the EU (i.e., the United States), whereas both the head office and branch in Danske Bank are located in EU member states.
The CJEU did not consider that these differences altered the conclusions reached in Skandia, concluding that when a head office belongs to a VAT group within its member state of establishment, its branches in other member states should be regarded as separate taxable persons (regardless of whether they are themselves members of local VAT groups).
In its ruling, the CJEU also stated that when either the head office or its branch is a member of a VAT group, the legal relationship between them must be assessed by taking into account the territorial limits of that group. The court notes that only establishments situated in Denmark may form part of a Danish VAT group, just as in Skandia, only establishments situated in Sweden are able to form part of a Swedish VAT group. Thus, the Swedish branch of Danske Bank could not be part of its head office’s VAT group.
Different consequences around the EU
In the Danske Bank case, the CJEU does not provide any real clarity on the question of whether an extraterritorial VAT group is allowed in accordance with Article 11 of the VAT Directive, in the sense that foreign branches could also be part of a domestic group. Instead, the CJEU states that the wording of Article 11 contains “a territorial limitation such that a member state may not provide for a VAT group to include persons established in another member state.” However, the CJEU does not define the concept of ‘person established,’ which leaves room for questions regarding how the ruling is to be applied with regard to jurisdictions, such as the Netherlands, where the concept includes the legal entity as a whole, including foreign branches.
It is also unclear whether, for those member states with territorial VAT grouping, the decision in Danske Bank only applies where the VAT group is located in the member state of the recipient establishment, or also where the VAT group is located in the member state of the supplier establishment and the recipient establishment is not a member of a VAT group.
The consequence of applying VAT on the transactions between the head office and the branch is that the recipient establishment must reverse charge local VAT on the costs charged by the supplier establishment. Since the member states implement Article 11 in different manners, the Danske Bank ruling could be interpreted as meaning that it is necessary to consider the VAT legislation in the member state of the supplier establishment in order to determine the VAT liability of a supply taking place in the member state of the recipient establishment.
In the absence of guidance from the European Commission or a change to the legislation, this uncertainty is unlikely to change in the short to medium term. The decision in Danske Bank therefore requires global businesses to consider the implications of Danske Bank for their existing structures while also offering an opportunity to review their VAT grouping strategy (perhaps even to decide that VAT grouping does not offer sufficient benefits to be retained). In the meantime, we set out below an overview of how VAT grouping applies in a number of EU jurisdictions (and also the UK) and how the decision in Danske Bank is or is expected to be applied.
Luxembourg, Sweden and Spain – examples of a territorial approach to VAT grouping
In Luxembourg, only Luxembourg companies and Luxembourg branches of foreign companies are permitted to be part of a local VAT group. The Danske Bank ruling is applied in Luxembourg. More information here.
Similarly, in Sweden, only Swedish companies and Swedish branches of foreign companies are permitted to be part of a local VAT group. On 24 June 2021, the Swedish Supreme Administrative Court ruled in accordance with the preliminary ruling of the CJEU in Danske Bank.
VAT groups in Spain can typically only include Spanish entities, with the exception that a VAT group can be formed by a Spanish branch of the foreign entity — as dominant entity — together with those Spanish entities owned by the branch as nondominant entities (i.e., attached to the business activity of the branch). A foreign branch of a Spanish head office can never be part of a Spanish VAT group. Even if there has not been any Spanish case law or specific/amended guidelines on this topic to date, the Danske Bank ruling has a direct impact in Spain since it can technically be applied.
Netherlands, the UK and Germany – examples of an extra-territorial approach to VAT grouping
In the Netherlands, a foreign branch can be part of a Dutch VAT group. This has been confirmed by the Dutch Supreme Court in a judgment from 2002. To date, the status quo from a Dutch perspective remains. In a decree (post-Skandia), which referred to the Dutch Supreme Court judgment, the Dutch State Secretary of Finance stated that the Skandia ruling has no consequences in the Netherlands. Considering the line of reasoning in the decree, it would be surprising if the Ministry of Finance would take a different approach in reaction to the Danske Bank ruling. Even if that were to be the case, taxpayers should be able to legitimately rely on the Supreme Court judgment until the Supreme Court overrules its 2002 judgment, if this ever happens.
The UK VAT grouping rules allow for overseas establishments to belong to a domestic VAT group on the basis that it is the ‘person as a whole’ who is member of the VAT group. Given that the legal interpretation of ‘person’ in the UK includes any establishment of the same person — regardless of its location — the impact of Skandia has always been very limited in the UK, and we expect Danske Bank to have no impact either. In addition, given that Danske Bank was issued post-Brexit, the judgment has no binding authority under UK VAT law.
Under German law, the VAT group concept differs from many other countries insofar as a VAT group is not treated as a new taxable person. Instead, the subordinated companies lose their independence for VAT purposes and are considered a business unit of the head of the VAT group. Also, German VAT law applies an extra-territorial scope for VAT groups. The official guidelines of the tax authorities specifically point out that a foreign branch of a company that is part of a German VAT group is considered as a part of the VAT group as well. As long as these guidelines exist, it is unlikely that taxpayers in Germany will be affected by the Danske Bank ruling.