Benefits of a cost-sharing group

Background

Taxable persons that provide VAT-exempt supplies are not entitled to deduct input VAT from supplies received from third parties. Input VAT thus becomes a cost factor. Businesses that have the capacity to perform the necessary work internally without having to appoint an external provider have an advantage because no VAT is payable on personnel costs.

Businesses for which it is not an option to perform the work themselves often join forces with others to form a cost-sharing group that procures and provides the necessary input supplies for all members. This would normally result in non-deductible input VAT for the members and thus a disadvantage compared to companies that have internalised these services. To avoid this disadvantage, Art. 132(1)(f) of the VAT Directive exempts services provided to their members by independent groups of persons who perform VAT-exempt services in the public interest. If the members are not taxable persons for these services, the exemption also applies. The prerequisite is that these services are provided for the purpose of rendering their members the service directly necessary for the exercise of that activity. Moreover, the remuneration must consist solely of the proportionate costs and the VAT exemption must not likely lead to a distortion of competition.

Facts and questions referred

The Spanish cases decided by the ECJ concerned the cleaning of hospitals, nurseries, schools and similar establishments. Several hospitals, nurseries and schools had each formed an association to provide cleaning services to its members for payment. The associations entered into contracts with third parties for the management of the necessary personnel.

A dispute arose whether the services provided by the associations to their members were exempt from VAT under Article 132(1)(f) of the VAT Directive. The Spanish court referred the following questions to the ECJ for a preliminary ruling (simplified wording):

1. Does it violate the VAT Directive if national law requires that the VAT-exempt service be used directly and exclusively for the VAT-exempt activity and interprets this to mean that this is not the case here, even though the cleaning service is singular, technical and complex in its organisation and nature, and absolutely necessary?
2. Does it violate the VAT Directive if it is equated with a distortion of competition that the potentially VAT-exempt service does not serve exclusively the VAT-exempt activity? Should the VAT exemption always be refused if the taxable person does not dispute the distortion of competition?

Decision of the ECJ

With regard to the first question, the ECJ clarifies, with reference to the wording of Article 132(1)(f) of the VAT Directive, that the service provided by the independent group of persons be specific services constituting a contribution essential to that activity or to a specific transaction. It is sufficient that the service is directly necessary for the exercise of the exempt activity of its members. The service provided by the independent group of persons must only be essential for the VAT-exempt transactions of the members referred to in Article 134(a) of the VAT Directive, but Article 132(1)(f) is not mentioned there. The service provided by the independent group of persons must contribute directly to the pursuit of activities in the public interest.

This is the case if the services are usually supplied by such a group in so far as they are necessary for the exercise of the exempt activity. Even "general" services such as cleaning services can be regarded as directly necessary, especially since specific hygiene requirements apply to hospitals, kindergartens and schools and, moreover, cleaning services are unique, technical and complex.

With regard to the second question, the ECJ points out that, in view of its answer to the first question, it is already clear that the association's activity serves the direct purposes of its members' activities in the public interest. The fact that the association's activity is of a general nature, i.e. that it can also be provided to other persons, does not automatically lead to the conclusion that there is a (potential) distortion of competition. This would be contrary to the objectives of the VAT exemption. Only abusive use of the VAT exemption is excluded. However, abuse cannot be based on a general and irrefutable presumption.

As a result, the services provided by the associations to their members may therefore be subject to VAT exemption under Article 132(1)(f) of the VAT Directive.

Impacts of the ruling in different EU Member States

In Germany, the VAT exemption under Article 132(1)(f) of the VAT Directive was fully implemented on 1 January 2020 by § 4 No. 29 of the German VAT Act (UStG). Previously, it had only been partially implemented, limited to the health sector, by § 4 No. 14(d) UStG, which the ECJ had objected to in its decision C-616/15 of 21 September 2017. For cases prior to 1 January 2020, taxable persons can refer directly to Article 132(1)(f) of the VAT Directive.

In its decision XI R 37/21 of 4 September 2024, the German Federal Court of Finance ruled that cleaning services provided by a group practice of doctors to individual doctors in 2019 were VAT-exempt – if not under § 4 No. 14 d) UStG, then at least by direct reference to Article 132(1)(f) of the VAT Directive. The ECJ decision is therefore consistent with the legal opinion in Germany.

It is worth noting that § 4 No. 29 UStG only applies if both the independent group of persons and its members are based in Germany. It is unclear whether this restriction is contrary to EU law. In the case of Kaplan International Colleges UK Ltd. (C-77/19), the Advocate General had argued in her opinion of 23 April 2020 that this domestic restriction should be read into Article 132(1)(f), but the ECJ ultimately did not need to rule on this. 

Author: Nadia Schulte