ECJ decision on German submissions on VAT groups

The "big bang" has failed to materialise, but questions remain

Both VAT senates of the Federal Fiscal Court (BGH) had submitted fundamental questions regarding VAT groups to the ECJ. The BFH was most concerned about whether the German system, according to which the taxable person is not the VAT group itself but rather the head of the VAT group, was compatible with EU law. After the Advocate General delivered an opinion, the mood among experts darkened even further, because the AG concluded that internal supplies were VAT taxable (as we reported here). Fortunately, the ECJ disagreed.

Norddeutsche Gesellschaft für Diakonie mbH (C-141/20)

The XIth senate of the BFH submitted the case "Norddeutsche Gesellschaft für Diakonie mbH" (C-141/20), in which the potential head of the VAT group held the majority of the shares (51%) in the potential group member but did not have the majority of voting rights.

The ECJ initially ruled that it was compatible with EU law if, under German law, the taxable person was not a VAT group itself but rather the head of the VAT group. The reasoning was that the controlling company would report the same transactions as required of a VAT group so that this essentially amounted to the same thing. This should provide great relief. The ECJ hedged its decision by stating that this German regulation must not result in a risk of tax losses. The scope of this restriction remains unclear, especially as VAT groups with taxable entities not (fully) entitled to deduct input VAT are the norm.

Secondly, there is the condition that the head of the VAT group can enforce its will on the group members. How this relates to the ECJ’s second response seems questionable because that stipulates that the German regulation, which states that financial integration requires not only the majority of shareholdings but also the majority of voting rights, is incompatible with EU law. If the majority of the voting rights is missing, the controlling company cannot enforce its will – which is precisely why a majority of the voting rights has been required in Germany until now.

The ECJ also ruled that EU-Member States are not permitted to automatically consider entities as non-independent  because they are financially, economically, and organisationally integrated into a controlling company. This very abstract aspect relates to a kind of "exit scenario" of the XIth senate because the corresponding question was submitted for a preliminary ruling  in case the German VAT group rules were found to be incompatible with EU law: The XIth senate wanted to know whether the group members would then be absorbed into the controlling company, at least due to the lack of independence, which would lead to comparable results to a "real" VAT group. However, since the ECJ approves of the German regulation, according to which the head of the VAT group is the taxable person, this aspect no longer seems relevant.

The BFH did not ask whether internal services were taxable, as the Advocate General had postulated. Probably for this reason, the ECJ limited itself to the brief statement that the VAT Directive precludes "...members of a VAT group (...) from continuing to be regarded as taxable persons within and outside their group (...)". The Advocate General's contention can therefore be considered resolved.

Tax Office T versus S (C-269/20)

The case handled by the Vth senate (C-269/20) involved a foundation as a potential head of a VAT group that had divisions with both entrepreneurial and non-entrepreneurial activities. The potential member of the VAT group provided cleaning services for both divisions of the foundation. In contrast to the XIth senate case, this case also posed the question of whether "supplies" from the entrepreneurial to the non-entrepreneurial sphere trigger a free transfer of value within a VAT group. The ECJ responded No.

In this case, as well, the ECJ ruled that the German model, according to which only the head of the VAT group and not the VAT group itself was a taxable person, was compatible with EU law - also with the restrictions discussed above.

What happens next?

The two ECJ rulings will provide much material for discussion. We will keep you updated on the status of the debate and give recommendations for dealing with it.

In any case, it is advisable to carefully check whether, perhaps unintentionally, a VAT group exists in your company, or whether the requirements for such may have lapsed unnoticed. Here you can learn about our VAT Group Deep Dive, which provides clarity on this issue.

2 December 2022