VAT exemptions within a VAT group

Facts

A Dutch VAT group consisted of two foundations and three limited liability companies. These five legal entities were each involved in different aspects of the care and support of people with intellectual disabilities in specialised accommodation.

One of the limited liability companies, Company Y, provided services consisting of supervising people with intellectual disabilities day and night using technical aids. For these services, it sought to claim a VAT exemption under Dutch law based on Article 132 of the VAT Directive – that is, for certain activities serving the public good. Specifically, the present case concerned, on the one hand, Article 132(1)(b), under which, amongst other things, services in the field of medical treatment and closely related transactions are exempt if the relevant institution is duly recognised. Subsection 1(g) of the provision was also relevant, which exempts services closely linked to social welfare and social security from VAT – provided that the service is provided by an institution of a social nature that is recognised as such.

The tax office refused to grant the VAT exemption because Y was not recognised either as an institution providing care and support for people in a residential home or as an institution of a social nature.

The VAT group, on the other hand, argued that whilst company Y itself was not a recognised institution, another member of the VAT group – namely one of the foundations – was. This foundation had been duly recognised, for the purposes of the VAT exemption for care and nursing, as a relevant institution and as an institution of a social nature. Consequently, the condition for the VAT exemption was fulfilled within the VAT group as a whole. The fact that this was not the case for Y was irrelevant, as the situation could not be considered in isolation.

ECJ ruling

According to the ECJ, although under Article 11 of the VAT Directive a supplier belonging to a VAT group is not to be regarded as a taxable person in its own right, so that supplies provided by an individual are not supplied by that individual but by the group. However, the question of the conditions under which a group may claim a VAT exemption is a separate matter; the wording of Article 11 of the VAT Directive provides no guidance on this point. The objectives of that provision, namely administrative simplification and the prevention of certain abuses, do not, however, support extending the VAT exemption to a VAT group if it would not apply to the members individually.

Furthermore, VAT exemptions must be interpreted strictly. It should be noted that both relevant grounds for exemption have two conditions which must be met cumulatively: firstly, in relation to the nature of the supply, and secondly, in relation to certain characteristics of the supplier. The requirement for a strict interpretation suggests that, when assessing the characteristics of the supplier, the focus should be on the person who actually provides the supply, namely Company Y.

Moreover, the overarching principle regarding VAT exemptions under Article 132 of the VAT Directive is the public interest. This, too, suggests that persons who do not meet the conditions should be excluded from the VAT exemption.

Analysis

The ECJ’s ruling is convincing – otherwise, the mere establishment of a VAT group would create extended VAT exemption options that would not otherwise exist. Although a VAT group is regarded as a single taxable person for VAT purposes, the personal conditions for a VAT exemption are not transferred to all group members. The decisive factor is which group member actually renders the supply.

The decision is also likely to be of significance for German VAT law, although, under the German VAT Act, not a VAT group as such is the taxable person, but the head of the VAT group.

In accordance with the judgement, VAT exemptions – particularly in the health and social care sectors – must be checked to determine whether the personal eligibility criteria are met at the level of the respective group company. A VAT group cannot compensate for the absence of eligibility criteria in individual group companies.

VAT groups (particularly those in the health and social care sectors) that provide tax-exempt supplies should check whether the requirements are also met by the company that actually provides the supplies in question.

Author: Nadia Schulte