Services between head office and branch attract VAT
In its ruling of 11 March, the European Court of Justice (ECJ) decided that services rendered by the Danish head office of the Danske Bank to its Swedish branch attract VAT. This was based on the fact that the Danish head office had joined a Danish VAT group. As a result of this decision intercompany cross-border services are inside the scope of VAT, if either the head office or the branch are a member of a VAT group. This may result in VAT leakage. We will discuss this ruling and its impact in practice.
Danske Bank’s head office in Denmark has entered into a VAT group with Danish group companies. For the use of a computer platform, the head office has charged costs to its Swedish branch. The question referred to the ECJ was whether these intra group recharges of costs are subject to VAT.
The ECJ ruled that the head office and its branch are considered separate taxable persons for VAT. The Danish group companies of Danske Bank including the head office formed a single VAT taxable person. Since VAT grouping is limited to local entities, the Swedish branch could not be part of the Danish VAT group. Following this reasoning, the services rendered to the Swedish branch are subject to VAT. Assuming the branch cannot fully recover input VAT, this leads to VAT leakage.
The ECJ’s ruling does not come as a complete surprise. In the Skandia case of 2014 (C-7/13), the ECJ ruled in a ‘reverse’ situation. The Swedish branch was part of a VAT group without its foreign head office. As a result, the services rendered by the US head office to the Swedish branch were subject to VAT. Based on the Danske Bank case, it is now clear that in case of a VAT group all services between a head office and its branch – and vice versa – fall within the scope of VAT.
What to do now?
If your business has foreign branches and VAT grouping is applied, we strongly recommend assessing the practical impact of the ECJ’s ruling. When timely and appropriate measures are taken, your business structure can be optimized preventing possible VAT exposure.
Please contact your trusted adviser at Loyens & Loeff or get in touch with your dedicated specialists in the Indirect Tax practice group.