The VAT grouping scheme
Legally independent entities that are closely bound to one another should be considered one VAT taxable person: the VAT group. The entities need to be closely linked from a financial, organizational and economic perspective. The VAT group has its own VAT number and must file VAT returns on a consolidated basis. For VAT purposes, third parties interact with the VAT group and not with the individual entities.
Under the German rules, it is not the VAT group (the Organschaft) that is considered the VAT taxable person, but it is the parent entity (the Organträger) into which the other members of the VAT group (the Organtöchter) are ‘absorbed’ for VAT purposes. As the validity of this mechanism can be questioned, the German court raised preliminary questions to the ECJ. The ECJ ruled that this German concept of VAT grouping is in accordance with the VAT directive. The ECJ confirms that Member States can appoint a member of a VAT group as the VAT taxable person, as long as the parent entity is able to "impose its will" on the other entities and this does not entail a risk of tax losses.
Broader interpretation of the necessary links
The ECJ considers that the Member States cannot require the condition that an entity holds the majority of voting rights in addition to a majority of the shares to determine that an entity can “impose its will” on the other entities. To form a VAT group, it is not necessarily required that an entity is subordinate to the other entity. This means that the ECJ opens the door for a broader interpretation of the financial link.
Intra VAT group supplies VAT taxed?
Interestingly, the ECJ suggests that intra VAT group supplies are VAT taxed. In the context of the German VAT grouping regime (the 'Organschaft'), the ECJ considers that members of a VAT group (the Organtöchter) can still carry out independent economic activities that are not ‘outside the scope of VAT’ for other members of the VAT group.
Relevance for practice
We welcome the broader interpretation of the necessary links. This does not go for the suggestion that intra VAT group supplies are VAT taxed. We strongly doubt whether the ECJ considers this to be a general rule of law (i.e. outside the German VAT group concept). This would be in clear contradiction to prevailing consensus, following preceding EU case law. Furthermore, taxation of intra VAT group transactions would have a huge impact on VAT groups. Aside from cash-flow disadvantages and additional compliance costs, the taxation of intra VAT group transactions would especially have an enormous impact if members of the VAT group are not entitled to reclaim VAT in full or in part. We are therefore very reluctant to apply the ECJ’s suggestions on this point in situations where the VAT group (and not the parent entity) is the VAT taxable person.
What to do?
We recommend to check whether these judgments could have an impact on your position. At this moment we do not see an immediate reason to change the current practice in which intra VAT group transactions are considered to be outside the scope of VAT. However, we do recommend to analyze the potential impact and to take precautionary measures if intra VAT group transactions should be deemed to be VAT taxed. Our tax advisors are happy to discuss any question you may have about the impact of these judgments on your position.