On 11 March 2021, the Court of Justice of the European Union (CJEU) released its long-anticipated judgment in the Danske Bank case. The case considers the VAT treatment of cross-border services where the supplier head office (Business Establishment) is locally VAT grouped, but the customer overseas branch (Fixed Establishment) is not. CJEU held that the principles established in the FCE Bank plc case (C-210/04) are not applicable where the head office is part of a VAT group and therefore the services between head office and branch are subject to VAT.
The CJEU released its judgment in the Skandia case (C-7/13) in September 2014, in which a head office had the responsibility for making central purchases of IT services for the worldwide operation. The company purchased such services and supplied them to its Swedish branch which was a member of a Swedish VAT group. In its judgment, the CJEU held that a VAT group was a new and separate person, distinct from its members and that supplies into a VAT-grouped branch from an overseas head office (in Skandia’s case a US-headquartered entity) were subject to VAT.
However, the Skandia judgment did not explicitly consider the situation where the VAT grouped establishment was the supplier rather than the customer. Given the gap in the Skandia judgment, a further question was referred to the CJEU in the Danske Bank case.
The facts and question referred
Danske Bank, a Danish headquartered bank, provided IT services to its Swedish branch. Danske Bank (Head office) is part of a Danish VAT group, whilst its Swedish Branch is separately registered for Swedish VAT. The Swedish Tax Authorities argued that Swedish VAT should be due on these, with Danske Bank (Swedish Branch) liable to self-account for VAT under the reverse charge mechanism. Given the continuing uncertainty around the application of Skandia principles, the following question was referred to the CJEU:
“Does a Swedish branch of a bank established in another Member State constitute an independent taxable person where the principal establishment supplies services to the branch and imputes the costs thereof to the branch, if the principal establishment is part of a VAT group in the other Member State, while the Swedish branch is not a member of any Swedish VAT group?”
The CJEU held that the so-called ‘Reverse Skandia’ principle applies, as it has followed the principles set out in its earlier judgment in the Skandia case and has ruled that the services provided by Danske Bank’s VAT-grouped Danish head office to its Swedish branch should be subject to Swedish VAT. The judgement is based on the fact that the head office was a member of a VAT group. That meant, in line with the Skandia case, that the Swedish branch could no longer be regarded as part of the company. It worth noting that a VAT group is a fiction created under the provisions of the VAT Directive; once it has been registered, it is treated as a single taxable person, and the members lose whatever separate identities they might have had before.
The judgment will impact the VAT treatment of intercompany services provided by members of a branch network. Although there has already been partial implementation of Skandia and Reverse Skandia across the EU, additional changes should be expected. The addition of VAT on these services is significant, particularly for Financial Services businesses, which cannot typically recover their VAT costs.
A VAT group should always be treated as a taxable person in its own right. As the VAT group is distinct and separate from its constituent members, supplies between branches of the same legal entity are supplies for VAT purposes, where one or both establishments are locally VAT grouped.
Moreover, it appears to conclude that VAT groups should be limited to a particular jurisdiction and that overseas establishments should not be considered members of that group.
Consequently, the judgment is likely to result in a large number of additional cross-border intercompany services (Head office-to-branch and vice versa) becoming subject to VAT. Financial Services businesses will be particularly impacted by this, since they cannot typically recover their VAT costs.
Way forward: how InterTaxAudit can help you
If you are a business engaged with cross border intra-entity transactions and, either the head office or the branch is part of a VAT group and you wish to assess whether and how this impacts the VAT treatment of your transactions, please contact InterTaxAudit to arrange a meeting. Our expert indirect tax team is at your disposal to discuss about any transactions affected by the amendment of the legislation and provide advice as per the correct VAT treatment.
For more information on how this development might affect you or your business, please contact:
Mr. Aris Theophanous
Chief Executive Officer
Mr. Pantelis Karonias
BSc, FCCA, ADIT
Head of Indirect Tax Department